Entry Modes Chapter Fifteen McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Pioneers vs. Fast Followers Can gain and maintain competitive edge in new market May not perform as well in the long run as followers Are most successful when High entry barriers exist Firm has sufficient size, resources, and competencies Followers Many become followers by default May let pioneer take initial risks There are few legal, technological, cultural, or financial barriers They have sufficient resources and competencies to overwhelm the pioneer’s early advantage LO1

Entering Foreign Markets Non Equity Modes Exporting Selling some regular production overseas Requires little investment Relatively free of risk Indirect exporting Direct exporting Subcontracting Countertrade (discussed in Chapter 21) Licensing Franchising Contract Manufacturing LO2

Non-Equity Mode Indirect exporting through home-based exporters Manufacturers’ export agents sell for the manufacturer Export commission agents buy for overseas customers Export merchants purchase and sell for own accounts International firms export to their own affiliates use the goods overseas LO2

Non-Equity Mode Indirect Exporting Advantages Simpler than direct exporting Disadvantages Commission paid to export agents, commission agents, export merchants Foreign business can be lost if exporters decide to change their sources and supply Exporting firm gains little experience from transactions handled by others LO2

Non-Equity Mode Direct exporting refers to the exporting of goods and services by some entity within the producing firm Sales company Business established to market goods and services produced by others Internet has simplified direct exporting Cost of trial low LO2

Non-Equity Mode Turnkey Projects Turnkey projects are used to export technology management expertise capital equipment (some cases) Exporter of a turnkey project may be a 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 After a trial run, the facility is turned over to the purchaser LO2

Non-Equity Mode Licensing Licensing refers to a contractual arrangement in which one firm sells access to its patents, trade secrets, or technology to another firm Licensee pays fixed sum and sales royalties (2%-5%) Licensing is attractive because courts have begun upholding patent infringement claims patent holders have started suing violators foreign governments have begun enforcement of their patent laws LO2

Non-Equity Mode Franchising Franchising is a form of licensing in which one firm contracts with another to operate a business The franchisee gets a well-established name proven set of procedures carefully controlled marketing strategy The franchisor retains the right to enforce processes and strategy The franchisee expects operational, marketing, supply chain, R&D, etc. support LO2

Non-Equity Mode 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 LO2

Equity-Based Modes of Entry Equity-based entry modes include wholly owned subsidiaries joint ventures strategic alliances mergers and acquisitions LO2

Equity-Based Mode Wholly Owned Subsidiary In a wholly owned subsidiary, the company has full equity ownership of the foreign entity Entry strategies build a new plant (greenfield investment) acquire a going concern purchasing the company that used to be the local distributor allows the firm to obtain an established distribution network LO2

Equity-Based Mode Joint Venture A joint venture is a corporate entity formed by international company and local owners a corporate entity formed by two international companies for the purpose of doing business in a third market a corporate entity formed by the international company and a government entity a cooperative undertaking between two or more firms for a limited-duration project LO2

Equity-Based Mode Joint Venture Disadvantages of joint ventures Shared profits Loss of control Minority ownership control is possible if Foreign firm holds 49% of shares, gives another 2% to local law firm or trusted national, balance owned by local firm There is a local majority partner (sleeping partner) Management contract stipulates that global partner controls specific key aspects of a joint venture even though it holds only a minority position LO2

Equity or Non-Equity Based Mode Strategic Alliances Strategic alliances involve partnerships between competitors, customers, or suppliers Can take various equity or non-equity forms The goals of strategic alliances include Faster market entry and start-up Access to new products, technologies, and markets Cost-savings by sharing costs, resources, and risks LO2

Equity or Non-Equity Based Mode Strategic Alliances Strategic alliances can be joint ventures Pooling alliances are driven by similarity and integration Trading alliances are driven by the contribution of dissimilar resources Alternatives to mergers and acquisitions Future of Alliances Many fail or are taken over by a partner Difficult to manage due to diverging, strategies, operating practices, and organizational cultures Partner may acquire technological or other competencies and become competitor LO2

Channel of Distribution Members 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 LO4

Indirect Exporting Exporters sell for the manufacturer Manufacturers’ export agent Acts as the international representative for various non-competing domestic manufacturers Export management company (EMC) Acts as the export department for non-competing manufacturers International trading company Acts as agent for some companies and as wholesaler for others LO4

Indirect Exporting 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 LO4

Indirect Exporting Export commission agents buy for their overseas customers They represent overseas purchasers, such as import firms and large industrial users They are paid commission by the purchaser for acting as a resident buyer LO4

Indirect Exporting Export merchants Purchase products directly from the manufacturer Sell, invoice, and ship products 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 LO4

Direct Exporting by A Firm Such a firm has overseas middlemen 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 an intermediary between foreign buyers and domestic sellers and vice versa LO4

Piracy as Product Diffusion Market entry by accident “Piracy” is supported by commercial industry Sponsors events Media companies participate Software distribution (Windows) in China is mostly pirated Through this Microsoft has huge market share Tolerates pirates Supports users Sells other software and services LO3