How Can Government Improve the Business Climate_ - The Manzella Report _ the Premier Source for Global Business and Economic News

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Strategic Options for Global Expansion

In order for lenders to obtain a full appreciation of the exporters mindset, it is important to understand some of his/her

considerations prior to obtaining an ov erseas order. One of the first issues confronting an exporter is deciding what

markets to pursue. In doing so, exporters should determine each country s market size, its rate of growth, U.S. market

share and whether that market share is increasing or decreasing. In addition, he/she should calculate whether or not the

firm can be competitiv e in the selected markets. Trade barriers (tariffs, as well as standards, regulations, quotas,

labeling requirements, etc.) in each selected market must be identified. If excessiv e, these barriers may make the

exporters product too expensiv e and limit his/her exports. If the barriers are deemed manageable, the next step would

inv olv e inv estigating whether any v ested interests can bar the exporters product from the market.

The exporter must also conduct research to become informed about competitors products, prices, distribution methods

and commitments to after-sale serv ice, as well as target customers. If intense competition exists, the exporter may decide

to look at smaller markets that may be unattractiv e for multinationals, but big enough for a small firm.

Sensitiv ity to foreign cultures is not only polite, its good business. As a result, the exporter also must be concerned with

the customers culture and tastes. If the products and designs will not suit the target market, the exporter will need to

make changes or choose another market. In addition, other factors to be considered include the degree of foreign

intellectual property protection, env ironmental standards, an understanding of the legal sy stem and how it works, and

the comprehensiv eness, or lack of, commercial legislation. The absence of civ il, commercial and criminal codes can be a

major constraint. And confusing and burdensome bureaucratic requirements can tie up v aluable time. As a result of the

effort up to this point, it is not uncommon for the exporter to grow fatigued, giv e up, or abandon the objectiv e.

There are many strategies from which a company can choose to expand internationally . These include direct exporting,

indirect exporting, establishing a joint v enture or strategic alliance in a foreign market, acquiring a firm through direct

inv estment, or licensing technology abroad. In order to understand the exporters needs, it is important for lenders to

grasp these strategies. The benefits and risks associated with each method are contingent on many factors, including the

ty pe of product or serv ice, the need for support, and the foreign economic, political, business, and cultural env ironment

the exporter is seeking to penetrate. The best strategy will depend on the firms lev el of resources and commitment, and

degree of risk it is willing to incur.

A number of questions must be answered before committing to a particular strategy . Experienced international

executiv es often say the company contemplating international expansion must be v ery familiar with the env ironment it

is seeking to penetrate and understand how to do business there. What it will take to be successful, to staff appropriately ,

integrate distribution, finance operations, and remedy currency risks should be analy zed ahead of time. A primary

concern frequently expressed is the need to know how to terminate an agreement if the arrangement does not work.

Additionally , seasoned executiv es indicate it is essential to determine the potential for political risk and the propensity for

business disruption in each country under consideration.

Should the client decide not to get inv olv ed in exporting, he/she may consider selling the product to an intermediary

located in the United States. Indirect exporting demands little or no knowledge of foreign markets. The adv antages to

small- and medium-size firms are that indirect exporting requires less international experience, less commitment of

resources, and less risk. In addition, firms often can enter foreign markets more quickly through indirect exporting. The

disadv antages include less control ov er the marketing of the product, less information about the buy ers and generally

less profit because of the greater number of intermediaries inv olv ed. These intermediaries include foreign buy ing agents,

brokers and agents, export management and export trading companies, piggy back marketing, and foreign trading

companies.

Foreign buy ing agents, also known as commission agents, are locators and purchasers of merchandise for foreign firms or

gov ernments. They are compensated by the foreign entity . Brokers and agents, also known as import-export brokers, act

as independent intermediaries who facilitate international transactions by coordinating activ ities of buy ers and sellers of

particular products. Brokers and agents receiv e commissions based on the v alue of the transaction. In some instances, a

broker or agent may prefer to keep the identity of the buy er or seller confidential to prev ent compromising his/her

Indirect Exporting

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position in future dealings. In this case, the broker or agent would retain ownership of the merchandise for a limited

period of time, receiv ing his/her compensation from the final price of the product. In some instances, a broker or agent

will prov ide documentation, labeling, packaging, and marketing serv ices.

Both export management companies (EMCs) and export trading companies (ETCs) serv e as indirect exporting

intermediaries by prov iding export-related serv ices. EMCs act as the export department for one or sev eral manufacturers

of non-competitiv e products, pursuing ov erseas orders in the name of the manufacturer. A long-term contractual

relationship ty pically exists between the EMC and manufacturer. Most EMCs can be v iewed as manufacturers sales

representativ es for export. Compensation packages v ary . EMCs may receiv e a commission based on sales, a combination

of retainer plus commission, or they may purchase and mark-up the product for export. They usually specialize in

particular products or country markets and work closely with well-established networks of foreign distributors. They are

familiar with the necessary formalities in packaging, documentation and shipping.

ETCs ty pically act as independent brokers, international distributors or wholesalers, with no long-term obligation to the

manufacturer. ETCs take title to the merchandise, pay ing the manufacturer directly . Both ETCs and EMCs can prov ide

immediate access to foreign markets and are used extensiv ely by many small businesses.

Piggy back marketing is an arrangement in which one manufacturer or serv ice firm distributes another company s

product or serv ice abroad. The most common example is when a manufacturer complements its product line with other

non-competing, ancillary products, such as TVs and VCRs.

Foreign trading companies, also known simply as trading companies, were important in the colonial mov ement and still

are important today . Trading companies are v ery popular in Japan and to a lesser extent in Korea, Taiwan, China,

Germany , the Netherlands, Sweden, England, and the larger Latin American nations. They tend to focus on a particular

market or product line. Dealing with a trading company is similar to dealing with a domestic distributor. Terms may

include a limited or exclusiv e territory inv olv ing one, sev eral or all foreign countries. The manufacturer may be

expected to maintain a certain lev el of support in inv entory , turnaround time, adv ertising, packaging, pricing, and

financing. In turn, the trading company normally will agree to achiev e a certain lev el of export sales in a specific time

period.

Direct exporting offers sev eral adv antages ov er indirect marketing. These include:

Partial or full control ov er the foreign marketing strategy , including distribution, pricing, promotion, and product

serv ices;

Direct and unadulterated feedback from the foreign market, allowing the manufacturer improv ed insight and the

ability to respond faster to changing market conditions to alter or improv e the product;

Better protection of trademarks, patents and goodwill; and

Fewer intermediaries with which to share profits.

Although direct exporting inv olv es greater risk, it often y ields greater profits. Generally , it is the best choice for

companies that expect international business to produce a significant portion of their profits.

Before commencing the export program, it is important to adv ise the exporter to meet with potential end-users,

distributors, agents, and U.S. gov ernment trade representativ es, including U.S. Export Assistance Centers (USEACs),

(see Chapter Fiv e). It is just as important to dev elop a first-hand insight into the country as it is to build a distribution

network. Before committing significant resources, the exporter should test the market in order to determine product

receptiv ity .

Foreign priv ate sector import channels usually include direct sales, distributors, sales agents, and retail distribution.

Direct sales to most foreign retail establishments, corporations, institutions or gov ernment agencies inv olv e contractual

terms and conditions often similar to those in the United States.

Distributors, also known as importing distributors or foreign distributors, play an important role for many U.S.

exporters. Distributors in dev eloping countries, for example, tend to purchase less sophisticated and less expensiv e

products to complement their preferred, more expensiv e and sophisticated lines, which they then distribute, acting as

agents for foreign firms. Factors that should be considered when choosing a distributor include the following: regions

cov ered, lines handled, track record, rapport with local banks, after-sales serv ice, firm size, knowledge of product, lev el of

cooperation, reputation, relations with local gov ernment officials, willingness and ability to inv entory , conditions of

facilities, and av erage percentage added to product price.

A common method of selling is through agents who solicit business in the foreign country on behalf of their U.S.

principals. Foreign sales agents, like U.S. sales representativ es, do not take title of the goods. This method is well suited for

the sale of capital goods directly to end-users. Contracts between exporters and agents in most countries usually are not

subject to gov ernment regulations. Howev er, the exporters relationship with the agent should be clearly defined so it is

not misconstrued by the foreign gov ernment to be an employ ee-employ er relationship, which could subject the exporter

Direct Exporting

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to tax and labor law obligations.

The agent relationship can be v ery beneficial depending on the exporters interests. Dev eloping a close working

relationship between the exporter and the foreign sales representativ e is crucial. Personal contact is v ital to dev eloping a

foreign business relationship. Similar to a distributor, the factors that should be considered when choosing an agent are

regions cov ered, lines handled, knowledge of product, track record, size and quality of sales staff, after-sales serv ice,

reputation, lev el of cooperation, length of contract, and commission required. On the downside, U.S. firms must also be

aware of the commitment they incur when signing an agent or distributor agreement. Foreign regulations are different

and can be more difficult to sev er.

Ov er the past decade, foreign marketing techniques and distribution channels hav e become more sophisticated.

Although small mom-and-pop retailers still dominate many foreign sectors in terms of numbers, larger retail chains and

discount stores are play ing an increasing role in the distribution of products to consumers. For example, in Mexico and in

many other dev eloping countries, large retail chains hav e been established. Many of them hav e adopted American-sty le

marketing techniques, such as automated checkout sy stems. This has resulted in more efficient business operations and

may require a reassessment of the agent/distributor expectations.

A joint v enture is a cooperativ e business v enture established by two or more companies. Prior to commencing operations,

partners usually allocate resources, consign risks and potential rewards, and delegate operational responsibilities to each

other while preserv ing autonomy . Upon completion of the project, the joint v enture is usually disbanded. Howev er, it

also may be a permanent relationship, maintaining, for example, a long-term production schedule.

An international joint v enture enables a firm to establish a marketing or manufacturing presence abroad with the

assistance of a local foreign partner. The partner may prov ide knowledge of gov ernment workings, regulations, internal

markets and distribution know-how. This knowledge may be particularly v aluable to an exporter in unfamiliar

territory .

A strategic alliance is similar to a joint v enture in many way s y et v ery different. An alliance may be formed when one

organization grants another the authority to exploit technology , research and dev elopment knowledge, marketing rights

and so forth, but does not create a separate entity . A ty pical example of a strategic alliance is the basic manufacturer -

foreign independent sales representativ e relationship. To solidify this informal arrangement, a handshake or simple

written agreement may suffice. A strategic alliance, often less formal, is a preliminary step to creating a joint v enture.

Consequently , both allow a company quickly to respond to a changing env ironment and contribute complementary

strengths to seize opportunities quickly . In some foreign markets, such as China, a joint v enture with a Chinese partner

may be the only legal way to enter the market, except under v ery special circumstances.

A small company with limited capital and manpower, and the need to reduce and share risks, may find a joint v enture

an ideal entry strategy in an ov erseas market. By utilizing the management skills, experience and knowledge of the

foreign market by the local partner, a firm significantly can reduce its learning curv e and share its risks with a partner

that has a similar agenda. A joint v enture is also safer than a full-scale acquisition should an unfamiliar host

gov ernment legislate adv erse policies affecting foreign inv estment. Or, as a result of social unrest, the host country

becomes embroiled in v iolence, resulting in property damage and the disruption of business. Many smaller companies

fav or joint v entures ov er other methods of expansion because they allow companies to target the exact activ ity for which

they are looking rather than tie up capital in areas in which they hav e no interest. And from a tax perspectiv e, partners

can form a structure so their income crosses the fewest possible borders.

While there are significant potential adv antages associated with joint v entures, there are also limitations. For example,

in a ty pical joint v enture the profits are shared. Additionally , there are many factors that can lead to disagreements

between the partners, such as a dispute ov er efforts and marketing strategies, differences in management philosophies,

etc. The ability to compromise and work together is essential, regardless of cultural differences. A complaint often heard

by v eteran executiv es is that many smaller companies do not inv est the necessary lev el of commitment to

understanding the culture or dev eloping a strong personal relationship with their joint v enture or strategic alliance

partners abroad. This, many say , is key to a successful partnership.

From the outset, the lev el of compatibility between potential partners is difficult to assess. Many auto analy sts speculated

that the joint v enture between Toy ota and General Motors that created New United Motors Manufacturing, Inc. in the

United States in 1 984 would not succeed due to differences in management sty les. It appears, howev er, that the analy sts

predictions were wrong. Conflicts can often arise with regard to interests in second markets. For example, assume a U.S.-

Mexican joint v enture in Mexico sells its fabrics to Argentina. Should the U.S. partner wish to establish a second joint

v enture in Argentina with an Argentinean partner, the second joint v enture would compete with the first. This can, and

has, resulted in many disputes.

Jerald Blumberg, Executiv e Vice President for DuPont, Wilmington, Delaware, believ es its imperativ e to hav e an

operating and marketing presence in the markets one wishes to pursue. He stated that DuPonts ly cra spandex business,

Joint Ventures and Strategic Alliances



one of the company s most global businesses, has 7 0 percent of its sales outside the United States. We operate 1 0 plants in

1 0 different countries, and no region or country is fav ored. There is no home region. Importantly , he said the business

is able to prov ide customers with the product they need, when they need it, any where in the world.

The company has sought joint v entures and alliances as a way to expand abroad. Many times wev e found this to be the

safest, best and most practical way to establish a presence and credibility in emerging and ev olv ing markets, Blumberg

said. Howev er, this approach may not work in places like Russia, where operating manufacturing plants and an

understanding of the consumer are limited. Blumberg claims a div erse business team who can serv e customers in local

markets is v ital. It is simply not possible for a cadre of expatriates from the home country to master the language and

cultural differences in this div erse world.

Through a strategic alliance or joint v enture, a U.S. producer may wish to license its technology , know-how or designs to

a foreign company for use in a geographic area for a limited period of time. This may include patents, trademarks,

production techniques, and technical, marketing and managerial expertise.

Licensing is particularly attractiv e to small- and medium-size firms because it affords international expansion while

significantly limiting risks. It rarely requires capital inv estment and neither requires the parties to work closely

together nor demands continuous attention. Generally , small firms do not hav e the expertise, staff or resources to satisfy

requirements demanded by other methods of expansion. In many cases, licensing is the only v iable strategy for any size

firm to securely enter a foreign market that lacks hard currency , sev erely restricts the repatriation of profits and foreign

direct inv estment, maintains unreasonable trade barriers, and/or is economically or politically unstable.

As with each market-entry method, licensing has its disadv antages. For example, the licensor loses control ov er the

quality , distribution and marketing policies, as well as the essential support serv ices employ ed for the purpose of selling

the product or technology . If compensation is based on sales v olume, the licensor must rely on the honesty of the licensee

to report units sold. Additionally , earnings are usually less than those prov ided by most other entry methods.

A ty pical licensing agreement may call for an up-front fee, roy alties based on a percentage of future earnings, and

consulting and training assistance. Many licensing agreements ev olv e into joint v entures, while some joint v entures or

strategic alliances are ev entually conv erted to simple licensing agreements when one party s interests div erge from the

original purpose.

Through foreign direct inv estment, a company can acquire an interest in another firm located abroad. This decision is

often part of a company s long-term strategy to strengthen its foreign presence. Most often, a company will complete a

foreign acquisition once a market is prov en, usually after y ears of exporting or when a high degree of success has been

experienced through a preexisting joint v enture.

The degree of ownership desired is often a choice of whether the foreign operation is to be wholly owned (either as a

branch or separate subsidiary ) or partially owned. If the inv estor or group of inv estors desire controlling interests, the

stock purchase will range from 51 to 1 00 percent. If the company is successful, the rev enue generated can often exceed

profits obtained through other ty pes of international expansion methods.

Controlling interests will prov ide full authority ov er all policies, including marketing strategies, financing, cost cutting,

expansion programs, production, and quality control. A foreign acquisition can also position the inv estor to accept host

gov ernment incentiv es. Although the greater degree of control may allow the new owners to dictate management policy ,

trade experts often adv ise clients to respect and v alue the input prov ided by existing managers. A v ery successful

acquisition strategy is one where the new owners study preexisting management sty les and seek to understand what

management thinks of proposed policy changes, and then incorporate this input.

Nationalist consumers tend to fav or goods produced in their country . As a result, it sometimes makes sense to establish a

manufacturing presence in the host country through an acquisition to achiev e this benefit. In addition to this, both

acquisitions and joint v entures allow for more effectiv e serv icing of products in distant markets, often leading to more

satisfied customers. Many Japanese automobile manufacturers, for example, serv ice the European market through their

manufacturing facilities in the United Kingdom. The sav ings in response time and shipping costs alone can make this

ty pe of v enture worthwhile, ultimately benefiting the customer.

Establishing a foreign base to serv ice a particular region is also beneficial for cultural reasons. For example, its predicted

that more U.S. companies operating in Mexico will use the country as a base to serv ice smaller Latin American countries.

The cultural affinity among the Mexicans and Central and South Americans can make assimilation less difficult and

sales easier.

Foreign acquisitions usually require an abundance of resources, and the exposure to risk is considerably higher, as

compared to other methods of foreign market entry . As a result, large companies are usually better suited for this ty pe of

Licensing Technology

Foreign Acquisitions



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undertaking. Changes in gov ernment policy can subject these resources to great risk. For example, transfer risk, arising

from adv erse gov ernment policies can restrict the transfer of capital, pay ments, products, technology , and persons into

or out of the host country . Operational risk can constrain the management and performance of local operations in

production, marketing, finance, and other business functions. These ty pes of risks, and others, can financially ruin a

foreign acquisition.

This appeared as Chapter Five in the book Trade and Finance For Lenders , 1999.

About The Author John Manzella [Fu ll Bio]

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John Manzella, a world-recognized author and speaker on global business, competitive strategies,and today's new economic realities, is editor-in-chief of The Manzella Report, and president ofManzella Trade Communications, a strategic communications, custom media and public affairsfirm.

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