1. 1

2. Foreign operation modes = foreign market servicing methods/modes Coupling between entry mode and foreign market operations … is particularly tight (Reid&Rosson1987) Choice of entry mode almost determines how foreign market operations will be conducted (Welch et al 2007) Associated managerial training programs, government supported trade assistance agencies = way of operating in foreign markets by used by internationalizing organizations Classification to contractual, exporting and investment modes Interesting per se, and from the point of their use in relation to each other, to international marketing, strategy, HRM and to management… 2

3. 1) Contractual modes Franchising Licensing Management contracts International sub-contracting Project operations Alliances 3

4. 2) Exporting Indirect Direct: agent/distributor Own sales office 4

5. 3) Investment modes Minority share (alliance) 50/50 Majority share 100% owned - joint ventures, subsidiaries 5

6. Theoretical approaches Two dimensions: locations, governance Ways of organising interdependencies across value activities: market transactions, inhouse operations, contracts Inward: import, contract, FDI Outward: export, contract, FDI 6

7. Managerial concerns Order Changes in time Strategic decisions of utmost importance LT considerations, risky, investments, strategic and operative control 7

8. Mode switching – changing strategies Why to change? Correction of managerial misjudgements Adaptation to new circumstances Barriers to switch Costs, revenue losses, perceived barriers Termination or integration? Incremental process of changing strategies 8

9. Insert table 11.1 9

10. Mode combination strategies Why? Same value chain, same customer segment, same value chain activity, same operator Unrelated business units Servicing different customer segments Value activity specialization (division of labor) Commitment and control Benchmarking local operators 10

11. Kuvio 12.2 11

12. Barriers to mode combination Insufficient scale of foreign market value activities Fixed costs of setting up multiple modes Cognitive limitations (mode myopia) 12

13. Mode strategy influenced by Company background Resources, size, global spread, experience, product/service/system, global strategy Specific company mode concerns Control, risk and uncertainty, partner, flexibility, revenue, profitability, speed of foreign market entry Foreign market influences Market conditions: size, growth, competition, inflation, exchange rate Other external environment issues: government, politics, way of doing business Evaluating modes 13

14. Insert 14.2 14

15. Examples of international strategies of FOM Export sales firm International sourcing firm Multi-domestic corporation Global corporation 15

16. 16

17. Franchising Last 30 years – change of importance; in some places 50% of the retail activity Highly successful franchisors: McDonald’s, Body Shop, Benetton Important expansion strategy in three industries: motor vehicle dealerships, retail oil business, soft drink bottling Simple franchising/ 1st generation franchising/ product/ tradename franchising ITA 1987: “an independent sales relationship between supplier and dealer in which the dealer acquires some identity of the supplier. Franchised dealers concentrate on one co’s product line and to some identifying of their business with that company” 17

18. Franchising 2nd generation franchising/ business format franchising ITA 1987: ongoing relationship betw franchisor and franchisee including the entire business format, a marketing strategy and plan, operation manuals and standards, quality control and continuing 2way communication Incl. trademarks, intellectual property rights, training programs, IT hardware, software, network connections Difference betw franchising and licensing: degree of control, often f. longer Up-front payment, royalties, other, like rent, finance charges 18

19. Franchising in international operations Direct franchising = setting up each individual franchisee in foreign countries, more feasible in culturally and geographicallly close markets Master franchising – the most used path – an independent foreign co is licensed to establish, develop and manage the franchising operation in the foreign market Franchisors as joint-ventures: Dial a Dino’s, McDonald’s entering Japan Wholly owned subsidiary + lower costs, only one franchisee ? Finding a suitable partner, building an effective relationship, achieving and sustaining knowledge, obtaining an acceptable level of control 19

20. Lisää 3.1 20

21. Franchising – a growth method Gvt role Golden hands Franchisor’s expansion Franchisee’s expansion Publicity/media Trading companies People movement Banks Consultants Increasing use of acquisition 21

22. Issues Franchisor perspectives Franchisee perspectives Implementation issues Franchisor-franchisee relationship Franchisee selection Market selection Package and market adaptation Legal and regulatory issues Lack of profile in foreign markets Timing of foreign market entries 22

23. 23

24. Licensing = the sale of a right to use certain proprietary knowledge in a defined way; commonlay based on operational experience In knowledge economy, intellectual property moves from a legal matter to a strategic issue (Smith & Hansen 2002); Large increase of revenue (Cukier 2005) Covers a wide range of activities, users and diverse roles Tends to be associated with technological advance and its exploitation, it covers also commercial rights to use famous names, symbols, entertainment vehicles Used in several roles: support of managerial control objectives regarding subsidiary, or other FDI; often in internal transfers within subsidiary networks of an MNE Ex. IBM; Texas Instruments; Norwegian companies,Disney might license Mickey Mouse 24

25. Against Licensing Some strongly against: TRUST LT commitment to a foreign partner about whom little known beforehand; transfer and knowledge and skill with the aim of creating capacity in another entity to reproduce what the licensor is doing  creating competitors? Horror stories, Japanese after WWII 25

26. International licensing More used than domestic licensing MNE operation 26

27. Licensing Protection of intellectual property Common law (US, UK) – to use trademark Code law (Europe) – to register trademark Differences between countries Japanese system stresses technology sharing Application public after 18 months Slower to sytem US system aims to protect individual inventors Application remain secret First to invent system 27

28. Licensing/patents Patent= “an exclusive right granted for an invention, which is a product/process that provides an new way of doing something, or offers a new technical solution to a problem, provides protection for the invention to the owner of the patent, for a limited period, normally 20 years” Country differences on novelty Expose co’s technology to public view  obtain patent protection without most important technology – to avoid strictures but make it difficult for others Ex Dell, the US computer assembler built a patent around its method of doing business Kodak and Polaroid; Microsoft and IBM 28

29. Licensing/patents www.wipo.int (UN) www.wipo.int WTO: TRIPS India began to implement patent production in number of areas earlier only with process patents China and India – rising concern about intellectual property protection for local firms (Lego won in China, Viagra lost) One of the most significant emerging business developments: proactive management of intellectual capital by innovating firms Nokia cross- licensing 29

30. Licensing/trademarks Trademark = a distinctive sigh identifying certain goods or services as those produced or provided by a specific person or enterprise Provides protection to the owner of the mark by ensuring exclusive right to use it to identify goods or services or to authorize another to use it in return for payment 60 countries in WIPO Period of protection varies but can be renewed indefinitely Individual or combination of letters, words, phrases, shapes, logos, pictorial features, smells, sounds, designs Ex BP green, Coca cola bottle shape, Absolut Beach vs Absolut Vodka 30

31. Licensing/copyright Official registration not required Creators of literary and artistic works (music, art, sculptures, photographs, films, computer software, ads, databases, technical drawings) to control and exploit their work Berne convention, administered by WIPO Creator’s lifetime and at least 50 years thereafter Rights international, but legal protection by national copyright laws 31

32. Licensing/trade secrets Legal defence in court Ex Texas Instruments against two former employees having copied computer files before leaving their jobs 32

33. Licensing/know-how Tacitness of know-how provides effective protection 50% of US patents studied included know-how Technical know-how Commercial know-how 33

34. Evaluation of licensing + simple + cheap + new cos based on IP consciousness - Slow protection of intellectual property - Costly protection 34

35. Why international licensing? Licensee: Seeking technology without own R&D Licensor: for SMEs a cost effective way, for MNEs more objectives Linked to other modes: project operations, control MNE network method Accessing blocked markets Licensing as a trojan horse Residual technology/markets Stepping stone strategy Quick delivery Frequent customer contact Constant monitoring of product performance Need to fix breakdowns 35

36. Issues in international licensing Pre-agreement Timing of foreign-push Finding licensees Constraints on marketing activity Selection of licensees Negotiation Licensing agreement and terms of payment, performance clauses, post-agreement transfers, long-term interaction and agreement completion 36

37. 37

38. Management contracts = an arrangement under which operational control of an enterprise or one of its SBU which would otherwise be exercised by the board of directors/managers elected/appointed by its owners is vested by contract in separate enterprise which performs necessary managerial function in return for a fee Sometimes no equity connection, or other mode linkages Frequently referring to a tripartite arrangement in which foreign contractor provides the managerial function for a negotiated fee to an enterprise that is owned by a client organization, the contractee. The contract enterprise pays relevant costs Duration 2-20 years, renewal common/ 5-10 years 38

39. Insert 5.2 39

40. Management contracts Ex Philippine airlines run by Lufthansa; Australian airline Ansett for Air Vanuatu hotel chains like Starwood, InterContinental, Hilton; Jordanian water authorities, tourism, hospitality, retailing sectors Ethiopian government – running main bank 40

41. Management contracts Not much researched Sometimes confused with consultation or licensing; often together with licensing Viable method possibility in its own right but also a possibility to be accompanied by other foreign operation modes 41

42. Management contracts as a connected form Equity investment Exports/imports Marketing services Licensing, technical services Project operation Usually in a connected form, in JVs/minority equity, incl exports or with project forms Overall management or management of a function Idea to ensure commitment of the contractor 42

43. Example Company x shall have full and exclusive authority for the management of x and shall supervise all services connected with operation of x including Production, office management, financial accounting, cost accounting, purchase or requisition of raw materials or finished products, inventory control, hiring of personnel and payroll records, sales, engineering services relating to production, maintenance, repair, replacement of plant equipment including utilities and supply of technical information Incl basic fee, incentive payment, additional service payments (ex training) 43

44. Benefits For contractee - Fill a need/deficiency of managerial/technical experience/skills in running a particular type of activity - Establishing a new business - Change of ownership - Link to other services (computer reservation system, catering, HRM, accounting, marketing, aircraft leasing in Air Vanuatu, 44

45. Benefits for contractor A response to the perceived constraints Often driven by government action Push to internationalize (Ansett) Establish/maintain a foreign market position Potential to extend this involvement as own activity Turnkey project: maintenance of market involvement, generation of additional returns, ensuring project functions after completion (ex Alfa Laval building a turnkey dairy farm and milk processing plant in Saudi Arabia) 45

46. Risks Developing future competitors Control Financial viability Government interference Need for a strong commitment – is there such? Mismatched expectations Implementation problems Staffing Building relationships Handling disputes 46

47. After the management contract Mode switch - JVs Connection ceases, client takes over, market withdrawal Renewal of management contract Contractor switch 47

48. 48

49. International subcontracting = all export sales of articles ordered in advance and where the giver of the order arranges the marketing Overwhelming consensus of importance or outsourcing (Czinkota & Ronkainen 2005) Connected often to contractual modes (foreign entity, licensing), exporting, FDI Normally MNE internal operations not counted to this category 49

50. Subcontracting Offshoring vs subcontracting Within firm = own offshoring – foreign placement of production activity External to firm = int. subcontracting – external supplier Destination of output Selling into the home market, contractee’s home market or into third markets Further processing might be involved Often imported subject to further processing or final assembly and the re- exported 50

51. Subcontracting Potential: Cost reduction – employment effects + Enhance the development of foreign operation modes Services area, ex transfer of R&D to India in the IT (Hewlett Packard) and pharmaceutical sectors (Australian Mayne Group) Ex European clothing co sourcing material from China & India and sewing from Vietnam – considerable demands on coordination, monitoring, general management, often intermediaries to fulfill these tasks – outsourcing the outsourcing problem 51

52. Drivers of int. subcontracting development Cost differences Footloose subcontractors (textile and clothing: China, Taiwan, South-Korea, Czech republic, Slovakia, Hungary, Poland) Subcontracting and advanced technologies (IBM, Hewlett Packard) Impact of reduced trade protection (China) Reduced transport and communication costs (Foamex Int – polyurethane foam; IT hardware) Role and impact of retailers (WalMart in China; Canon; Free trade zones (Mumbai, Dubai, China) 52

53. Benefits More than cost savings Access skills and to improve the quality of services provided (call centres and IT services to India; Nike, Reebok, Puma) Involves lower commitment as in direct FDI Extend their existing product range (design and manufacture of mobile handsets) 53

54. Additional costs incurred Transit time, political risks, trade barriers, culture, language, quality control, supervision procedures International transport costs, inland freight, insurance, tariffs, export taxes, foreign exchange costs, rejects, letters of credit, damage in transit 54

55. Other issues Importance of marketing and brand strength Assuring quality and timely deliveries Long-term relationships (IKEA) Difficult for SMEs? Creating future competitor? (BenQ & Motorola, Acer, Samsung, Lenovo purchasing IBM) Other strategic risks Eliminating non-core? Loss of critical skills Developing wrong skills 55

56. 56

57. Project operations - definition = complex transaction covering a package of products, services and work, specifically designed to create capital assets that produce benefits for a buyer over an extended period of time - Creation of human assets - Discontinuity - Uniqueness - Complexity - Risk and uncertainty 57

58. Project operations Different sized of operations (community housing to large hydro-electric power projects) US, European and Japanese dominate – considerable changes: Korea, Brazil, Egypt, Turkey, China Broad umbrella Elements of FDI/JVs, contracts covering the transfer of technology (licensing), int. financing arrangements, product/system/service exports/imports International personnel transfers 58

59. Forms of project contribution Different roles and positions: Design role in pre-tender phase Principal contractor with overall responsibility Partial project basis Subcontractor 59

60. Example Turnkey project One party responsible for setting up a plant and putting it into operation Incl. responsibility for supply and establishment of the works, plants, facilities Supply of technology and know-how Basic design and engineering Supply of complete plant and equipment Design and construction of civil works Complete erection of plant and equipment Commissioning of the total plant facilities up to the stage of start up 60

61. Project + -arrangements Feasibility study (project design) Help in start up Training Setting up management systems Operational back up LT help Management contract Licensing Equity share in client firm Financing assistance JV Training, technical services 61

62. Project stages Market scanning and networking (Swedes in ACEAN) Marketing approach Prequalification, specific marketing, interaction with consultants, foreign office establishment, tender preparation Bid process (High speed rail in Korea -consortiums) Initial tender, short listing, alterations, resubmission of offer Supplier choice Project implementation Operational phase Provision of additional services, goods, equipment 62

63. Contract content Engineering and technical specifications of the project Construction schedule Contractual relations Relationship between parties Responsibilities of each party Risk apportionment of the contract Reimbursement structure (fixed price or mixed fixed price and cost basis; 5-10% to start; 5-10% to end) Cultural differences (German, Danish, Swedes) 63

64. Perceived risk and uncertainty Project size, cost complexity Project bought long before made – a future promise Time to delivery Gaps, ex cultural differences, between buyer and seller (social relations in China and Scandinavia) Financing issues (build operate transfer; build own operate transfer) Government relations (corruption, bribery; government assistance or buyer, financer, influencer, facilitator, evaluator, resource provider, terminator) 64

65. Project mix Package mix Relational mix Strategic mix Understanding the above 65

66. 66

67. Exporting Major mode option Focus of WTO attention Originally foreign sales of physical goods, nowadays applying to services (4:1) Exporting often starting route to international involvement + relatively easy, low cost, foreign customer initiative- based (1/3) 67

68. 8.3 68

69. Parallel exports Risk of parallel exports Unintended path in to exporting Authorized domestic distributors exporting via unauthorized foreign intermediaries Authorized foreign distributor re-exporting to other foreign markets via unauhtorized intermediares 69

70. Exporting mode form Number of options Domestic indirect export (35% of Finnish industrial SMEs started through domestic-based intermediaries, trading companies) Foreign indirect export Direct export – undertaking activity itself 70

71. Other issues Agents vs distributors Selection of intermediaries Intermediary relationships, performance and switches Ecommerce and extended use of Internet After sales 71

72. 72

73. 73

74. 74

75. Alliances Important form, extensively used but difficult to operate, diverse forms No consensus of definition even though extensive research Collaboration, cooperation Frequently embedded in broader combination packages Ex strategic alliance of Kone elevators and Toshiba escalators Equity swap, exports, cooperation on technical development, sourcing and marketing, cross-licensing 75

76. Different types of alliances Intra-firm activities Inter-firm activities Market transactions 76

77. Alliance drivers Cost reduction Foreign market access and expansion Network access Technology and know-how access and development Risk and uncertainty reduction Sharing risks 77

78. Important issues Number of partners Industry characteristics of partners Size of partners Nationality of partners Formality of alliance Nature and extent of commitment (ex marketing) Length Equity/non-equity Number of foreign markets included Initiating source Importance of alliance to partners Nature of alliance goals Process perspective to alliances (pre-agreement, agreement, alliance establishment, alliance functioning,alliance performance, closer) 78

79. 79

80. FDI = level of ownership via equity in a foreign enterprise reaching a certain level (10-20%) with investing company acquiring a significant influence possibility through a LT investment ST investment – portfolio investment for financial purposes Wholly owned, majority/50-50/minority JVs Investing companies prefer wholly owned 80

81. FDI – two modes Branch establishment = foreign country operation legally connected to and a liability of the parent firm Subsidiary = legally established within the foreign market and legally separate from the parent company 81

82. Foreign direct investment (FDI) Major set of foreign operation modes under heading FDI MNEs: Of global exports 60% sales inside MNEs Most powerful method Focus of government action 82

83. FDI package Parent company strategy and control mechanisms Foreign entity role, market orientation, set up Often result of using other modes earlier 83

84. Before FDI Drivers Arise of company interests Target company interests Foreign market conditions, demands Process - Negotiation - Cross-cultural interaction - Language issues 84

85. Why FDI? Powerful means of foreign market exploitation and expansion Proximity to customers Exploitation of unique assets such as technology, know- how, brands (India) Access to unique local assets Reducing costs – outsourcing (China, India) Contribution to global network performance of MNEs Avoiding tariff and other trade barriers (government, and natural) Following clients (Japan, Finland) Responding to the action of competitors (India) Import security (China, India, the US) Government incentives (Australia, the US) 85

86. Acquisition vs greenfield Why acquisition? Preferred mode during past 30 years Speed of entry Existing facilities mean reduced risk Low price of divestment Complementarity Synergy of operations Diversification Rationalization & restucturing Assets of acquiree Acquisition problems High failure rate Integration difficulties Pressure to move on quickly Over-confidence Lack of market experience Difficulties of retaining key staff Divestment problems Lack of firms to acquire High price due to competitive pressure Acquisitions as distractions 86

87. Acquisition vs greenfield Why greenfield? Implement own systems and culture without problems of trying to change something To be considered: Location Cost of production Market prospects Political, economic, business climate Network linkages - Cultural factors - Distance to markets - Legal framework - Extent of corruption - Relevant government policy - Availability of natural resources - Availability of appropriately skilled workforce - Infrastructure quality 87

88. Insert 14.3 88