Tuesday, October 23 Why companies get involved in International Business

• chain of supply
• opportunistic response
• mature domestic market
• product cannot be sold on domestic market
• additional volume
• following customers
• defensive purposes

Market Entry Strategies

• Exporting
• Licensing
• Franchising
• Contract Manufacturing
• Management Contracting
• Turnkey Operations
• Foreign Direct Investment
• Strategic Alliances

Exporting

• historically the most popular entry mode
• encouraged by home governments
• motivated by competition and a desire to expand

• top exporters: USA, Germany, Japan
• two options: direct or indirect (EMC's)

Advantages of exporting

• minimizes political risk
• effective when market potential is unknown
• flexibility of control of marketing activities
• preparation for more involved entry if market potential increases
• termination of business relationship will not incur significant costs

Disadvantages of Exporting

• fluctuating exchange rates can affect earnings
• governmental interventions can affect earnings
• difficult to respond to market changes
• lack of control over marketing activities

Export Facilitators

• Private sector:

• export Management Companies (EMC's)

• trading Companies
• other firms in the industry
• distributors
• banks and other service firms
• Chambers of Commerce and business associations

• Public sector:

• Department of Commerce
• Small Business Administration
• Export-Import Bank
• State and local agencies

Licensing

• payment of a fee or royalty in exchange for the use of a patent, trademark, product formula, company name, or anything of value
• transfer of intangible property rights
• majority in developed nations
• United Kingdom, USA, and Germany are net licensors
• Japan is a net licensee

Advantages of licensing

• cost-effective way for a firm to expand (no capital investment)
• test of the market without a major involvement
• effective when high tariffs are present
• opportunity to enter a country when production is not possible (e.g., host country regulations, risk of expropriation, lack of resources…)
• increase the inflow of sophisticated technology and managerial expertise

Disadvantages of licensing

• restricts the ability of a firm to take full advantage of market potential
• no guarantees of future expansion
• creates competitor in third markets
• loss of control over the use of the firm's technology
• loss of control over the quality of products
• can result in conflict between licensee and licensor

Franchising

• franchisor grants the franchisee permission to use a patent, trademark, product formula, company name, or anything of value
• franchisor provides operational and managerial help to the franchisee (raw materials, equipment, training, financing…)
• franchisor receives initial franchising fees and regular payments of a percentage of sales
• growing since the 1960's worldwide

Advantages of franchising

• cost-effective way for a firm to expand
• effective when high tariffs are present
• opportunity to enter a country when production is not possible
• increase the inflow of sophisticated technology and managerial expertise
• entry without large outlays of resources
• increase of franchisor's revenues

Disadvantages of franchising

• restricts the ability of a firm to take full advantage of market potential
• creates competitor in third markets
• loss of control over the use of the firm's technology
• loss of control over the quality of products and level of service
• can result in conflict between franchisee and franchisor
• governmental intervention

Contract Manufacturing

• a firm supplies a manufacturer with parts, OR,
• a firm has the manufacturer fabricate the whole product according to specifications
• in both cases, the firm retains marketing responsibilities

Advantages of Contract Manufacturing

• the firm will capitalize on its expertise in marketing products using delegation
• economical way to expand business activities
• access to world capabilities

Disadvantages of Contract Manufacturing

• contractual partner can become a potential competitor
• loss of control over the manufacturing of product
• may create scheduling problems
• pressure on contractor to cut cost may lead to quality problems

Management Contracting

• a firm provides management expertise and technical know-how to another concern or a government
• "management consultant team" can also get involved in operational activities

Advantages of Management Contracting

• use of excess of managerial talent the firm does not want to dismiss
• creates contacts to explore opportunities for future business involvements
• easily remittable fees for managerial services
• firm can use its involvement with host country company to provide resources to nearby operations

Disadvantage of Management Contracting

• limited duration

Turnkey Operations

• a firm agrees to complete a project before handing it over to the owner
• responsibilities include design, construction, and operation of the project. Training may also be included
• usually made with governments

Advantages of Turnkey Operations

• large projects
• Long-term
• Profitable

Disadvantages of Turnkey operations

• precarious operations
• effect of a change of government is unknown

Foreign Direct Investment

• major commitment of resources
• two forms: joint ventures and wholly-owned subsidiaries
• high growth rate

Reasons for the growth of FDI since the 1980's

• strong recovery of the world economy
• emergence of Japan as a major investor
• rise of newly industrializing economies such as Singapore, Taiwan, and Hong Kong as investors
• growth in the number of cross-border mergers and acquisitions
• economic integration of the EU
• rise in the service sector in the global economy
• liberalization of regulations on the movement of capital flows

Characteristics of a Joint Venture

• contribution by partners of money, property, effort, knowledge, skill, or other asset to a common undertaking
• joint property interest in the subject matter of the venture
• right of mutual control or management of the enterprise
• expectation of profits, or presence of "adventure"
• right to share in the profit
• usual limitation of the objective to a single undertaking or ad-hoc enterprise

Three types of Joint Venture

• between a foreign-owned concern and a privately owned local firm
• between a foreign-owned firm and a local state enterprise or the local government
• between a number of foreign-owned companies without any local participation

Wholly-owned subsidiary

• ownership by foreign-owned concern
• firm assumes full responsibility for strategic and operational functions

Advantages of FDI

• better control over business activities
• provides entry into closed markets
• opportunities for vertical integration, access to raw materials and supplies
• freedom to react to market's changes

Disadvantages of FDI

• greater risk associated with economic changes and governmental interventions
• possible disagreement between partners in a joint venture

Strategic Alliances

• cooperation between firms without the creation of a new business organization
• alliances motivated by desire to share technology, production, and marketing resources
• mostly among companies in the three main economic regions: North America, Asia Pacific, and Europe

Advantages of Strategic Alliances

• access to markets
• distribution of large R&D expenses
• sharing of complementary resources
• spreading risks

Disadvantages of Strategic Alliances

• loss of competitive strength
• possibility of misunderstandings and ineffective communication, particularly when different cultures are present

Factors influencing entry strategies

• internal conditions
• objectives
• management orientation
• need for control
• resources
• flexibility
• type of product
• external conditions
• market potential (size and growth)
• competitive environment
• home country regulations
• local infrastructure
• host country regulations
• political risk

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