1. Chapter 13 Entry Modes McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Exporting “Pioneer” or “Fast Follower” Which is Better?
“Pioneers” succeed in exporting when
Insulated from competitor entry
Strong patent protection proprietary technology
Big investment requirements
Has size, resources and competencies (R&D, marketing) to leverage pioneering position
“Fast Followers” will succeed when
Few legal, financial, and cultural barriers exist
Sufficient resources and competencies to overwhelm pioneer’s early advantage
Larger resource base than Pioneer to reduce unit costs and offer lower prices
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3. Nonequity Modes of Entry
LO2
Nonequity Modes of Entry
Starts with Exporting:
Selling some regular production overseas
Requires little investment
Relatively free of risk
The next choices:
Indirect Exporting
Direct Exporting
Or:
Turnkey Projects
Licensing
Franchising
Management Contracts
Contract Manufacturing
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4. Nonequity Modes of Entry
LO2
Nonequity Modes of Entry
Indirect exporting done through home-country based exporters
No special expertise
No large cash outlay
Called in the trade as:
Manufacturers’ Export Agents
sell for the manufacturer
Export Commission Agents
buy for overseas customers
Export Merchants
purchase and sell for own accounts
International Firms
Use their own goods abroad
Costs of indirect exporting:
Commissions
Lost foreign business if exporters change suppliers
Exporters gain little international experience
Firms shift to direct exporting to avoid these costs.
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5. Direct Exporting Direct Exporting:
LO2
Direct Exporting
Direct Exporting:
“the exporting of goods and services by a firm that produces them”
Initial responsibility done internally – sales manager
Sales company may be set up
Internet makes direct exporting easier
High level investment for international presence
Cost of trial is low
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6. Turnkey Projects Turnkey projects are used to export:
LO2
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
After a trial run, the facility is turned over to the purchaser
company that wishes to earn money from its expertise
producer of a factory
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7. LO2
Licensing
Licensing
“a contractual arrangement in which one firm (licensor) grants access to its patents, trade secrets, or technology to another (licensee) for a fee”
Licensee pays fixed sum and sales royalties (2%-5%) over life of contract with renewal option
Anything can be licensed – technology, brand & manufacturer names, logos, symbols, colors
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
A Licensee may become a competitor!
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8. Piracy Patent Infringement Intellectual property protection:
LO3
Piracy
Patent Infringement
Intellectual property protection:
courts have begun upholding patent infringement claims
patent holders have started suing violators
foreign governments have begun enforcement of their patent laws
Traditional Piracy
Attack on defenseless sailing vessels, theft of cargo and/or ship on the high seas
Pirates can be:
International terrorists
Organized crime
Poor local fisherman
Locations:
Waters around Indonesia, Nigeria, Somalia, Bangladesh & Caribbean
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9. Franchising Franchising: The franchisee gets: Publicized brand name
LO2
Franchising
Franchising:
“a form of licensing in which one firm contracts with another to operate a business under an established name according to specific rules”
The franchisee gets:
Publicized brand name
Well-known set of procedures
carefully developed & controlled controlled marketing plan
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10. Management Contract Management Contract MNCs make contracts with:
LO2
Management Contract
Management Contract
“An arrangement by which one firm provides management in all or specific areas to another firm”
Typical fee is 2-5% of annual sales and tax deductable
MNCs make contracts with:
Other firms with no ownership interest
Joint venture partners
Wholly owned subsidiaries
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11. Contract Manufacturing
LO2
Contract Manufacturing
Contract Manufacturing
“An arrangement in which one firm contracts with another to produce products to its specifications but assumes responsibility for marketing”
Other types of:
Subcontract assembly or parts production
Lend capital to 3rd party foreign contractor
Called “foreign direct investment without investment”
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12. Equity-Based Modes of Entry
LO2
Equity-Based Modes of Entry
Wholly Owned Subsidiary
Joint Venture
Strategic Alliances
Wholly Owned Subsidiary
Start from the ground up by building a new plant (greenfield investment)
Acquire a going concern
Purchase its distributor to obtain a distribution network familiar with its products
Host governments may ban wholly owned subsidiaries
Firm may lack capital or expertise
Tax or other advantages with other forms of investment
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13. Joint Venture Joint Venture
LO2
Joint Venture
Joint Venture
“A cooperative effort among two or more organizations that share a common interest in a business enterprise or undertaking”
A corporate entity formed by an 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 a government agency (usually in the country of investment) and an international firm; or
A cooperative undertaking between two or more firms of a limited-duration project.
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14. Issues with Venture Ventures
LO2
Issues with Venture Ventures
Strong nationalism
Expertise, tax & other benefits
Disadvantages:
Shared profits
Minority ownership position
Difficulty in share distribution to allow minority owner to be largest stockholder
Lack of control
Local law requiring local majority ownership
Joint venture control through management contracts
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15. Strategic Alliances Strategic Alliances
LO2
Strategic Alliances
Strategic Alliances
“partnerships between or among competitors, customers, or suppliers that may take one or more various forms, both equity and nonequity”
Goals of Strategic Alliances:
Faster market entry and start-up
Access to new products, technologies, and markets
Cost-savings by sharing costs, resources, and risks
Issues with Strategic Alliances:
Alliances may be Joint Ventures
Pooling versus Trading Alliances
Alliances versus Mergers and Acquisitions
Future of Alliances
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16. Issues with Strategic Alliances
LO2
Issues with Strategic Alliances
Strategic Alliances may be Joint Ventures
In manufacturing and marketing
Pooling versus Trading Alliances
Pooling Alliances – driven by similarity and integration
Trading Alliances –driven by the logic of contributing dissimilar resources
Fundamental differences:
Goals (common vs. compatible)
Optimal resources (many vs. few partners)
Managerial challenges (low vs. high coordination needs)
Alliances versus Mergers and Acquisitions
Mergers and acquisitions not considered alliances, but ways to access new technology
Future of Alliances
Many fail or are taken over by a partner
Difficult to manage due to different strategies, operating practices, and organizational cultures
Partner may acquire technological or other competencies and become competitor
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17. LO4
Reasons to Export
To serve markets where the firm has no or limited production facilities.
To satisfy a host government’s requirements that the local subsidiary have exports.
To remain price competitive in the home market.
To test foreign markets and foreign competition inexpensively.
To meet actual or prospective customer requests for the firm to export.
To offset cyclical sales in the domestic market.
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18. LO4
Reasons to Export
To achieve additional sales, which will allow the firm to use excess production capacity to lower per-unit fixed costs.
To extend a product’s life cycle by exporting to currently unserved markets where the product will be at the introduction stage of the life cycle.
To respond strategically to foreign competitors that are in the firm’s home market by entering their home market.
To achieve the success the firm’s management has seen others achieve by exporting.
To improve the efficiency of manufacturing equipment, which usually works better at or near full capacity.
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