Entry Modes

McGraw-Hill/IrwinInternational Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

chapter sixteen

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Learning Objectives

Explain the international market entry methods

Discuss the debate on whether being a market pioneer or a fast follower is most useful

Identify two different forms of piracy and discuss which might be helpful and harmful to firms doing international business

Discuss channel members available to companies that export or manufacture overseas

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Pioneers vs. Fast Followers

• Pioneers– Can gain and maintain

competitive edge in new market

– Overall pioneers may not perform as well in the long run as followers

• Most successful when– High entry barriers exist– Firm has sufficient size,

resources, and competencies

• Followers– Many become followers

by default– May be advantage to let

pioneer take initial risks

• Most successful when– Few legal, technological,

cultural, or financial barriers

– Sufficient resources or competencies to overwhelm the pioneer’s early advantage

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Entering Foreign Markets

• Nonequity modes of market entry– Exporting

• Selling some regular production overseas• Requires little investment• Relatively free of risk• Indirect exporting• Direct exporting

• Equity modes of market entry– Wholly owned subsidiary– Joint venture– Strategic alliance

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Summary: Modes of Entry

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Indirect Exporting

• Exporting of goods and services through various home-based exporters

– Manufacturers’ export agents

• sell for manufacturer

– Export commission agents

• buy for overseas customers

– Export merchants

• purchase and sell for own accounts

– International firms

• use the goods overseas

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Indirect Exporting, cont’d.

• Disadvantages– Commission to export agents, commission

agents, export merchants

– Foreign business can be lost if exporters decide to change their sources and supply

– Firm gains little experience from transactions

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Direct Exporting

• Exporting of goods and services by the producing firm

• Sales company option• Business established to market goods and

services• Internet has made direct exporting much

easier• Cost of trial low

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Exporting

• Turnkey Project used for export of– Technology– Management expertise– Capital equipment (some cases)

• After trial run, facility is turned over to purchaser

• Exporter of a turnkey project may be– Contractor that specializes in designing and erecting

plants in a particular industry– Company that wishes to earn money from its

expertise– Producer of a factory

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Exporting, cont’d

• Licensing– A contractual arrangement: one firm sells access to its patents,

trade secrets, or technology to another – Licensee pays fixed sum and sales royalties (2%-5%)

• Popular because– Courts have begun upholding patent infringement claims– Patent holders have become vigilant in suing violators– Foreign governments have been pressed to enforce their

patent laws

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Franchising

• Franchising

– Form of licensing in which one firm contracts with another to operate a certain type of business under an established name according to specific rules

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Contracts

• Management Contract– Arrangement by which one firm provides

management in all or specific areas to another firm

• Contract Manufacturing– Arrangement in which one firm contracts with

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

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Equity-Based Modes of Entry

• Wholly Owned Subsidiary

• Joint Venture

• Strategic Alliance

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Wholly Owned Subsidiary

• Wholly Owned Subsidiary

• build a new plant (greenfield investment)

• acquire a going concern

• purchase distributor, to obtain a distribution network familiar with products

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Joint Venture

• Joint Venture– Cooperative effort among two or more

organizations that share common interest in business enterprise

• corporate entity formed by international company and local owners

• corporate entity formed by two international companies for the purpose of doing business in a third market

• a corporate entity formed by a government

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Joint Venture, cont’d.

• Disadvantages– Profits shared– If law allows no more than 49% foreign ownership,

lose control– Control with minority ownership is possible if

• Take 49% of shares and give 2% to local law firm or trusted national

• Take in local majority partner (sleeping partner)• Management contract

– Can enable the global partner to control many aspects of a joint venture even when holding only a minority position

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Strategic Alliances

• Partnerships between competitor, customers, or suppliers that may take various forms

• Aims to achieve– Faster market entry and start-up– Access to new

• Products• Technologies• Markets

– Cost-savings by sharing• Costs• Resources• Risks

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Strategic Alliances, cont’d.

• May be Joint Ventures

• Pooling alliances driven

by similarity and

integration

• Trading alliances driven

by contribution of

dissimilar resources

• Alternatives to mergers

and acquisitions

• Future of Alliances– Many fail or are taken

over by a partner– Difficult to manage

• Different strategies• Different operating practices• Different organizational

cultures

– Allow partner to acquire technological or other competencies

– Regardless, will continue to be important strategic tool

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Channel of Distribution

• Links producer with foreign user

• Product and its title pass from producer to user

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Channel of Distribution Members: Indirect Exporting

– Indirect Export Channel Members• Sell for manufacturer

• Buy for overseas customers

• Buy and sell for own account

• Purchase on behalf of foreign middlemen or users

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Indirect Exporting

• Exporters that sell for the manufacturer

– Manufacturers’ export agent• Acts as the international representative for

various noncompeting domestic manufacturers– Export management companies (EMC)

• Acts as the export department for noncompeting manufacturers

– International trading companies• Acts as agent for some companies and as

wholesaler for others

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Indirect Exporting: International Trading Companies

• International Trading Companies– Japan: Sogo Shosha

• Originally established by the zaibatsu, centralized, family-dominated economic groups

– Korean: chaebol– Owned by Korean conglomerates

• Export trading companies (ETC)– U.S. firm established principally to export domestic

goods and services

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International Channels of Distribution

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Indirect Exporting, cont’d.

• Exporters that buy for their overseas customers– Export commission agents

• Represent overseas purchasers, such as import firms and large industrial users

• Paid commission by the purchaser for acting as resident buyer

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Indirect Exporting, cont’d.

• Exporters that buy and sell for their own account– Export merchants

• Purchase products directly from the manufacturer and then sell, invoice, and ship them in their own names

– Cooperative exporters/piggyback exporters• Established international manufacturers that export

other manufacturers’ goods as well as their own – Webb-Pomerene Associations

• Organizations of competing firms that have joined together for the sole purpose of export trade

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Indirect Exporting, cont’d.

• Exporters that purchase for foreign users and middlemen– Large foreign users

• Buy for their own use overseas

– Export resident buyers• Perform essentially the same functions as

export commission agents but more closely associated with a foreign firm

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Direct Exporting Distribution Channel Members

• Manufacturer’s agent– Independent sales representative of noncompeting

suppliers

• Distributor/wholesale importer– Independent importer that buys for own account for

resale

• Retailer– Frequently direct importer

• Trading company– Firm that develops international trade and serves

as intermediary between foreign buyers and domestic sellers and vice versa