1. 11-1 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Chapter 11 E ntering F oreign M arkets 1

2. 11-2 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Lecture/Chapter Topics Entry Modes Selecting an Entry Mode Greenfield Venture versus Acquisition Countertrade

3. 11-3 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Entry Modes There are several options, including: –Exporting –Turnkey projects –Licensing –Franchising –Foreign Direct Investment  Joint ventures with a host-country firm  Wholly owned subsidiary in the host country

4. 11-4 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Entry Modes The advantages and disadvantages associated with each entry mode are determined by: – transport costs and trade barriers – political and economic risks – business risks – cost and firm strategy The optimal entry mode varies by situation, depending on these factors.

5. 11-5 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Entry Modes Exporting –Most manufacturing firms begin their global expansion as exporters and only later switch to another mode for servicing a foreign market. –Advantages  Exporting avoids the substantial cost of establishing manufacturing operations in the host country.  Exporting may also help a firm achieve experience curve location economies.

6. 11-6 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Entry Modes Exporting (Cont’d) –Disadvantages  There may be lower cost locations for manufacturing abroad.  High transport costs can make exporting uneconomical.  Tariff barriers can make exporting uneconomical.  Agents in a foreign country may not act in exporter’s best interest.

7. 11-7 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Entry Modes Turnkey Projects –In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel. –At completion of the contract, the foreign client is handed the ‘key’ to a plant that is ready for full operation.

8. 11-8 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Entry Modes Turnkey Projects –Advantages  Turnkey projects are a way of earning great economic returns from the know-how required to assemble and run a technologically complex process.  Turnkey projects make sense in a country where the political and economic environment is such that a longer term investment might expose the firm to unacceptable political and/or economic risk.

9. 11-9 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Entry Modes Turnkey Projects –Disadvantages  By definition, the firm that enters into a turnkey deal will have no long-term interest in the foreign country.  The firm that enters into a turnkey project may create a competitor.  If the firm's process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors.

10. 11-10 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Entry Modes Licensing –A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified time period, and in return, the licensor receives a royalty fee from the licensee. –Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks.

11. 11-11 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Entry Modes Licensing –Advantages  The firm does not have to bear the development costs and risks associated with opening a foreign market.  The firm avoids barriers to investment.  It allows a firm with intangible property that might have business applications, but which doesn’t want to develop those applications itself, to capitalise on market opportunities.

12. 11-12 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Entry Modes Licensing –Disadvantages  The firm doesn’t have the tight control over manufacturing, marketing and strategy that is required for realising experience curve and location economies.  Licensing limits a firm’s ability to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another.

13. 11-13 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Entry Modes Licensing –Disadvantages (Cont’d)  There is the potential for loss of proprietary (or intangible) technology or property.  One way of reducing this risk is through the use of cross- licensing agreements where a firm might license intangible property to a foreign partner, but requests that the foreign partner license some of its valuable know-how to the firm in addition to a royalty payment.

14. 11-14 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Entry Modes Franchising –Franchising is basically a specialised form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business. –Advantages  The firm avoids many costs and risks of opening up a foreign market.

15. 11-15 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Entry Modes Franchising (Cont’d) –Disadvantages  Franchising may inhibit the firm's ability to take profits out of one country to support competitive attacks in another.  The geographic distance of the firm from its foreign franchisees can make poor quality difficult for the franchisor to detect.

16. 11-16 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Entry Modes Joint Ventures –A joint venture is the establishment of a firm that is jointly owned by two or more otherwise independent firms. –Advantages  A firm can benefit from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems and business systems.

17. 11-17 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Entry Modes Joint Ventures –Advantages (Cont’d)  The costs and risks of opening a foreign market are shared with the partner.  Political considerations may make joint ventures the only feasible entry mode.

18. 11-18 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Entry Modes Joint Ventures (Cont’d) –Disadvantages  A firm risks giving control of its technology to its partner.  The firm may not have the tight control over subsidiaries that it might need to realise experience curve or location economies.  Shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time.

19. 11-19 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Entry Modes Wholly Owned Subsidiaries –In a wholly owned subsidiary, the firm owns 100% of the stock. –Establishing a wholly owned subsidiary in a foreign market can be done two ways: i.The firm can set up a new operation in that country. ii.The firm can acquire an established firm.

20. 11-20 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Entry Modes Wholly Owned Subsidiaries (Cont’d) –Advantages  A wholly owned subsidiary reduces the risk of losing control over core competencies.  A wholly owned subsidiary may be required if a firm is trying to realise location and experience curve economies.

21. 11-21 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Entry Modes Wholly Owned Subsidiaries –Advantages (Cont’d)  A wholly owned subsidiary gives a firm the tight control over operations in different countries that is necessary for engaging in global strategic coordination (i.e. using profits from one country to support competitive attacks in another).

22. 11-22 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Entry Modes Wholly Owned Subsidiaries (Cont’d) –Disadvantages  Firms bear the full costs and risks of setting up overseas operations.  Acquisitions raise additional problems, including those associated with trying to marry divergent corporate cultures.

23. 11-23 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Selecting an Entry Mode The optimal choice of entry mode involves trade- offs. Core Competencies and Entry Mode –The optimal entry mode depends to some degree on the nature of a firm’s core competencies. –A distinction can be drawn between firms whose core competency is in technological know-how and those whose core competency is in management know-how.

24. 11-24 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Selecting an Entry Mode Technological Know-How –A firm with a competitive advantage based on proprietary technological know-how should avoid licensing and joint venture arrangements in order to minimise the risk of losing control over the technology. –If a firm believes its technological advantage is only transitory, or the firm can establish its technology as the dominant design in the industry, then licensing may be appropriate even if it does involve the loss of know-how.

25. 11-25 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Selecting an Entry Mode Management Know-How –The competitive advantage of many service firms is based upon management know-how. –The risk of losing control over the management skills to franchisees or joint venture partners is not high, and the benefits from getting greater use of brand names are significant.

26. 11-26 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Selecting an Entry Mode Pressures for Cost Reductions and Entry Mode –The greater the pressures for cost reductions, the more likely a firm will be to want to pursue some combination of exporting and wholly owned subsidiaries. –This will allow it to achieve location and scale economies as well as retain some degree of control over its worldwide product manufacturing and distribution.

27. 11-27 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Greenfield Venture vs. Acquisition Should a firm establish a wholly owned subsidiary in a country by building a subsidiary from the ground up (greenfield strategy), or should it acquire an established enterprise in the target market (acquisition strategy)?

28. 11-28 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Greenfield Venture vs. Acquisition Pros and Cons of Acquisition –Benefits of Acquisitions  Acquisitions have three major points in their favour: i.They are quick to execute ii.Acquisitions enable firms to pre-empt their competitors iii.Managers may believe acquisitions are less risky than green-field ventures

29. 11-29 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Greenfield Venture vs. Acquisition Why Do Acquisitions Fail? –The acquiring firms often overpay for the assets of the acquired firm. –There may be a clash between the cultures of the acquiring and acquired firm. –Attempts to realise synergies by integrating the operations of the acquired and acquiring entities often run into roadblocks and take much longer than forecast. –There is inadequate pre-acquisition screening.

30. 11-30 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Greenfield Venture vs. Acquisition Reducing the Risks of Failure –A firm can overcome all these problems if it is careful about its acquisition strategy.  Through careful screening of the firm to be acquired  By moving rapidly once the firm is acquired to implement an integration plan

31. 11-31 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Greenfield Venture vs. Acquisition Pros and Cons of Greenfield Ventures –The main advantage of a greenfield venture is that it gives the firm a greater ability to build the kind of subsidiary company that it wants. –However, greenfield ventures are slower to establish. –Another disadvantage of greenfield ventures is that they are risky.

32. 11-32 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Countertrade A government may restrict the convertibility of its currency to preserve its foreign exchange reserves so they can be used to service international debt commitments and purchase crucial imports. Non-convertibility implies that the exporter may not be paid in his or her home currency; and few exporters would desire payment in a currency that is not convertible.

33. 11-33 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Countertrade The Incidence of Countertrade –Countertrade arose in the 1960s as a way for the Soviet Union and the Communist states of Eastern Europe, whose currencies were generally non-convertible, to purchase imports. –During the 1980s, the technique grew in popularity among many developing nations. –The 1997 financial crisis left many Asian nations with little hard currency to finance international trade. They turned to the only option available to them: countertrade.

34. 11-34 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Countertrade Types of Countertrade –Barter  This is the direct exchange of goods or services between two parties without a cash transaction.  It is primarily used for one-time-only deals in transactions with trading partners who are not creditworthy or trustworthy.

35. 11-35 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Countertrade Types of Countertrade (Cont’d) –Problems with Barter  If goods are not exchanged simultaneously, one party ends up financing the other for a period.  Firms engaged in barter run the risk of having to accept goods they do not want, cannot use or have difficulty reselling at a reasonable price.

36. 11-36 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Countertrade Types of Countertrade (Cont’d) –Counterpurchase  This is a reciprocal buying agreement.  It occurs when a firm agrees to purchase a certain amount of materials back from a country to which it made a sale.

37. 11-37 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Countertrade Types of Countertrade (Cont’d) –Switch Trading  The term refers to the use of a specialised third-party trading house in a countertrade arrangement.  When a firm enters a counterpurchase or offset agreement with a country, it often ends up with what are called counterpurchase credits, which can be used to purchase goods from that country.

38. 11-38 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Countertrade Types of Countertrade (Cont’d) –Buy-Back  This occurs when a firm builds a plant in a country — or supplies technology, equipment, training or other services to the country — and agrees to take a certain percentage of the plant’s output as partial payment for the contract.

39. 11-39 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Countertrade The Pros and Cons of Countertrade –Countertrade’s main attraction is that it can give a firm a way to finance an export deal when other means are not available. –Countertrade can become a strategic marketing weapon. –On the downside, countertrade contracts may involve the exchange of unusable or poor-quality goods that the firm cannot dispose of profitably.

40. 11-40 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Countertrade The Pros and Cons of Countertrade (Cont’d) –Countertrade requires the firm to invest in an in-house trading department dedicated to arranging and managing countertrade deals. –Countertrade is most attractive to large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods acquired in countertrading.

41. 11-41 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Summary of Main Themes This chapter focuses on various modes for serving foreign markets such as exporting, licensing or franchising to host-country firms, establishing joint ventures with a host-country firm, setting up a new wholly owned subsidiary in a host country to serve its market, or acquiring an established enterprise in the host nation to serve that market. Each of these options has advantages and disadvantages.

42. 11-42 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang. Summary of Main Themes The magnitude of the advantages and disadvantages associated with each entry mode is determined by a number of factors, including transportation costs, trade barriers, political risks, economic risks, business risks, costs and firm strategy. Some firms may best serve a given market by exporting, other firms may better serve the market by setting up a new wholly owned subsidiary or by acquiring an established enterprise.