Foreign-Market Entry

Chapter 10

Reporters:» Grampil, Vience» Rejuso, Lorry Ann» Miguel, Mary Rose

Objectives

• Explore the many types of indirect exporting possible, including export management companies, trading companies and piggybacking.

• Explain how cooperation among companies wishing to export can increase effectiveness and offer cost economies.

• Discuss the challenges, problems and rewards of do-it-yourself, direct exporting.

• Give reasons for assembling products abroad as a way to enter the market.

• Discuss the advantages and disadvantages of contract manufacturing, licensing, joint ventures, and wholly owned operations as a ways of entering foreign markets.

Decision criteria for entry method

The selection of the method of the foreign markets depends on some peculiar to the firm and its industry.

1.Company goals regarding the volume of international business desired, geographic coverage, and the time span of the foreign involvement.

2.The size of the company in sales and assets.

3.The company’s product line and nature of its products

4.Competition abroad.

Number of marketsCompanies differ as to the number of countries they want to

enter.

Penetration within marketsAn export management

company might claim to give access to 60 countries.

Market feedbackIf the firm wants to know

what is going in its foreign market, it must choose an entry method that will provide this feedback.

Learning by experienceThe firm with international ambitions should choose an entry

method to help it gain experience and realize these ambitions.

ControlManagement control over foreign marketing ranges none at all.

Incremental marketing costsThere are costs associated with the international marketing, no

matter who does it.

Profit possibilitiesIn evaluating profit potential of

different entry methods, the long term sales and costs associated with each entry method must be estimated.

Investment requirementInvestment requirements are

highest in wholly owned foreign operations.

Administrative requirementsThe administrative burdens and

costs of international marketing vary by entry method.

Personnel requirementsPersonnel needs also vary by

entry of method. The more direct kinds of involvement require a number of skilled international personnel. Exposure to foreign problems

The more directly the firm is involved in foreign markets, the more management must deal with new kinds of legislation, regulation, taxes, labor problems and other foreign market peculiarities.Flexibility

The firm must have the ability to change to meet new conditions.

Risks

Foreign markets are usually perceived as riskier than the domestic market.

Indirect exporting

The firm is an indirect exporter when its products are sold in foreign market but no special activity for this purpose is carried on within the firm.

Export management companies

Another form of indirect exporting is the export management company often considered as constituting the export department of the producer. That is, the producer gets the performance of an export department without establishing one.

Cooperation in exporting

Cooperation in exporting is another way to enter foreign markets without bearing the costs and burdens of an in house export department. Among the forms of cooperation in exporting are webb-pomerene association’s export trading companies (ETCs) and piggybacking.

Webb-Pomerene association – can act as the exporting arm of all member companies, representing a united front to world markets and gaining significant economies of scale.

Its major functions are as follows:

1. Exporting in the name of the association2. Consolidating freight, negotiating rates, and chartering ships3. Performing market research4. Appointing selling agents in the US or abroad5. Obtaining credit information and collecting debts6. Setting prices for export7. Allowing uniform contracts and terms of sale8. Allowing cooperative bids and sales negotiation

Piggyback exporting

In piggyback exporting, one manufacturer uses its overseas distribution to sell another company’s product along with its own. Two parties with different interests-the carrier and the rider-make up the piggy back operation.

Piggyback decisions: the carrier. A firm that has a gap in its export operation has two options. One is to develop internally the products necessary to round out its line and fill up its exporting capacity.The rider: for the rider or company using an export company “to carry” to carry its products to foreign markets, piggy backing is one alternative route to foreign markets.

• In indirect exporting, the tasks of market contract, market research, physical distribution, export documentation, pricing and so on fall on the firm.

•Direct exporting, usually results in more sales than does in indirect exporting.

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DIRECT EXPORTING

• Choosing representatives in the target markets

• Physical distribution and export documentation

This task differs from the same task in the domestic market. Different shipping companies and modes of transportation are necessary.

Other marketing taskAdditional responsibilities of export

management include market intelligence, pricing and promotion. In indirect exporting, marketing information is gathered by the firm selling abroad.

Marketing through foreign distributorsThe major marketing tasks the exporter must perform from its home

country base. The actual marketing to final consumers abroad must be done by the firms distributor in the market.

Foreign manufacturing as foreign market entrySeveral factors may encourage, or force, the firm to produce in

foreign markets if it wishes to sell in them. Tariffs or quotas can prevent entry of exporter’s products.

CONTRACT MANUFACTURINGContract manufacturing abroad is foreign manufacturing by proxy.

That is, the firms product is produced in the foreign market by another producer under contract with the firm. Because the contract covers only manufacturing, marketing is handled by the firm.

Licensing is another way the firm can establish local production in foreign markets without capital investment it differs from contract manufacturing in that is usually for a longer term and involves much greater responsibilities for the national party.

The licensor (the international company) may give the licensee (the national firm) one or more the following things:1.Patent rights.2.Trade mark rights.3.Copyrights.4.Know-how on products or processes.

LICENSING

MANAGING AND LICENSING

Firms that are successful in licensing have developed certain techniques for minimizing the pitfalls of licensing and accentuating its potential benefits.

1.Have a deliberate policy and plan for licensing; that is, give it proper attention.2.Fix licensing responsibility in the firm by means of a licensing manager or department3.Select licensees carefully4.Draft a careful agreement and review it with the licensee. Some items to include are territorial coverage, duration, royalties, trade secrets, quality control, and a minimum performance clause.

5. Supply the licensee with critical ingredients6. Obtain equity in the licensee7. Limit product and territorial coverage8. Keep patent and trademark registrations in the licensor’s

name9. Be a reasonably important part of the licensee’s business.

MANAGING AND LICENSING

International licensing can be an important part of company strategy; US firms receive over $10billion a year from licensing agreements. It should be noted that licensing income in not limited to royalties but includes such items as:

1.Technical assistance fees2.Sale of materials or components to licensee3.Lump-sum payments for transfer of rights or technology4.Technology feedback

5. Reciprocal license rights6. Fees for engineering services7. Sales of machinery or equipment and,8. Management fees9. Be reasonably important part of the licensees

business.

Cont…

An exporter may find tariffs or other trade restrictions have taken away of its export markets. If it is not feasible or desirable for the firm to set up a local production in that market, the firm could maintain a position there by licensing.

Joint ventures in foreign markets

Foreign joint ventures in manufacturing have something common in foreign licensing. Both involve foreign manufacturing and distribution by a foreign firm. The major difference is that joint venture, the international firm has equity and a management voice in the foreign firm. The equity share of the international company generally is between 25 and 75 percent.

Licensing as a fallback strategy

Advantages of joint ventures

1.Potentially greater returns from equity participation as opposed to royalties.2.Greater control over production and marketing3.Better market feedback4.More experience in international marketing

TO JOIN OR NOT TO JOIN

The joint venture approach must be compared with both the lesser commitment of contract manufacturing and licensing and the greater commitment of wholly owned foreign production.

Disadvantages include a need for greater investment of capital and management resources, and a potentially greater risk than with a non equity approach.

When joint venture compared with wholly owned foreign production a different picture emerges:1.Joint venture requires less capital and fewer management resources and thus is more open to smaller companies.2.A given amount of capital can cover more countries.3.The danger of expropriation is less when a firm has a national partner than when the international firm is sole owner.

STRATEGIC CONSIDERATIONS

Marketing considerations play a primary role when international firms evaluate the joint venture approach. Local market knowledge is usually the foreign firm’s major lack when entering a host country.

STARTEGIC ALLIANCES

Strategic alliance covers a variety of usually no equity contractual relationships, frequently between competitors and frequently between competitors in different countries.

Why would a firm help a competitor enter its home market?

•Because the local firm is getting a new product, one that is complimentary rather than directly

competitive.

Wholly owned foreign production –Wholly owned foreign represents the greatest

commitment to foreign markets. wholly owned means 100 percent ownership by the international firm.

MAKE OR BUY

The firm can obtain wholly owned foreign production facilities in two ways1.Buy out a foreign producer2.The acquisition route -3.Develop its own facilities from the ground up.

Deciding on wholly owned operations

The advantages of wholly owned ventures are few but powerful. Ownership of 100 percent means 100 percent of the profits go to the international firm, eliminating the possibility that a national partner gets a “free ride”. Complete ownership also gives the firm greater experience and better market contact.