METHODS OF ENTRY INTO INTERNATIONAL BUSINESS Ref : International Business. P. Subba Rao International Business. Francis Cherunilam (Pg.

497 -516)

Foreign Market Analysis Analyze alternative foreign markets

--Market potential ..Population, ..GDP, ..Urban/rural, ..Purchasing power --Level of competition ..No. & size of existing firms, ..Their relative strengths & weaknesses ..Their product, price & distribution strategies, ..Actual market conditions --Legal political environment ..Companies should assess legal & political environment carefully --Socio-cultural influences Companies must consider sociocultural carefully while deciding to go abroad

Assessing costs, benefits and risks

-- Costs ..Direct costs involved in setting up operations in the global market ..Opportunity cost loss of earning from alternative market --Benefits ..High sales, profits ..Low acquisition, manufacturing costs ..Foreclosing of markets to competitors ..Competitive advantage ..Access to new technology ..Cheap labor/resources in host country --Risks Exchange rate fluctuations, Operating complexity, financial losses, Government action

Decision Factors in selecting the mode of entry

The following factors must be considered while deciding on the mode of entry
Ownership advantages --- Derived by the company by owning resources.. e.g. TISCO owned its iron ore mines and coal mines. This grants the advantage of low cost producer to the company --- Locational advantages in the host country motivates the Company to enter foreign markets through Direct Investment. --- If locational advantages are more in the home country, them the Company enters foreign markets through exporting

Location advantages

Factors that provide locational advantage : -- Customer needs, -- Logistic requirements preferences & tastes -- Cheap land acquisition cost -- Cheap labour -- Political stability -- Low cost raw materials -- Climatic conditions e.g. Siam Cement locating its factory in Thailand and exporting to Vietnam, Cambodia and Laotia

Internationalization advantages
--- Are those benefits that a company gets by manufacturing goods or rendering service in the host country by itself rather than contract arrangements with companies in the host country . --- Sometimes the cost of negotiating, monitoring, and enforcing an agreement with the host country would be difficult and costly . In such case the Company enters the host country through Direct Investment
--- If the company thinks that the transaction costs are low, and local companies in the host country can produce efficiently, without jeopardizing its interests, the company can enter the foreign market through contract Manufacturing, Franchising or Licensing e.g. Toyota enters foreign markets through direct investment and joint-ventures as the local companies in foreign countries cannot produce as efficiently as Toyota

Other factors Need for control Resource availability Global strategy

Choosing a Mode of Entry

Exporting
Decision Factors: Ownership advantages Location advantages Internalization advantages Other factors Need for control Resource availability Global strategy

International Licensing International Franchising Specialized Modes Foreign Direct Investment

Exporting

Exports
EXPORT INVOLVEMENT

DIRECT EXPORTERS
Own name and beneficiary

INDIRECT EXPORTERS
Not on their own name, but supply direct to exporters

Forms of Exporting

Indirect exporting Direct exporting Intracorporate transfers

12-8

Indirect Exporting

Exporting the products either in their original form or in the modified form to a foreign country through another domestic company
E.g. --- Various publishers in India including Himalaya Publishing House sell their products, i.e., books to various exporter in India, who in turn export these books to various foreign countries

Direct Exporting

Selling the products in a foreign country directly through its distribution arrangements or through a host countrys company
E.g. --- Baskin Robins initially exported its ice-cream to Russia in 1990 and later opened 74 outlets with Russian partners. Finally it established its ice-cream factory in Russia

Intracorporate Transfers

Selling of products by a company to its affiliated company in the host country (another country) E.g. --- Selling products by Hindustan Lever in India to Unilever in USA --- This transaction is treated as exports in India and imports in USA

CLASSIFICATIONS OF EXPORTERS

SIZE

PRODUCT LINE

LEGAL STATUS

DESTINATION

FREQUENCY

SMALL LARGE PARTNERSHIP PROPRIETY SINGLE SINGLE PRODUCT MULTIPLE PRODUCTS PUB. LTD PVT. LTD

OCCASIONAL BRISK

MULTIPLE

Considerations for Exporting

--- export policies --- import policies --- export financing --- foreign exchange --- image --- distribution network --- responsiveness to the customer --- customer awareness --- customer preferences --- physical distribution costs --- warehousing costs --- packaging costs --- transporting costs --- inventory carrying costs --- own distribution network --- network of host countrys companies

Governmental policies

Marketing concerns

Logistical considerations

Distribution issues

Types of Export Intermediaries

Export Management Company
An export management company (EMC) is a firm that acts as its client's export department by managing the legal, financial, and logistical details of exporting, and providing advice about consumer needs and available distribution channels in the foreign markets the exporter wants to penetrate.

Co-operative Society
The domestic companies desire to export the goods from a cooperative society, which undertakes exporting operation of its members

International trading company

This company is engaged in directly exporting and importing. It buys goods from domestic companies and exports

Manufacturers Agents
They work on commission basis. They solicit domestic orders for foreign companies

Types of Export Intermediaries

Manufacturers export agents
Work on a commission basis. They sell domestic manufacturers products in foreign markets and act as their foreign sales department

Export and Import Brokers

These brokers bridge the gap between exporters and importers and bring these parties together

Freight Forwarders
Freight Forwarders help the domestic manufacturer in exporting their goods by performing various functions like physical transportation of goods , arranging customs documents and arranging transportation services

Advantages/Disadvantages of Exporting

Advantages Relatively low financial exposure Permit gradual market entry Acquire knowledge about local market Avoid restrictions on foreign investment Disadvantages Vulnerability to tariffs and NTBs Logistical complexities Potential conflicts with distributors

International Licensing

Foreign companies who have entered the Indian market by licensing

--- The IFB washing machine was manufactured in India under license from Bosch of Germany --- The US multinational General Electric (GE) has licensed it patented technology to a small scale unit in India, established for the manufacture of high density discharge (HID) fittings --- Nike International Ltd. , the worlds largest sports shoe and apparel company entered the Indian market in mid-1990s by licensing. Sierra Industrial Enterprises Ltd. The licensee was to invest in setting up the complete quality control, marketing and distribution operations and will pay Nike 5 per cent royalty on exfactory price of footwear and apparel for the use of brand name --- Arvind brands (Arvind Mills)owns the marketing rights for the leading US brands like Arrow, Lee and Wrangler

Licensing Licensing is when a firm, called the licensor, leases the right to use its intellectual propertytechnology, work methods, patents, copyrights, brand names, or trademarksto another firm, called the licensee, in return for a fee.
Xerox, inventor of the photocopier , licensed its xerographic know-how to Fuji-Xerox. In return, Fuji-Xerox paid Xerox, a royalty fee equal to 5% of net sales revenue that Fuji-Xerox earned from the sale photocopiers based on Xeroxs patented know-how

Trademark licensing
12-19

--- names or logo of designers --- literary characters --- sports teams --- movies & stars

Appear on clothing, games, food & beverages gifts & novelties, toys & home furnishings

Licensing : Concept and practice

Licensor

Country A

License Fee

Licensee Manufacturer and Markets

One or more countries as per agreement

Country B

Licensing Process

LICENSOR

PROVIDES THE RIGHT TO USE INTELLECTUAL PROPERTY AND BRAND NAME

RECEIVES ROYALTY MONEY

LICENSEE

USES THE INTELLECTUAL PROPERTY TO PRODUCE PRODUCTS FOR SALE IN HIS COUNTRY AND BRAND NAME

PAYS ROYALTIES TO THE LICENSOR FOR USING THE INTELLECTUAL PROPERTY AND BRAND NAME

Basic Issues in International Licensing

Specifying the boundaries of the agreement Determining compensation Establishing rights, privileges, and constraints Specifying the duration of the contract

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Basic Issues in International Licensing

Should be clearly defined. They determine which rights and privileges are being conveyed in the agreement E.g. -- Pepsi-Cola granted license Heineken of Netherlands with exclusive right of producing and selling Pepsi-Cola in Netherlands -- Pepsi-Cola supplies concentrated Cola syrup and Heineken adds carbonated water to produce beverage -- Pepsi-cola can grant license to other companies in Netherlands to produce other products of Pepsi, like Potato chips

Boundaries of the Agreement

Determination of Royalty

The most important factor in deciding the license is the payment of royalty by the licensee to the licensor.

Basic Issues in International Licensing

Another important factor, in granting license is determining clearly and specifically the Rights, privileges and constraints to reduce hurdles in the implementation of the agreement. E.g. -- Indian licensee of Aiwa TV uses interior inputs in order to reduce price to boost sales and profits would be damaging the image of the Japanese Licensor

Determining Rights, Privileges and Constraints

Dispute settlement mechanism

The licensor and licensee should clearly mention the mechanism to settle disputes. E.g. -- Settlement of disputes in courts is costly time consuming and hinders business interests

Basic Issues in International Licensing

The two parties of the agreement specify the duration of the agreement. .

Agreement Duration

E.g. -- Tokyo Disneyland demanded a 100 year licensing agreement with The Walt Disney Company

Advantages/ Disadvantages of Licensing

Advantages Low financial risks Low-cost way to assess market potential Avoid tariffs, NTBs, restrictions on foreign investment Licensee provides knowledge of local markets Reduces risk of exposure to government intervention

Disadvantages Limited market opportunities/profits Dependence on licensee Potential conflicts with licensee Possibility of creating future competitor

FRANCHISING
Well known creator with brand command can become strong franchisor Encashes on past and present effort

FRANCHISOR

FRANCHISEE FEE

SELECT

FRANCHISEE

Invests in all the resources

Franchising
A franchising agreement allows an independent entrepreneur or organization, called the franchisee, to operate a business under the name of another, called the franchisor, in return for a fee.
The franchisor provides the following service to the franchisee --- trade mark --- operating systems --- continuous support systems like, advertising employee training reservation services quality assurance programmes

Franchising

Franchising is a form of in which a parent company (the franchisor) grants another independent identity (the franchisee) the right to do business in a prescribed manner . This can take the form of selling the franchisors products, using its name, production and marketing techniques, or general business approach. One of the common forms of franchising involves the franchisor supplying an important ingredient ( part, material, etc.) for the finished product. E.g. --- Coca Cola supplying the syrup to the bottlers.

Major forms of franchising

Manufacturer retailer systems

Automobile dealership

Manufacturer wholesaler systems Service- retailer systems

Soft drink companies

Lodging services and fast food outlets

Reverse franchise agreements

ITC hotels franchised two of its hotels in Bangkok and Hongkong, to ITT Sheraton Holding, in exchange the franchise for Sheraton in India

Basic Issues in International Franchising

The franchisor has been successful in his home country --- McDonald was successful in USA due to popular menu and fast and efficient services Are these success factors transferable to foreign locations? --- The factors for success of McDonald are later transferred to other countries

Has franchising been a successful domestic strategy? --- The franchisor may have been successful in home country before going for international franchising . Foreign investors should come forward for introducing the product on franchising basis

Yum! Brands Franchise Opportunities

Franchising Advantages
Low financial risks Low-cost way to assess market potential Avoid tariffs, NTBs, restrictions on foreign investment Maintain more control than with licensing Franchisee provides knowledge of local market

Disadvantages
Limited market opportunities/profits Dependence on franchisee Potential conflicts with franchisee Possibility of creating future competitor

Specialized Entry Modes

Contract manufacturing

Management contract Turnkey project

CONTRACT MANUFACTURING
Under contract manufacturing, a company doing international marketing contracts with firms in foreign companies to manufacture or assemble the products while retaining the responsibility of marketing the product. There are a number of multinationals and affiliates of multinationals which employ this strategy in India in respect of some of the products they market, like, Park Davis, Hindustan Unilever, Ponds, etc.

..DETTOL for Reckitt and Coleman

..CLEARTON for Nicholas Laboratories Godrej Soaps ..JHONSONS BABY SOAP for Johnson & Johnson ..PONDS DREANFLOWER, COLD CREAN, AND SANDLEWOOD FOR Ponds

CONTRACT MANUFACTURING
Some companies outsource their part or entire production and concentrate on marketing

--- Nike has contracted with a number of factories in South East Asia to produce its athletic footwear and it concentrates on marketing. --- Bata Shoe also contracted with a number of cobblers to produce its footwear and it concentrated on marketing --- Mega Toys --- a Los Angeles Company contracts with Chinese plants to produce toys and mega Toys concentrates on marketing

CONTRACT MANUFACTURING

A well-known marketing company

Supply

Selects

Manufacturers China/India/ASEAN

Advantages of Contract Manufacturing

--- The company does not have to commit resources for set up production facilities

--- It frees the company from risk of investing in foreign countries

--- If idle production capacity is readily available in the foreign country, it enables the marketer to get started immediately --- The cost of production by contract manufacturing is lower than if it were manufacture by the international firm on account of low wages, lower overheads, tax concessions --- It is a less risky way to start business ; if the business does not pick up sufficiently, dropping it is easy; but if the company had established its own production facilities, , the exit would be difficult

Disadvantages of Contract Manufacturing

--- In some cases, there will be loss of potential profits from manufacturing --- Reduced control over manufacturing process (may affect quality, delivery schedules, etc.) --- Contract manufacturing also has the risk of developing potential competitors. --- It would not be suitable in cases of high tech products and cases which involve technical secrets --- Reduce learning potential

--- Potential public relations problems

Conclusion

Contract manufacturing is an opportunity for developing country firms to increase their business by manufacturing products for sale in foreign markets , by the contracting firm. India has enormous potential to benefit from the global outsourcing trend. More and more foreign firms are entering into contract manufacturing agreements with Indian Firms, particularly for marketing products abroad.

MANAGEMENT CONTRACTS
--- A Management Contract is an agreement between two companies, whereby one company provides managerial assistance technical expertise specialized services --- To the second company of the agreement for a certain period in return for monetary compensation in the form of : A flat fees Percentage over sales Performance bonus based on based on profitability, sales growth, production or quality measures --- Management contracts are mostly due to government intervention

e.g. Saudi Arabian Govt. requesting former owners to manage Armco Delta (USA) , Air France and KLM (Dutch) often provide technical and managerial assistance to small airlines companies owned by Governments

Advantages/Disadvantages Management Contracts

Advantages
Focus firms resources on its area of contracts Minimal financial exposure

Disadvantages
Potential returns limited by contract expertise May unintentionally transfer proprietary knowledge and techniques to contractee

12-42

TURNKEY PROJECTS
--- A turnkey project is a contract under which a firm agrees to fully design, construct and equip a manufacturing/business/service facility and turn the project over to the purchaser when it is ready for operation, for a remuneration --- The forms of remuneration includes : a fixed price payment on cost plus basis e.g. Indonesian turnkey project for construction of a sugar factory to a Japanese firm

Advantages/Disadvantages of Turnkey Projects

Advantages
Focus firms resources on its area of expertise Avoid all long-term operational risks

Disadvantages
Financial risks Cost overruns Construction risks Delays Problems with suppliers

FOREIGN DIRECT INVESTMENT

Any country

Investor

Money

Project/Technology/ Trade
Short term/ Long term

ROI

Foreign Direct Investment

Building new facilities (the greenfield strategy) Buying existing assets in a foreign country (acquisition strategy) Participating in a joint venture
FDI without alliance
Companies enter the international markets through FDI , invest money, establish manufacturing and marketing facilities rough ownership and control

Greenfield Strategy
Starting the operations of the company from scratch in foreign country --- market survey --- selection the location ---buys or lease land --- creates new facilities --- erects the machinery --- remits or transfers human resources --- starts the operations and marketing activities e.g. Fuji in South Carolina, Mercedes-Benz in Alabama, Nissan in England

New Wholly-Owned Subsidiary

Greenfield Venture

Most costly & complex of entry alternatives. Achieves greatest degree of control. Potentially most profitable, if successful. Maintain control over technology, marketing and
distribution. May need to acquire expertise & knowledge that is relevant to host country.
Could require hiring host country nationals or consultants at high cost.

STRATEGIC ALLIANCES

Strategic Alliances PHARMACEUTICALS INDUSTRY Ranbaxy & Glaxo SmithKline Syneron Medical (Israel) & Suchita Numed Have a strategic alliance for R & D

For marketing the formers aesthetic products in India

SEMICONDUCTOR INDUSTRY Samsung Electronics Company & IBM Korea

Have a strategic alliance for R&D

Strategic Alliances

COMPUTER INDUSTRY
Apple Computer & IBM IBM & STET (Italy) & Nippon Telegraph & Telephone (Japan) Have formed an alliance for development of software and hardware technology for a new generation of desktop computers

To develop computer communication services

IBM & Ericson (Sweden)

To explore the linking of data-management technology with digital switching technology

Strategic Alliances

AUTOMOBILE INDUSTRY
Isuzu Motors Ltd & Fuji Heavy Industries Ltd. Have set up a joint plant in the US which can build cars for Fuji and trucks for Isuzu in the same line

-- Some Japanese automakers have joined forces with foreign big names like General Motors and Chrysler -- The European car manufacturers are also teaming up to enhance their competitiveness , often in one-off projects to produce, say, an engine of transmission.

Strategic Alliances

LEATHER GOODS INDUSTRY

Tatas & TFR

Tatas & TFR , a leading French leather finisher and European marketer for Tatas to integrate with the exact colour, texture, and other requirements of large European buyers, while TFR will provide the existing marketing network, links to key buyers, its name and reputation and knowledge of the latest fashion trends.

BEVERAGE INDUSTRY

Tata Tea & Tetley

To take advantage of the expertise of Tetley to market tea abroad

International Strategic Alliances

Strategic Alliance refers to any type of cooperative agreements between two or more firms who are potential or actual competitors. Can take multiple forms including: JVs, R&D collaborations, piggy backing, sourcing relationships, etc.

International Strategic Alliances

In general, any relationship that involves mutual dependence and shared decision making between two or more firms can be characterized as a strategic alliance.

It differs from traditional JVs in that: strategic alliances are increasingly between firms in the industrialized nations the focus is on creation of new products and technologies rather than the distribution of existing ones

Why Strategic Alliances? Rising R&D Costs Shortening Product Life Cycles Growing Barriers to Market Entry

Increasing Need for Global Scale Economies

Expanding Importance of Global Standards Forms the basis of Building and Sustaining Competitive Advantage in Industries undergoing major Transitions

Managing International Alliances The Logic of Collaboration

Identifying when, where, and why to collaborate An alliance is usually one of several options for pursuing a strategic goal; it is never an end in itself Strategic Goals: Product Exchange; Corporate Learning & Market Positioning Cost-Benefit Tradeoffs Alternatives to Collaboration: Self-Sufficiency; Buying the Inputs or Skills; Full Acquisition.

Key Issues in Managing International Alliances

Selecting Partners Knowing how to maximize benefits and minimize risks of partnerships Complementary needs and assets Structuring Alliances Choosing organizational forms that provide incentives for success Contracts vs. Equity Relationships

Key Issues in Managing International Alliances

Building Alliance Networks Creating a system of reinforcing alliances, and avoiding chaos Network Design: Is the whole greater than the sum of the parts? Who controls the network? & Where is competitive advantage created? Alliance Dynamics Managing with an eye to the forces for change in a relationship

Key Issues in Managing International Alliances

Limits to Alliances Recognizing the constraints on collaborative strategies Organizational Constraints; Strategic Gridlock; Dependence The Role of Governments Antitrust laws Host government intervention

CONCLUSION

It has been pointed out that as the business environment both locally and internationally, becomes increasingly competitive, companies will have more reasons and will find more ways to form strategic alliances . As that happens, strategic alliances will not only be a logical alternative but a key to survival in business. Management experts predict that in the not too distant future, alliances will be a necessity not only of individual companies but also for orderly development of entire industries and that companies in mature slow growth industries will increasingly look for strategic alliances for survival

Foreign Direct Investment

Advantages
High profit potential Maintain control over operations Acquire knowledge of local market Avoid tariffs and NTBs

Disadvantages
High financial and managerial investments Higher exposure to political risk Vulnerability to restrictions on foreign investment Greater managerial complexity

JOINT VENTURE

Partner one from Country A

Partner two from Country B

New Venture

Joint commitment

MERGERS & ACQUISITIONS

Choice of International Entry Mode Acquisitions

Enable firms to make most rapid international expansion. Can be very costly.

Legal and regulatory requirements may present barriers to foreign ownership.

Usually require complex and costly negotiations. Potentially disparate corporate culture.
9-64 2006 by Nelson, a division of Thomson Canada Limited.

TAKE-OVERS

COUNTER TRADE

Counter Trade

Pure Barter
Product-to-product exchange

Buy Back
Buy the end product from the host partner

Counter Purchase
Exchange of goods in various countries until foreign exchange is found

Why Use Countertrade?

Lack of money Lack of value of money Nonconvertibility of currency Offset financial risk

Other factors that make it more efficient to exchange goods directly than to use money as an intermediary As a competitive strategy Excellent mechanism to get a foothold into foreign markets

Major Drawbacks
Instead of there being a double coincidence of wants, there is likely to be a want of coincidence; so that, unless a hungry tailor happens to find an undraped farmer, who has both food and a desire for a pair of pants, neither can make a trade. Paul Samuelson

Transactions purely bilateral in nature and thus are not competitive Trade is formulated on the basis of the willingness to countertrade and not on economic considerations Creates economic inefficiencies

Types of Countertrade
Counter purchase or parallel barter (46%) Involves both cash & kind transactions Parallel reciprocity (a special case) Buyback (11%) Technology in return for finished goods Levi Strauss in Hungary Offset (27.5%) Cost offsets through investments Can be in multiple forms Common in high cost deals (defense) Swaps (11%) Debt for debt swaps Debt for equity swaps Debt for product swaps Debt for education swaps

 Clearing Arrangements
Extend over long period Involve basket of goods Held as deposits representing purchasing power (credit - debit account)

Switch Trading (4.5%)

A type of clearing arrangement where credit can be sold or transferred to a third party

Advantages and Disadvantages of Entry Modes

Entry Mode Advantage Exporting Ability to realize location and experience curve economies Ability to earn returns from process technology skills in countries where FDI is restricted Low development costs and risks

Disadvantage High transport costs Trade barriers Problems with local marketing agents Creating efficient competitors Lack of long-term market presence

Turnkey contracts

Licensing

Lack of control over technology Inability to realize location and experience curve economies Inability to engage in global strategic coordination

Advantages and Disadvantages of Entry Modes

Entry Mode Advantage Franchising Low development costs and risks Disadvantage Lack of control over quality Inability to engage in global strategic coordination

Joint ventures

Access to local partners Lack of control over technology knowledge Inability to engage in global strategic Sharing development costs and coordination risks Inability to realize location and Politically acceptable experience economies Protection of technology Ability to engage in global strategic coordination Ability to realize location and experience economies High costs and risks

Wholly owned subsidiaries

Chapter Objectives 1
Discuss how firms analyze foreign markets Outline the process by which firms choose their mode of entry into a foreign market Describe forms of exporting and the types of intermediaries available to assist firms in exporting their goods

12-73

Chapter Objectives 2
Identify the basic issues in international licensing and discuss the advantages and disadvantages of licensing Identify the basic issues in international franchising and discuss the advantages and disadvantages of franchising

12-74

Chapter Objectives 3
Analyze contract manufacturing, management contracts, and turnkey projects as specialized entry modes for international business Characterize the greenfield and acquisition forms of FDI

12-75

Foreign Market Analysis

Assess alternative markets Evaluate the respective costs, benefits, and risks of entering each Select those that hold the most potential for entry or expansion

12-76

Table 12.1 Factors in Assessing New Market Opportunities

Product-market dimensions Major product-market differences Structural characteristics of national market Competitor analysis Potential target markets Relevant trends Explanation of change Success factors Strategic options

12-77

Choice of Entry Modes

Exporting
Direct vs Indirect

Contractual Agreements
Licensing, Franchising, etc.

Equity Based
Joint Ventures Wholly Owned Subsidiary

Strategic Alliance

Choosing the Mode of Entry

Decision Criteria for Mode of Entry
Market Size and Growth Risk Government Regulations Competitive Environment Local Infrastructure

Choosing the Mode of Entry (cont)

Company Objectives Need for Control Internal Resources, Assets, and Capabilities Flexibility Mode of Entry Choice : A Transaction Cost Explanation

Market Entry Decisions

Foreign Market Selection Timing & Order of Entry Market Expansion Strategies

Mode of Entry Decisions

International Strategy Opportunities & Outcomes

Identify International Opportunities Explore Resources & Capabilities Use Core Competence Strategic

Competitiveness
Outcomes

International
Strategies Increased Market Size Return on Investment Economies of Scale and Learning International Bus.-Level Strategy Multidomestic Strategy Global Strategy

Modes of Entry
Exporting Licensing Strategic Alliances Acquisition

Management Problems, Risk, and First Steps

Higher Performance Returns

Innovation

Location Advantage

Transnational Strategy

Establishment of New Sub.

Management Problems, Risk, and First Steps

9-82

CONTRACT MANUFACTURING