Chapter 16

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Entry Modes:

Entry Modes McGraw-Hill/Irwin International Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. chapter sixteen

Learning Objectives:

16- 3 Learning Objectives Explain the international market entry methods Discuss the debate on whether being a market pioneer or a fast follower is most useful Identify two different forms of piracy and discuss which might be helpful and harmful to firms doing international business Discuss channel members available to companies that export or manufacture overseas

Pioneers vs. Fast Followers:

16- 4 Pioneers vs. Fast Followers Pioneers Can gain and maintain competitive edge in new market Overall pioneers may not perform as well in the long run as followers Most successful when High entry barriers exist Firm has sufficient size, resources, and competencies Followers Many become followers by default May be advantage to let pioneer take initial risks Most successful when Few legal, technological, cultural, or financial barriers Sufficient resources or competencies to overwhelm the pioneer’s early advantage

Entering Foreign Markets:

16- 5 Entering Foreign Markets Nonequity modes of market entry Exporting Selling some regular production overseas Requires little investment Relatively free of risk Indirect exporting Direct exporting Equity modes of market entry Wholly owned subsidiary Joint venture Strategic alliance

Summary: Modes of Entry:

16- 6 Summary: Modes of Entry

Indirect Exporting:

16- 7 Indirect Exporting Exporting of goods and services through various home-based exporters Manufacturers’ export agents sell for manufacturer Export commission agents buy for overseas customers Export merchants purchase and sell for own accounts International firms use the goods overseas

Indirect Exporting, cont’d.:

16- 8 Indirect Exporting, cont’d. Disadvantages Commission to export agents, commission agents, export merchants Foreign business can be lost if exporters decide to change their sources and supply Firm gains little experience from transactions

Direct Exporting:

16- 9 Direct Exporting Exporting of goods and services by the producing firm Sales company option Business established to market goods and services Internet has made direct exporting much easier Cost of trial low


16- 10 Exporting Turnkey Project used for export of Technology Management expertise Capital equipment (some cases) After trial run, facility is turned over to purchaser Exporter of a turnkey project may be Contractor that specializes in designing and erecting plants in a particular industry Company that wishes to earn money from its expertise Producer of a factory

Exporting, cont’d:

16- 11 Exporting, cont’d Licensing A contractual arrangement: one firm sells access to its patents, trade secrets, or technology to another Licensee pays fixed sum and sales royalties (2%-5%) Popular because Courts have begun upholding patent infringement claims Patent holders have become vigilant in suing violators Foreign governments have been pressed to enforce their patent laws


16- 12 Franchising Franchising Form of licensing in which one firm contracts with another to operate a certain type of business under an established name according to specific rules


16- 13 Contracts Management Contract Arrangement by which one firm provides management in all or specific areas to another firm Contract Manufacturing Arrangement in which one firm contracts with another to produce products to its specifications but assumes responsibility for marketing

Equity-Based Modes of Entry:

16- 14 Equity-Based Modes of Entry Wholly Owned Subsidiary Joint Venture Strategic Alliance

Wholly Owned Subsidiary:

16- 15 Wholly Owned Subsidiary Wholly Owned Subsidiary build a new plant (greenfield investment) acquire a going concern purchase distributor, to obtain a distribution network familiar with products

Joint Venture:

16- 16 Joint Venture Joint Venture Cooperative effort among two or more organizations that share common interest in business enterprise corporate entity formed by international company and local owners corporate entity formed by two international companies for the purpose of doing business in a third market a corporate entity formed by a government

Joint Venture, cont’d.:

16- 17 Joint Venture, cont’d. Disadvantages Profits shared If law allows no more than 49% foreign ownership, lose control Control with minority ownership is possible if Take 49% of shares and give 2% to local law firm or trusted national Take in local majority partner (sleeping partner) Management contract Can enable the global partner to control many aspects of a joint venture even when holding only a minority position

Strategic Alliances:

16- 18 Strategic Alliances Partnerships between competitor, customers, or suppliers that may take various forms Aims to achieve Faster market entry and start-up Access to new Products Technologies Markets Cost-savings by sharing Costs Resources Risks

Strategic Alliances, cont’d.:

16- 19 Strategic Alliances, cont’d. May be Joint Ventures Pooling alliances driven by similarity and integration Trading alliances driven by contribution of dissimilar resources Alternatives to mergers and acquisitions Future of Alliances Many fail or are taken over by a partner Difficult to manage Different strategies Different operating practices Different organizational cultures Allow partner to acquire technological or other competencies Regardless, will continue to be important strategic tool

Channel of Distribution:

16- 20 Channel of Distribution Links producer with foreign user Product and its title pass from producer to user

Channel of Distribution Members: Indirect Exporting:

16- 21 Channel of Distribution Members: Indirect Exporting Indirect Export Channel Members Sell for manufacturer Buy for overseas customers Buy and sell for own account Purchase on behalf of foreign middlemen or users

Indirect Exporting:

16- 22 Indirect Exporting Exporters that sell for the manufacturer Manufacturers’ export agent Acts as the international representative for various noncompeting domestic manufacturers Export management companies (EMC) Acts as the export department for noncompeting manufacturers International trading companies Acts as agent for some companies and as wholesaler for others

Indirect Exporting: International Trading Companies:

16- 23 Indirect Exporting: International Trading Companies International Trading Companies Japan: Sogo Shosha Originally established by the zaibatsu, centralized, family-dominated economic groups Korean: chaebol Owned by Korean conglomerates Export trading companies (ETC) U.S. firm established principally to export domestic goods and services

International Channels of Distribution:

16- 24 International Channels of Distribution

Indirect Exporting, cont’d.:

16- 25 Indirect Exporting, cont’d. Exporters that buy for their overseas customers Export commission agents Represent overseas purchasers, such as import firms and large industrial users Paid commission by the purchaser for acting as resident buyer

Indirect Exporting, cont’d.:

16- 26 Indirect Exporting, cont’d . Exporters that buy and sell for their own account Export merchants Purchase products directly from the manufacturer and then sell, invoice, and ship them in their own names Cooperative exporters/piggyback exporters Established international manufacturers that export other manufacturers’ goods as well as their own Webb-Pomerene Associations Organizations of competing firms that have joined together for the sole purpose of export trade

Indirect Exporting, cont’d.:

16- 27 Indirect Exporting, cont’d. Exporters that purchase for foreign users and middlemen Large foreign users Buy for their own use overseas Export resident buyers Perform essentially the same functions as export commission agents but more closely associated with a foreign firm

Direct Exporting Distribution Channel Members:

16- 28 Direct Exporting Distribution Channel Members Manufacturer’s agent Independent sales representative of noncompeting suppliers Distributor/wholesale importer Independent importer that buys for own account for resale Retailer Frequently direct importer Trading company Firm that develops international trade and serves as intermediary between foreign buyers and domestic sellers and vice versa