How do companies enter foreign markets International Business I
Exporting• Send a firm’s products or services to international destinations. – Indirect: without the firm’s ultimate involvement • Cost CEM (ads), MEA (no ads, own name) – Direct: Import without intermediaries Export department. • Export Sales Subsidiary
Countertrade• Arrangements in which the flow of goods and services in both directions is the core of the transaction. – Pure Barter: acceptance of goods or services as payment. (sugar for oil) – Swith trading: three or more countries. Brazil • PCs for • Cofee Coffee • Coffee from UK for PCs UK Italy
Countertrade (cont.)– Counterpurchase: Country A exports to Country B in return promises to spend some or all of the receipts on imports from B. • No details, specific time (2 or 3 years)– Buyback: requires a company to provide machinery, factories, or technology and to buy products made from this machinery over an agreed period.– Offset: a foreign supplier is required to manufacture/ assemble the product locally and/or purchase local components as an exchange for the right to sell its products locally.
Contract manufacturing• Contractual agreement between a company and a foreign producer under which the foreign producer manufactures the company’s product. – The company controls promotion and distribution. – Pharmaceutical industry.
Licensing• In this agreement, the international company, the licensor, agrees to make available to another company abroad , the licensee, use of its: – Patents and trademarks – Manufacturing process – Know-how – Trade secrets – Managerial and technical services.
Franchising• Is a form of licensing.• Transfer of technology, business system, brand name, trademark and other property rights.• Franchisor: developed the business, lends the names and brands.• Franchisee: buys the rights (fees or royalties) to operate the business under the name of the franchisor.
Management service contracts• It is a long term agreement, in which the legal owners of the property and real estate enter into a contract with an outsider firm to run and operate the business. – The Firm gets regular payments as well as comissions.
Turnkey projects• The international company engages in the design and construction of the entire operation, once it is finished, the management goes to local personnel in exchange of a substantial fee. – Airports, dams, electric power stations, roads, factory complexes: steel mills, refineries, chemical plants and automobile plants.
Foreign direct investment• Serve a local market better (HFDI) – Copy and paste from the HQ plant. – As it is “there” it substitutes trade.• Lower cost imputs (VFDI) – Splitting the value chain activities to low-cost location.
Foreign mode of entry choices Acquisition Wholly Owned International Choices Greenfield Investments Decision toInternationalize Equity Join Ventures Cooperative International Choices Nonequity Strategic Alliances / Licensing
Type and degree of control Mode of Entry Strong Control Weak Control Nonexistent ControlContract A BCDManufacturingLicensing D C ABFranchising D C ABManagement D AC BService ContractJoint Venture D ABCWholly Owned ABCDSubsidiaryA: Daily management and QC.B: Control over physical assetsC: Control over tacit expertise and knowledge.D: Control over codified assets
Factors influencing the entry mode• Degree of control.• Systemic Risk: the level of political, economical and finacial risk.• Dissemination Risk: the expropriation of Know-how by a partner• Resource commitment: $
Factors influencing the entry mode Entry Mode Degree of Control Systemic Risk Dissemination Risk Resource Commitment Export Low Low Low LowCountertrade Low Low Low Low Contract Medium Medium Low to Medium LowManufacturing Licensing Low Low High Low Franchising Low to Medium Low Medium Low Management Medium Low Medium LowService Contract Turnkey Low Low Low Low EJV Medium-high Medium-high Medium to high Medium to high WOS High High Low High
Determinants of foreign mode of entry1. Firm’s Size: managerial capabilities and resources of the firm.2. Multinational Experience3. Industry Growth: in the target country.4. Global Industry Concentration: global competition demands global strategy.5. Technical Intensity: probably other firm has got the required technology.
Determinants of foreign mode of entry6. Advertising Intensity7. Country Risk8. Cultural Distance9. Market Potential10. Market Knowledge11.Value of Firm-Specific Assets: protection of technology and know-how.12.Contractual Risk: Prevent opportunism from partners.
Determinants of foreign mode of entry13.Tacit Nature of Know-how14.Venture Size15.Intent to conduct joint R&D16.Global Strategic Motivation: Competitors.17. Global Synergies: Hierarchical control over affiliates.
The OLI framework• Ownership Advantages – The use of the firm’s own assets and skills.• Location Advantages – Invest in the advantageous and attractive location.• Internalization Advantages – Operations of the firm organized internally