GBS CH 7 ENTRY MODE STRATEGY

CHAPTER 7
Entry Mode Strategy
LEARNING OBJECTIVES
1. identify different type of trade-related and transfer-related entry mode
strategies
2. understand the importance of selecting appropriate trade-related and transfer-
related entry mode strategies
3. explain the strengths and weaknesses of each different strategy
1

 MNEs strategic decision for
international expansion commonly
revolves around where, when and
how to enter a particular foreign
market.
 The selection on how to enter
foreign market is also known as entry
mode strategy.
 Firms may also combine few
strategies simultaneously to
penetrate foreign market.
2
TRADE RELATED ENTRY MODE
STRATEGY

Which is the most common trade-related entry
mode strategy? Why?
3
STRATEGY

Firm pursues exporting as entry mode strategy because:
1) exporting involved fewer risks as compared to other entry mode
strategy.
2) There is no substantial investment to establish production facilities
abroad.
3) Furthermore, firm does not have to deal with different business
environment in different countries unlike greenfield (foreign direct
investment or FDI).
4) Exporting firm can gain specific knowledge about a particular foreign
market that lead to further business expansion in that country. e.g. firm
can evaluate the market where it is doing business and ultimately set up
production facilities in that particular market.
4
STRATEGY:
Export

However, there are some disadvantages of using exporting as an entry mode
strategy as it can influence the firm competitiveness and incur more cost.
Some of the disadvantages include but are limited to:
1) tariff barrier or import tax imposed by local government. Tax may
increase the price of the products in foreign market and reduce product
competitiveness.
2) transportation cost may also reduce product competitiveness as it
increases the price of the products.
3) firm may be unable to sell the product directly to consumer as it
needs to hire third party or intermediaries who act as distributor to sell the
product in foreign country market. The third party may not be able to
perform the task efficiently as the firm does at a home country.
5
STRATEGY:
Export

1. Understanding the export process: direct exports
 exporting can be done directly by the firm or through the third party or
known as export intermediaries or export management company (EMC).
 the 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 (ICC).
 the terms specify which party either buyer or seller pays for which shipment
and loading cost.
6
STRATEGY:
Export

 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.
 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 destination
port.
7
STRATEGY:
Export

 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.
 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. Among all of 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 transportation and insurance.
8
STRATEGY:
Export

9
STRATEGY:
Export

10
STRATEGY:
Export

11
STRATEGY:
Export
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.
 A bill of landing (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, as well as commercial
invoice, insurance certificate and certificate of origin.

12
STRATEGY:
Export
2. Understanding the export process: export intermediaries
Export intermediaries are a company, also known as export management
company (EMC) which specializes in facilitating imports and export
activities. their services include handling foreign shipments, preparing
export documents and dealing with customs offices, insurance companies
or commodity inspection agencies.

13
STRATEGY:
International Subcontracting
 Subcontracting is the process in which a firm seek other firm or
company (typically foreign firm) to provide them with raw materials, semi-
finished products, sophisticated components or technology for producing
final goods.
 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 e.g. Nike, an American brand, subcontracts the production of its
products to other countries like China, Vietnam, Thailand and Indonesia.
 Nike still maintains property rights over materials and products, control
production processes and production quality and pays fees to foreign
company.

14
STRATEGY:
Countertrade
A situation where a seller and a buyer from different countries exchange
merchandise without or with little cash equivalents. In international trade,
countertrade is viewed as a form of flexible financing or payment.
This trade arrangement can be categorized into four different activities
which include:
 Barter
Barter trade (i.e. exchange of goods) may be the oldest form of trading.
In modern barter trade, it involves direct and simultaneous exchange of
goods between two parties without any cash transaction. In barter trade,
the two parties involve can be between individuals, firms, government or
between firms and government in two different countries e.g. French
and Cuba barter trade involve the exchange of wheat for sugar.

15
STRATEGY:
Countertrade
 Counterpurchase
 Counterpurchase is a reciprocal buying agreement between two
parties. In this arrangement, one firm sells its product to another firm at
one point in time and in return, the other firm will buy their products.
 Counterpurchase is a reciprocal buying agreement that occurs at
different time.
 Counterpurchase is more flexible than barter trade in which the volume
of trade does not have to be equal.
 The differences in value can be settled either through escrow account
or by using cash.
 The value of the counter-purchased goods is calculated on an agreed
percentage of the price of the goods originally exported. It is found
particularly in the key industrial sectors - machine tools, transport
supplies, and chemical and metallurgical products e.g. Malaysia granted
India Railway Company IRCON Intl Ltd. to construct a railway link at
Tanjung Pelepas, payment were made using palm oil.

16
STRATEGY:
Countertrade
 Offset
 An offset is an agreement between two parties in which one party
agrees to purchase goods and services with a specified percentage of
its proceeds from an original sale. In offset agreement, products are
normally related.
 Offset arrangement is commonly popular in sales of expensive military
equipment or high-cost civilian infrastructure hardware and normally
involve some technology transfer e.g. Shanghai Aircraft Manufacturing
Corps, China gets the contract to manufacture tail section of Boeing jet
and the payment will be made using the proceeds gained from its
manufacturing activities.

17
STRATEGY:
Countertrade
 Buyback
 it involves two contracts which are sales agreement and purchase
agreement e.g. a steel producer export its’ goods to foreign company
which would be used to produce shelving. The steel producer will buy
the shelving from the foreign company at a reduced price. In this case,
steel producer is actually paying part of the purchased shelving with
raw steel.
 In essence, buyback is a compensation agreement that occurs when
one firm provides another firm with inputs for manufacturing products,
and agrees to take certain percentage of the output produced by the
producing firm as partial payment.

18
TRANSFER RELATED ENTRY MODE
STRATEGY:
International Franchising
Transfer-related entry mode strategy occurs when one firm transfer
ownership or property rights of its technology or assets in exchange for
royalty fees. There are four different type of transfer-related entry modes
strategy widely used by firms. These include international franchising,
international licensing, international leasing, and build-operate- transfer
(BOT) or turnkey operations.
International franchising is an arrangement between two parties known as
franchisor and franchisee. In this type of arrangement, a firm (franchisor)
grants the intangible property rights to the franchisee in exchange of royalty
fees. The intangible property rights include trademark and brand name. The
franchisee must abide by the terms and rules of doing business as specified
by the franchisor examples of international franchising are McDonalds
and Subway from the United States.

19
STRATEGY:
The advantages include:
• Low political risks as the business is managed by franchisee which is
familiar with local market condition.
• Low cost of doing business abroad as the cost of setting up the business in
foreign market will be borne by franchisee.
• Franchising is an easy way for franchisor to create revenue by leveraging on
assets.
The disadvantages include:
• Franchisee could jeopardize and damage the image of the firm if they are
unable or do not follow the quality standard set by franchisor.
• Franchising arrangement limits the franchisor’s profit revenue.

20
STRATEGY:
International Licensing
International licensing is an agreement between foreign firm known as
licensor and local firm known as licensee. In this arrangement, licensor grants
specified intangible property rights to licensee for a specified period of time
and in return licensor will receive royalty payment. The intangible property
rights include trademarks, patents, inventions, formula, processes,
designs, copyrights, etc.
The advantages include:
• A firm is able to minimize the costs and risks associated with doing
investment in foreign market for example political risks.
• No substantial investment is required to penetrate foreign market as there
is no need to establish production facilities abroad.
• Licensing is an attractive strategy for firm lacking of capital to venture into
foreign market.

21
STRATEGY:
International Licensing
The disadvantages include:
• Firm does not have control over the manufacturing and marketing of the
products as the business operations is managed by licensee.
• Potential loss of intangible property and know-how.
• By granting specific property rights, the licensee may gain knowledge of
the products and eventually may become a competitor by setting up its own
business operations.

22
STRATEGY:
International LeasingInternational leasing is another entry mode strategy where firm known as
lessor leases its equipment or machines to foreign firm known as lessee for a
specified period of time. Lessor benefits from this arrangement through:
• The generation of revenue through leasing fees.
• Fully utilisation of the available equipment or machines as these equipment
and machines are commonly not fully used by the firm but still in good
condition to be leased out.
• Business expansion to foreign market and accumulate experience in foreign
land.
The benefits to lessee include:
• Reduce financial burden to access foreign technologies.
• Less hassle and little or no maintenance cost.
• Easier way to access to foreign technologies and facilities that enable lessee
to increase their knowledge and experience with foreign technologies and
facilities.

23
STRATEGY:
Built-Operate-Transfer (BOT)
Build-operate-transfer (BOT) is also known as “turnkey projects” whereby
foreign investors are paid by a client to design and construct new facilities
and train local personnel. Upon completion, or over a period of time, the
project will be hand over to the client.
The advantages of BOT to MNCs are firms can capitalize on BOT strategy to
rapidly generate revenue and also as a mean to penetrate foreign market.
However, the drawbacks of BOT projects include:
• The client may later become competitor as the clients are exposed and
trained to use firms’ advance and state-of-the-art technologies.
• BOT does not allow long-term presence in international market since firm
have to eventually hand over the project to local client.

GBS CH 7 ENTRY MODE STRATEGY

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