MODES OF ENTRY INTO IB

CHAPTER 10

Mode of Entry into International Business

Foreign Market Analysis

Assess alternative markets Evaluate the respective costs,

benefits, and risks of entering each Select those that hold the most

potential for entry or expansion

Factors in Assessing New Market Opportunities

Product-market dimensions

Major product-market differences

Structural characteristics of national market

Competitor analysis

•Potential target markets•Relevant trends•Explanation of change•Success factors•Strategic options

Evaluating Costs, Benefits and RisksC

OSTS - Direct cost

the Firm incurs in entering a new foreign market and included costs associated with setting up a business operation- Opportunity costa firm has a limited resources, entering one market may preclude or delay its entry into another

BEN

EFI

TS - Expected sales

- Profits from the market- Lower acquisition and manufacturing costs- Foreclosing of markets to competitors- Competitive adv.- Access to new technology- Opportunity to achieve synergy with other operations

RIS

KS - Exchange rate

fluctuations- Additional operating complexity- Direct financial losses due to inaccurate assessment of market potential

Choosing a Mode of Entry

Decision Factors:*Ownership advantages*Location advantages*Internalization advantages*Other factors: -Need for control -Resource availability -Global strategy

Export

International Licensing

International Franchising

Specialized modes

Foreign Direct Investment

(FDI)

•Resources owned by a firm that grant it a competitive adv.

•Depends on the nature of the firm

Ownership Advantage

•Affect the desirability of the host country

•Compares economic and non economic characteristics

Location Advantages

•Affect the desirability of a firm’s producing a good/services itself

•The amount of transaction costs is critical to any decision made

Internalization advantage

•Control and availability of resources

•Overall global strategy

Other factors

Exporting

Advantages

Relatively low financial exposure

Permit gradual market entry

Acquire knowledge about

local market

Avoid restrictions on foreign investment

Disadvantages

Vulnerability to tariffs and NTBs

Logistical complexities

Potential conflicts with distributors

Forms of Exporting

Indirect exporting

Direct exporting

Intra-corporated

transfer

Indirect Exporting

U.S.A

• Company A transfer to company B

Malaysia

• Company C sell to Malaysian

Direct Exporting

China

• Company A

Malaysia

• Company C

Intra-corporate Transfer

U.K

• Company A

Malaysia

• Company A

Additional Considerations for Exporting

Government Policies

Marketing Concern

Logistical Consideration

Distribution Issue

Types of Export IntermediariesExport Management CompaniesWebb-Pomerene AssociationsInternational Trading Companies

Other Intermediaries

Export Management Companies(EMC)

An export management company (EMC) is a firm that acts as its client's export department by managing the legal, financial, and logistical details of exporting, and providing advice about consumer needs and available distribution channels in the foreign markets the exporter wants to penetrate.

Webb-Pomerene Associations

A Webb-Pomerene association is a group of U.S. firms that operate within the same industry and that are allowed by law to coordinate their export activities without fear of violating U.S. antitrust laws.

International Trading Company Directly involved in importing and

exporting a wide variety of goods for its own business. Provides the necessary exporting and importing services. (buying goods in one country and selling to another country).

Other Intermediaries

Manufacturers’ Agents

Manufacturers’ Export Agent

Export And Import Brokers

Freight Forwarders

Licensing

Licensing is when a firm, called the licensor, leases the right to use its intellectual property—technology, work methods, patents, copyrights, brand names, or trademarks—to another firm, called the licensee, in return for a fee.

THE LICENSING PROCESS

Licensor leases the rights to use

intellectual property

Licensee uses the intellectual

property to create products

Pays a royalty to licensor

Earns new revenues with low investment

Basic Issues in International Licensing

Specifying the boundaries of the agreement

Determining compensation Establishing rights, privileges, and

constraints Specifying the duration of the contract

Licensing

Advantages

• Low financial risks• Low-cost way to

assess market potential

• Avoid tariffs, NTBs, restrictions on foreign investment

• Licensee provides knowledge of local markets

Disadvantages

• Limited market opportunities/profits

• Dependence on licensee

• Potential conflicts with licensee

• Possibility of creating future competitor

International Franchising

A franchising agreement allows an independent entrepreneur or organization, called the franchisee, to operate a business under the name of another, called the franchisor, in return for a fee.

Basic Issues in International Franchising

Does a differential advantage exist in domestic market?

Are these success factors transferable to foreign locations?

Has franchising been a successful domestic strategy?

Franchising

Advantages

• Low financial risks• Low-cost way to

assess market potential

• Avoid tariffs, NTBs, restrictions on foreign investment

• Maintain more control than with licensing

• Franchisee provides knowledge of local market

Disadvantages

• Limited market opportunities/profits

• Dependence on franchisee

• Potential conflicts with franchisee

• Possibility of creating future competitor

Specialized Entry Modes

Management Contract

Turnkey Projects

Contract Manufacturing

Contract Manufacturing

Advantages

• Low financial risks

• Minimize resources devoted to manufacturing

• Focus firm’s resources on other elements of the value chain

Disadvantages

• Reduced control (may affect quality, delivery schedules, etc.)

• Reduce learning potential

• Potential public relations problems

Management Contract

• Focus firm’s resources on its area of contracts

• Minimal financial exposureAdvantages

• Potential returns limited by contract expertise

• May unintentionally transfer proprietary knowledge and techniques to contractee

Disadvantages

Turnkey ProjectAdvantages •Focus firm’s resources on

its area of expertise•Avoid all long-term

operational risks

Disadvantages •Financial risks

•Cost overruns•Construction risks

•Delays•Problems with suppliers


Entering international market through ownership of assets in host countries. A firm may first enter the foreign market through exporting, licensing or franchising.


•High profit potential

•Maintain control over operations

•Acquire knowledge of local market

•Avoid tariffs and NTBs

Advantages

•High financial and managerial investments

•Higher exposure to political risk

•Vulnerability to restrictions on foreign investment

•Greater managerial complexity

Disadvantages

FDI Method

Building new facilities (the Greenfield strategy)

Buying existing assets in a foreign country (acquisition strategy)

Participating in a joint venture

Greenfield Strategy

• Best site• Modern facilities• Economic development incentives• Clean slateAdvantages

• Huge time and patience needed• Expensive • Comply with local and national

regulation• Local workforce needed• Strongly perceived as a foreign worker

Disadvantages

Acquisition Strategy

Advantages• Obtains control over the acquired

firm such as factories and brand names

• Integrate the mgt of the firm into its overall international strategy

Disadvantages• Assumes all the liabilities such as

financial and managerial

Joint Venture

An arrangement, whereby a new enterprise is created by two or more firms working together for mutual benefit.

Example:- IBM and Siemens- Motorola and Toshiba