1. SELECTING AND MANAGING ENTRY MODES
CHAPTER XIII
SELECTING AND MANAGING ENTRY MODES

2. Learning Objectives
Explain why and how companies use exporting, importing, and countertrade.
Explain the various means of financing export and import activities.
Describe the different contractual entry modes that are available to companies
Explain the various types of investment entry modes
Discuss the important strategic factors in selecting an entry mode.

3. I. EXPORTING, IMPORTING, AND COUNTERTRADE
Why Companies Export
Developing and Export Strategy: A Four-Step Model
Degree of Export Involvement
Avoiding Export and Import Blunders
Countertrade
Export/ Import Financing.

4. I.1 Why Companies Export
Three reasons:
Expand Sales
Diversify Sales
Gain Experience

5. I.2 Developing and Export Strategy: A Four-Step Model
Step 1: Identify a Potential Market
Step 2: Match Needs to Abilities
Step 3: Initiate Meetings
Step 4: Commit Resources

6. I.2.1 Step 1 Identify a Potential Market
Market research should be performed and the results interpreted
Novice exporters should focus on one or only a few markets.

7. I.2.2 Step 2: Match Needs to Abilities
Assess carefully whether the company has the ability to satisfy the need of the market

8. I.2.3 Step 3: Initiate Meetings
Having meeting early with potential local distributors, buyers, and others is a must
Initial contract should focus on building trust and developing a co-operative climate among all parties.

9. I.2.4 Step 4: Commit Resources
After all the meetings, negotiations, and contract signings, it is time to put the company’s human, financial, and physical resource to work.

10. I.3 Degree of Export Involvement
Direct Exporting
Indirect Exporting

11. I.3.1 Direct Exporting Direct Exporting
Practice by which a company sells its products directly to buyers in a target market.
Sales Representatives
Distributors

12. I.3.2 Indirect Exporting Indirect Exporting
Practice by which a company sells its products to intermediaries who resell to buyers in a target market.
Agents
Export Management Companies (EMC)
Export Trading Company (ETC)

13. I.3.2 Indirect Exporting Agents
Individuals or organizations that represent one or more indirect exporters in a target market
Export Management Companies (EMC)
company that exports products on behalf of indirect exporters
Export Trading Company (ETC)
Company that provides services to indirect exporters in addition to activities related directly to clients’ exporting activities.

14. I.4 Avoiding Export and Import Blunders
Freight Forwarder
Specialist in export-related activities such as customs clearing, tariff schedules, and shipping and insurance fees.

15. I.5 Countertrade
Countertrade
Practice of selling goods or services that are paid for, in whole or part, with other goods or services.

16. I.5 Countertrade… Types of Countertrade Batter Counterpurchase Offset
Switch Trading
Buyback

17. I.5 Countertrade… Batter
Exchange of goods or services directly for other goods or services without the use of money.
Counterpurchase
Sales of goods or services to a country by a company that promise to make a future purchase of a specific product from the country.

18. I.5 Countertrade… Offset
Agreement that a company will offset a hard- currency sale to a nation by making a hard- currency purchase of an unspecified product from that nation in the future.

19. I.5 Countertrade… Switch Trading
Practice in which one company sells to another its obligation to make a purchase in a given country.

20. I.5 Countertrade… Buyback
Export of industrial equipment in return for products produced by that equipment.

21. I.6 Export/ Import Financing
Advance Payment
Documentary Collection
Letter of Credit
Open Account

22. I.6.1 Advance Payment
Advance Payment
Export/ Import financing in which an importer for merchandise before it is shipped.

23. I.6.2 Documentary Collection
Export/ Import financing in which a bank acts as an intermediary without accepting financial risk.

24. I.6.2 Documentary Collection
High
Open Account
Document Collection
Exporter’s risk
Letter of Credit
Advance Payment
Low
High
Importer’s risk
Risk of Alternative Export/ Import Financing Methods

25. I.6.2 Documentary Collection Process1
Exporter
Importer 3 7 6 2 4 9 8
Exporter’s Bank
Importer’s Bank 5
1. E/ I contract to sell/ buy goods
2. E’s bank gives draft to E
3. E ships goods to I
4. E delivers documents to its bank
5. E’s bank sends documents to I’s bank
6. I delivers payment to its bank
7. I’s bank gives bill of lading to I
8. I’s bank pays E’s bank
9. E’s bank pays E for goods.

26. I.6.2 Documentary Collection
Draft (bill of exchange)
Document ordering an importer to pay an exporter a specified sum of money at a specified time.
Bill of Lading
Contract between an exporter and a shipper that specifies merchandise destination and shipping costs.

27. I.6.3 Letter of Credit Letter of Credit
Export/ import financing in which the importer’s bank issues a document stating that the bank will pay the exporter fulfills the terms of the document.
Several types of letters of credit:
An irrevocable letter of credit
A revocable letter of credit
A confirmed letter of credit

28. I.6.3 Letter of Credit Exporter Importer 1 5 11 9 2 4 6 7 10
Exporter’s Bank
Importer’s Bank 8 3
1. E/ I contract to sell/ buy goods
2. I applies for letter of credit (L)
3. I’s B issues L to E’s B on I’s behalf
4. E’s B informs Economic of L
5. Economic ships goods to I
6. E delivers documents to its B
7. E’s B checks documents & pays E
8. E’s B delivers documents to I’s B
9. I pays its B for value of goods
10. I’s B sends payment to E’s B
11. I’s B delivers documents to I

29. I.6.4 Open Account
Open Account
Export/ import financing in which an exporter ships merchandise and later bills the importer for its value.

30. II. CONTRACTUAL ENTRY MODES
Licensing
Franchising
Management Contracts
Turnkey Projects

31. Advantages of Licensing Disadvantages of Licensing
II.1 Licensing
Advantages of Licensing
Disadvantages of Licensing

32. II.1 Licensing Licensing
Practice by which one company owning intangible property (the licensor) grants another firm (the licensee) the right to use that property for a specified period of time.

33. II.1 Licensing… Cross Licensing
Practice by which companies use licensing agreements to exchange intangible property with one another.

34. II.1 Licensing…
Here are few examples of successful licensing agreements:
NOVELL (US) licensed its software to three HK universities that installed it as the campus-wide standard.
HITACHI (Japan) licensed from Duales system Deutschland (Germany) technology to be used in the recycling of plastics in Japan.
HEWLETT-PACKARD (US) licensed from Canon (Japan) a printer engine for use in its monochrome laser printers.

35. II.1 Licensing Advantages of Licensing
Licensors can use licensing to finance their international expansion.
Licensing can be a less risky method of international expansion for a licensor than other entry modes.
Licensing can help reduce the likelihood that a licensor’s product will appear on the black market
Licensees can benefit from licensing by using it as a method of upgrading existing production technologies.

36. II.1 Licensing Disadvantages of Licensing
Licensing can restrict a licensor’s future activities.
Licensing might reduce the global consistency of the quality and marketing of a licensor’s product in different national markets.
Licensing might amount to a company “lending” strategically important property to its future competitors.

37. II.2 Franchising Franchising
Practice by which one company (Franchiser) suppliers another (the franchisee) with intangible property and other assistance over an extended period.

38. II.2 Franchising
Some examples of the kinds of companies involved in international Franchising:
OZ (Australia) awarded Magictel (HK) a franchise to operate its Internet phone and fax service in HK
JEAN-LOUIS DAVID (France) awarded franchises to more than 200 hairdressing salons in Italy
BROOKS BROTHERS (US) awarded Dickson Concepts (HK) a franchise to operate Brooks Brothers stores across Southeast Asia.

39. II.2 Franchising Advantages of Franchising
Franchisers can use franchising as a low-cost, low risk entry mode into new markets.
Franchising is an entry mode that allows for rapid geographic expansion.
Franchiser can profit from the cultural knowledge and know-how of local managers.

40. II.2 Franchising Disadvantages of Franchising
Franchisers may find it cumbersome to manage a large number of franchisees in a variety of national markets.
Franchisees can experience a loss of organizational flexibility in franchising agreements. Franchise contracts can restrict their strategic and tactical options, and they may even be forced to promote products owned by the franchiser’s other divisions.

41. II.3 Management Contracts
Practice by which one company supplies another with managerial expertise for a specific period of time.

42. II.3 Management Contracts
Some examples of Management Contracts
BBA (Britain)
DBS Asia (Thailand)
LYONNAISE DE EAUX (France)

43. II.3 Management Contracts
Advantages of Management Contracts
A firm can award a management contract to another company and thereby exploit an international business opportunity without having to place a great deal of its own physical assets at risk.
Governments can award companies management contracts to operate and upgrade public utilities, particularly when a nation is short of investment financing.
Governments use management contracts to develop the skills of local workers and managers.

44. II.3 Management Contracts
Disadvantages of Management Contracts
Management contracts reduce the exposure of physical assets in another country
Suppliers of expertise may end up nurturing a formidable new competitor in the local market.

45. II.4 Turnkey Projects Turnkey (Build- Operate-Transfer) Projects
Practice by which one company designs, constructs, and test a production facility for a client firm.

46. II.4 Turnkey Projects
Here are two examples of International Turnkey Projects
Telecommunications Consultants India constructed telecom networks in both Madagasca and Ghana
Lubei Group (China)

47. II.4 Turnkey Projects Advantages of Turnkey Projects
Turnkey Projects permit firms to specialize in their core competencies and to exploit opportunities that they could not undertake alone.
Turnkey projects allow governments to obtain designs for infrastructure projects from the world’s leading companies.

48. II.4 Turnkey Projects Disadvantages of Turnkey Projects
A company may be awarded a project for political reasons rather than for technological know-how
Turnkey projects can create future competitors

49. III. INVESTMENT ENTRY MODES
Wholly Owned Subsidiaries
Joint Ventures
Strategic Alliances
Selecting Partners for Cooperation

50. III.1 Wholly Owned Subsidiaries
Facility entirely owned and controlled by a single parent company.

51. III.1 Wholly Owned Subsidiaries…
Advantages of Wholly Owned Subsidiaries
Managers have complete control over day-to-day operations in the target market and over access to valuable technologies, process, and other intangible properties within the subsidiary.

52. III.1 Wholly Owned Subsidiaries…
Disadvantages of Wholly Owned Subsidiaries
Companies must finance investment internally or raise funds in financial markets.
Risk exposure is high

53. III.2 Joint Ventures
Joint Venture Configurations
Advantages of Joint Ventures
Disadvantages of Joint Ventures

54. III.2 Joint Ventures
Joint Venture
Separate company that is created and jointly owned by two or more independent entities to achieve a common business objective.

55. III.2.1 Joint Venture’s Examples
Examples of Joint Ventures
SUZUKI MOTOR CORPORATION (Japan & India government)
BILTRITE CORPORATION (US & China)

56. III.2.2 Joint Venture Configurations
Forward Integration Joint Venture
Backward Integration Joint Venture
Buyback Joint Venture
Multistage Joint Venture

57. III.2.3 Joint Venture Advantages
Companies reply on joint ventures to reduce risk
Companies can use joint ventures to penetrate international markets that are otherwise off-limits.
A company can gain access to another company’s international distribution network through the use of a joint venture.
Companies form international joint ventures for defensive reasons.

58. III.2.4 Joint Venture Disadvantages
Joint Venture ownership can result in conflict between partners.
Loss of control over a joint venture’s operations can also result when the local government is a partner in the joint venture.

59. III.3 Strategic Alliances
Relationship whereby two or more entities cooperate (but do not form a separate company) to achieve the strategic goals of each.

60. III.3.1 Strategic Alliance’s Examples
Examples of Strategic Alliance
SIEMENS (Germany) + HP (US)
NIPPON LIFE GROUP (Japan) + PUTNAM INVESTMENT (US)

61. III.3.2 Strategic Alliance’s Advantages
Companies use strategies alliances to share the cost of an international investment project.
Companies use strategies alliances to tap into competitors’ specific strengths
Companies turn to strategic alliances for many of the same reasons that they turn to joint ventures.

62. III.3.3 Strategic Alliance’s Disadvantages
To create a future local or even global competitor
A company can reduce the likelihood of creating a competitor that would threaten its main area of business
A company can insist on contractual clauses that constrain partners from competing against it with certain products or in certain geographic regions.
Conflict can arise and eventually undermine cooperation.

63. III.4 Selecting Partners for Cooperation
Partner selection is a crucial ingredient for success. Now focus on partner selection on joint ventures and strategic alliances
Every partner must be firmly committed to the goals of the cooperative arrangement
Cooperation should be approached with caution.

64. IV STRATEGIC FACTORS IN SELECTING AN ENTRY MODE
Cultural Environment
Political and Legal Environment
Market Size
Production and Shipping Costs
International Experience

65. IV.1 Cultural Environment
The dimensions of culture-values, beliefs, customs, languages, religions- can differ greatly from one nation to another.

66. IV.2 Political and Legal Environments
Political instability in a target market increase the risk exposure of investments.
A target market’s legal system influences the choice of entry model.
Firms tend to prefer investment when a market is lax in enforcing copyright and patent laws.

67. IV.3 Market Size
The size of a potential market influences the choice of entry mode
Rising income in a market encourage investment entry modes
High domestic demand is attracting investment in joint ventures, strategic alliances, and wholly owned subsidiaries.
A market is likely to remain relatively small exporting, contractual entry.

68. IV.4 Production and Shipping Costs
Setting up production in a market is desirable when the total cost of production there is lower than in the home market.
Low cost local production: Licensing, franchising
Turn out products with high shipping costs typically prefer local production Contractual and investment entry modes
There are fewer substitutes, discretionary items  higher shipping and production costs Exporting.

69. IV.5 International Experience
Illustrate the control, risk, and experience relationships of each entry mode
Most companies enter the international marketplace through exporting
Explore the advantages of licensing, franchising, management contracts, turnkey projects.
To become comfortable in a particular market: joint venture, strategic alliances and wholly owned subsidiaries.

70. IV.5 International Experience
Wholly Owned Subsidiary
Management Contract
Joint Venture/ Alliance
Franchising
Control
Turnkey Project
Licensing
Exporting
Risk

71. V A Final word
Explained the important factors in selecting entry modes and key aspects in their management.

72. THE END