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Going Global
Licensing
Strategic Alliances
FDI
Exports is not the only Option
Barriers to trade such as Tariffs, quotas and complex customs procedures discourage exports
Other options are Licensing Strategic Alliances Foreign Direct Investments (FDI)
Optimal mode of entry depends on business strategy, trade barriers & product situation
Entry Barriers
Tariff barriers are the most obvious barriers to entry.
Import Tariffs make imports more expensive when compared to domestic products
High tariffs create local monopolies, which results in higher prices for consumers
Tariffs also increase the cost of doing business in that country
Non Tariff barriers
Non Tariff barriers are common & include: Government Rules & Regulations e.g: FDA
rules in US, Purity laws in Germany Complex Customs Procedures Limited or No access to local distribution
network e.g: Fuji prevented its distributors from carrying Kodak products
Natural Barriers: The local competitors are too competitive, have a dominant market share, have a strong brand name
Developed Vs Developing Countries
Trade barriers in developing countries are often tariffs, Rules, Regulations & lack of infrastructure
Barriers in developed countries are usually natural barriers, Government Rules & regulations
Developed countries are often the learning grounds for firms from developing countries in their global expansion
Exit Barriers Exit barriers are non-recoverable investments
made while operating in a country. Often times it is difficult to lay off people, and
may have to pay a huge compensation to do so. Loss of good will, Brand Value, Brand Image also
acts as an Exit barrier E.g: Peugeot Exited US market in 1992, Philips
is still operating in US even after 15 straight years of losses
Loss of learning opportunity is cited as an exit barrier
Effect of Barriers on Entry Mode
Entry Mode depends heavily on trade barriers Firm must be ready to unbundle its Value chain
to gain entry Compulsory Joint Ventures in China Local Content Requirements in Czech Lack of distribution network in US
Firms often build managerial expertise in one mode of entry & would prefer it over others IBM, Philips, P&G prefer Wholly Owned Subsidiaries Small tech companies may prefer licensing or Joint
Ventures
Managerial Skills & Mode of Entry
Each Mode of entry involves different managerial skills Supervising hundreds of Franchising is
different from Running foreign subsidiaries
Joint Ventures & Wholly owned subsidiaries involve quite a lot of learning, Learning curve effects must be considered while planning the entry mode
Licensing
Licensing refers to a firm’s know-how or other intangible asset to a foreign company for a fee, royalty or some other form of payment
Overcomes tariffs and other trade barriers Licensee will learn FSA from the licensor
and may become a future competitor Loss of FSA can be prevented by proper
contracts & licensing agreements
Licensing – How not to do it
Gillette avoided investment in market research and investments in Europe, so it licensed its razor blade manufacturing technology to Wilkinson of UK – forgetting to exclude continental Europe in the contract
As a result Gillette now has to compete with its own technology in Continental Europe – A long uphill battle
Elements of a licensing Contract
Technology Package Definition, Know-How, Patents, trade marks
Use Conditions Territorial rights, Sublicensing agreements, exclusion
zones, performance/Quality conditions, reporting rules
Compensation Mode of payment, Minimum & maximum fees, Other
assistance fees, marketing fees
Other Provisions Contract laws, Arbitration conditions, terminations
conditions
Franchising Franchising is similar to licensing but in addition
franchisor provides a well recognized brand name, marketing support and in some cases raw materials
Franchisor also provides advertising, employee training, production & quality training
In return Franchisee must adhere to the rules of the franchisor and both share revenue based on a preset agreement
Popular for fast foods, Hotels, Auto Repair Shops Franchisor has a greater control over the
operations
Original Equipment Manufacturing
OEM is actually exports Manufacturer sends there parts to another
company which sells the final product under their Brand name Canon provides cartridges for HP printers Canon Provides copiers for Savin
Pro: Avoids expensive marketing efforts Con: Firm fails to learn from foreign
Markets
Strategic Alliances (SA)
SA is a collaboration between 2 firms Equity based SA is called Joint Ventures SA is mutually beneficial and takes
advantages of both firm’s FSA Share R&D, Distribute each others products
In some cases SA involves sharing of vital information – A potential loss of FSA
Unlike licensing, there is usually no royalty or fees to be paid
Non-Equity SA
SA between competitors is relatively new Need to access each other’s technology,
marketing skills, manufacturing skills to exploit new markets is driving Non-Equity SA
Shortage of resources is one of the reason Control is established by soft skills I.e. the need
for mutual gain First Mover advantage Learn from leading markets Reduce competitive pressures
Distribution Alliances Distribution networks are often expensive to
setup A mutual distribution alliance agreement
prevents duplication of efforts while maximizing benefits Airlines typically sell seats in other airlines Mitsubishi joined hands with Chrysler in US
Pro: Saves costs & uses a ready network Con:
Limits growth of the partners via a non-compete agreements
Firm loses learning opportunity
Manufacturing Alliances
Manufacturing Alliance is a sharing of manufacturing facilities to save on investment costs, achieve economies of scale, save on transportation costs
Manufacturing Alliances tend to be unstable as: Limits growth of the partners Potential loss of know-how Priority on manufacturing will always favor one partner
over the other Loss or learning curve economies
R&D Alliances
R&D alliances are often between competitors
Such alliances are for: Developing a common technology Need for accessing each other’s technology Need to stay ahead of other competition Lower R&D costs, Avoid Duplication Need to impose a joint technology standard
Unintended Loss of technology is possible
Joint Ventures
Equity Based SA. Usually firms need to transfer capital, man power, technology and management skills to the new venture
Potential loss of know-how exists Mutually beneficial if partners learn from
each other and their joint experience Usually a first step before setting up a
Wholly Owned subsidiary Care must be taken in selecting partners
FDI
FDI is usually for Wholly owned subsidiaries Greater Control over know-how – I.e Internalization of
FSA Avoid tariff & other barriers Faster response to foreign markets Lowering prices for buyers, gaining market share,
establishing an insider position
Carries higher risk than any other mode of entry May suffer from Country-of-origin effects
E.g Sony from Malaysia
FDI – Green Field project or Acquisition
FDI decisions will have to consider a green field venture or an acquisition of a foreign firm
Acquisition of an existing company speeds up entry, gains a ready market share
Benefits from existing facilities, marketing channels etc
Disadvantages are: Incompatible product lines Culture mismatch Political Backlash or resurgence of national pride Loss of Goodwill Struck with existing legacy systems
FDI – Financial Analysis
FDI requires rigorous financial analysis Cash flows are subjected to foreign
exchange risks IRR or NPV analysis for a foreign project is
difficult due to lots of unknowns Financial analysis is based on market
forecast. In many cases market forecast will be inaccurate
Optimal Entry Strategy
Closing Thoughts