1. Chapter 12 The firm’s market-entry strategies
EXPORTING ?
FRANCHISING?
TURNKEY?
DIRECT INVESTMENT ?
LICENSING ?

2. Export-import management
Company business strategies
Domestic strategies
– investment in product development
– expand domestic market share
– diversify into new industry.
Foreign business strategies
– exporting
– international contracting
– foreign direct investment/foreign production

3. The firm’s foreign business strategy
1. JV = Joint Venture
2. WOC = Wholly-Owned Company
Source: adapted from R. Grosse & D. Kujawa, International Business, Irwin, 1992

4. Exporting
World exports of goods ($US8880 billion in 2004) have declined in relative importance compared to foreign production ($US17,580 billion in 2003).
Most likely mode for serving a foreign market for a domestic firm starting in international business.
– the business plan (export marketing plan)
– many global companies combine exports and FDI

5. Exports: advantages Least costly and risky – L/C payment
Specialisation, economies of scale.
Open to any size or kind of firm

6. Exports: disadvantages
Production costs in the home country may be higher.
Transport costs may make exporting uneconomical.
Trade barriers in target markets
Divided loyalties of different agents

7. Types of international exporters
Casual exporter
domestic firms that do not do international business on a regular basis (< 5% of T/O)
Small-scale exporter
5–20% of turnover
Experienced/global exporter
high ratio of its turnover through involvement in worldwide business deals (exports + FDI)

8. Licensing
Licensor grants rights to intangible property to a Licensee in exchange for a royalty payment.
Time and territorial limits
Advantages:
– speed of execution
– low risk/investment cost
– brand recognition
– preliminary cooperation which may be expanded
into FDI

9. Licensing: disadvantages
Isolation from the market
Lack of managerial control
Limited life
Risk of technology loss

10. Franchising
A franchisor sells limited brand use rights, products and services to a franchisee in return for a lump sum payment and a share of the franchisee’s profits.
20% of US franchise systems have foreign operations (Japan, Canada, UK, Australia)
- Domino’s Pizza vs Pizza Haven (200 in 7 years);
- Dunkin’ Donuts vs Donut King
Low market entry costs and risks
Quality control is difficult due to big number of franchisees and geographic location.

11. Subcontracting
Supply arrangement between a principal and a subcontractor
Advantages
low investment cost
speed
stable processing cost and quality
control of sales and marketing
can become the basis for later alliance
Disadvantages
risk of non-delivery or late delivery

12. Turnkey operations
Contract for the construction of operating facilities that are transferred for a fee to the owner after commissioning
Advantages
high economic returns
less risky than FDI
Disadvantages
lack of long-term market presence
loss of control over technology
client may turn into a competitor

13. Joint ventures
A legal entity jointly owned by two or more legally distinct organisations which share in the JV’s decision-making activities
Various options
– 2 companies from the same country
– foreign/local
– 2 or more companies setting up a JV in a third country

14. Joint ventures cont. Advantages partner’s local knowledge
cost/risk sharing
host government legislation
low risk of nationalisation
Disadvantages
technology control risk
less control over subsidiaries
management control conflicts

15. Wholly-owned subsidiaries
A firm owns 100% of the stock
Trend in the motor-car sector (e.g. India, China)
Advantages
complete management control
optimum security for technology
‘internalisation’ of operations
Disadvantages
high costs and risks
long lead time to first sale (especially for ‘Greenfield’ operations)

16. Strategic FDI plan issues (cont.)
Investment location evaluation
see matrix on next slide
Strategic organisation
international group
business/product units
functional units
global matrix

17. Strategic FDI plan issues
Financial management and control
investment decisions
financing decisions
global money management
Global sourcing strategy
outsourcing
Global human resource strategies

18. Investment location evaluation
Variable 1 2 3 4 5
Weight
Country A
Country B
1 x 2
1 x 3
Political 9
Economic 6 15 18
Automotive 12 16
Personnel
Total 10 19 17 40 44
Source: Fig. 12.3, p.298

19. Instruments in variables…
Political: political stability, nationalization and privatization policies, expropriation risk, govt. attitude to foreign investment
Economic: GNP/GDP size, growth, structure; general exports / imports; FDI inflows / stock; inflation; govt. controls; macroeconomic policies; currency fluctuations
Sector (Automotive): production size and growth, local and foreign competition, FDI in the automotive sector, govt. policies in the automotive sector (import protection, export assistance, incentives to foreign investors)
Personnel: size and quality of workforce, labour costs, limits on expatriates