1. Entry Modes Chapter Fifteen
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Pioneers vs. Fast Followers
Can gain and maintain competitive edge in new market
May not perform as well in the long run as followers
Are most successful when
High entry barriers exist
Firm has sufficient size, resources, and competencies
Followers
Many become followers by default
May let pioneer take initial risks
There are few legal, technological, cultural, or financial barriers
They have sufficient resources and competencies to overwhelm the pioneer’s early advantage
LO1

3. Entering Foreign Markets Non Equity Modes
Exporting
Selling some regular production overseas
Requires little investment
Relatively free of risk
Indirect exporting
Direct exporting
Subcontracting
Countertrade (discussed in Chapter 21)
Licensing
Franchising
Contract Manufacturing
LO2

4. Non-Equity Mode Indirect exporting through home-based exporters
Manufacturers’ export agents
sell for the manufacturer
Export commission agents
buy for overseas customers
Export merchants
purchase and sell for own accounts
International firms export to their own affiliates
use the goods overseas
LO2

5. Non-Equity Mode Indirect Exporting Advantages
Simpler than direct exporting
Disadvantages
Commission paid to export agents, commission agents, export merchants
Foreign business can be lost if exporters decide to change their sources and supply
Exporting firm gains little experience from transactions handled by others
LO2

6. Non-Equity Mode
Direct exporting refers to the exporting of goods and services by some entity within the producing firm
Sales company
Business established to market goods and services produced by others
Internet has simplified direct exporting
Cost of trial low
LO2

7. Non-Equity Mode Turnkey Projects
Turnkey projects are used to export
technology
management expertise
capital equipment (some cases)
Exporter of a turnkey project may be a
contractor that specializes in designing and erecting plants in a particular industry
company that wishes to earn money from its expertise
producer of a factory
After a trial run, the facility is turned over to the purchaser
LO2

8. Non-Equity Mode Licensing
Licensing refers to a contractual arrangement in which one firm sells access to its patents, trade secrets, or technology to another firm
Licensee pays fixed sum and sales royalties (2%-5%)
Licensing is attractive because
courts have begun upholding patent infringement claims
patent holders have started suing violators
foreign governments have begun enforcement of their patent laws
LO2

9. Non-Equity Mode Franchising
Franchising is a form of licensing in which one firm contracts with another to operate a business
The franchisee gets a
well-established name
proven set of procedures
carefully controlled marketing strategy
The franchisor retains the right to enforce processes and strategy
The franchisee expects operational, marketing, supply chain, R&D, etc. support
LO2

10. Non-Equity Mode Contracts
Management Contract
Arrangement by which one firm provides management in all or specific areas to another firm
Contract Manufacturing
Arrangement in which one firm contracts with another to produce products to its specifications but assumes responsibility for marketing
LO2

11. Equity-Based Modes of Entry
Equity-based entry modes include
wholly owned subsidiaries
joint ventures
strategic alliances
mergers and acquisitions
LO2

12. Equity-Based Mode Wholly Owned Subsidiary
In a wholly owned subsidiary, the company has full equity ownership of the foreign entity
Entry strategies
build a new plant (greenfield investment)
acquire a going concern
purchasing the company that used to be the local distributor allows the firm to obtain an established distribution network
LO2

13. Equity-Based Mode Joint Venture
A joint venture is
a corporate entity formed by international company and local owners
a corporate entity formed by two international companies for the purpose of doing business in a third market
a corporate entity formed by the international company and a government entity
a cooperative undertaking between two or more firms for a limited-duration project
LO2

14. Equity-Based Mode Joint Venture
Disadvantages of joint ventures
Shared profits
Loss of control
Minority ownership control is possible if
Foreign firm holds 49% of shares, gives another 2% to local law firm or trusted national, balance owned by local firm
There is a local majority partner (sleeping partner)
Management contract stipulates that global partner controls specific key aspects of a joint venture even though it holds only a minority position
LO2

15. Equity or Non-Equity Based Mode Strategic Alliances
Strategic alliances involve partnerships between competitors, customers, or suppliers
Can take various equity or non-equity forms
The goals of strategic alliances include
Faster market entry and start-up
Access to new products, technologies, and markets
Cost-savings by sharing costs, resources, and risks
LO2

16. Equity or Non-Equity Based Mode Strategic Alliances
Strategic alliances can be joint ventures
Pooling alliances are driven by similarity and integration
Trading alliances are driven by the contribution of dissimilar resources
Alternatives to mergers and acquisitions
Future of Alliances
Many fail or are taken over by a partner
Difficult to manage due to diverging, strategies, operating practices, and organizational cultures
Partner may acquire technological or other competencies and become competitor
LO2

17. Channel of Distribution Members
Indirect export channel members
sell for manufacturer
buy for overseas customers
buy and sell for own account
purchase on behalf of foreign middlemen or users
LO4

18. Indirect Exporting Exporters sell for the manufacturer
Manufacturers’ export agent
Acts as the international representative for various non-competing domestic manufacturers
Export management company (EMC)
Acts as the export department for non-competing manufacturers
International trading company
Acts as agent for some companies and as wholesaler for others
LO4

19. Indirect Exporting International Trading Companies Japan: Sogo Shosha
Originally established by the zaibatsu, centralized, family-dominated economic groups
Korean: Chaebol
Owned by Korean conglomerates
Export trading companies (ETC)
U.S. firm established principally to export domestic goods and services
LO4

20. Indirect Exporting
Export commission agents buy for their overseas customers
They represent overseas purchasers, such as import firms and large industrial users
They are paid commission by the purchaser for acting as a resident buyer
LO4

21. Indirect Exporting Export merchants
Purchase products directly from the manufacturer
Sell, invoice, and ship products in their own names
Cooperative exporters/piggyback exporters
Established international manufacturers that export other manufacturers’ goods as well as their own
Webb-Pomerene Associations
Organizations of competing firms that have joined together for the sole purpose of export trade
LO4

22. Direct Exporting by A Firm
Such a firm has overseas middlemen
Manufacturer’s agent
Independent sales representative of noncompeting suppliers
Distributor/wholesale importer
Independent importer that buys for own account for resale
Retailer
Frequently direct importer
Trading company
Firm that develops international trade and serves as an intermediary between foreign buyers and domestic sellers and vice versa
LO4

23. Piracy as Product Diffusion
Market entry by accident
“Piracy” is supported by commercial industry
Sponsors events
Media companies participate
Software distribution (Windows) in China is mostly pirated
Through this Microsoft has huge market share
Tolerates pirates
Supports users
Sells other software and services
LO3