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CHAPTER XIII

SELECTING AND MANAGING ENTRY MODES

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Learning ObjectivesExplain why and how companies use exporting, importing, and countertrade.Explain the various means of financing export and import activities.Describe the different contractual entry modes that are available to companiesExplain the various types of investment entry modesDiscuss the important strategic factors in selecting an entry mode.

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I. EXPORTING, IMPORTING, AND COUNTERTRADE

1. Why Companies Export

2. Developing and Export Strategy: A Four-Step Model

3. Degree of Export Involvement

4. Avoiding Export and Import Blunders

5. Countertrade

6. Export/ Import Financing.

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I.1 Why Companies Export

Three reasons:

Expand Sales

Diversify Sales

Gain Experience

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I.2 Developing and Export Strategy: A Four-Step Model

Step 1: Identify a Potential Market

Step 2: Match Needs to Abilities

Step 3: Initiate Meetings

Step 4: Commit Resources

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I.2.1 Step 1 Identify a Potential Market

Market research should be performed and the results interpreted

Novice exporters should focus on one or only a few markets.

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I.2.2 Step 2: Match Needs to Abilities

Assess carefully whether the company has the ability to satisfy the need of the market

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I.2.3 Step 3: Initiate Meetings

Having meeting early with potential local distributors, buyers, and others is a must

Initial contract should focus on building trust and developing a co-operative climate among all parties.

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I.2.4 Step 4: Commit Resources

After all the meetings, negotiations, and contract signings, it is time to put the company’s human, financial, and physical resource to work.

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I.3 Degree of Export Involvement

Direct Exporting

Indirect Exporting

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I.3.1 Direct Exporting

Direct Exporting

Practice by which a company sells its products directly to buyers in a target market.

• Sales Representatives

• Distributors

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I.3.2 Indirect Exporting

Indirect Exporting

Practice by which a company sells its products to intermediaries who resell to buyers in a target market.

• Agents

• Export Management Companies (EMC)

• Export Trading Company (ETC)

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I.3.2 Indirect Exporting

• Agents

Individuals or organizations that represent one or more indirect exporters in a target market

• Export Management Companies (EMC)

company that exports products on behalf of indirect exporters

• Export Trading Company (ETC)

Company that provides services to indirect exporters in addition to activities related directly to clients’ exporting activities.

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I.4 Avoiding Export and Import Blunders

Freight Forwarder

Specialist in export-related activities such as customs clearing, tariff schedules, and shipping and insurance fees.

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I.5 Countertrade

Countertrade

Practice of selling goods or services that are paid for, in whole or part, with other goods or services.

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I.5 Countertrade…

Types of Countertrade

Batter

Counterpurchase

Offset

Switch Trading

Buyback

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I.5 Countertrade…

Batter

Exchange of goods or services directly for other

goods or services without the use of money.

Counterpurchase

Sales of goods or services to a country by a

company that promise to make a future

purchase of a specific product from the

country.

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I.5 Countertrade…

Offset

Agreement that a company will offset a hard- currency sale to a nation by making a hard- currency purchase of an unspecified product from that nation in the future.

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I.5 Countertrade…

Switch Trading

Practice in which one company sells to another its obligation to make a purchase in a given country.

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I.5 Countertrade…

Buyback

Export of industrial equipment in return for products produced by that equipment.

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I.6 Export/ Import Financing

Advance Payment

Documentary Collection

Letter of Credit

Open Account

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I.6.1 Advance Payment

Advance Payment

Export/ Import financing in which an importer for merchandise before it is shipped.

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Documentary Collection

Export/ Import financing in which a bank acts as an intermediary without accepting financial risk.

I.6.2 Documentary Collection

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I.6.2 Documentary Collection

High

HighLow

Exp

orte

r’s

risk

Importer’s risk

Open Account

Document Collection

Letter of Credit

Advance Payment

Risk of Alternative Export/ Import Financing Methods

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Exporter Importer

Importer’s Bank

Exporter’s Bank

1

3

5

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2 4 9 7 6

1. E/ I contract to sell/ buy goods2. E’s bank gives draft to E3. E ships goods to I4. E delivers documents to its bank5. E’s bank sends documents to I’s bank

6. I delivers payment to its bank 7. I’s bank gives bill of lading to I 8. I’s bank pays E’s bank 9. E’s bank pays E for goods.

I.6.2 Documentary Collection Process

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Draft (bill of exchange)

Document ordering an importer to pay an exporter a specified sum of money at a specified time.

Bill of Lading

Contract between an exporter and a shipper that specifies merchandise destination and shipping costs.

I.6.2 Documentary Collection

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Letter of Credit

Export/ import financing in which the importer’s bank

issues a document stating that the bank will pay the

exporter fulfills the terms of the document.

Several types of letters of credit:

An irrevocable letter of credit

A revocable letter of credit

A confirmed letter of credit

I.6.3 Letter of Credit

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Exporter Importer

Importer’s Bank

Exporter’s Bank

1

5

8

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4 6 7 11 2

1. E/ I contract to sell/ buy goods2. I applies for letter of credit (L) 3. I’s B issues L to E’s B on I’s behalf 4. E’s B informs Economic of L5. Economic ships goods to I 6. E delivers documents to its B

7. E’s B checks documents & pays E 8. E’s B delivers documents to I’s B9. I pays its B for value of goods 10. I’s B sends payment to E’s B11. I’s B delivers documents to I

I.6.3 Letter of Credit

3

9

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Open Account

Export/ import financing in which an

exporter ships merchandise and later

bills the importer for its value.

I.6.4 Open Account

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II. CONTRACTUAL ENTRY MODES

1. Licensing

2. Franchising

3. Management Contracts

4. Turnkey Projects

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II.1 Licensing

Advantages of Licensing

Disadvantages of Licensing

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II.1 Licensing

Licensing

Practice by which one company owning

intangible property (the licensor) grants

another firm (the licensee) the right to

use that property for a specified period

of time.

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II.1 Licensing…

Cross Licensing

Practice by which companies use licensing agreements to exchange intangible property with one another.

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II.1 Licensing…

Here are few examples of successful licensing agreements:

NOVELL (US) licensed its software to three HK

universities that installed it as the campus-wide

standard.

HITACHI (Japan) licensed from Duales system

Deutschland (Germany) technology to be used in the

recycling of plastics in Japan.

HEWLETT-PACKARD (US) licensed from Canon (Japan) a

printer engine for use in its monochrome laser

printers.

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II.1 Licensing

Advantages of Licensing Licensors can use licensing to finance their

international expansion. Licensing can be a less risky method of

international expansion for a licensor than other entry modes.

Licensing can help reduce the likelihood that a licensor’s product will appear on the black market

Licensees can benefit from licensing by using it as a method of upgrading existing production technologies.

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II.1 Licensing

Disadvantages of Licensing

Licensing can restrict a licensor’s future activities.

Licensing might reduce the global consistency of the quality and marketing of a licensor’s product in different national markets.

Licensing might amount to a company “lending” strategically important property to its future competitors.

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II.2 Franchising

Franchising

Practice by which one company (Franchiser) suppliers another (the franchisee) with intangible property and other assistance over an extended period.

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II.2 Franchising

Some examples of the kinds of companies involved in international Franchising:

OZEMAIL (Australia) awarded Magictel (HK) a franchise to operate its Internet phone and fax service in HK

JEAN-LOUIS DAVID (France) awarded franchises to more than 200 hairdressing salons in Italy

BROOKS BROTHERS (US) awarded Dickson Concepts (HK) a franchise to operate Brooks Brothers stores across Southeast Asia.

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II.2 Franchising

Advantages of Franchising

Franchisers can use franchising as a low-

cost, low risk entry mode into new markets.

Franchising is an entry mode that allows for

rapid geographic expansion.

Franchiser can profit from the cultural

knowledge and know-how of local

managers.

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Disadvantages of Franchising

Franchisers may find it cumbersome to manage a

large number of franchisees in a variety of national

markets.

Franchisees can experience a loss of organizational

flexibility in franchising agreements. Franchise

contracts can restrict their strategic and tactical

options, and they may even be forced to promote

products owned by the franchiser’s other divisions.

II.2 Franchising

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II.3 Management Contracts

Management Contracts

Practice by which one company

supplies another with managerial

expertise for a specific period of

time.

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II.3 Management Contracts

Some examples of Management Contracts

BBA (Britain)

DBS Asia (Thailand)

LYONNAISE DE EAUX (France)

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II.3 Management ContractsAdvantages of Management Contracts

A firm can award a management contract to another company and thereby exploit an international business opportunity without having to place a great deal of its own physical assets at risk.

Governments can award companies management contracts to operate and upgrade public utilities, particularly when a nation is short of investment financing.

Governments use management contracts to develop the skills of local workers and managers.

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II.3 Management Contracts

Disadvantages of Management Contracts

Management contracts reduce the exposure

of physical assets in another country

Suppliers of expertise may end up nurturing

a formidable new competitor in the local

market.

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II.4 Turnkey Projects

Turnkey (Build- Operate-Transfer) Projects

Practice by which one company designs, constructs, and test a production facility for a client firm.

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II.4 Turnkey Projects

Here are two examples of International Turnkey Projects

Telecommunications Consultants India constructed telecom networks in both Madagasca and Ghana

Lubei Group (China)

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II.4 Turnkey Projects

Advantages of Turnkey Projects

Turnkey Projects permit firms to specialize in their core competencies and to exploit opportunities that they could not undertake alone.

Turnkey projects allow governments to obtain designs for infrastructure projects from the world’s leading companies.

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II.4 Turnkey Projects

Disadvantages of Turnkey Projects

A company may be awarded a project

for political reasons rather than for

technological know-how

Turnkey projects can create future

competitors

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III. INVESTMENT ENTRY MODES

1. Wholly Owned Subsidiaries

2. Joint Ventures

3. Strategic Alliances

4. Selecting Partners for Cooperation

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III.1 Wholly Owned Subsidiaries

Wholly Owned Subsidiaries

Facility entirely owned and controlled by a single parent company.

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III.1 Wholly Owned Subsidiaries…

Advantages of Wholly Owned

Subsidiaries

Managers have complete control over day-

to-day operations in the target market and

over access to valuable technologies,

process, and other intangible properties

within the subsidiary.

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III.1 Wholly Owned Subsidiaries…

Disadvantages of Wholly Owned

Subsidiaries

Companies must finance investment

internally or raise funds in financial

markets.

Risk exposure is high

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III.2 Joint Ventures

Joint Venture Configurations

Advantages of Joint Ventures

Disadvantages of Joint Ventures

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III.2 Joint Ventures

Joint Venture

Separate company that is created and

jointly owned by two or more

independent entities to achieve a

common business objective.

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Examples of Joint Ventures

SUZUKI MOTOR CORPORATION (Japan & India

government)

BILTRITE CORPORATION (US & China)

III.2.1 Joint Venture’s Examples

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III.2.2 Joint Venture Configurations

Forward Integration Joint Venture

Backward Integration Joint Venture

Buyback Joint Venture

Multistage Joint Venture

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III.2.3 Joint Venture Advantages

Companies reply on joint ventures to reduce

risk

Companies can use joint ventures to penetrate

international markets that are otherwise off-

limits.

A company can gain access to another

company’s international distribution network

through the use of a joint venture.

Companies form international joint ventures for

defensive reasons.

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III.2.4 Joint Venture Disadvantages

Joint Venture ownership can result in

conflict between partners.

Loss of control over a joint venture’s

operations can also result when the local

government is a partner in the joint

venture.

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III.3 Strategic Alliances

Strategic Alliances

Relationship whereby two or more entities

cooperate (but do not form a separate company)

to achieve the strategic goals of each.

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Examples of Strategic Alliance

SIEMENS (Germany) + HP (US)

NIPPON LIFE GROUP (Japan) + PUTNAM

INVESTMENT (US)

III.3.1 Strategic Alliance’s Examples

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Companies use strategies alliances to

share the cost of an international

investment project.

Companies use strategies alliances to tap

into competitors’ specific strengths

Companies turn to strategic alliances for

many of the same reasons that they turn to

joint ventures.

III.3.2 Strategic Alliance’s Advantages

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To create a future local or even global competitor

A company can reduce the likelihood of creating a competitor that would threaten its main area of business

A company can insist on contractual clauses that constrain partners from competing against it with certain products or in certain geographic regions.

Conflict can arise and eventually undermine cooperation.

III.3.3 Strategic Alliance’s Disadvantages

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III.4 Selecting Partners for Cooperation

Partner selection is a crucial ingredient for success. Now focus on partner selection on joint ventures and strategic alliances

Every partner must be firmly committed to the goals of the cooperative arrangement

Cooperation should be approached with caution.

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IV STRATEGIC FACTORS IN SELECTING AN ENTRY MODE

1. Cultural Environment

2. Political and Legal Environment

3. Market Size

4. Production and Shipping Costs

5. International Experience

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IV.1 Cultural Environment

The dimensions of culture-values, beliefs, customs, languages, religions- can differ greatly from one nation to another.

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IV.2 Political and Legal Environments

Political instability in a target market

increase the risk exposure of investments.

A target market’s legal system influences

the choice of entry model.

Firms tend to prefer investment when a

market is lax in enforcing copyright and

patent laws.

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IV.3 Market Size

The size of a potential market influences the choice of entry mode

Rising income in a market encourage investment entry modes

High domestic demand is attracting investment in joint ventures, strategic alliances, and wholly owned subsidiaries.

A market is likely to remain relatively small exporting, contractual entry.

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IV.4 Production and Shipping Costs

Setting up production in a market is desirable when the total cost of production there is lower than in the home market.

Low cost local production: Licensing, franchising

Turn out products with high shipping costs typically prefer local production Contractual and investment entry modes

There are fewer substitutes, discretionary items higher shipping and production costs Exporting.

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IV.5 International Experience

Illustrate the control, risk, and experience relationships of each entry mode

Most companies enter the international marketplace through exporting

Explore the advantages of licensing, franchising, management contracts, turnkey projects.

To become comfortable in a particular market: joint venture, strategic alliances and wholly owned subsidiaries.

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IV.5 International Experience

Con

trol

Risk

Experience

Exporting

Licensing

Franchising

Management Contract

Turnkey Project

Wholly Owned Subsidiary

Joint Venture/ Alliance

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V A Final word

Explained the important factors in selecting

entry modes and key aspects in their

management.

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THE END