McGraw-Hill/Irwin International Business, 11/e

chapter sixteen Entry Modes

Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

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

16-3

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 16-4

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 16-5

Summary: Modes of Entry

16-6

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 16-7

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 16-8

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 16-9

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 16-10

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 16-11

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 16-12

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 16-13

Equity-Based Modes of Entry

• Wholly Owned Subsidiary • Joint Venture • Strategic Alliance 16-14

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 16-15

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 16-16

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 16-17

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 16-18

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 16-19

Channel of Distribution

• Links producer with foreign user • Product and its title pass from producer to user 16-20

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 16-21

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 16-22

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 16-23

International Channels of Distribution

16-24

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 16-25

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 16-26

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 16-27

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 16-28