Chapter 13

EntryModes

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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Learning Objectives• LO1 Explain the pros and cons of market pioneer

versus fast follower.• LO2 Explain the international market entry

methods.• LO3 Identify two forms of piracy, and discuss

how they both help and harm firms doing international business.

• LO4 Discuss why firms export and the three challenges of exporting.

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Exporting “Pioneer” or “Fast Follower” Which is Better?

• Pioneers succeed in exporting when – Insulated from

competitor entry– Strong patent protection,

proprietary technology– Big investment

requirements– Has size, resources and

competencies (R&D, marketing) capabilities to leverage pioneering position

• Fast Followers will succeed when– Few legal, financial, and

cultural barriers – Sufficient resources and

competencies to overwhelm pioneer’s early advantage

– Larger resource base than pioneer to reduce unit costs and offer lower prices

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Nonequity Modes of Entry• Exporting

– Selling some regular production overseas– Little investment– Relatively free of risk

• The next choices– Indirect Exporting– Direct Exporting

• Or– Turnkey Projects– Licensing– Franchising– Management contracts– Contract manufacturing

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Nonequity Modes of Entry• Indirect exporting done through

home-country based exporters– No special expertise– No large cash outlay

• Called in the trades:– Manufacturers’ Export

Agents sell for the manufacturer

– Export Commission Agents buy for overseas

customers– Export Merchants

purchase and sell for own accounts

– International Firms Use their own goods abroad

• Costs of indirect exporting:– Commissions – Lost foreign business if

exporters change suppliers

– Exporters gain little international experience

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Direct Exporting• Direct Exporting:

– Exporting of goods and services by firm that produces them

– Initial responsibility internal – sales manager– Sales company may be set up

– Internet makes direct exporting easier• Significant investment for international presence • Cost of trial low

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Turnkey Projects• Turnkey projects used to export:

– technology– management expertise– capital equipment (some cases)

• Exporter of a turnkey project may be:– contractor that specializes in designing and erecting

plants in a particular industry• After a trial run, the facility is turned over to the purchaser

– company that wishes to earn from its expertise– producer of a factory

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Licensing• Licensing

– Contractual arrangement in which one firm (licensor) grants access to its patents, trade secrets, or technology to another (licensee) for a fee

– Licensee pays fixed sum and sales royalties (2%-5%) over life of contract with renewal option

• Anything can be licensed – technology, brand and manufacturer names, logos, symbols, colors

• Licensing is attractive because:– Courts uphold patent infringement claims– patent holders sue violators– foreign governments enforce patent laws

• A Licensee may become a competitor

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Piracy• Patent infringement• Intellectual property

protection:– courts have begun

upholding patent infringement claims

– patent holders have started suing violators

– foreign governments have begun enforcement of their patent laws

• Traditional Piracy– Attack on defenseless

sailing vessels, theft of cargo and/or ship on the high seas

• Pirates can be:– International terrorists– Organized crime– Poor local fisherman• Locations:– Waters around Indonesia,

Nigeria, Somalia, Bangladesh, Caribbean

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Franchising• Franchising:

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

• Franchisee receives:– Publicized brand name – Well-known set of procedures– Carefully developed & controlled marketing

plan

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Management Contract• Management Contract

– Arrangement by which one firm provides management in all or specific areas to another firm

– Fee typically 2-5% annual sales, tax deductable in U.S.

• MNCs make contracts with:– Other firms with no ownership interest– Joint venture partners– Wholly owned subsidiaries

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Contract Manufacturing• Contract Manufacturing

– Arrangement in which one firm contracts with another to produce products to its specifications but assumes responsibility for marketing

• Other types:– Subcontract assembly or parts production– Lend capital to 3rd party foreign contractor

• Called “foreign direct investment without investment”

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Equity-Based Modes of Entry1. Wholly Owned

Subsidiary2. Joint Venture3. Strategic Alliances

• Wholly Owned Subsidiary

1. Start from the ground up by building a new plant (greenfield investment)

2. Acquire a going concern3. Purchase distributor to

obtain a distribution network familiar with product

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Joint Venture1. Joint Venture

– Cooperative effort among two or more organizations that share a common interest in a business enterprise or undertaking

Possible forms

1. international company and local owners

2. two international companies for the purpose of doing business in a third market

3. government agency (usually in the country of investment) and an international firm

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

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Issues with Venture Ventures• Strong nationalism• Expertise, tax & other benefits• Disadvantages:

– Shared profits– Minority ownership position– Difficulty in share distribution to allow minority

owner to be largest stockholder– Lack of control– Local law requiring local majority ownership– Joint venture control through management

contracts

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Strategic Alliances• Strategic Alliances

– partnerships between or among competitors, customers, or suppliers that may take one or more various forms, both equity and nonequity

• Goals of Strategic Alliances:– Faster market entry and

start-up– Access to new products,

technologies, and markets– Cost-savings by sharing

costs, resources, and risks

• Issues with Strategic Alliances:– Alliances may be Joint

Ventures– Pooling versus trading

alliances– Alliances versus mergers

and acquisitions– Future of alliances

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Issues with Strategic Alliances• Strategic Alliances may be Joint Ventures

– In manufacturing and marketing• Pooling versus Trading Alliances

– Pooling Alliances – driven by similarity and integration– Trading Alliances –driven by the logic of contributing dissimilar resources– Fundamental differences:

• Goals (common vs. compatible)• Optimal resources (many vs. few partners)• Managerial challenges (low vs. high coordination needs)

• Alliances versus Mergers and Acquisitions– Mergers and acquisitions not considered alliances, but ways to access

new technology• Future of Alliances

– Many fail or are taken over by a partner– Difficult to manage due to different strategies, operating practices, and

organizational cultures– Partner may acquire technological or other competencies and become

competitor

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Reasons to Export• To serve markets where the firm has no or limited

production facilities

• To satisfy host government’s requirements that local subsidiary have exports

• To remain price competitive in home market

• To test foreign markets and foreign competition inexpensively

• To meet customer requests for exports

• To offset cyclical sales in the domestic market

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Reasons to Export• To achieve additional sales, which will allow the firm to use

excess production capacity to lower per-unit fixed costs

• To extend a product’s life cycle by exporting to currently unserved markets where the product will be at the introduction stage of the life cycle

• To respond strategically to foreign competitors in the firm’s home market by entering their home markets

• To achieve the success the firm’s management has seen others achieve by exporting

• To improve the efficiency of manufacturing equipment, which usually works better at or near full capacity

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GLOBAL gauntlet

• Social Networking– With more businesses

using the Internet, it seems that anyone can become an Internet entrepreneur. But it might be more complicated, since many people use both global and local/regional social networking sites.

• Is it important to appeal to local tastes over the Internet? Why? How?

• Are exporting obstacles being created by a two-tiered social networking structure?

• Should only the largest firms be players?