International Business by Prof. Yong-Sik Hwang Sejong University

Foreign Market Entry Strategies Importing or global sourcing: Procurement of products and services from foreign sources Exporting: Producing products or services in one country (often the producer’s home country), and selling and distributing them to customers in other countries Countertrade: International transaction in which all or partial payments are made in kind rather than cash

Global Sourcing Ratio

Foreign Market Entry Strategies (cont.) In contrast to home-based international operations (e.g., exporting), foreign direct investment (FDI) involves establishing a presence in the foreign market by investing capital and securing ownership of a factory, subsidiary, or other facility there. Collaborative ventures include joint ventures in which the firm makes similar equity investments abroad, but in partnership with another company.

Foreign Market Entry Strategies (cont.) With licensing, the firm allows a foreign partner to use its intellectual property in return for royalties or other compensation. Franchising is common in retailing. McDonalds, Dunkin’ Donuts, Century 21 Real Estate, and many other firms have used franchising to internationalize worldwide.

Factors to Consider When Choosing a Foreign Market Entry Strategy Goals and objectives of the firm, such as desired profitability, market share, or competitive positioning Degree of control desired regarding decisions, operations, and assets involved in a venture The firm’s financial, organizational, and technological resources and capabilities The types of risk inherent in each proposed foreign venture

Factors to Consider When Choosing Entry Strategy (cont.) Conditions in the target country, such as legal, cultural, and economic circumstances, as well as distribution and transportation systems Nature and extent of competition from existing rivals and from firms that may enter the market later Availability and capabilities of partners in the market

Additional Factors to Consider The value-adding activities the firm is willing to perform in the market and the activities it will delegate to local partners Long-term strategic importance of the market Characteristics of the product or service

Classification of Entry Strategies Based on Degree of Control for Focal Firms

Typical Stages of Company Internationalization

Exporting Is a Popular Entry Strategy The focal firm retains its manufacturing activities in its home market but conducts marketing, distribution, and customer service activities in the export market. It can conduct the latter activities itself, or contract with an independent distributor or agent. As an entry strategy, exporting is very flexible. Compared to more complex strategies such as FDI, the exporter can both enter and withdraw from markets easily, with minimal risk and expense. Both small and large firms rely on exporting as a relatively low-cost, low-risk market entry strategy.

Overview of Exporting Usually the firm’s first foreign entry strategy. Low risk, low cost, and flexible. Popular among SMEs. When we talk about trade, trade deficits, trade surpluses, etc., we’re talking about exporting. Most exports involve merchandise. Export channels: Independent distributor or agent Firm’s own marketing subsidiary abroad

International Sales Intensity of Various U.S.-Based Industries

Services Are Also Exported Examples are architecture, education, banking, insurance, entertainment, and information. However, many pure services cannot be exported because they cannot be transported. Retailers offer their services by establishing retail stores abroad via FDI. Retailing requires direct contact with customers. Overall, most services are delivered to foreign customers via entry strategies other than exporting.

Advantages of Exporting

Disadvantages of Exporting Requires firm to acquire new capabilities and redirect organizational resources; Sensitive to tariffs and other trade barriers; Sensitive to exchange rate fluctuations; Compared to FDI, firm has fewer opportunities to learn about customers, competitors, and the marketplace.

A Systematic Approach to Exporting Screen for the most attractive markets; identify qualified distributors; estimate industry market potential and company sales potential Assess firm’s resource needs; establish timetable for achieving export goals; decide on distribution strategy Acquire new abilities in such areas as product development, logistics, finance, contracts, currency management, foreign languages, cross-cultural skills Devise needed on-the-ground tactics; adapt products and marketing as needed

Export Intermediation Options Indirect exporting: Contracting with an intermediary, often an export management company or a trading company, in the firm’s home country to perform all export functions; common among firms new to exporting Direct exporting: Contracting with intermediaries, such as distributors or agents, in the foreign market to perform export functions; perform downstream value-chain activities in the target market Company-owned foreign subsidiary: Similar to direct exporting, except the exporter owns the foreign intermediation operation; the most advanced option

Alternative Organizational Arrangements for Exporting

United States: Top Trading Partners Sum of merchandise exports and imports, in billions of U.S. dollars

Canada: Top Trading Partners Sum of merchandise exports and imports, in billions of U.S. dollars

China: Top Trading Partners Sum of merchandise exports and imports, in billions of U.S. dollars

European Union: Top Trading Partners Sum of merchandise exports and imports, in billions of U.S. dollars

Export Documentation The official forms and other paperwork required to transport exported goods and clear customs Quotation or pro forma invoice: Issued on request to advise a potential buyer about the price and description of the exporter’s product or service Commercial invoice: Actual demand for payment issued by the exporter when a sale is concluded Bill of lading: Basic contract between exporter and shipper; authorizes the shipping company to transport the goods to the buyer’s destination

Export Documentation (cont.) Shipper's export declaration: Lists the contact information of the exporter and buyer, full description, declared value, and destination of the products being shipped Certificate of origin: The "birth certificate" of the goods, showing country where the product originated Insurance certificate: Protects the exported goods against damage, loss, pilferage, and, sometimes, delay

Incoterms (International Commerce Terms) A system of universal, standard terms of sale and delivery. Commonly used in international sales contracts and price lists to specify how the buyer and the seller share the cost of freight and insurance, and at which point the buyer takes title to the goods.

Examples of INCOTERMS

Methods of Payment METHODADVANTAGESDISADVANTAGES Cash in Advance Best for the sellerRisky from the buyer’s standpoint, and thus unpopular; tends to discourage sales Open Account Easy for the exporter, who simply bills the buyer, who is expected to pay at some future time as agreed. Risky unless there is strong established relationship between exporter and buyer Letter of Credit A contract between the banks of the buyer and the seller. Largely risk- free, it helps establish instant trust. Requires following a strict protocol, specified in the contract; can involve much paperwork

Letter of Credit Cycle

Sources of Information to Identify Potential Intermediaries Country and regional business directories such as Kompass (Europe), Bottin International (worldwide), Japanese Trade Directory, and Foreign Yellow Pages Trade associations such as the National Furniture Manufacturers Association or the National Association of Automotive Parts Manufacturers Government ministries and agencies such as Austrade in Australia, Export Development Canada, and the U.S. Department of Commerce Commercial attachés in embassies and consulates abroad Branch offices of government agencies located in exporter’s country, such as the Japan External Trade Organization

Working with Foreign Intermediaries The exporter relies on intermediaries for much of the marketing, physical distribution, and customer service activities in the export market. The exporter should cultivate mutually beneficial, bonding relations; respond to the intermediary’s needs; demonstrate commitment; and build trust. Intermediaries prefer handling good, profitable products, and desire various types of support.

Common Dispute Areas With Intermediaries Compensation arrangements Pricing practices Advertising and promotion practices and the extent of advertising support After-sales service Return policies Adequate inventory levels Incentives for promoting new products Adapting the product for local customers

Criteria for Evaluating Export Intermediaries

Bugaboo

Countertrade An international business transaction in which all or partial payments are made in kind rather than cash; similar to barter. Used when conventional means of payment are difficult, costly, or nonexistent Accounts for between 10% and 33% of all world trade Common in large-scale government procurement Risky May involve inferior or hard-to-price goods May lead to price padding Can be complex, cumbersome, and time consuming

Types of Countertrade Barter: Goods are directly exchanged without the transfer of any money Compensation deal: Payment in goods and cash Buy-back agreement: Seller agrees to supply technology or equipment to construct a facility and receives payment in the form of goods it produces

Examples of Countertrade Boeing traded aircraft for oil in Saudi Arabia. Caterpillar received caskets in Colombia and wine in Algeria in exchange for earthmoving equipment. Goodyear traded tires for minerals, textiles, and agricultural products. Coca-Cola received tomato paste from Turkey, oranges from Egypt, and beer from Poland in exchange for Coke.

Overview of Countertrade