1. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 9 Market Entry and Expansion

2. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 9.1 - A Model of International Entry and Expansion

3. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Stimuli to Internationalize In business activities, a variety of stimuli push and pull firms along the international path. The major motivations for firms to go international have been differentiated into proactive and reactive. –Proactive motivations represent stimuli to attempt strategic change. –Reactive motivations influence firms that respond to environmental shifts by changing their activities over time.

4. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 9.2 - Why Firms go International Proactive Stimuli Profit advantage Unique products Technological advantages Exclusive information Economies of scale Market size Reactive Stimuli Competitive pressures Overproduction Stable or declining domestic sales Excess capacity Saturated domestic markets Proximity to customers and ports

5. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 9.3 - Change Agents in the Internationalization Process Internal Enlightened management New management Significant internal event External Foreign demand Competition Domestic distributors Service firms Business associations Governmental activities Export intermediaries - Export management companies and Trading companies

6. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Going International Export –The innate or start-up exporters play a growing role in an economy’s international trade involvement. –Stages involved in the gradual internationalization: Awareness of international market opportunities. Gradual interest in international activities. Explore international markets, considering the feasibility of exports. Evaluation of export efforts. Export adaptation.

7. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Going International Export - Modes of export –Direct export. –Through market intermediaries. –Selling goods to a domestic firm who in turn sells abroad.

8. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Going International Export management companies (EMC) –Domestic firms that perform international marketing services as commission representatives or distributors for other firms. –Two primary forms of operation Take title to goods and operate internationally. Perform services as agents. –Both parties must recognize the delegation of responsibilities, the costs associated with these activities, and the need for information sharing and cooperation.

9. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Going International Trading companies –The most famous trading companies are the sogoshosha of Japan. –Reasons for the success of the Japanese sogoshosha: The firms are organized to gather, evaluate, and translate market information into business opportunities. Their vast transaction volume provides them with cost advantages. They serve large markets around the world and have transaction advantages. They had access to capital, both within Japan and in the international capital markets.

10. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Going International Export trading companies (ETCs) –Designed to improve the export performance of small- and medium-sized firms. –Permits bank participation in trading companies to allow better access to capital. –Reduces the antitrust threat to joint export efforts to enable firms to share the cost of international market entry. –Must balance the demands of the market and the supply of the members to be successful.

11. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Going International E-commerce –The ability to offer goods and services over the Web. –Various methods to market products over the internet: Development of corporate websites. Business-to-consumer and consumer-to-business forums.

12. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Going International E-commerce concerns - Firms must be ready to: –Provide 24-hour order taking and customer support service. –Have the regulatory and customs-handling expertise to deliver internationally. –Have an understanding of global marketing environments for further development of business relationships.

13. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Licensing and Franchising Licensing –Under a licensing agreement, one firm, known as the licensor, permits another to use its intellectual property in exchange for compensation designated as a royalty. –Advantages of licensing Capital investment or knowledge or marketing strength is not required. Royalty income provides additional return on research and development investments already incurred. Reduces the risk of R&D failures, the cost of designing around the licensor’s patents, or the fear of patent infringement litigation.

14. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Licensing and Franchising –Advantages of licensing Ongoing licensing cooperation and support enables the licensee to benefit from new developments. Reduces the exposure to both government intervention and terrorism. Allows a firm to test a foreign market without major investment of capital or management time. Preempts a market for competition, especially if the licensor’s resources permit full-scale involvement only in selected markets. Increases protection of intellectual property rights.

15. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Licensing and Franchising –Disadvantages of licensing Licensor gets limited expertise. Licensor creates its own competitor. Allows multinational corporations (MNCs) to capitalize on older technology.

16. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Licensing and Franchising Principal issues in negotiating licensing agreements: –The scope of the rights conveyed - Involves specifying the technology, know-how, or show-how to be included, the format, and guarantees. –Compensation - Covering transfer, R&D, and opportunity costs.

17. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Licensing and Franchising Principal issues in negotiating licensing agreements: –Licensee compliance, which should address: Export control regulations. Confidentiality of the intellectual property and technology provided. Record keeping and provisions for licensor audits. –Dispute resolution. –Specification of term, termination, and survival of rights.

18. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Licensing and Franchising Trademark licensing –Permits use of the names or logos of designers, literary characters, sports teams, and movie stars on merchandise such as clothing. –Fees can range between 7 and 12 percent of net sales for merchandising license agreements.

19. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Licensing and Franchising Franchising –A situation under which a parent company (the franchiser) grants another independent entity (the franchisee) the right to do business in a specified manner. –The franchisee benefits from the reduced risk of implementing a proven concept. –The major forms of franchising are manufacturer- retailer systems, manufacturer-wholesaler systems, and service firm–retailer systems.

20. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Licensing and Franchising Franchising –Product/trade franchising emphasizes the product or commodity to be sold, while business format franchising focuses on ways of doing business. –Reasons for global franchising are market potential, financial gain, and saturated domestic markets.

21. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Licensing and Franchising Franchising concerns –The need for standardization. –Protection of the total business system. –Government intervention. –Selection and training.

22. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Foreign Direct Investment (FDI) Foreign direct investment - Investments to create or expand a long-term interest in an enterprise with some degree of control. Portfolio investment - The purchase of stocks and bonds internationally. Foreign direct investors often bring with them imports on an ongoing basis.

23. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Firms are categorized as: –Resource seekers - Search for natural and human resources. –Market seekers - Search for better opportunities to enter and expand within markets. –Efficiency seekers - Attempt to obtain the most economic sources of production. Foreign Direct Investment

24. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Foreign Direct Investment Reasons for FDI –Marketing factors Growth and profit motivations. Wider market access to maintain and increase sales. Circumvent barriers to trade. Local customers preference for domestic goods and services. Obtain low-cost resources and ensure their supply. –Derived demand - Results when businesses move abroad and encourage their suppliers to follow them, creating a chain or pattern of direct investment in a market.

25. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Reasons for FDI –Government incentives Fiscal incentives - Specific tax measures designed to attract the foreign investor. Financial incentives - Special funding for land or buildings, loans and guarantees, wage subsidies. Non-financial incentives - Guaranteed government purchases; protection from competition through tariffs, import quotas, and local content requirements; and investments in infrastructure facilities. Foreign Direct Investment

26. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Positive perspectives on foreign direct investors –Bring in capital, economic activity, and employment. –Transfer technology and managerial skills. –Encourage competition, market choice, and competitiveness. Foreign Direct Investment

27. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Negative perspectives on foreign direct investors –Drain resources from host countries. –Starve smaller capital markets. –Discourage local technology development. –Bring in outmoded technology. –Create new competition for local firms. Foreign Direct Investment

28. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Foreign Direct Investment Types of ownership - Full ownership –Result of ethnocentric considerations or one of the principles. –May be desirable, but is not necessary for success internationally. –A major concern is the “fairness” of profit repatriation, or transfer of profits, and the extent to which firms reinvest into their foreign operations. –Can be limited either through outright legal restrictions or through measures designed to make foreign ownership less attractive.

29. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Foreign Direct Investment Types of ownership - Joint ventures –Collaborations of two or more organizations for more than a transitory period. –Partners share assets, risks, and profits, though equality of partners is not necessary. –Reasons for joint ventures are governmental and commercial.

30. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Foreign Direct Investment Advantages of joint ventures –Pooling of resources. –Better relationships with local organizations. –The partner’s knowledge of the local market. –Minimize exposure to political risk. –Tap local capital markets. Disadvantages of joint ventures –Different levels of control are required. –Difficulty in maintaining the relationship. –Disagreements over business decisions. –Disagreements over profit accumulation and distribution (profit repatriation).

31. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Foreign Direct Investment Types of ownership - Strategic alliances –Arrangement between two or more companies with a common business objective. –Can be formed, adjusted, and dissolved rapidly. –Formed for market development, spreading the cost and risk inherent in production, and blocking or co- opting competitors.

32. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Foreign Direct Investment Types of ownership - Strategic alliances –Management contract Supplier brings together a package of skills that provides an integrated service to the client without incurring the risk and benefit of ownership. Provides organizational skills that are not available locally, expertise that is immediately available, and management assistance that would be difficult and costly to replicate locally. Lowers the risk of participating in an international venture and allows operational control.

33. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Foreign Direct Investment Types of ownership - Government consortia –Takes place at the industry level; characterized by government support or subsidization. –A reflection of escalating cost and a governmental goal of developing or maintaining global leadership in a particular sector. –Research consortia - Pool their resources for research into technologies.