1. International Business Bluefield College April 19, 2009
Global Trade Opportunities Exporting and Countertrade Foreign Direct Investment and Colloborations
International Business
Bluefield College
April 19, 2009

2. Overview of Foreign Market Entry Strategies
International transactions that involve the exchange of products: Home based international trade activities such as global sourcing, exporting, and countertrade.
Equity or ownership-based international business activities: Include FDI and equity-based collaborative ventures.
Contractual relationships: Include licensing and franchising.

3. Foreign Market Entry Strategies
Exchange of Products
Global sourcing: Strategy of buying products and services from foreign sources. Also known as ‘importing’, ‘global procurement’, or ‘global purchasing’.
Exporting: Strategy of producing products or services in one country (often the producer’s home country), and selling and distributing them to customers in another country.
Countertrade: Refers to a transaction in which all or part of the payment is received in the form of products or commodities.
Equity or Ownership-Based IB Activities
Typically involve foreign direct investment (FDI) and equity-based collaborative ventures.
In contrast to home-based international operations (e.g., exporting), the firm establishes 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

4. Foreign Market Entry Strategies
Contractual Relationships
Usually licensing or franchising
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 others have used franchising to internationalize worldwide.
Factors Relevant to Choice of Foreign Market Entry Strategy
The goals and objectives of the firm, such as desired profitability, market share, or competitive positioning;
The firm’s financial, organizational, and technological resources and capabilities;
Unique conditions in the target country, such as legal, cultural, and economic circumstances, as well as distribution and transportation systems;
Risks inherent in each proposed foreign venture;
The nature and extent of competition from existing and potential rivals;
The characteristics of the product or service to be offered to customers in the market (e.g., glass, yogurt, tires, copy machines)

5. Stages in Firm Internationalization

6. Exporting
The firm manufactures in one country (usually the home country) conducts marketing, distribution, and customer service activities in a foreign export market.
Export channels:
Independent distributor or agent, or
Firm’s own marketing subsidiary abroad
Exporting is low risk, low cost, and flexible.
Popular among SMEs.
Services Are Exported As Well
Examples: architecture, education, banking, insurance, entertainment, information.
However, many pure services cannot be exported because they cannot be transported.
Retailers offer their services by establishing retail stores abroad, that is, via FDI. This is because retailing requires direct contact with customers.
Overall, most services are delivered to foreign customers via entry strategies other than exporting.

7. An Analysis of Exporting
Export Advantages
Increase sales and profits
Increase economies of scale
Diversify customer base, reducing dependence on the home market
Stabilize fluctuations in sales associated with economic cycles or seasonality
Low cost entry strategy
Minimal risk
Maximal flexibility
Develop useful foreign relationships
Export Disadvantages
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

8. A Systematic Approach to Exporting

9. Indirect versus Direct Exporting
Indirect Exporting: Contracting with intermediaries in the firm’s home country to perform export functions, such as an Export Management Company (EMC) or a Trading Company. These intermediaries assume responsibility for finding foreign buyers, shipping products, and getting paid.
Direct Exporting: Contracting with intermediaries located in the foreign market to perform export functions, such as distributors or agents. They perform downstream value-chain activities in the target market.
Company-Owned Foreign Subsidiary
Handles downstream value-chain activities, such as marketing, physical distribution, promotion, and customer service activities, directly in the market.
Preferred method if:
target market is big
target market is complex
firm needs to closely control local operations
firm needs to control its intellectual property

10. Export Documentation
The official forms and other paperwork required to transport exported goods and clear customs.
Quotation or pro forma invoice: issued on request by potential customers 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.
Packing list: indicates exact contents of a shipment, particularly when there are many goods
Bill of lading: basic contract between exporter and shipper. Authorizes the shipping company to transport the goods to the buyer’s destination.
Shipper's export declaration: lists the contact information of the exporter and the buyer, full description, declared value, and destination of the products being shipped. Used by governments to collect statistics.
Certificate of origin: the "birth certificate" of the goods being shipped, indicating the country where the product originated.
Insurance certificate: protects the exported goods against damage, loss, pilferage (theft) and, in some cases, delay.

11. 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.

12. Methods of Payment
Cash in Advance. Risky from the buyer’s standpoint; Unpopular with foreign buyers; Tends to discourage sales.
Open Account. Exporter simply bills the customer, who is expected to pay under agreed terms at some future time. Best between buyer/seller with an established relationship.
Letter of Credit. Contract between the banks of the buyer and the seller. Essentially risk- free. Immediately establishes trust between the parties.

13. Evaluation Criteria for Export Intermediaries

14. 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.

15. Countertrade Examples of Countertrade Nature of Countertrade
Caterpillar received caskets from Colombian customers and wine from Algerian customers in return for selling them 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.
Nature of Countertrade
Accounts for between 10% and 1/3 of all world trade.
Common in large-scale government procurement.
Occurs mainly when a developing country cannot obtain sufficient hard currency.
Enables developing-country firms to generate otherwise unobtainable sales.
Risky (e.g., may involve inferior goods, hard-to-price goods; leads to price padding; complex, cumbersome, and time-consuming)
Types of Countertrade
Barter: Direct exchange of goods without any money.
Compensation deals: Involve payment both in goods and cash.
Counterpurchase: Seller sells its product at a set price for cash, but also agrees to buy goods from the buyer.
Buy-back agreement. Seller agrees to supply technology or equipment to construct a facility and receives payment in the form of goods produced by the facility.

16. Variables Used in Country Screening

17. FDI and Collaborative Ventures
Foreign direct investment (FDI): an internationalization strategy in which the firm establishes a physical presence abroad by acquiring productive assets such as capital, technology, labor, land, plant, and equipment.
International collaborative venture: a cross-border business alliance in which partnering firms pool their resources and share costs and risks of a venture.
Joint venture (JV): a form of collaboration between two or more firms to create a jointly-owned enterprise.

18. Nature of FDI
The complex, and riskiest entry strategy, involves the building of manufacturing plants or other facilities abroad.
Undertaken by firms from both the advanced economies and emerging markets.
Target countries are advanced economies & emerging markets.
Occasionally raises patriotic sentiments among citizens
Considerations in choice of foreign market entry strategy
Degree of control that the firm wants to maintain over decisions, operations, and strategic assets involved in a venture;
Degree of risk firm is willing to tolerate, and the timeframe in which it expects returns;
Organizational and financial resources firm can commit
Availability and capabilities of partners in the market
Value-adding activities firm wants to perform itself in the market, and what activities it will leave to partners
Long-term strategic importance of the market.

19. Foreign Market Control Strategies

20. Foreign Direct Investment Motives

21. Public Companies with Largest FDI

22. Service Multinationals
Firms that offer services – such as lodging, construction, and personal care – must offer them when and where they are consumed.
Service firms establish either a permanent presence through FDI (e.g., retailing), or a temporary relocation of personnel (e.g., construction industry).
Many support services – such as advertising, insurance, accounting, and package delivery – are best provided at the customer’s location.

23. Largest Financially-based MNEs

24. Leading Destinations for FDI
Advanced economies in Europe (especially Britain), Japan, and North America, are popular FDI destinations, mainly as attractive markets
In recent years, emerging markets and developing economies have gained appeal as FDI destinations.
Examples:
Firms target China to do low-cost manufacturing and as a huge target market
Firms target Eastern Europe to do low-cost manufacturing, and to easily access the huge European Union
Firms target Mexico to do low-cost manufacturing and to easily access the United States.

25. FDI Selection Factors

26. Types of Foreign Direct Investment
Greenfield investment vs. mergers and acquisitions
Greenfield investment: firm invests to build a new manufacturing, marketing or administrative facility, as opposed to acquiring existing facilities.
Acquisition : direct investment or purchase an existing company or facility.
Merger: special type of acquisition in which two firms join to form a new, larger company.
The nature of ownership: Wholly owned direct investment vs. equity joint venture
Equity participation: Acquisition of partial ownership in an existing firm.
Wholly owned direct investment: Investor fully owns the foreign assets
Equity joint ventures: Partnership in which a separate firm is created through the investment of assets by two or more parent firms that gain joint ownership of a new legal entity.
Level of integration: Vertical vs. horizontal FDI
Vertical integration: The firm owns, or seeks to own
Horizontal integration: Arrangement whereby the firm owns, or seeks to own, the activities involved in a single stage of its value chain

27. Toyota FDI in the United States

28. International Collaborative Venture
A partnership between two or more firms.
Includes equity joint ventures and non-equity, project-based ventures.
Sometimes called partnerships and strategic alliances.
Collaboration helps overcome the often substantial risk and high costs of international business. It makes possible the achievement of projects that exceed the capabilities of the individual firm.
Half of all global collaborative ventures fail within the first 5 years of operations due to unresolved disagreements, confusion, and frustration. Therefore, partners should:
Be aware of cultural differences;
Emphasize communications and building trust;
Pay attention to planning and management of the venture;
Protect core competencies.
Other types of collaborative ventures
Consortium: project-based, usually non-equity venture with multiple partners fulfilling a large-scale project. E.g., commercial aircraft manufacturing (Boeing and Airbus).
Cross-licensing agreement: type of a project-based, non-equity venture where partners agree to access licensed technology developed by the other, on preferential terms. E.g., telecommunications industry for inventing new technologies.

29. Advantages and Disadvantages of Collaborative Ventures

30. Retailers: A Special Case of FDI
Retailers internationalize substantially through FDI and collaborative ventures. Retailing takes various forms:
Department stores (e.g., Marks & Spencer, Macy's);
Specialty retailers (Body Shop, Gap, Disney Store);
Supermarkets (Sainsbury, Safeway, Sparr);
Convenience stores (Circle K, 7-Eleven, Tom Thumb); discount stores (Zellers, Tati, Target);
‘Big box stores” (Home Depot, IKEA, Toys "R" Us).
Wal-Mart has over 100 stores and 50,000 employees in China, sourcing almost all its merchandise locally and providing thousands of local jobs.

31. Barriers to Retailer Success Abroad
Culture and language barriers. E.g., differing product and service portfolio, store hours, store layout, relations between management and labor.
Consumers tend to develop strong loyalty to indigenous retailers. E.g., Both Galleries Lafayette in New York, and Wal-Mart in Germany failed.
Legal and regulatory barriers. Countries have idiosyncratic laws that affect retailing. E.g., Germany limits store hours and requires recycling
Retailers often must develop local sources of supply. E.g., McDonald’s in Russia; KFC in China.