2 TOPIC PLAN The firm’s foreign business strategy Exporting Contracting (licensing, leasing etc)Joint venturesWholly-owned companyAdvantages and disadvantages of various market entriesStrategic FDI plan issues
3 Export-import Management Company business strategiesDomestic strategiesInvestment in product developmentExpand domestic market shareDiversify into new industry.Foreign business strategiesExportingInternational contractingForeign Direct Investment/Foreign production
4 The Firm’s Foreign Business Strategy Steps(Figure 12.1) 1.The firm’s evaluationCompetitive advantages and disadvantages2.Selection of a target (geographic) market.3.Selection of product to make/sell in target market4.Selection of market-entry mode:Exporting/Contracting/Foreign Direct Investment5.Business plan development and execution.6.Monitoring and evaluation of results.
5 ExportingWorld Exports of Goods (US $6,1862 billion in 2000) have declined in relative importance compared to foreign production (US$ 15,680 billion in 2000)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.
6 EXPORTS : Advantages Least costly and risky L/C payment Specialisation, economies of scale.Open to any size or kind of firm
7 EXPORTS : Disadvantages Production costs in the home country may be HIGHERTransport costs may make exporting uneconomical.Trade barriers in target markets.Divided loyalties of O/S agents.
8 Types of International Exporters The Casual ExporterDomestic firms that do not do international business on a regular basis(< 5% of T/O)The Small Scale Exporter5-20% of turnoverThe Experienced/Global Exporterhigh ratio of its turnover through involvement in worldwide business deals(Exports +FDI)
9 LicensingLicensor grants rights to intangible property to a Licensee in exchange for a royalty payment.Time and territorial limitsAdvantages:Speed of execution.Low risk/investment costBrand recognitionPreliminary cooperation which may be expanded into FDI
10 Licensing : Disadvantages Isolation from the marketLack of managerial controlLimited life.Risk of technology loss
11 FranchisingA 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 vs.Pizza Haven(200 in 7 years);-Dunkin’Donuts vs.Donut KingLow market entry costs and risks.Quality control is difficult due to big number of Franchisees and geographic location.
12 SubcontractingSupply arrangement between a principal and a subcontractorAdvantages:Low investment costSpeedStable processing cost and qualityControl of sales and marketingCan become the basis for later allianceDisadvantages:Risk of non-delivery or late delivery
13 TURNKEY OPERATIONSContract for the construction of operating facilities that are transferred for a fee to the owner after commissioningAdvantages :high economic returnsless risky than FDIDisadvantageslack of long-term market presence.loss of control over technologythe client may turn into a competitor
14 JOINT VENTURESA legal entity jointly owned by two or more legally distinct organisations which share in the J.V.’s decision-making activities.Various options2 companies from the same countryForeign/Local2 or > companies setting a j.v. in a third country
15 JOINT VENTURES(cont.) Advantages : Disadvantages : Partner’s local knowledgeCost/risk sharingHost government legislationLow risk of nationalisation.Disadvantages :Technology control risk .Less control over subsidiaries .Management control conflicts
16 Wholly Owned subsidiaries A firm owns 100 percent of the stock.Trend in the motor-car sector(e.g.India,China)Advantages :complete management control.Optimum security for technology.“Internalisation” economies.Disadvantages :High costs and risksLong lead time to first sale(especially for" Greenfield”)