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Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea EXPORTING ? FRANCHISING?

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Presentation on theme: "Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea EXPORTING ? FRANCHISING?"— Presentation transcript:

1 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea EXPORTING ? FRANCHISING? DIRECT INVESTMENT ? SUB-CONTRACTING ? LICENSING ? TURNKEY? Chapter 12: The Firm’s Market-Entry Strategies

2 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea TOPIC PLAN » The firm’s foreign business strategy » Exporting » Contracting (licensing, leasing etc) » Joint ventures » Wholly-owned company » Advantages and disadvantages of various market entries » Strategic FDI plan issues

3 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Export-import Management l 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

4 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea The Firm’s Foreign Business Strategy Steps(Figure 12.1) l 1.The firm’s evaluation » Competitive advantages and disadvantages l 2.Selection of a target (geographic) market. l 3.Selection of product to make/sell in target market l 4.Selection of market-entry mode: » Exporting/Contracting/Foreign Direct Investment l 5.Business plan development and execution. l 6.Monitoring and evaluation of results.

5 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Exporting l World Exports of Goods (US $6,1862 billion in 2000) have declined in relative importance compared to foreign production (US$ 15,680 billion in 2000) l 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 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea EXPORTS : Advantages l Least costly and risky » L/C payment l Specialisation, economies of scale. l Open to any size or kind of firm

7 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea EXPORTS : Disadvantages l Production costs in the home country may be HIGHER l Transport costs may make exporting uneconomical. l Trade barriers in target markets. l Divided loyalties of O/S agents.

8 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Types of International Exporters l The Casual Exporter » Domestic firms that do not do international business on a regular basis(< 5% of T/O) l The Small Scale Exporter » 5-20% of turnover l The Experienced/Global Exporter » high ratio of its turnover through involvement in worldwide business deals(Exports +FDI)

9 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Licensing l Licensor grants rights to intangible property to a Licensee in exchange for a royalty payment. l Time and territorial limits l Advantages: » Speed of execution. » Low risk/investment cost » Brand recognition » Preliminary cooperation which may be expanded into FDI

10 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Licensing : Disa dvantages l Isolation from the market l Lack of managerial control l Limited life. l Risk of technology loss

11 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Franchising l 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. l 20% of US franchise systems have foreign operations (Japan,Canada,UK,Australia) -Domino vs.Pizza Haven(200 in 7 years); -Dunkin’Donuts vs.Donut King l Low market entry costs and risks. l Quality control is difficult due to big number of Franchisees and geographic location.

12 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Subcontracting l Supply arrangement between a principal and a subcontractor l Advantages: » Low investment cost » Speed » Stable processing cost and quality » Control of sales and marketing » Can become the basis for later alliance l Disadvantages: » Risk of non-delivery or late delivery

13 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea TURNKEY OPERATIONS l Contract for the construction of operating facilities that are transferred for a fee to the owner after commissioning l Advantages : » high economic returns » less risky than FDI l Disadvantages » lack of long-term market presence. » loss of control over technology » the client may turn into a competitor

14 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea JOINT VENTURES l A legal entity jointly owned by two or more legally distinct organisations which share in the J.V.’s decision-making activities. l Various options » 2 companies from the same country » Foreign/Local » 2 or > companies setting a j.v. in a third country

15 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea JOINT VENTURES(cont.) l Advantages : » Partner’s local knowledge » Cost/risk sharing » Host government legislation » Low risk of nationalisation. l Disadvantages : » Technology control risk. » Less control over subsidiaries. » Management control conflicts

16 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Wholly Owned subsidiaries l A firm owns 100 percent of the stock. l Trend in the motor-car sector(e.g.India,China) l Advantages : » complete management control. » Optimum security for technology. » “Internalisation” economies. l Disadvantages : » High costs and risks » Long lead time to first sale(especially for" Greenfield”)

17 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea China:Joint ventures versus Wholly Owned

18 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Strategic FDI Plan Issues l Investment location evaluation » See Matrix on next slide l Strategic organisation » International group » Business/product units » Functional units » Global matrix

19 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Investment Location Evaluation Variable12345 WeightCountryACountryB1x21x3 Political19494 Economic Auto- Motive Personnel22346 TOTAL

20 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea Strategic FDI Plan Issues l Financial Management and Control » Investment decisions » Financing decisions » Global money management l Global Sourcing Strategy » Outsourcing l Global Human Resource Strategies


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