Chapter 7 discusses entry mode strategies for international business, including trade-related (exporting, subcontracting, countertrade) and transfer-related strategies (franchising, licensing, leasing, and build-operate-transfer). Exporting is highlighted as a less risky option compared to foreign direct investment, while countertrade offers flexible financing. Key considerations and documentation involved in these processes, as well as their respective advantages and disadvantages, are also explored.

1. CHAPTER 7
Entry Mode
Strategy

2. CHAPTER OUTLINES
• Trade-related Entry Mode Strategy
•  Export Strategy and Process
•  International Subcontracting
•  Countertrade
• Transfer-Related Entry Mode Strategy
•  International Franchising
•  International Licensing
•  International Leasing
•  Build-Operate-Transfer

3. A. TRADE RELATED
ENTRY MODES
STRATEGY

4. 1.EXPORT STRATEGY AND PROCESS
• Exporting is where MNE’s maintains its presence at
home country and sells its products internationally.
• Seems as less risky compared to FDI, since does not
involve physical presence of production facilities in
foreign land.
• Export is NOT feasible if the cost of exporting is
getting higher rather go for FDI to low cost country.
- Tariff barriers, transportation cost, and third party
distributors may all increase the cost and reduce the
competitiveness of the product.

5. • Firms pursue exporting because (advantage/reasons):
 Involve fewer risks. No substantial investment abroad
and does not have to deal with different business
environment.
 Firms can gain specific knowledge that will leads for
further business expansion.

6. • Disadvantages associated with exporting:
 Tariff barrier or import tax – increase price and
reduce competitiveness.
 Transportation cost - reduce product
competitiveness as it increases the price of the products.
 Need to hire third party who act a distributors – they
may not able to perform the task efficiently.

7. Understanding Export
Process
• Exporting can be done directly by the firm or through
the third party or known as export intermediaries.
• Person in charged of the exporting process must
familiarize with the export terms which is also known
as Terms of Sale as defined by International Chamber
of Commerce.
• The terms specify which party either buyer or seller
pays for which shipment and loading cost.

8. 1.Free alongside Ship (FAS)
•Sometimes is also known as Free House delivery is a
term of price whereby the seller covers all costs and
risks up to the side of the ship in a designated
shipment export port. The buyer bears all costs and
risks thereafter.
2.Free on board (FOB)
•Is a term of price whereby the seller covers all costs
and risks up to the point where the goods are
delivered on board of the ship in a designated export
port. While the buyer bear all costs and risks once
goods delivered which means the buyer is
responsible for the insurance and freight expenses in
transporting the goods from shipment port to the
i. Direct Export

9. 3.Cost, Insurance and Freight (CIF)
•Is a term of price whereby the seller covers costs of
the goods, insurance and all transportation and
miscellaneous charges to the name of foreign port in
the country of final destination.
4.Ex Works/Ex Factory
•Is a term of price where the buyer bear all costs of
the goods, transportation and miscellaneous charges
to the name of foreign port in the country of final
destination.
•This is where the buyer purchases and bears the
insurance. Of all the arrangements between exporter
and the importer, ex-factory is considered the most
cheapest arrangement as the buyer can make their
own arrangement and choose the cheapest cost of

10. •A manager involved in exporting must also
familiar with the key documentation in
exporting. Frequently used documents include:
• A letter of credit (L/C) is a document issued by
mostly financial institution. L/C serves as a
contract between an importer and a bank that
transfers liability for paying the exporter from
the importer to the importer’s bank.

11. •A bill of lading (B/L) is the document issued by
a shipping company or its agent that serves as
evidence of a contract for shipping the
merchandise and as a claim of ownership of the
goods.
•Other important documents commonly used in
international trade are bank draft which serves
as a guaranteed fund, commercial invoice,
insurance certificate and certificate of origin.

12. ii. Export Intermediaries
• Rather than manage export activities directly with
foreign customers, a firm may use a third party or
export intermediaries, especially when they are unable
to do export on their own or they are not familiar with
foreign country’s market.
• Their services include handling foreign shipments,
preparing export documents and dealing with customs
offices, insurance companies or commodity inspection
agencies

13. • It’s a process in which a firm seek other firm or company
(foreign firm) to provide them with raw material, semi-
finished product, components or technology for final
product.
• In this arrangement, the foreign firm does not own the
property rights of the product produced, as they will only
receive some fees for producing them.
• Example Nike, subcontracts the production of its
products to other countries like China, Vietnam, Thailand
and Indonesia.
2. INTERNATIONAL SUBCONTRACTING

14. • Advantages:
 Other foreign firm are more efficient and can produce
the product cheaper
 Low labor cost in a foreign country – enhance
competitiveness.
❑ Seek for lower cost of production that can enhance its
competitiveness in the global marketplace
• Threats:
 Foreign firms may gain knowledge and expertise to
produce the products

15. 3.COUNTERTRADE
• Seller and buyer from different countries
exchange merchandise with or without little cash
equivalents.
• In international trade, countertrade is viewed as
a form of flexible financing or payment.

16. 4 activities in countertrade
i. Barter
• Involves direct and simultaneous exchange goods
between two parties without any cash transaction.
Example, French and Cuba barter trade involve the
exchange of wheat for sugar.
ii. Counterpurchase
• Reciprocal buying agreement between two parties.
One firms sell its product to another firm at one point
in time and in return, the other firm will buy their
product. Occurs at a different time. Volume of trade
does not have to be equal.

17. iii. Offset
• Two parties in which one party agrees to purchase
goods and services with a specified percentage of its
proceeds from an original sale. Normally product are
related. Commonly popular is sales of expensive
military equipment or high cost civilian infrastructure
hardware.
iv. Buyback
• It involves two contracts which are sales agreement
and purchase agreement. For example, a steel
producer sends its goods to a foreign company would
be used to produce shelving. The steel producer will
buy the shelving at a reduced price.

18. B. TRANSFER
RELATED ENTRY
MODES STRATEGY

19. • Arrangements between two parties known as
franchisor and franchisee.
• Franchisor grants the intangible property rights to the
franchisee in exchange of royalty.
• Intangible property include trademark and brand
name.
• Franchisee must abide with all rules and regulations
made by the franchisor in order to maintain standard
quality and protect firm’s image. Examples of
international franchising are McDonalds and Subway
from the United States.
1.INTERNATIONAL FRANCHISING

20. Advantages
 Low political risk – franchisee familiar with local market
conditions.
 Low cost of doing business - cost of starting business
borne by franchisee.
 Easy way for the franchisor to create revenue by
leverage on assets.
Disadvantages
 Franchisee could jeopardize and damage the image.
 Limits franchisor’s profit revenue.

21. • An agreement between foreign firms known as
licensor and local firm known as licensee.
• Licensor grants specified intangible property rights to
the licensee in exchange of royalty.
• Licensee are allowed to produce and market the same
product in local and export markets.
• The intangible property rights include trademarks,
patents, inventions, formula, processes, designs,
copyrights, etc.
• Example Disney.
2.INTERNATIONAL LICENSING

22. Advantages
• Minimize the cost and risk example political risks.
• No need to established production facilities abroad.
• Attractive for firm to venture but lack of capital
Threats
• No control over manufacturing and marketing
(business manage by licensee).
• Potential loss of intangible property and know how.
• May gain knowledge of operating and eventually
become competitor.

23. • Lessor leases its equipment or machines to foreign
firms known as lessee for a certain period of time.
• Equipment and machines can be new or used
machines that are normally leased to manufacturing
firm in developing countries.
• Foreign firm from developing countries lack financial
capability to purchase the equipment or machines and
not available in developing countries.
• Example Mitsubishi from Japan lease its new and
used heavy truck to China for mining and construction.
3.INTERNATIONAL LEASING

24. Advantages to Lessor
 Generate revenue through leasing fees.
 Utilization of equipment or machines.
 Business expansion and experience accumulation in
foreign land.
Advantages to Lessee
 Reduce financial burden to access foreign technology.
 Little maintenance cost.
 Easier way to access foreign technologies and
facilities.

25. • Known as turnkey projects whereby foreign investors
are paid by a client to design and construct new
facilities and train local personnel.
• Widely used in large scale, long term infrastructure
such as highways, airport and power stations, which
commonly requires a much specialized expertise.
• Traditionally, strictly involve build and transfer, in which
foreign firm build and once the project is completed,
foreign firm will handover to client.
4.BUILD-OPERATE-TRANSFER

26. • BOT – Upon completion of the project, the foreign firm
will operate the project before handing it over to the
client.
• For example, consortium of firms from Germany and
Italy was awarded a BOT power plant project by the
Iranian government.
Threats Of BOT
 Clients may become competitor
 BOT does not allow long term presence in international
market since firm have to eventually hand over the project
to local client

27. PowerPoint picture page
END OF
CHAPTER 7