Entry modes of international business

1. Market Entry Methods
Exporting/Importing
 Direct
 Indirect
Contractual Entry Modes
 Licensing
 Franchising
 Management Contracts
 Turnkey Projects
Investment Entry Modes
 Wholly-Owned
Subsidiary
 Joint Venture
 Strategic Alliance

2. Exporting
 Selling and shipping products across borders
 Easiest and most common first step
 All size companies use this strategy
 Direct exporting: Company actively seeks
exporting
 Indirect exporting: Casual exporting which
uses agents or intermediaries

3.  Advantages:
 Risk of loss minimized because not much is
invested
 Product can remain unchanged
 Can be used to get rid of excess inventory or gain
additional sales

4.  Disadvantages:
 May not make the most of an opportunity
 Strongly dependent on exchange rates
 Examples:
 Producer sells to Wal-Mart which ships overseas
 Stora Enso sells paper products to Canada

5. Intermediaries
 Agents
 Representatives of one or more indirect exporters
in a target market
 Export Management Company
 Exports products on behalf of exporters
 Export Trading Company
 Provides services to indirect exporters

6. Licensing
 Domestic company allows foreign
company to use trademarks, patents,
copyrights, processes, or technical
knowledge for a fee
 Establishes foothold in foreign market
without a big investment
 Favorite strategy of small to medium size
companies
 Often use in addition to exporting

7.  Advantages:
 Foothold in foreign marketing without big
investment
 Formal agreement in licensing contract
 Avoids import restrictions

8.  Disadvantages:
 Hard to protect intellectual property
 May be least profitable means of entry
 Examples:
 Nestle makes food products with Disney
characters

9. Franchising
 Franchisor provides standardized products
and management processes while franchisee
provides capital, management personnel and
knowledge of local markets
 Fastest growing market entry strategy
 More than 30,000 franchises throughout the
world

10.  Advantages:
 Allows skills to be located with franchisor while
operations are spread over franchisees
 Expands company quickly with little investment by
franchisor
 Foreign laws are friendly because of local
ownership

11.  Disadvantages:
 Must share profits
 Poor franchisee can ruin image

12. Management Contracting
 Company sells management skills and runs a
foreign operation
 Main advantage is that it’s low risk
 Main disadvantage is that there is low profit potential
and lack of a long-term presence in market
 Example: DBS Asia (Thailand) awarded a contract
to Favorlangh Communication (Taiwan) to set up
and run digital tv programming in Taiwan

13. Turnkey Operation
 One company designs, constructs and tests a
production facility for a client firm for a fee
 Often used by governments
 Ex: Turkey’s government had two
consortiums of international firms build four
hydroelectric dams

14. Wholly-Owned Subsidiary
 Domestic company owns 100% of the stock
of another company
 Can buy an existing business (easiest
method that takes advantages of existing
strengths) or start from scratch

15.  Advantages:
 Can take advantage of low cost labor
 Avoid high import taxes
 Can gain access to raw materials
 May cut transportation costs to market

16.  Disadvantages:
 High investment
 High risk
 May suffer backlash from country
 Many countries restrict foreign direct investment
 Examples
 Nike
 Stora Enso

17. Joint Ventures
 Legal agreements between two or more
companies to conduct business together
 Separate company is created and jointly
owned
 Creates an alliance that combines strengths
and accomplishes goals more efficiently
 2nd most frequently used strategy behind
exporting

18.  Advantages:
 Less capital investment required from each
partner
 Shared risks
 Access to skills of partner
 With a local partner may allow access to markets
which are forbidden to foreigners

19.  Disadvantages:
 Shared control complicates decision making
 Agreements require frequent review
 Could create competitor
 Share revenue

20. Strategic Alliance
 Relationship between two companies to
cooperate to achieve strategic goals
 Similar to joint venture except a new
company is not formed

21.  Unz & Co. Guide to Exporting
http://www.unzco.com/basicguide/toc.html
 Small Business Administration Guide
http://www.sba.gov/OIT/info/Guide-To-
Exporting/

22. Inc. equivalents
 Canada, Japan, England – Ltd. (limited)
 France, Belgium – Sarl
 Spain, Mexico, Portugal and Brazil – S.A.
 Germany, Switzerland – GmbH
 Netherlands – N.V.
 Italy – Srl
 Denmark – A/S

23. What method of market entry
is this??
A company from Singapore is working with
businesses in Kenya to help organize and run
hospitals

24. A British toy company allows a Japanese
company to create clothing and school
supplies with one of the British company’s
doll characters on the products.

25. An example of this would be Nike making
shoes in Asia and Honda producing cars in
the United States.

26.  A small food-packaging firm cannot afford to
sell in other countries, so it asks an export
agent to obtain orders for the company.

27. A Vietnamese company decides to obtain
assistance from an Israeli company to share
production costs and profits of a chemical
manufacturing enterprise.

28.  An Italian restaurant is planning to allow a
company in New Zealand to operate several
restaurants using the same name and menu
items.

29.  A company in Egypt has purchased 51
percent of the stock of a company in Peru.

30. A disadvantage of this entry method is that it is
strongly dependent on exchange rates
between countries and may not make the
most of of an international opportunity.

31. Advantages to this method are that it requires
less capital, and risks are shared

32. Which method of entry is the costliest?

33. Which method of entry is the easiest and most
common first step for businesses to go
international?

34. Which is the fastest growing market entry
method with over 30,000 possibilities
worldwide?