13 Selecting and Managing Entry Modes

Chapter Objectives Explain how companies use exporting, importing, and countertrade Explain the various means of financing export and import activities Describe the different contractual entry modes that are available to companies Explain the various types of investment entry modes Discuss the important strategic factors in selecting an entry mode

Marvel Enterprises Licenses characters for films and products Earns royalties from licensing agreements

Exports to the United States Source: WTO statistics 2013, $ Billions

Step 1Step 2 Identify a potential market Match needs to abilities Step 3 Initiate meetings Developing an Export Strategy Step 4 Commit resources

Degree of Export Involvement Direct exporting (sell to buyers) Indirect exporting (sell to intermediary) Sales representative Distributor Sales representative Distributor Agent Export management company Export trading company Agent Export management company Export trading company

Avoiding Export Blunders Conduct market research Obtain export advice Hire a freight forwarder

Discussion Question What are the four steps companies can follow when building an export strategy?

Answer to Discussion Question First, a firm should identify a potential market through careful market research and analysis. Second, it should match the needs of the market to its ability to satisfy those needs. Third, it should initiate meetings with potential distributors, buyers, and others. Fourth, it should commit human, financial, and physical resources to get the job done.

Forms of Countertrade Barter Counterpurchase Offset agreement Switch trading Buyback Direct exchange without money Sale to a nation in return for promise of future purchase from that nation Offset a hard-currency sale to a nation with future hard-currency purchase Sale by a company of an obligation to purchase from a country Export of industrial equipment in return for products that the equipment produces

Barter in Argentina Agencia el Universal/El Universal de Mexico/Newscom Barter (Trueque) in Argentina Clothing, food, cars, etc.

Export/Import Financing

High Risk Methods Exporter bills importer after merchandise ships Importer pays exporter before merchandise ships Open accountAdvance payment

Documentary Collection Bank acts as intermediary without accepting financial risk Draft (bill of exchange) Document that orders an importer to pay an exporter a specific sum of money at a specific time Bill of lading Contract between an exporter and shipper specifying destination and shipping costs for merchandise

Documentary Collection Process

Letter of Credit Importer’s bank issues a document stating that the bank will pay the exporter when exporter fulfills document’s terms  Irrevocable  Revocable  Confirmed

Letter of Credit Process

Discussion Question Export/import financing whereby a bank acts as an intermediary without accepting financial risk is called __________. a. Offset financing b. Letter of credit c. Documentary collection

Answer to Discussion Question Export/import financing whereby a bank acts as an intermediary without accepting financial risk is called __________. a. Offset financing b. Letter of credit c. Documentary collection

Licensing Advantages + Finance expansion + Reduce risks + Reduce counterfeits + Upgrade technologies – Restrict licensor’s activities – Reduce global consistency – Lend strategic property Disadvantages Company owning intangible property (licensor) grants another firm (licensee) the right to use it for a specific time

Franchising Advantages + Low cost and low risk + Rapid expansion + Local knowledge – Cumbersome – Lost flexibility Disadvantages Company (franchiser) supplies another (franchisee) with intangible property over an extended period

Management Contract Company supplies another with managerial expertise for a specific period of time Advantages + Few assets risked + Nations finance projects + Develops local workforce Disadvantages – Personnel at risk – Create competitor

Turnkey Project Advantages + Firms specialize in competency + Nations obtain infrastructure – Politicized process – Create competitor Disadvantages Company designs, constructs, and tests a production facility for a client

Discussion Question In what ways does franchising differ from licensing?

Answer to Discussion Question First, franchising gives a company greater control over the sale of its product in a target market than does licensing. Second, franchising is primarily used in the service sector, whereas licensing is common in manufacturing industries. Third, franchising requires ongoing assistance from the franchiser, but licensing normally involves a one-time transfer of property.

Wholly Owned Subsidiary Facility entirely owned and controlled by a single parent company Advantages + Day-to-day control + Coordinate subsidiaries Disadvantages – Expensive – High risk

Joint Venture Company created and jointly owned by two or more entities to achieve a common objective Advantages  Reduce risk level  Penetrate markets  Access channels Disadvantages  Partner conflict  Lose control

Joint Venture Configurations Source: Based on Peter Buckley and Mark Casson, “A Theory of Cooperation in International Business,” in Farok J. Contractor and Peter Lorange (eds.), Cooperative Strategies in International Business (Lexington, MA: Lexington Books, 1988), pp. 31–53.

Strategic Alliance Disadvantages Partner conflict Create competitor Advantages Share project cost Tap competitors’ strengths Gain channel access Entities cooperate (but do not form a separate company) to achieve strategic goals of each

Selecting Partners  Commitment  Trustworthiness  Cultural knowledge  Valuable contribution

Strategic Factors Cultural environment Political/Legal environments Market size Production and shipping costs International experience

Discussion Question An investment entry mode that gives a company the most control over day-to- day activities in a host country is called a __________. a. Joint venture b. Strategic alliance c. Wholly owned subsidiary

Answer to Discussion Question An investment entry mode that gives a company the most control over day-to- day activities in a host country is called a __________. a. Joint venture b. Strategic alliance c. Wholly owned subsidiary