Going Global Licensing Strategic Alliances FDI

Exports is not the only Option -Barriers to trade such as Tariffs, quotas and complex customs procedures discourage exports -Other options are DLicensing DStrategic Alliances DForeign Direct Investments (FDI) -Optimal mode of entry depends on business strategy, trade barriers & product situation

Entry Barriers -Tariff barriers are the most obvious barriers to entry. -Import Tariffs make imports more expensive when compared to domestic products -High tariffs create local monopolies, which results in higher prices for consumers -Tariffs also increase the cost of doing business in that country

Non Tariff barriers -Non Tariff barriers are common & include: DGovernment Rules & Regulations e.g: FDA rules in US, Purity laws in Germany DComplex Customs Procedures DLimited or No access to local distribution network e.g: Fuji prevented its distributors from carrying Kodak products DNatural Barriers: The local competitors are too competitive, have a dominant market share, have a strong brand name

Developed Vs Developing Countries -Trade barriers in developing countries are often tariffs, Rules, Regulations & lack of infrastructure -Barriers in developed countries are usually natural barriers, Government Rules & regulations -Developed countries are often the learning grounds for firms from developing countries in their global expansion

Exit Barriers -Exit barriers are non-recoverable investments made while operating in a country. -Often times it is difficult to lay off people, and may have to pay a huge compensation to do so. -Loss of good will, Brand Value, Brand Image also acts as an Exit barrier -E.g: Peugeot Exited US market in 1992, Philips is still operating in US even after 15 straight years of losses -Loss of learning opportunity is cited as an exit barrier

Effect of Barriers on Entry Mode -Entry Mode depends heavily on trade barriers -Firm must be ready to unbundle its Value chain to gain entry DCompulsory Joint Ventures in China DLocal Content Requirements in Czech DLack of distribution network in US -Firms often build managerial expertise in one mode of entry & would prefer it over others DIBM, Philips, P&G prefer Wholly Owned Subsidiaries DSmall tech companies may prefer licensing or Joint Ventures

Managerial Skills & Mode of Entry -Each Mode of entry involves different managerial skills DSupervising hundreds of Franchising is different from Running foreign subsidiaries -Joint Ventures & Wholly owned subsidiaries involve quite a lot of learning, Learning curve effects must be considered while planning the entry mode

Licensing -Licensing refers to a firms know-how or other intangible asset to a foreign company for a fee, royalty or some other form of payment -Overcomes tariffs and other trade barriers -Licensee will learn FSA from the licensor and may become a future competitor -Loss of FSA can be prevented by proper contracts & licensing agreements

Licensing – How not to do it -Gillette avoided investment in market research and investments in Europe, so it licensed its razor blade manufacturing technology to Wilkinson of UK – forgetting to exclude continental Europe in the contract -As a result Gillette now has to compete with its own technology in Continental Europe – A long uphill battle

Elements of a licensing Contract -Technology Package DDefinition, Know-How, Patents, trade marks -Use Conditions DTerritorial rights, Sublicensing agreements, exclusion zones, performance/Quality conditions, reporting rules -Compensation DMode of payment, Minimum & maximum fees, Other assistance fees, marketing fees -Other Provisions DContract laws, Arbitration conditions, terminations conditions

Franchising -Franchising is similar to licensing but in addition franchisor provides a well recognized brand name, marketing support and in some cases raw materials -Franchisor also provides advertising, employee training, production & quality training -In return Franchisee must adhere to the rules of the franchisor and both share revenue based on a preset agreement -Popular for fast foods, Hotels, Auto Repair Shops -Franchisor has a greater control over the operations

Original Equipment Manufacturing -OEM is actually exports -Manufacturer sends there parts to another company which sells the final product under their Brand name DCanon provides cartridges for HP printers DCanon Provides copiers for Savin -Pro: Avoids expensive marketing efforts -Con: Firm fails to learn from foreign Markets

Strategic Alliances (SA) -SA is a collaboration between 2 firms -Equity based SA is called Joint Ventures -SA is mutually beneficial and takes advantages of both firms FSA DShare R&D, Distribute each others products -In some cases SA involves sharing of vital information – A potential loss of FSA -Unlike licensing, there is usually no royalty or fees to be paid

Non-Equity SA -SA between competitors is relatively new -Need to access each others technology, marketing skills, manufacturing skills to exploit new markets is driving Non-Equity SA -Shortage of resources is one of the reason -Control is established by soft skills I.e. the need for mutual gain DFirst Mover advantage DLearn from leading markets DReduce competitive pressures

Distribution Alliances -Distribution networks are often expensive to setup -A mutual distribution alliance agreement prevents duplication of efforts while maximizing benefits DAirlines typically sell seats in other airlines DMitsubishi joined hands with Chrysler in US -Pro: Saves costs & uses a ready network -Con: DLimits growth of the partners via a non-compete agreements DFirm loses learning opportunity

Manufacturing Alliances -Manufacturing Alliance is a sharing of manufacturing facilities to save on investment costs, achieve economies of scale, save on transportation costs -Manufacturing Alliances tend to be unstable as: DLimits growth of the partners DPotential loss of know-how DPriority on manufacturing will always favor one partner over the other DLoss or learning curve economies

R&D Alliances -R&D alliances are often between competitors -Such alliances are for: DDeveloping a common technology DNeed for accessing each others technology DNeed to stay ahead of other competition DLower R&D costs, Avoid Duplication DNeed to impose a joint technology standard -Unintended Loss of technology is possible

Joint Ventures -Equity Based SA. Usually firms need to transfer capital, man power, technology and management skills to the new venture -Potential loss of know-how exists -Mutually beneficial if partners learn from each other and their joint experience -Usually a first step before setting up a Wholly Owned subsidiary -Care must be taken in selecting partners

FDI -FDI is usually for Wholly owned subsidiaries DGreater Control over know-how – I.e Internalization of FSA DAvoid tariff & other barriers DFaster response to foreign markets DLowering prices for buyers, gaining market share, establishing an insider position -Carries higher risk than any other mode of entry -May suffer from Country-of-origin effects DE.g Sony from Malaysia

FDI – Green Field project or Acquisition -FDI decisions will have to consider a green field venture or an acquisition of a foreign firm -Acquisition of an existing company speeds up entry, gains a ready market share -Benefits from existing facilities, marketing channels etc -Disadvantages are: DIncompatible product lines DCulture mismatch DPolitical Backlash or resurgence of national pride DLoss of Goodwill DStruck with existing legacy systems

FDI – Financial Analysis -FDI requires rigorous financial analysis -Cash flows are subjected to foreign exchange risks -IRR or NPV analysis for a foreign project is difficult due to lots of unknowns -Financial analysis is based on market forecast. In many cases market forecast will be inaccurate

Optimal Entry Strategy

Closing Thoughts