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 pioneers
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, contd.
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, contd
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
16-10
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 franchisors requirements; appearance, financial
reporting, operating procedure, customer service etc.
3. Establishing manufacturing facilities, services facilities, provides expertise,
advertising, corporate image etc
4. But some degree of flexibility in order to meet the local tastes and preferences.
Ex: McDonald, Dominos, 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.
16-13
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, contd.
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, contd.
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, contd.
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, contd.
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, contd.
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
Manufacturers 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