15 Entry Modes International Business by Ball, McCulloch, Frantz, This chapter covers: Market pioneering versus fast following International market entry methods Forms of piracy Channel members for export or overseas manufacture Structural trends in wholesaling and retailing Entry Modes International Business by Ball, McCulloch, Frantz, Geringer, and Minor McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives Appreciate the debate on whether being a market pioneer, or a fast follower, is most useful Understand the international market entry methods Identify two different forms of piracy and discuss which might be helpful and harmful to firms doing international business Discuss channel members available to companies that export or manufacture overseas 15-2

Pioneers vs. Fast Followers Can gain and maintain a competitive edge in a new market Overall pioneers may not perform as well in the long run as followers Most successful when High entry barriers exist Firm has sufficient size, resources and competencies 15-3 Followers Many become followers by default Sometimes an advantage to let the pioneer take the initial risks Most successful when Low entry barriers exist Sufficient resources or competencies to overwhelm the pioneers’ early advantage

Modes of Entry Trade Export Subcontracting Countertrade Transfer Licensing Franchising 15-4 Foreign Direct Investment Wholly Owned Subsidiary Joint Venture Contract Manufacturing Management Contract M&A

Exporting Most firms begin involvement in overseas business by exporting Selling some of their regular production overseas Requires little investment Relatively risk free Means of getting a feel for international business without a large commitment Direct or indirect 15-5

Indirect Exporting Exporting of goods and services through various types of home-based exporters Manufacturers’ export agents - sell for manufacturer Export commission agents - buy for overseas customers Export merchants - purchase and sell for own accounts International firms - use the goods overseas 15-6

Indirect Exporting Disadvantages Most exporters require a commission Business can be lost if exporter changes source of supply Firms gain little international experience 15-7

Direct Exporting The Internet has made direct exporting much easier The exporting of goods and services by the exporting firm Sales company A business established for the purpose of marketing goods and services, not production Imports its own name from the parent and invoices in local currency The Internet has made direct exporting much easier Cost of trial very low 15-8

Exporting Turnkey Project – the export of Technology Management expertise Capital equipment After a trial run, the facility is turned over to the purchaser Exporter of a turnkey project may be A contractor that specializes in designing and erecting plants in a particular industry A company that wishes to earn money from its expertise The producer of a factory 15-9

Transfer Licensing Licensing has become more popular because Firm will grant another firm the right to use any kind of expertise for one or more of the licensor’s products Licensee pays fixed sum when signing and pays royalties of 2%-5% of sales over the life of the contract 15-10 Licensing has become more popular because Courts have begun upholding patent infringement claims Patent holders have become more vigilant in suing violators Foreign governments have been pressed to enforce their patent laws

Transfer Franchising A special kind of licensing Permits the franchisee to sell products or services under a highly publicized brand name and well-proven set of procedures with a carefully developed and controlled marketing strategy Fast food most numerous 15-11

Foreign Direct Investment Four distinct alternatives available for foreign manufacturing Wholly owned subsidiary Joint venture Contract manufacturing Management contract Utilized by both manufacturing and service operations Providing management expertise for a fee 15-12

Wholly Owned Subsidiary A company that wishes to own a foreign subsidiary outright may Start from the ground up by building a new plant Acquire a going concern Currently the preference of foreign investors Purchase its distributor, obtaining a distribution network familiar with its products 15-13 In 2000 96% of the money spent by foreign investors was used for acquiring American firms Sometimes it is not possible to have a wholly owned subsidiary Host government may not permit it Firm may lack capital or expertise May be disadvantageous tax-wise or otherwise

Joint Venture A Joint Venture may be a corporate entity formed by an international company and local owners a corporate entity formed by two international companies to do business in a third market a corporate entity formed by a government agency and an international firm a cooperative undertaking between two or more firms of a limited-duration project 15-14

Joint Venture If government requires local participation, firm must engage in joint ventures with local owners Strong nationalistic sentiment may cause foreign firm to try to lose its identity by joining with local investors Companies may enter joint ventures to acquire expertise, tax benefits or additional capital 15-15 Disadvantages Profits must be shared If law forbids no more than 49% foreign ownership, lose control Control with minority ownership is possible if Take 49% of shares and give 2% to local law firm or trusted national Take in local majority partner (sleeping partner) Management contract

Management Contract Arrangement under which a company provides managerial know-how in some or all functional areas to another party for a fee Used in Firms in which they have no ownership Joint ventures Enables the global partner to control many aspects of a joint venture even when holding only a minority position May also earn income by selling inputs manufactured in home plant Wholly owned subsidiaries To siphon off some of subsidiary’s profits 15-16

Contract Manufacturing Means to enter foreign market without investing in facilities One firm contracts with another to produce products to its specifications but markets products itself Subcontract assembly work or production of parts to independent companies overseas FDI without investment 15-17

Strategic Alliances Partnerships between competitor, customers, or suppliers Also referred to as competitive alliances, competitive collaborations, or coopetition Reasons firms form strategic alliances Expanding global competition The growing cost of research, product development, and marketing The need to move faster in carrying out global strategies 15-18

Strategic Alliances Alliances may be Joint Ventures Pooling alliances driven by similarity and integration Trading alliances driven by contribution of dissimilar resources Mergers and acquisitions are not considered alliances 15-19 Future of Alliances Many fail or are taken over by one of the partners Different strategies, operating practices, organizational cultures Allow a partner to acquire technological or other competencies Regardless, will continue to be important strategic tool

International Channels of Distribution Members Indirect Exporting Distribution Members Exporters that sell for the manufacturer Exporters that buy for their overseas customers Exporters that buy and sell for their account Exporters that purchase for foreign users 15-20

International Channels of Distribution Members Indirect Exporting Exporters that sell for the manufacturer Manufacturers’ export agents Act as the international representatives for various noncompeting domestic manufacturers Export management companies Act as the export department for noncompeting manufacturers International trading companies Act as agents for some companies and as wholesaler for others

Indirect Exporting International Trading Companies (cont’d) Sogo Shosha The largest of the Japanese trading companies Originally established by the zaibatsu (centralized, family-dominated economic groups) 15-22 Korean general trading companies Owned by huge Korean conglomerates called chaebol Export trading companies Allows American businesses to join together to export goods and services without violating antitrust regulations

Indirect Exporting Exporters that buy for their overseas customers Export commission agents Represent overseas purchasers, such as import firms and large industrial users These agents are paid a commission by the purchaser for acting as resident buyers in industrialized nations 15-23

Indirect Exporting Exporters that buy and sell for their own account Export merchants Purchase products directly from the manufacturer and then sell, invoice, and ship them in their own names Cooperative exporters Established international manufacturers that sell the products of other companies in foreign markets along with their own Webb-Pomerene Associations Organizations of competing firms that have joined together for the sole purpose of export trade 15-24

Indirect Exporting Exporters that purchase for foreign users and middlemen Large foreign users Buy for their own use overseas Export resident buyers Perform essentially the same functions as export commission agents but more closely associated with a foreign firm May be official buying representative or an employee 15-25

International Channels of Distribution Members Direct Exporting Distribution Members Manufacturer’s agents Distributors or wholesale importers Retailers Trading companies 15-26

Direct Exporting Manufacturer’s agents Represent various noncompeting foreign suppliers, and take orders in those firm’s names Distributors or wholesale importers Independent merchants that buy for their own account 15-27 Retailers Frequently direct importers Trading companies Develop trade and serve as intermediaries between foreign buyers and domestic sellers and vice versa Relatively unknown in the U.S. but important world wide

SBA Exporting Guidelines Advantages Disadvantages enhance domestic competitiveness increase sales and profits gain global market share reduce dependence on existing markets exploit corporate technology and know-how extend the sales potential of existing products stabilize seasonal market fluctuations enhance potential for corporate expansion sell excess production capacity gain information about foreign competition Your business may have to develop new promotional material subordinate short-term profits to long-term gains incur added administrative costs allocate personnel for travel wait longer for payments modify your product or packaging apply for additional financing obtain special export licenses

How to Locate an Importer, Agent or Distributor in a Foreign Country U.S. Federal and State Government Offices Abroad The USDA's Foreign Agricultural Service (FAS) and the U.S. Department of Commerce have trade contact services for American exporters Direct Mail — Write a letter to a company requesting that it represent your product Personal Visits — Once you receive a few prospective distributors, plan a trip to that country Trade Shows & Exhibitions — Trade shows and exhibitions are perhaps the best source for finding distributors Foreign Magazines and Newspapers — Placing "distributor wanted" or "representative wanted" advertisements in foreign publications can generate responses

IBT Turnkey Project Facility       Turnkey Project Facility PROPOSAL - I BICYCLE RESEARCH & DEVELOPMENT CENTRE, LUDHIANA (INDIA) PROPOSAL FOR SETTING UP OF BICYCLE ASSEMBLY PLANT ON TURNKEY BASIS (BOUGHT OUT 25%) Capacity : 100,000 Units (Roadster Model) per annum Total cost of the Project : US$ 1,159,000 Duration: 36 to 42 months