Chapter 13

EntryModes

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Exporting “Pioneer” or “Fast Follower” Which is Better?

• “Pioneers” succeed in exporting when – Insulated from

competitor entry– Strong patent

protection proprietary technology

– Big investment requirements

– Has size, resources and competencies (R&D, marketing) to leverage pioneering position

• “Pioneers” succeed in exporting when – Insulated from

competitor entry– Strong patent

protection proprietary technology

– Big investment requirements

– Has size, resources and competencies (R&D, marketing) to leverage pioneering position

• “Fast Followers” will succeed when– Few legal, financial, and

cultural barriers exist– Sufficient resources and

competencies to overwhelm pioneer’s early advantage

– Larger resource base than Pioneer to reduce unit costs and offer lower prices

• “Fast Followers” will succeed when– Few legal, financial, and

cultural barriers exist– Sufficient resources and

competencies to overwhelm pioneer’s early advantage

– Larger resource base than Pioneer to reduce unit costs and offer lower prices

LO1

13-2

Nonequity Modes of Entry• Starts with Exporting:

– Selling some regular production overseas– Requires little investment– Relatively free of risk

• The next choices:– Indirect Exporting– Direct Exporting

• Or:– Turnkey Projects– Licensing– Franchising– Management Contracts– Contract Manufacturing

• Starts with Exporting:– Selling some regular production overseas– Requires little investment– Relatively free of risk

• The next choices:– Indirect Exporting– Direct Exporting

• Or:– Turnkey Projects– Licensing– Franchising– Management Contracts– Contract Manufacturing

LO2

13-3

Nonequity Modes of Entry• Indirect exporting done through

home-country based exporters– No special expertise– No large cash outlay

• Called in the trade as:– Manufacturers’ Export

Agents sell for the manufacturer

– Export Commission Agents buy for overseas

customers– Export Merchants

purchase and sell for own accounts

– International Firms Use their own goods abroad

• Indirect exporting done through home-country based exporters– No special expertise– No large cash outlay

• Called in the trade as:– Manufacturers’ Export

Agents sell for the manufacturer

– Export Commission Agents buy for overseas

customers– Export Merchants

purchase and sell for own accounts

– International Firms Use their own goods abroad

• Costs of indirect exporting:– Commissions – Lost foreign business if

exporters change suppliers

– Exporters gain little international experience

• Costs of indirect exporting:– Commissions – Lost foreign business if

exporters change suppliers

– Exporters gain little international experience

LO2

13-4

Direct Exporting• Direct Exporting:

– “the exporting of goods and services by a firm that produces them”

– Initial responsibility done internally – sales manager

– Sales company may be set up

– Internet makes direct exporting easier• High level investment for international presence • Cost of trial is low

• Direct Exporting: – “the exporting of goods and services by a firm

that produces them” – Initial responsibility done internally – sales

manager– Sales company may be set up

– Internet makes direct exporting easier• High level investment for international presence • Cost of trial is low

LO2

13-5

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• After a trial run, the facility is turned over to the purchaser

– company that wishes to earn money from its expertise– producer of a factory

• 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• After a trial run, the facility is turned over to the purchaser

– company that wishes to earn money from its expertise– producer of a factory

LO2

13-6

Licensing• Licensing

– “a contractual arrangement in which one firm (licensor) grants access to its patents, trade secrets, or technology to another (licensee) for a fee”

– Licensee pays fixed sum and sales royalties (2%-5%) over life of contract with renewal option

• Anything can be licensed – technology, brand & manufacturer names, logos, symbols, colors

• 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

• A Licensee may become a competitor!

LO2

13-7

Piracy• Patent Infringement• Intellectual property

protection:– courts have begun

upholding patent infringement claims

– patent holders have started suing violators

– foreign governments have begun enforcement of their patent laws

• Patent Infringement• Intellectual property

protection:– courts have begun

upholding patent infringement claims

– patent holders have started suing violators

– foreign governments have begun enforcement of their patent laws

• Traditional Piracy– Attack on defenseless

sailing vessels, theft of cargo and/or ship on the high seas

• Pirates can be:– International terrorists– Organized crime– Poor local fisherman

• Locations:– Waters around Indonesia,

Nigeria, Somalia, Bangladesh & Caribbean

• Traditional Piracy– Attack on defenseless

sailing vessels, theft of cargo and/or ship on the high seas

• Pirates can be:– International terrorists– Organized crime– Poor local fisherman

• Locations:– Waters around Indonesia,

Nigeria, Somalia, Bangladesh & Caribbean

LO3

13-8

Franchising• Franchising:

– “a form of licensing in which one firm contracts with another to operate a business under an established name according to specific rules”

• The franchisee gets:– Publicized brand name – Well-known set of procedures– carefully developed & controlled controlled

marketing plan

• Franchising:– “a form of licensing in which one firm contracts

with another to operate a business under an established name according to specific rules”

• The franchisee gets:– Publicized brand name – Well-known set of procedures– carefully developed & controlled controlled

marketing plan

LO2

13-9

Management Contract• Management Contract

– “An arrangement by which one firm provides management in all or specific areas to another firm”

– Typical fee is 2-5% of annual sales and tax deductable

• MNCs make contracts with:– Other firms with no ownership interest– Joint venture partners– Wholly owned subsidiaries

• Management Contract– “An arrangement by which one firm provides

management in all or specific areas to another firm”

– Typical fee is 2-5% of annual sales and tax deductable

• MNCs make contracts with:– Other firms with no ownership interest– Joint venture partners– Wholly owned subsidiaries

LO2

13-10

Contract Manufacturing

• Contract Manufacturing– “An arrangement in which one firm contracts

with another to produce products to its specifications but assumes responsibility for marketing”

• Other types of:– Subcontract assembly or parts production– Lend capital to 3rd party foreign contractor

• Called “foreign direct investment without investment”

• Contract Manufacturing– “An arrangement in which one firm contracts

with another to produce products to its specifications but assumes responsibility for marketing”

• Other types of:– Subcontract assembly or parts production– Lend capital to 3rd party foreign contractor

• Called “foreign direct investment without investment”

LO2

13-11

Equity-Based Modes of Entry1. Wholly Owned

Subsidiary2. Joint Venture3. Strategic Alliances

1. Wholly Owned Subsidiary

2. Joint Venture3. Strategic Alliances

• Wholly Owned Subsidiary

1. Start from the ground up by building a new plant (greenfield investment)

2. Acquire a going concern3. Purchase its distributor to

obtain a distribution network familiar with its products

• Wholly Owned Subsidiary

1. Start from the ground up by building a new plant (greenfield investment)

2. Acquire a going concern3. Purchase its distributor to

obtain a distribution network familiar with its products

LO2

13-12

Joint Venture1. Joint Venture

– “A cooperative effort among two or more organizations that share a common interest in a business enterprise or undertaking”

1. Joint Venture– “A cooperative

effort among two or more organizations that share a common interest in a business enterprise or undertaking”

1. A corporate entity formed by an international company and local owners;

2. A corporate entity formed by two international companies for the purpose of doing business in a third market;

3. A corporate entity formed by a government agency (usually in the country of investment) and an international firm; or

4. A cooperative undertaking between two or more firms of a limited-duration project.

1. A corporate entity formed by an international company and local owners;

2. A corporate entity formed by two international companies for the purpose of doing business in a third market;

3. A corporate entity formed by a government agency (usually in the country of investment) and an international firm; or

4. A cooperative undertaking between two or more firms of a limited-duration project.

LO2

13-13

Issues with Venture Ventures• Strong nationalism• Expertise, tax & other benefits• Disadvantages:

– Shared profits– Minority ownership position– Difficulty in share distribution to allow minority

owner to be largest stockholder– Lack of control– Local law requiring local majority ownership– Joint venture control through management

contracts

• Strong nationalism• Expertise, tax & other benefits• Disadvantages:

– Shared profits– Minority ownership position– Difficulty in share distribution to allow minority

owner to be largest stockholder– Lack of control– Local law requiring local majority ownership– Joint venture control through management

contracts

LO2

13-14

Strategic Alliances• Strategic Alliances

– “partnerships between or among competitors, customers, or suppliers that may take one or more various forms, both equity and nonequity”

• Goals of Strategic Alliances:– Faster market entry and

start-up– Access to new products,

technologies, and markets– Cost-savings by sharing

costs, resources, and risks

• Issues with Strategic Alliances:– Alliances may be Joint

Ventures– Pooling versus Trading

Alliances– Alliances versus

Mergers and Acquisitions

– Future of Alliances

LO2

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Issues with Strategic Alliances• Strategic Alliances may be Joint Ventures

– In manufacturing and marketing• Pooling versus Trading Alliances

– Pooling Alliances – driven by similarity and integration– Trading Alliances –driven by the logic of contributing dissimilar

resources– Fundamental differences:

• Goals (common vs. compatible)• Optimal resources (many vs. few partners)• Managerial challenges (low vs. high coordination needs)

• Alliances versus Mergers and Acquisitions– Mergers and acquisitions not considered alliances, but ways to access

new technology• Future of Alliances

– Many fail or are taken over by a partner– Difficult to manage due to different strategies, operating practices, and

organizational cultures– Partner may acquire technological or other competencies and become

competitor

• Strategic Alliances may be Joint Ventures– In manufacturing and marketing

• Pooling versus Trading Alliances– Pooling Alliances – driven by similarity and integration– Trading Alliances –driven by the logic of contributing dissimilar

resources– Fundamental differences:

• Goals (common vs. compatible)• Optimal resources (many vs. few partners)• Managerial challenges (low vs. high coordination needs)

• Alliances versus Mergers and Acquisitions– Mergers and acquisitions not considered alliances, but ways to access

new technology• Future of Alliances

– Many fail or are taken over by a partner– Difficult to manage due to different strategies, operating practices, and

organizational cultures– Partner may acquire technological or other competencies and become

competitor

LO2

13-16

Reasons to Export• To serve markets where the firm has no or limited

production facilities.

• To satisfy a host government’s requirements that the local subsidiary have exports.

• To remain price competitive in the home market.

• To test foreign markets and foreign competition inexpensively.

• To meet actual or prospective customer requests for the firm to export.

• To offset cyclical sales in the domestic market.

• To serve markets where the firm has no or limited production facilities.

• To satisfy a host government’s requirements that the local subsidiary have exports.

• To remain price competitive in the home market.

• To test foreign markets and foreign competition inexpensively.

• To meet actual or prospective customer requests for the firm to export.

• To offset cyclical sales in the domestic market.

LO4

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Reasons to Export• To achieve additional sales, which will allow the firm to use

excess production capacity to lower per-unit fixed costs.

• To extend a product’s life cycle by exporting to currently unserved markets where the product will be at the introduction stage of the life cycle.

• To respond strategically to foreign competitors that are in the firm’s home market by entering their home market.

• To achieve the success the firm’s management has seen others achieve by exporting.

• To improve the efficiency of manufacturing equipment, which usually works better at or near full capacity.

• To achieve additional sales, which will allow the firm to use excess production capacity to lower per-unit fixed costs.

• To extend a product’s life cycle by exporting to currently unserved markets where the product will be at the introduction stage of the life cycle.

• To respond strategically to foreign competitors that are in the firm’s home market by entering their home market.

• To achieve the success the firm’s management has seen others achieve by exporting.

• To improve the efficiency of manufacturing equipment, which usually works better at or near full capacity.

LO4

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