The document discusses various methods that companies can use to enter foreign markets, including exporting, countertrade, contract manufacturing, licensing, franchising, management service contracts, turnkey projects, and foreign direct investment. It also examines factors that influence the choice of entry mode such as the degree of control, risk, resource commitment, and firm-specific characteristics. Finally, it introduces the OLI framework for analyzing why companies internalize operations across borders.

1. How do companies enter foreign
markets
International Business I

2. 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

3. 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

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. Foreign mode of entry choices
Acquisition
Wholly Owned
International
Choices
Greenfield
Investments
Decision to
Internationalize
Equity Join
Ventures
Cooperative
International
Choices Nonequity
Strategic Alliances
/ Licensing

12. Type and degree of control
Mode of Entry Strong Control Weak Control Nonexistent Control
Contract A BCD
Manufacturing
Licensing D C AB
Franchising D C AB
Management D AC B
Service Contract
Joint Venture D ABC
Wholly Owned ABCD
Subsidiary
A: Daily management and QC.
B: Control over physical assets
C: Control over tacit expertise and knowledge.
D: Control over codified assets

13. 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: $

14. Factors influencing the entry mode
Entry Mode Degree of Control Systemic Risk Dissemination Risk Resource
Commitment
Export Low Low Low Low
Countertrade Low Low Low Low
Contract Medium Medium Low to Medium Low
Manufacturing
Licensing Low Low High Low
Franchising Low to Medium Low Medium Low
Management Medium Low Medium Low
Service Contract
Turnkey Low Low Low Low
EJV Medium-high Medium-high Medium to high Medium to
high
WOS High High Low High

15. Determinants of foreign mode of
entry
1. Firm’s Size: managerial capabilities and
resources of the firm.
2. Multinational Experience
3. 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.

16. Determinants of foreign mode of
entry
6. Advertising Intensity
7. Country Risk
8. Cultural Distance
9. Market Potential
10. Market Knowledge
11.Value of Firm-Specific Assets: protection of
technology and know-how.
12.Contractual Risk: Prevent opportunism from
partners.

17. Determinants of foreign mode of
entry
13.Tacit Nature of Know-how
14.Venture Size
15.Intent to conduct joint R&D
16.Global Strategic Motivation: Competitors.
17. Global Synergies: Hierarchical control over
affiliates.

18. 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