into International Markets Lecture-03 Entry Modes into International Markets

INTERNATIONAL CONTRACTING Choosing a Mode of Entry Indirect export Direct export Joint Venture Greenfield M&A EXPORTING INVESTMENT Internet Entry INTERNATIONAL CONTRACTING B2B B2C With the channels of International Express Licensing Franchising Contract manufacturing Management contract Turnkey projects

Mode of Entry in international Business Indirect export modes Manufacturer uses independent export organizations located in its own country ( third country) There are five main entry modes of indirect exporting. Export buying agent – A representative of foreign buyers who is located in the exporter’s home country. The agent offers services to the foreign buyers: such as identifying potential sellers and negotiating prices. Export management company/export house – are specialist companies set up to act as the ‘export department ‘ for a range of companies.

Mode of Entry in international Business Direct export modes Manufacturers sells directly to an importer, agent or distributor located in the foreign target market. Distributor (Importer) – independent company that stocks the manufacturer’s products. It will have substantial freedom to choose own customers and price. It profits from the difference between its selling price and its buying price from the manufacturer. Agent – Independent company that sells on to customers on behalf of the manufacture( exporter). Usually it will not see or stock the product. It profits from a commission (typically 5-10%) paid by the manufacturer on a pre-agreed basis.

Piggyback – choosing a back to ride on Piggyback – choosing a back to ride on. It is about the rider ‘s use of the carrier’s international distribution organizations. The Strategy of Internationalization of Logitech - with the technology and the product sets of Performance Mouse MX and Anywhere Mouse MX, riding on IBM and Compaq, the revenue of 2011 was $2.32 billion.

Documentary Collection Process This diagram shows how the documentary collection process actually works.

Mode of Entry in international Business Intermediate Entry modes Contract manufacturing – is outsourced to an external partner, specialized in production and production technology. Licensing – the licensor gives a right to the licensee against payment ,e.g. a right to manufacture a certain product based on a patent against some agreed royalty. Franchising – the franchisor gives a right to the franchisee against payment, e.g. a right to use a total business concept/ system. Including use of trade marks (brands), against some agreed royalty. There are two major types of franchising: 1, Product and trade name franchising. It is very similar to the trade mark licensing

Mode of Entry in international Business 2, Business format ‘package ‘franchising. International business format franchising is a market entry mode that involves a relationship between the entrant ( the franchisor ) and a host country entity. The package can contain the following items: Trade marks/trade names, Copyright, designs, patents, trade secrets; Business know how; geographic exclusivity; design of the store; market research for the are, location selection, and management system Start with a response to a perceived local business opportunity, the franchisor will more rely on the knowledge and the flexible response to the local market. Franchisor will try to search a long term cooperation rather than a conflict. How to develop a monitorial system, a training procedure and adjustment mechanism is very important.

Mode of Entry in international Business Hierarchical Modes The firm owns and controls the foreign entry mode /organization. The degree of control that head office can exert on the subsidiary will depend on how many and which value chain functions can be transferred to the market. Domestic based sales representatives – it resides in the home county of the manufacturer and travel abroad to perform the sales function. Foreign branch – An extension of and a legal part of the manufacturer( often called a sales office), taxation of profits take place in the manufacturer’s country. Subsidiary – A local company owned and operated by a foreign company under the laws and taxation of the host country

Management Contract Advantages Disadvantages Company supplies another with managerial expertise for a specific period of time Advantages Few assets risked Nations finance projects Develops local workforce Another contractual entry mode is a management contract, which is when one company supplies another with managerial expertise for a specific period of time. The supplier of expertise is compensated with either a lump-sum payment or a fee based on sales. Management contracts are used to transfer specialized knowledge of technical managers and business management skills. Management contracts allow a firm to risk few assets when going international, let a nation upgrade its utilities when lacking financing, and help advance the skills of a nation’s workforce. Yet, management contracts can endanger the lives of home-country managers when abroad in unstable markets, and can create new competitors in target markets by transferring valuable skills. Disadvantages Personnel at risk Create competitor

Turnkey Project Advantages Disadvantages Company designs, constructs, and tests a production facility for a client Advantages Firms specialize in competency Nations obtain infrastructure Politicized process Create competitor Disadvantages Another contractual entry mode is a turnkey project, which is when a company designs, constructs, and tests a production facility for a client. These projects are often large-scale utility projects in host countries. They usually transfer special process technologies or facility designs to a client. Turnkey projects let a firm specialize in its core competency to exploit international opportunities, and allow a nation to obtain the latest infrastructure from the world’s leading companies. Yet, turnkey projects may be awarded for political reasons rather than for technological know-how, and can create future international competitors. Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Mode of Entry in international Business The way of HUAWEI go to Internationalization 2 4 6 3 1 5 3 2 The main products are programmed telephone exchanger and telecommunication software and service design

Foreign Direct Investment Mode of Entry in international Business Foreign Direct Investment Now many firms prefer to enter international market through ownership and control of assets in host countries. Other firms may first gain knowledge of and expertise in operation in the host country, and then expand in the market through ownership of production or distribution facilities. FDI affords the firm increased control over its international business operations, as well as increased profit potential. FDI exposes the firm to greater economic and political risks and operating complexity ,as well as the potential erosion of the value of its foreign investment if exchange rates change adversely.

Mode of Entry in international Business Marketing factors !. Size of Market 2. Market growth 3. Desire to maintain share of market and to follow competition 4.Desire to advance exports of parent company 5. Need to maintain close customer contact and following them Major Determinants of Foreign Direct Investment (FDI) Barriers to trade 1. Government-erected barriers to trade 2. Preference of local customers for local products Cost factors Desire to near labor and lower labor cost Availability to raw materials/capital/technology Lower transport cost Investment Climate 1.Political stability / Tax structure/ Currency exchange regulations 2. Limitations on ownership

Mode of Entry in international Business The DFI Decision Sequence The firm and Its Competitive Advantages 1 step Change the Advantages Exploit Existing Competitive Advantages Abroad 2 step Production at Home Exporting Production Abroad 3 step Licensing Management Contract Control Assets Abroad 4 step Joint Venture Wholly Owned Affiliate 5 step Greenfield Investment M&A Foreign Enterprises Source: Adapted from Gunter Dufey &R. Mirus, University of Michigan 1985

Mode of Entry in international Business Methods for FDI 1 2 3 Greenfield strategy: building new facilities ;the word green-field arises from the image of starting a virgin green site and then building on it Acquisition strategy: buying existing assets in a foreign country; the purchaser quickly obtains control over the acquired firms’ factories, employees, technology, brand names and distribution networks Joint Venture: creating when two or more firms agree to work together and create a jointly owned separate firm to promote their mutual interests

The Greenfield Strategy Mode of Entry in international Business The Greenfield Strategy Advantages : The firm can select the site that best meets its needs and construct modern, up-to-date facilities. The firm can start with a clean slate. The firm can acclimate itself to the new national business culture at its own pace, rather than having the instant responsibility of managing a newly acquired, ongoing business.

The Greenfield Strategy Mode of Entry in international Business The Greenfield Strategy Disadvantages : Successful implementation takes time and patience. Land in the desired location may be unavailable or very expensive. The firm may be more strongly perceived as a foreign enterprise.

The Acquisition Strategy Mode of Entry in international Business The Acquisition Strategy Advantages : It is quick to execute. In many cases firms make acquisitions to preempt (move faster and early than) their competitors. Maybe it is less risky than Greenfield.

The Acquisition Strategy Mode of Entry in international Business The Acquisition Strategy Disadvantages : The acquiring firm assumes all the liabilities—financial, managerial, and otherwise—of the acquired firm. The acquiring firm usually must also spend substantial sums up front.

The Acquisition Strategy Mode of Entry in international Business The Acquisition Strategy Why do acquisitions fail? The acquiring firms often overpay for the assets of the acquired firm. A clash between the cultures of the acquiring and acquired firm. Attempts to realize synergies by integrating the operations of the acquired and acquiring entities often run into roadblocks and take much longer than forecast. Inadequate pre-acquisition screening.

Mode of Entry in international Business Joint Venture Advantages : May facilitate entry into a foreign market. Allow firms to share the fixed costs (and associated risks) of developing new product or processes. A way to bring together complementary skills and assets that neither company could easily develop on its own. It can make sense to form an alliance that will help the firm establish technological standards for the industry than will benefit the firm.

Mode of Entry in international Business Joint Venture But alliances have risks, and one key to making a strategic alliance work is to select the right ally. The characteristics for a good ally 1.help the firm achieve its strategic goals 2. share the firm’s vision for the purpose of the alliance 3.unlikely to try to opportunistically exploit the alliance for its own ends

Joint Venture How to select a good partner Collect as much pertinent, publicly available information on potential allies as possible. Gather data from informed third parties, including firms that have had alliances with the potential partners, investment bankers who have had dealings with them, and former employees. Get to know the potential partner as well as possible before committing to an alliance. This process should include face-to-face meetings between senior managers to ensure that the chemistry is right.

The international Entrance by E-Commerce B2B or B2C marketing initially focused on domestic sales, but unexpectedly, the foreign customer orders coming and resulting in the concept of Internet marketing (IIM) For instance: Dell Amazon Shipments through international freight services company or express such UPS,DHL,TNT,FEDEX,EMS,NHK. Xsdot is a web development company that occupies itself with the development of internet, intranet, extranet, e-commerce and custom web based applications.

The Comparison of the Four Different Modes of international Entrance High Internet International Investment Degree of Risk & Management Control for the Profit Contractual Agreements Exporting Low

Mode of Entry in international Business Advantages and Disadvantages of Different Modes of Entry Mode Primary Advantage Primary Disadvantage Exporting Relative low financial exposure Vulnerability to tariffs and NTBs Permit gradual market entry Logistical complexities Acquire knowledge about local market Potential conflicts with distributors Avoid restrictions on foreign investment Licensing Low financial risk Limited market opportunity/profits Low-cost way to assess market potential Dependence on licensee Avoid tariffs NTBs restrictions on foreign investment Potential conflicts with licensee Licensee provides knowledge of local market Possibility of creating future competitors Franchising Maintain more control than with licensing Dependence on franchisee Franchisee provides knowledge of local market May be creating future competitors Potential conflicts with franchisee Avoid tariffs, NTBs, restrictions on foreign investment

Mode of Entry in international Business Advantages and Disadvantages of Different Modes of Entry Mode Primary Advantage Primary Disadvantage Contract Manufacturing Low financial risk Reduced control (may affect quality, delivery schedules, etc.) Minimize resources devoted to manufacturing Reduce learning potential Focus firm’s resources on other elements of the value chain Potential public relationship problems-may need more monitor working conditions, etc. Management contract Focus firm’s resources on its area of expertise Potential return limited by contract conflicts with licensee Minimal financial exposure May unintentionally transfer proprietary knowledge and techniques to contractee Turnkey project Financial risk (cost over runs, etc.) Avoid all long-term operational risk Construction risks (delays, problems with supplies, etc.) Foreign Direct investment High profit potential Maintain control over operations High financial and managerial investments Acquire knowledge of local market Higher exposure to political risk Avoid tariffs, NTBs Vulnerability to restrictions on foreign investment Greater managerial complexity

Risk, Control, Experience

6-Internat'l market entry Entry option A Entry option B Entry option C Value (1-5) (b) Weight (1-10) (1) Value (1-5) (2) Value (1-5) (4) Weighted score (1)x(4) Weighted score (1)x(b) Weighted score (1)x(2) Key factors Degree of control Resource availability Level of risk Speed Expected return Opportunities available - - - - Total weighted score - - - - Rank order Entry mode grid 20/ 6-Internat'l market entry

Entry Mode Decision Framework Control Resources Risk Dissem. Low Low Low High Licensing Exporting Intermediaries Direct Joint Venture Wholly-owned Subsidiary High High High Low

Entry Mode Decision Matrix Hi Strategic Importance of Country Lo Hi Resources, Control, Risk Lo Lo Hi Stand-alone Attractiveness of Country

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