2. 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 © The McGraw-Hill Companies, Inc. All rights reserved.

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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 % 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

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

28. 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

29. 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

30. 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

31. 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