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8/3/2019 MOD 3 Overall
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Amity School of Business
MODULE - 3
MODES OF INTERNATIONALENTRY
1
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Amity School of Business
Exports to the United States
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Step 1 Step 2
Identify a potential
market
Match needs to
abilities
Step 3
Initiate
meetings
Developing an Export StrategyDeveloping an Export Strategy
Step 4
Commit
resources
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Degree of Export InvolvementDegree of Export Involvement
Direct exporting(sell to buyers)
Indirect exporting(sell to intermediary)
Sales representative
Distributor
Agent
Export management company
Export trading company
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Avoiding Export BlundersAvoiding Export Blunders
Conduct market research
Obtain export advice
Hire a freight forwarder
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Amity School of BusinessGoing it Alone: ExportGoing it Alone: Export
HOME COUNTRY HOST COUNTRY
Export of Goods
MNE
Revenues
Customers
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Amity School of BusinessGoing it Alone: ExportAdvantages
Low initial investment
Reach customers quickly
Complete control overproduction
Benefit of learning forfuture expansion
Disadvantages
Potential costs of tradebarriers Transportation cost
Tariffs and quotas
Foregoes potentiallocation economies
Difficult to respond tocustomer needs well
When Is Export Appropriate?When Is Export Appropriate?
Low trade barriersLow trade barriers
Home location has cost advantageHome location has cost advantage
Customization not crucialCustomization not crucial
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Amity School of BusinessLicensing AgreementLicensing Agreement
Local Firm
Licensing of TechnologyHOME COUNTRY HOST COUNTRY
MNE
Fees and Royalties
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LicensingLicensing
Advantages
+ Finance e
xpansion+ Reduce risks
+ Reduce counterfeits
+ Upgrade technologies
Restrict licensors activities Reduce global consistency Lend strategic property
Disadvantages
Company owning intangible property (licensor) grants
another firm (licensee) the right to use it for a specific time
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FranchisingFranchising
Advantages+ Low cost and low risk+ Rapid expansion
+ Local knowledge
Cumbersome Lost flexibility
Disadvantages
Company (franchiser) supplies another (franchisee)
with intangible property over an extended period
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Amity School of BusinessManagement ContractManagement Contract
Management Fees
Local Firm
Technological Inputs
HOME COUNTRY HOST COUNTRY
Profit
MNE
Wholly-Owned
Subsidiary
Managerial
Service
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Management Contract
When Is a Management Contract Appropriate?When Is a Management Contract Appropriate? M
anager has a reputation to protectM
anager has a reputation to protect HotelsHotels Consulting companiesConsulting companies
PerformancePerformance--based contract provides nobased contract provides noperverse incentivesperverse incentives
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Turnkey ProjectTurnkey Project
Advantages+ Firms specialize in competency
+ Nations obtain infrastructure
Politicized process
Create competitorDisadvantages
Company designs, constructs, and testsa production facility for a client
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Amity School of BusinessWholly Owned SubsidiaryWholly Owned Subsidiary
Facility entirely owned and controlled by
a single parent company
Advantages+ Day-to-day control
+ Coordinate subsidiaries
Disadvantages Expensive High risk
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Amity School of BusinessJoint VentureJoint Venture
Joint Venture
Company
Inputs
MNE Local Firm
HOME COUNTRY HOST COUNTRY
Inputs
Share of Profit
Share of
Profit
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Joint Venture
When Is a Joint Venture Appropriate?When Is a Joint Venture Appropriate? Both partners contribute hardBoth partners contribute hard--toto--measure inputsmeasure inputs
Large expected mutual gains in the longLarge expected mutual gains in the long--runrun
Trade secrets can be walled offTrade secrets can be walled off
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Amity School of BusinessJoint VentureJoint Venture
Company created and jointly owned by two or more
entities to achieve a common objective
AdvantagesReduce risk level
Penetrate markets
Access channels
DisadvantagesPartner conflict
Lose control
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Joint Venture Configurations
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Strategic AllianceStrategic Alliance
DisadvantagesPartner conflict
Create competitor
AdvantagesShare project cost
Tap competitors strengthsGain channel access
Entities cooperate (but do not form a separate
company) to achieve strategic goals of each
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Selecting Partners
Commitment
Trustworthiness
Cultural knowledge
Valuable contribution
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Amity School of BusinessStrategic FactorsStrategic Factors
Cultural environment
Political/Legal environments
Market size
Production and shipping costs
International experience
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Amity School of BusinessInternational modes of entry and value
at risk FDI whether M&A or company growth puts full
value at risk.
Toyota factory, Wal-Mart store
Managers of an international business choose themode of entry based on a trade-off between riskversus control in the particular supplier or customercountry
Joint ventures, not only share knowledge, but alsoshare investment costs and value at risk
Spot or contract sales can substantially reduce value
at risk 23
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International modes of entry and value at risk
M&A
Growth
Alliances/JointVentures
Licenses
Contract
Spot
Increase in
control,
Increase in
commitmen
t
and risk
24
Choice of entry mode jointly determinesdegree of control and extent of risk
Degree of commitment depends oncontractual duration and vertical
integration
With less knowledge of other countrysmarket, choose lower degree ofcommitment
As knowledge increases over time, canincrease degree of commitment to getcloser to desired entry mode.
Contractual transactions may give
optimal mix of control and commitment
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Amity School of Business
Why is FDI so common in international business?
Advantages of FDI
Production or distribution facilities in a country canreduce costs of trade (transportation, tariff and nontariffbarriers, transaction costs, and time) Toyota in US
Production within a country takes advantage of domesticsourcing of parts, components, services
Investment and employment in host country gainpolitical support for the international business:
quid pro quo investment Cemex and Southdown
25
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Why is FDI so common in international business?
Advantages of FDI
Closer to customers for manufacturers
Necessary for retail and wholesale companies Wal Mart, Carrefour, Ingram Micro
Take advantage of low-cost labor, highly-skilled
labor, and proximity to resources
Reduce costs of trade from import/export
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Advantages of vertical FDI Coordination advantages through the value chain
Access to production facilities, sourcing networks anddistribution networks
Keeping technology and intellectual property in-house
Substitution of internal transactions for market transactions
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Advantages of Horizontal FDI M&A acquisition of competitors for market power
or cost savings
M&A to achieve economies of scale and scope(Daimler/Chrysler, VW)
M&A to purchase of technology
M&A to acquire brand names
Production avoids costs of trade relative to export
As hedge against demand and supply fluctuations --Cemex
Market power in international purchasing (e.g.Vodaphone/Airtouch purchases wireless equipmentfor its many operations)
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Disadvantages of FDI
Risk that firm many not recover investment
and returns to investment in supplier
country
FDI increases capital investment, reduces
flexibility
FDI ties business to particular country
locations for production or distribution29
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Amity School of BusinessFDI Trends
Shift of investment mix toward servicesAbout half in 1990, about two thirds in 2000
Shift of investment to outsourcing abroad(offshoring + outsourcing) reduction in verticalintegration
Globalization (lower costs of trade) leading toreduction in vertical FDI
Globalization (market integration) likely to lead toincreases in horizontal FDI
UNCTAD World Investment Report 2004
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Licensing versus FDIWhy is FDI more prevalent than technology licensing?
Licensing agreements depend heavily oninternational enforcement ofintellectual property
righ
ts International licensing also entails costs of trade
International licensing is quite common amongstdeveloped countries, reaching levels up to 1/3 ofdomestic R&D expenditures
International licensing experiencing rapid growth
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Overview and Take-Away Points FDI a major feature of international business
composition of FDI undergoing transformation fromvertical to horizontal
FDI offers advantages in terms of ownership and controland avoiding trade barriers
Choose target countries based on expected cash flow
and costs of investment and discount using risk adjustedrate of return
Adjust level of investment to reflect expected cash flowand risk-adjusted rate of return 32
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Outsourcing/Offshoring/BP0 Outsourcing: The practice of subcontracting manufacturing work, to outside
and especially foreign or nonunion companies
Offshoring: Outsourcing services/products from any country other than your
own
Business Process Offshore Outsourcing(BPO): The export of IT-related work from the US and other developed
countries to areas of the world where there is both political
stability and lower labor costs or tax savings
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Amity School of BusinessBPO
BPO is the outsourcing of back office and front officefunctions typically performed by white collar and clericalworkers
Examples include accounting, human resources andmedical coding and transcription
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History of the call centereconomy
India in the licence raj (1947-1990)
Nehruvian model of economy Import-substitution
Scientific training and education
Indias liberalized economy (1990- )
Macroeconomic crisis
Foreign Direct Investment
Shining India
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Amity School of BusinessWhy India?
Telecommunications and IT infrastructure
English-speaking urban population
Lower labor costs
Governmental incentives
Post-1990 support for private enterprise
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India: The outsourcing debate"India controls 44 percent of the global offshore outsourcing market for softwareand back-office services, with revenues of US$17.2 billion (euro14.07
billion) in the year ended March 2005..."
- Associated Press, June 2005
"The Indian software and services export is estimated at Rs. 78,230 crore
($17.2 billion) in 2004-05, as compared to Rs 58,240 crore ($12.8 billion) in
2003-04, an increase of 34 per cent.
- NASSCOM, December 2005
"Only 19% of US businesses have an offshore outsourcing strategy, a study by
Ventoro found. However, the percentage skyrockets to 95% if only Fortune
1000 companies are considered."
- ZDNet Research, October 2005
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Issues at hand Business optimization and benefits
Leveraging globalization
India as an emerging force on the world
politico-economic map
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India: The outsourcing debate"The survey of 25 large organizations with a combined $50 billion inoutsourcing contracts found that 70% have had negative experiences with
outsourcing projects and are now taking a more cautious approach. One
in four companies has brought outsourced functions back in-house...
- Associated Press, June 2005
"...a University of California-Berkeley study that warns as many as 14 million
Americans hold jobs at risk of being outsourced."
-Mercury News, October 2004
"...the number of buyers prematurely terminating an outsourcing relationship
has doubled to 51 percent while the number of buyers satisfied with theiroffshoring providers has plummeted from 79 percent to 62 percent."
- DiamondCluster, June 2005
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Issues at hand
Clash of civilizations?
Protectionist voices in neoliberal
economies?
Who benefits from globalization?
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What does the media say?For Economic progress
Benefits of globalization
G
reater access tomodernity and progress
India as the next super-power
Global trickle-down effect
Participation in globalcapital = Participation inglobal politics
Against
Disruption of adolescence
Moral regression
Influx of debauchedWestern lifestyles
Neo-colonization
Health and Sanity
Dangerous city
landscapes Unequal effects of
globalization
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Amity School of BusinessGlocalization
Global Vs. Local
What issues does outsourcing really hit
at? What will the society of the future be?