chapter sixteen

Entry Modes

McGraw-Hill/Irwin International Business, 11/e

Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives
Understand the international market entry methods Appreciate 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

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Pioneers vs. Fast Followers

Pioneers
Can gain and maintain competitive edge in new market Overall pioneers may not perform as well in the long run as followers

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 pioneers early advantage
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Most successful when

High entry barriers exist Firm has sufficient size, resources, and competencies

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
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Summary: Modes of Entry

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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
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Indirect Exporting, contd.

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

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Direct Exporting
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

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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

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Exporting, contd
Licensing
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

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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

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Contracts
Management Contract
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

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Equity-Based Modes of Entry

Wholly Owned Subsidiary Joint Venture Strategic Alliance

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Wholly Owned Subsidiary

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

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Joint Venture, contd.

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
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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
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Strategic Alliances, contd.

May be Joint Ventures Future of Alliances Many fail or are taken over by a partner Difficult to manage
Different strategies Different operating practices Different organizational cultures

Pooling alliances driven

by similarity and integration Trading alliances driven by contribution of dissimilar resources Alternatives to mergers and acquisitions

Allow partner to acquire technological or other competencies Regardless, will continue to be important strategic tool
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Channel of Distribution
Links producer with foreign user Product and its title pass from producer to user

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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

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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
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Indirect Exporting: International Trading Companies

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

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International Channels of Distribution

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Indirect Exporting, contd.

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

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Indirect Exporting, contd.

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

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Indirect Exporting, contd.

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

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Direct Exporting Distribution Channel Members

Manufacturers 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
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