15

Entry ModesEntry Modes

International Businessby Ball, McCulloch, Frantz,

Geringer, and Minor McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

This chapter covers:

•Market pioneering

versus fast following

•International market

entry methods

•Forms of piracy

•Channel members for

export or overseas

manufacture

•Structural trends in

wholesaling and

retailing

Chapter ObjectivesChapter Objectives

Appreciate the debate on whether being a market pioneer, or a fast follower, is most useful

Understand the international market entry methods

Identify two different forms of piracy and discuss which might be helpful and harmful to firms doing international business

Discuss channel members available to companies that export or manufacture overseas

15-2

Pioneers vs. Fast FollowersPioneers vs. Fast Followers Pioneers

Can gain and maintain a competitive edge in a 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

15-3

Followers Many become

followers by default Sometimes an

advantage to let the pioneer take the initial risks

Most successful when Low entry barriers

exist Sufficient resources

or competencies to overwhelm the pioneers’ early advantage

Modes of EntryModes of Entry

Trade Export Subcontracting Countertrade

Transfer Licensing Franchising

15-4

Foreign Direct Investment Wholly Owned

Subsidiary Joint Venture Contract

Manufacturing Management

Contract M&A

ExportingExporting

Most firms begin involvement in overseas business by exporting Selling some of their

regular production overseas

Requires little investment

Relatively risk free Means of getting a feel

for international business without a large commitment

Direct or indirect15-5

Indirect ExportingIndirect Exporting

Exporting of goods and services through various types of 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

overseas15-6

Indirect ExportingIndirect Exporting

Disadvantages Most exporters

require a commission

Business can be lost if exporter changes source of supply

Firms gain little international experience

15-7

Direct ExportingDirect Exporting

The exporting of goods and services by the exporting firm Sales company

A business established for the purpose of marketing goods and services, not production

Imports its own name from the parent and invoices in local currency

The Internet has made direct exporting much easier Cost of trial very low

15-8

ExportingExporting

Turnkey Project – the export of Technology Management expertise Capital equipment

After a trial run, the facility is turned over to the purchaser

Exporter of a turnkey project may be A contractor that specializes in designing and

erecting plants in a particular industry A company that wishes to earn money from its

expertise The producer of a factory

15-9

TransferTransfer

Licensing Firm will grant

another firm the right to use any kind of expertise for one or more of the licensor’s products

Licensee pays fixed sum when signing and pays royalties of 2%-5% of sales over the life of the contract

15-10

Licensing has become more popular because Courts have begun

upholding patent infringement claims

Patent holders have become more vigilant in suing violators

Foreign governments have been pressed to enforce their patent laws

TransferTransfer

Franchising A special kind of

licensing Permits the

franchisee to sell products or services under a highly publicized brand name and well-proven set of procedures with a carefully developed and controlled marketing strategy

Fast food most numerous

15-11

Foreign Direct InvestmentForeign Direct Investment

Four distinct alternatives available for foreign manufacturingWholly owned subsidiaryJoint ventureContract manufacturingManagement contract

Utilized by both manufacturing and service operations

Providing management expertise for a fee

15-12

Wholly Owned SubsidiaryWholly Owned Subsidiary

A company that wishes to own a foreign subsidiary outright may

Start from the ground up by building a new plant

Acquire a going concern

Currently the preference of foreign investors

Purchase its distributor, obtaining a distribution network familiar with its products

15-13

In 2000 96% of the money spent by foreign investors was used for acquiring American firms

Sometimes it is not possible to have a wholly owned subsidiary Host government may

not permit it Firm may lack capital or

expertise May be disadvantageous

tax-wise or otherwise

Joint VentureJoint Venture

A Joint Venture may be a corporate entity formed

by an international company and local owners

a corporate entity formed by two international companies to do business in a third market

a corporate entity formed by a government agency and an international firm

a cooperative undertaking between two or more firms of a limited-duration project

15-14

Joint VentureJoint Venture

If government requires local participation, firm must engage in joint ventures with local owners

Strong nationalistic sentiment may cause foreign firm to try to lose its identity by joining with local investors

Companies may enter joint ventures to acquire expertise, tax benefits or additional capital

15-15

Disadvantages Profits must be shared If law forbids 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

Management ContractManagement Contract

Arrangement under which a company provides managerial know-how in some or all functional areas to another party for a fee

Used in Firms in which they have no ownership Joint ventures

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

May also earn income by selling inputs manufactured in home plant

Wholly owned subsidiaries To siphon off some of subsidiary’s profits

15-16

Contract ManufacturingContract Manufacturing

Means to enter foreign market without investing in facilities One firm contracts with

another to produce products to its specifications but markets products itself

Subcontract assembly work or production of parts to independent companies overseas FDI without investment

15-17

Strategic AlliancesStrategic Alliances

Partnerships between competitor, customers, or suppliers

Also referred to as competitive alliances, competitive collaborations, or coopetition

Reasons firms form strategic alliances Expanding global competition The growing cost of research, product

development, and marketing The need to move faster in carrying

out global strategies15-18

Strategic AlliancesStrategic Alliances

Alliances may be Joint

Ventures

Pooling alliances driven by

similarity and integration

Trading alliances driven

by contribution of

dissimilar resources

Mergers and acquisitions

are not considered

alliances

15-19

Future of Alliances Many fail or are taken

over by one of the partners

Different strategies, operating practices, organizational cultures

Allow a partner to acquire technological or other competencies

Regardless, will continue to be important strategic tool

International Channels International Channels of Distribution Membersof Distribution Members

Indirect Exporting Distribution Members Exporters that sell for

the manufacturer

Exporters that buy for their overseas customers

Exporters that buy and sell for their account

Exporters that purchase for foreign users15-20

International ChannelsInternational Channels of Distribution Members of Distribution Members

Indirect Exporting Exporters that sell for the manufacturer

Manufacturers’ export agents

Act as the international representatives for various noncompeting domestic manufacturers

Export management companies

Act as the export department for noncompeting manufacturers

International trading companies

Act as agents for some companies and as wholesaler for others

Indirect ExportingIndirect Exporting

International Trading Companies (cont’d) Sogo Shosha

The largest of the Japanese trading companies

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

15-22

Korean general trading companies

Owned by huge Korean conglomerates called chaebol

Export trading companies

Allows American businesses to join together to export goods and services without violating antitrust regulations

Indirect ExportingIndirect Exporting Exporters that buy for

their overseas customers Export commission

agents Represent overseas

purchasers, such as import firms and large industrial users

These agents are paid a commission by the purchaser for acting as resident buyers in industrialized nations

15-23

Indirect ExportingIndirect Exporting

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 Established international manufacturers that sell

the products of other companies in foreign markets along with their own

Webb-Pomerene Associations Organizations of competing firms that have joined

together for the sole purpose of export trade15-24

Indirect ExportingIndirect Exporting

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

May be official buying representative or an employee

15-25

International ChannelsInternational Channels of Distribution Members of Distribution Members

Direct Exporting Distribution Members

Manufacturer’s agents

Distributors or wholesale importers

Retailers

Trading companies15-26

Direct ExportingDirect Exporting

Manufacturer’s agents Represent various

noncompeting foreign suppliers, and take orders in those firm’s names

Distributors or wholesale importers Independent merchants

that buy for their own account

15-27

Retailers Frequently direct

importers Trading companies

Develop trade and serve as intermediaries between foreign buyers and domestic sellers and vice versa

Relatively unknown in the U.S. but important world wide

SBA Exporting GuidelinesSBA Exporting GuidelinesAdvantages DisadvantagesAdvantages Disadvantages

enhance domestic competitiveness

increase sales and profits gain global market share reduce dependence on

existing markets exploit corporate

technology and know-how extend the sales potential

of existing products stabilize seasonal market

fluctuations enhance potential for

corporate expansion sell excess production

capacity gain information about

foreign competition

Your business may have to

develop new promotional material

subordinate short-term profits to long-term gains

incur added administrative costs

allocate personnel for travel

wait longer for payments modify your product or

packaging apply for additional

financing obtain special export

licenses

How to Locate an Importer, AgentHow to Locate an Importer, Agent

or Distributor in a Foreign Country or Distributor in a Foreign Country U.S. Federal and State Government Offices Abroad The

USDA's Foreign Agricultural Service (FAS) and the U.S. Department of Commerce have trade contact services for American exporters

Direct Mail — Write a letter to a company requesting that it represent your product

Personal Visits — Once you receive a few prospective distributors, plan a trip to that country

Trade Shows & Exhibitions — Trade shows and exhibitions are perhaps the best source for finding distributors

Foreign Magazines and Newspapers — Placing "distributor wanted" or "representative wanted" advertisements in foreign publications can generate responses

IBT Turnkey Project Facility 

   

Turnkey Project Facility

PROPOSAL - I BICYCLE RESEARCH & DEVELOPMENT CENTRE, LUDHIANA (INDIA)PROPOSAL FOR SETTING UP OF BICYCLE ASSEMBLY PLANT ON TURNKEY BASIS(BOUGHT OUT 25%)Capacity : 100,000 Units (Roadster Model) per annumTotal cost of the Project : US$ 1,159,000Duration: 36 to 42 months