Selecting and Managing Entry Modes

© Prentice Hall, 2006International Business 3e Chapter Chapter Preview Discuss the essential aspects of exporting Define each form of countertrade Explain each type of export/import financing Describe the advantages and disadvantages of each contractual entry mode Identify the pluses and minuses of each investment entry mode Identify strategic factors in selecting entry modes

© Prentice Hall, 2006International Business 3e Chapter Developing an Export Strategy Step 1 - Identify a potential market Step 2 - Match needs to abilities Step 3 - Initiate meetings Step 4 - Commit resources

© Prentice Hall, 2006International Business 3e Chapter Degree of Export Involvement Direct exporting (sell to buyers) - Sales representatives - Distributors Indirect exporting (sell to intermediary) - Agents - Export management companies - Export trading companies

© Prentice Hall, 2006International Business 3e Chapter Avoiding Export Blunders Conduct market research Obtain export advice Consider a freight forwarder

© Prentice Hall, 2006International Business 3e Chapter Forms of Countertrade Barter - Direct exchange without money Counterpurchase - Sale to a country in return for promise of future purchase from it Offset agreement - Offset a hard-currency sale to a nation with future hard- currency purchase Switch trading - Sale by a company of obligation to purchase from a country Buyback - Export of industrial equipment in return for products the equipment produces

© Prentice Hall, 2006International Business 3e Chapter High-Risk Approaches Advance payment - Importer pays exporter for merchandise before it ships Open account - Exporter ships merchandise and later bills importer

© Prentice Hall, 2006International Business 3e Chapter Documentary Collection Bank acts as intermediary without accepting financial risk - Draft (bill of exchange) Document that orders importer to pay exporter a specified sum of money at a specified time - Bill of lading Contract between exporter and shipper specifying destination and shipping costs for merchandise

© Prentice Hall, 2006International Business 3e Chapter Letter of Credit Importer’s bank issues a document stating that the bank will pay the exporter when exporter fulfills document’s terms - Irrevocable - Revocable - Confirmed

© Prentice Hall, 2006International Business 3e Chapter Licensing Company owning intangible property (licensor) grants another firm (licensee) the right to use it for a specified time - Advantages Finance expansion Reduce risk Reduce counterfeits Upgrade technologies - Disadvantages Restrict licensor’s future Reduce global consistency Lend strategic property

© Prentice Hall, 2006International Business 3e Chapter Franchising Company (franchiser) supplies another (franchisee) with intangible property over an extended period - Advantages Low cost and low risk Rapid expansion Local knowledge - Disadvantages Cumbersome Lost flexibility

© Prentice Hall, 2006International Business 3e Chapter Management Contract Company supplies another with managerial expertise for a specific period of time - Advantages Few assets risked Nations finance projects Develops local workforce - Disadvantages Personnel at risk Create competitor

© Prentice Hall, 2006International Business 3e Chapter Turnkey Project Company designs, constructs and tests a production facility for a client - Advantages Firms specialize in core competency Nations obtain infrastructure projects - Disadvantages Politicized process Create competitor

© Prentice Hall, 2006International Business 3e Chapter Wholly Owned Subsidiary Facility entirely owned and controlled by a single parent company - Advantages Day-to-day control Coordinate subsidiaries - Disadvantages Expensive High risk

© Prentice Hall, 2006International Business 3e Chapter Joint Venture Separate company created and jointly owned by two or more independent entities to achieve a common business objective Forward Backward Buyback Multistage - Advantages Reduce risk level Penetrate markets Access channels Protect interests - Disadvantages Partner conflict Lose control

© Prentice Hall, 2006International Business 3e Chapter Strategic Alliance Entities cooperate (but do not form a separate company) to achieve strategic goals of each - Advantages Share project cost Tap competitors’ strengths Gain channel access Protect interests - Disadvantages Create competitor Partner conflict

© Prentice Hall, 2006International Business 3e Chapter Entry Modes: Strategic Factors Cultural environment Political/Legal environments Market size Production and shipping costs International experience