Entry Modes

Modes of entering International Business

Pioneers vs. Fast Followers

• Pioneers– Can gain and maintain

competitive edge in new market

– Overall pioneers may not perform as well in the long run as followers

• Most successful when– High entry barriers exist– Firm has sufficient size,

resources, and competencies

• Followers– Many become followers

by default– May be advantage to let

pioneer take initial risks• Most successful when

– Few legal, technological, cultural, or financial barriers

– Sufficient resources or competencies to overwhelm the pioneer’s early advantage

Entering Foreign Markets

• Nonequity modes of market entry– Exporting

• Selling some regular production overseas• Requires little investment• Relatively free of risk• Indirect exporting• Direct exporting

• Equity modes of market entry– Wholly owned subsidiary– Joint venture– Strategic alliance

Summary: Modes of Entry

Exporting - Indirect Exporting

• Exporting of goods and services through various home-based exporters– Manufacturers’ export agents

• sell for manufacturer– Export commission agents

• buy for overseas customers– Export merchants

• purchase and sell for own accounts– International firms

• use the goods overseas

Indirect Exporting, cont’d.

• Disadvantages– Commission to export agents, commission agents, export

merchants

– Foreign business can be lost if exporters decide to change their sources and supply

– Firm gains little experience from transactions

Direct Exporting

• Exporting of goods and services by the producing firm• Sales company option

• Business established to market goods and services• Internet has made direct exporting much easier

• Cost of trial low

Exporting

• Turnkey Project used for export of– Technology– Management expertise– Capital equipment (some cases)

• After trial run, facility is turned over to purchaser• Exporter of a turnkey project may be

– Contractor that specializes in designing and erecting plants in a particular industry

– Company that wishes to earn money from its expertise– Producer of a factory

Exporting, cont’d

• Licensing– A contractual arrangement: one firm sells access to its patents,

trade secrets, or technology to another – Licensee pays fixed sum and sales royalties (2%-5%)

• Popular because– Courts have begun upholding patent infringement claims– Patent holders have become vigilant in suing violators– Foreign governments have been pressed to enforce their

patent laws

Issues in International Licensing

Under international licensing manufacturer leases the right to use intellectual property to a manufacturer in a foreign country for a fee.

• Boundaries of the agreements• Determination of royalty• Determining rights, privileges and constraints• Dispute settlement mechanism• Agreement duration

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Franchising• Franchising

– Form of licensing in which one firm contracts with another to operate a certain type of business under an established name according to specific rules.

• Basic issues in Franchising- franchising agreements

1. Franchisee has to pay a fixed amount and royalty based on sales 2. Agree to adhere to follow the franchisor’s requirements; appearance, financial

reporting, operating procedure, customer service etc.3. Establishing manufacturing facilities, services facilities, provides expertise,

advertising, corporate image etc4. But some degree of flexibility in order to meet the local tastes and preferences.

Ex: McDonald, Domino’s, Pizza Hut, KFC etc

Contracts

• Management Contract– Arrangement by which one firm provides management in all

or specific areas to another firm– Ex: Delta, Air France and KLM often provide technical and

managerial assistance to the small airlines companies owned by govt.

• Contract Manufacturing– Arrangement in which one firm contracts with another to

produce products to its specifications but assumes responsibility for marketing. Ex: Nike with factories in south-east Asia to Athletic footware; Bata with cobblers in India.

• Business Process Outsourcing

Turnkey Project

• It is a contract under which a firm agrees to fully design, construct and equip a manufacturing/business/service facility and turn the project over to the purchaser when it is ready for operation for a remuneration.

• It includes: a fixed price or payment on cost plus basis.• So shifts the risk of inflation/enhanced costs to the purchaser.• Ex: International turnkey projects include nuclear power, air ports,

oil refinery, national highways, railways etc.

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Equity-Based Modes of Entry

• Wholly Owned Subsidiary or Foreign Direct Investment without Alliances

• Joint Venture

• Strategic Alliance

Wholly Owned Subsidiary

• Wholly Owned Subsidiary

• build a new plant (greenfield strategy). It refers to starting of the operations of a company from scratch in a foreign market.

• Ex: Fuji manufacturing unit in South Carolina, Nissan factory in Sunderland, England

Joint Venture

• Joint Venture– Cooperative effort among two or more organizations that

share common interest in business enterprise• corporate entity formed by international company and

local owners• corporate entity formed by two international companies for

the purpose of doing business in a third market • a corporate entity formed by a government

Joint Venture, cont’d.

• Disadvantages– Profits shared– If law allows no more than 49% foreign ownership, lose

control– Control with minority ownership is possible if

• Take 49% of shares and give 2% to local law firm or trusted national

• Take in local majority partner (sleeping partner)• Management contract

– Can enable the global partner to control many aspects of a joint venture even when holding only a minority position

Strategic Alliances

• Partnerships between competitor, customers, or suppliers that may take various forms

• Aims to achieve– Faster market entry and start-up– Access to new

• Products• Technologies• Markets

– Cost-savings by sharing• Costs• Resources• Risks

Ex: Xerox of USA and Fuji of Japan –to explore new markets in Europe and Pacific Rim.

Strategic Alliances, cont’d.

• May be Joint Ventures

• Pooling alliances driven by similarity and integration

• Trading alliances driven by contribution of dissimilar resources

• Alternatives to mergers and acquisitions

• Future of Alliances– Many fail or are taken

over by a partner– Difficult to manage

• Different strategies• Different operating

practices• Different

organizational cultures– Allow partner to acquire

technological or other competencies

– Regardless, will continue to be important strategic tool

Channel of Distribution

• Links producer with foreign user

• Product and its title pass from producer to user

Channel of Distribution Members: Indirect Exporting

– Indirect Export Channel Members• Sell for manufacturer

• Buy for overseas customers

• Buy and sell for own account

• Purchase on behalf of foreign middlemen or users

Indirect Exporting

• Exporters that sell for the manufacturer

– Manufacturers’ export agent• Acts as the international representative for various

noncompeting domestic manufacturers– Export management companies (EMC)

• Acts as the export department for noncompeting manufacturers

– International trading companies• Acts as agent for some companies and as wholesaler for

others

Indirect Exporting: International Trading Companies

• International Trading Companies– Japan: Sogo Shosha

• Originally established by the zaibatsu, centralized, family-dominated economic groups

– Korean: chaebol– Owned by Korean conglomerates

• Export trading companies (ETC)– U.S. firm established principally to export domestic goods and

services

International Channels of Distribution

Indirect Exporting, cont’d.

• Exporters that buy for their overseas customers– Export commission agents

• Represent overseas purchasers, such as import firms and large industrial users

• Paid commission by the purchaser for acting as resident buyer

Indirect Exporting, cont’d.• Exporters that buy and sell for their own account

– Export merchants• Purchase products directly from the manufacturer and

then sell, invoice, and ship them in their own names– Cooperative exporters/piggyback exporters

• Established international manufacturers that export other manufacturers’ goods as well as their own

– Webb-Pomerene Associations• Organizations of competing firms that have joined together

for the sole purpose of export trade

Indirect Exporting, cont’d.

• Exporters that purchase for foreign users and middlemen– Large foreign users

• Buy for their own use overseas– Export resident buyers

• Perform essentially the same functions as export commission agents but more closely associated with a foreign firm

Direct Exporting Distribution Channel Members

• Manufacturer’s agent– Independent sales representative of noncompeting suppliers

• Distributor/wholesale importer– Independent importer that buys for own account for resale

• Retailer– Frequently direct importer

• Trading company– Firm that develops international trade and serves as

intermediary between foreign buyers and domestic sellers and vice versa