2. chapter sixteen Entry Modes McGraw-Hill/Irwin
International Business, 11/e
Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

3. Learning Objectives Explain the international market entry methods
Discuss the debate on whether being a market pioneer or a fast follower is most useful
Identify two different forms of piracy and discuss which might be helpful and harmful to firms doing international business
Discuss channel members available to companies that export or manufacture overseas

4. Pioneers vs. Fast Followers
Can gain and maintain competitive edge in new market
Overall pioneers may not perform as well in the long run as followers
Most successful when
High entry barriers exist
Firm has sufficient size, resources, and competencies
Followers
Many become followers by default
May be advantage to let pioneer take initial risks
Most successful when
Few legal, technological, cultural, or financial barriers
Sufficient resources or competencies to overwhelm the pioneer’s early advantage

5. Entering Foreign Markets
Nonequity modes of market entry
Exporting
Selling some regular production overseas
Requires little investment
Relatively free of risk
Indirect exporting
Direct exporting
Equity modes of market entry
Wholly owned subsidiary
Joint venture
Strategic alliance

6. Summary: Modes of Entry

7. Indirect Exporting
Exporting of goods and services through various home-based exporters
Manufacturers’ export agents
sell for manufacturer
Export commission agents
buy for overseas customers
Export merchants
purchase and sell for own accounts
International firms
use the goods overseas

8. Indirect Exporting, cont’d.
Disadvantages
Commission to export agents, commission agents, export merchants
Foreign business can be lost if exporters decide to change their sources and supply
Firm gains little experience from transactions

9. Direct Exporting Sales company option
Exporting of goods and services by the producing firm
Sales company option
Business established to market goods and services
Internet has made direct exporting much easier
Cost of trial low

10. Exporting Turnkey Project used for export of
Technology
Management expertise
Capital equipment (some cases)
After trial run, facility is turned over to purchaser
Exporter of a turnkey project may be
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

11. Exporting, cont’d Licensing Popular because
A contractual arrangement: one firm sells access to its patents, trade secrets, or technology to another
Licensee pays fixed sum and sales royalties (2%-5%)
Popular because
Courts have begun upholding patent infringement claims
Patent holders have become vigilant in suing violators
Foreign governments have been pressed to enforce their patent laws

12. Franchising Franchising
Form of licensing in which one firm contracts with another to operate a certain type of business under an established name according to specific rules

13. Contracts Management Contract Contract Manufacturing
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

14. Equity-Based Modes of Entry
Wholly Owned Subsidiary
Joint Venture
Strategic Alliance

15. Wholly Owned Subsidiary
build a new plant (greenfield investment)
acquire a going concern
purchase distributor, to obtain a distribution network familiar with products

16. Joint Venture Joint Venture
Cooperative effort among two or more organizations that share common interest in business enterprise
corporate entity formed by international company and local owners
corporate entity formed by two international companies for the purpose of doing business in a third market
a corporate entity formed by a government

17. Joint Venture, cont’d. Disadvantages Profits shared
If law allows no more than 49% foreign ownership, lose control
Control with minority ownership is possible if
Take 49% of shares and give 2% to local law firm or trusted national
Take in local majority partner (sleeping partner)
Management contract
Can enable the global partner to control many aspects of a joint venture even when holding only a minority position

18. Strategic Alliances
Partnerships between competitor, customers, or suppliers that may take various forms
Aims to achieve
Faster market entry and start-up
Access to new
Products
Technologies
Markets
Cost-savings by sharing
Costs
Resources
Risks

19. Strategic Alliances, cont’d.
May be Joint Ventures
Pooling alliances driven by similarity and integration
Trading alliances driven by contribution of dissimilar resources
Alternatives to mergers and acquisitions
Future of Alliances
Many fail or are taken over by a partner
Difficult to manage
Different strategies
Different operating practices
Different organizational cultures
Allow partner to acquire technological or other competencies
Regardless, will continue to be important strategic tool

20. Channel of Distribution
Links producer with foreign user
Product and its title pass from producer to user

21. Channel of Distribution Members: Indirect Exporting
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

22. Indirect Exporting Exporters that sell for the manufacturer
Manufacturers’ export agent
Acts as the international representative for various noncompeting domestic manufacturers
Export management companies (EMC)
Acts as the export department for noncompeting manufacturers
International trading companies
Acts as agent for some companies and as wholesaler for others

23. 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

24. International Channels of Distribution

25. Indirect Exporting, cont’d.
Exporters that buy for their overseas customers
Export commission agents
Represent overseas purchasers, such as import firms and large industrial users
Paid commission by the purchaser for acting as resident buyer

26. Indirect Exporting, cont’d.
Exporters that buy and sell for their own account
Export merchants
Purchase products directly from the manufacturer and then sell, invoice, and ship them 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

27. Indirect Exporting, cont’d.
Exporters that purchase for foreign users and middlemen
Large foreign users
Buy for their own use overseas
Export resident buyers
Perform essentially the same functions as export commission agents but more closely associated with a foreign firm

28. Direct Exporting Distribution Channel Members
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 intermediary between foreign buyers and domestic sellers and vice versa