This chapter discusses various modes of entry for international markets. It begins by comparing pioneers and fast followers, noting the advantages and disadvantages of each approach. It then outlines several nonequity entry methods like exporting, indirect exporting, direct exporting, turnkey projects, licensing, franchising, management contracts and contract manufacturing. Key equity-based entry methods are also summarized, including wholly owned subsidiaries, joint ventures and strategic alliances. The chapter concludes by discussing reasons why firms export and some of the challenges of exporting.

1. Chapter 13
Entry
Modes
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 13-2
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.
• 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.

3. 13-3
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
• 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
• 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

4. 13-4
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
• 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

5. 13-5
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
• 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
• Costs of indirect
exporting:
– Commissions
– Lost foreign business if
exporters change
suppliers
– Exporters gain little
international experience

6. 13-6
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
• 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

7. 13-7
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
• 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

8. 13-8
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

9. 13-9
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
• 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
• 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

10. 13-10
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
• 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

11. 13-11
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
• 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

12. 13-12
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”
• 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”

13. 13-13
Equity-Based Modes of Entry
1. Wholly Owned
Subsidiary
2. Joint Venture
3. Strategic Alliances
1. Wholly Owned
Subsidiary
2. Joint Venture
3. Strategic Alliances
• Wholly Owned
Subsidiary
1. Start from the ground up by
building a new plant
(greenfield investment)
2. Acquire a going concern
3. Purchase distributor to
obtain a distribution network
familiar with product
• Wholly Owned
Subsidiary
1. Start from the ground up by
building a new plant
(greenfield investment)
2. Acquire a going concern
3. Purchase distributor to
obtain a distribution network
familiar with product

14. 13-14
Joint Venture
1. Joint Venture
– Cooperative effort
among two or more
organizations that
share a common
interest in a
business enterprise
or undertaking
1. 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.
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.

15. 13-15
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
• 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

16. 13-16
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

17. 13-17
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
• 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

18. 13-18
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
• 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

19. 13-19
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
• 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

20. 13-20
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.
• 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?
• 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?