intern

ation

al bu

siness, 5

th edition

chapter 12strategies for analyzing and entering foreign markets

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Chapter Objectives 1

• Discuss how firms analyze foreign markets

• Outline the process by which firms choose their mode of entry into a foreign market

• Describe forms of exporting and the types of intermediaries available to assist firms in exporting their goods

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Chapter Objectives 2

• Identify the basic issues in international licensing and discuss the advantages and disadvantages of licensing

• Identify the basic issues in international franchising and discuss the advantages and disadvantages of franchising

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Chapter Objectives 3

• Analyze contract manufacturing, management contracts, and turnkey projects as specialized entry modes for international business

• Characterize the greenfield and acquisition forms of FDI

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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

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Table 12.1 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

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Map 12.1 A Tale of Two Chinas

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Dole Food Company’s international operations are subject to a variety of costs,

benefits, and risks.

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Figure12.1 Choosing a Mode of Entry

Exporting

InternationalLicensing

InternationalFranchising

Specialized Modes

Foreign Direct Investment

Decision Factors:Ownership advantagesLocation advantagesInternalization advantagesOther factors

Need for controlResource availabilityGlobal strategy

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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

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Motivations for Exporting

Proactive Reactive

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Forms of Exporting

Indirect exporting

Intracorporatetransfers

Direct exporting

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Figure 12.2a Indirect Exporting

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Figure 12.2b Direct Exporting

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Figure 12.2c Intracorporate Transfers

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Additional Considerations for Exporting

Governmental policies

Marketing concerns

Logistical considerations

Distribution issues

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Types of Export Intermediaries

Export management company

International trading company

Other intermediaries

Webb-Pomerene association

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Export Management Company

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.

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Webb-Pomerene Association

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.

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Five Largest Soga Soshas

• Mitsubishi Corporation

• Mitsui & Company

• Marubeni

• Sumitomo Group

• Itochu Corporation

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Other Intermediaries

Manufacturers’ agents

Manufacturers’ export agents

Export and import brokers

Freight forwarders

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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.

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Figure 12.3 The Licensing Process

Licensor leases the rights to use

intellectual property

Earns new revenues with low investment

Licensee uses the intellectual property to create products

Pays a royalty to licensor

$ $ $

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Basic Issues in International Licensing

• Specifying the boundaries of the agreement

• Determining compensation

• Establishing rights, privileges, and constraints

• Specifying the duration of the contract

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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

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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.

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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?

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Yum! Brands Franchise Opportunities

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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

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Specialized Entry Modes

Contract manufacturing

Turnkeyproject

Managementcontract

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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

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Management Contracts

Advantages

• Focus firm’s resources on its area of contracts

• Minimal financial exposure

Disadvantages

• Potential returns limited by contract expertise

• May unintentionally transfer proprietary knowledge and techniques to contractee

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Turnkey Projects

Advantages

• 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

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Foreign Direct Investment

Advantages

• High profit potential

• Maintain control over operations

• Acquire knowledge of local market

• Avoid tariffs and NTBs

Disadvantages

• High financial and managerial investments

• Higher exposure to political risk

• Vulnerability to restrictions on foreign investment

• Greater managerial complexity

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Foreign Direct Investment

• Building new facilities (the greenfield strategy)

• Buying existing assets in a foreign country (acquisition strategy)

• Participating in a joint venture

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Greenfield Strategy

• Best site

• Modern facilities

• Economic development incentives

• Clean slate