Entry Modes

Modes of Entry

EXPORTING

• 1. Indirect Exports2. Direct Exports3. Intra-corporate Transfers

LICENSING

• 4. International Licensing

FRANCHISING

• 5. International Franchising

SPECIAL MODES

• 6. Contract Manufacturing7. Business Process Outsourcing 8.

Management Contracts9. Turnkey Projects

FOREIGN DIRECT INVESTMENT WITHOUT ALLIANCES

• 10. Green Field Strategy

FOREIGN DIRECT INVESTMENT WITH ALLIANCES

Marketing

and Sales

Production

R&D

Company Infrastructure

Organization, Coordination & HRM

Value Chain of an MNE

Innovative

Capabilities

Advanced

Technology

&

Know-How

Industry-Specific

Marketing

Expertise



What additional resources may the MNE need to

enter a foreign market?

World Market

Principal Motives for Int‟l Expansion

Locations

Economies

Economies

of Scale

Economies

of Scope

production factor costs

To expand sales and production volume

To exploit proprietary assets

The Core Competencies

•

Dunning’s OLI theory stated in 1980’s

Ownership advantages –

it consist of intangible assets

such as ‘know-how’.

Location advantages

-

it could be profitable for the

firms to continue these assets with factor endowment

( labor force, energy, materials, transport, and

communication channels) in foreign market.

Internationalization advantages

– it must more profitable

for the firms to use its advantages rather than selling

them, or the right to use them to a foreign firm.

7

International modes of entry and value at risk

• M&A

• Growth

• Alliances/

Joint

Ventures

• Licenses

• Contract

• Spot

Increase in

control,

Increase in

commitment

and risk

• Choice of entry mode jointly determines

degree of control and extent of risk

• Degree of commitment depends on

contractual duration and vertical

integration

• With less knowledge of other country‟s

market, choose lower degree of

commitment

• As knowledge increases over time, can

increase degree of commitment to get

closer to desired entry mode.

• Contractual transactions may give

Mode of Entry in international Business

Indirect export modes

Manufacturer uses independent export organizations

located in its own country ( third country)

There are five main entry modes of indirect exporting

.

Export buying agent

– A representative of foreign

buyers who is located in the exporter’s home country.

The agent offers services to the foreign buyers: such as

identifying potential sellers and negotiating prices.

Export management company/export house

– are

specialist companies set up to act as the ‘export

department ‘ for a range of companies.

Mode of Entry in international Business

Direct export modes

Manufacturers sells directly to an importer, agent or

distributor located in the foreign target market.

Distributor (Importer)

– independent company that stocks

the manufacturer‟s products. It will have substantial

freedom to choose own customers and price. It profits from

the difference between its selling price and its buying price

from the manufacturer.

Agent

– Independent company that sells on to customers

on behalf of the manufacture( exporter). Usually it will not

see or stock the product. It profits from a commission

(typically 5-10%) paid by the manufacturer on a pre-agreed

basis.

CES is the world„s largest consumer electronics exhibition, the mainstream of Chinese color TV enterprises every year at this international fair. In the year 2005, the achievements of Chinese TV Legion is far beyond people‟s expectations.

The Xiaxin Electronic exhibited a 30 variety of digital definition plasma TVs and

high-definition LCD TV, the only orders signed at the meeting had more than 100,000 units.

Case Study：How to sale the Color TV Sets in USA market？

The same excited is Hisense Group, with the agent of the eight regions, including North America, signed a $ 200 million flat-panel TV orders. In fact, in order to bypass the high tax levy of anti-dumping restrictions in CRT television which United States involved, the Chinese color TV providers exhibiting almost invariably played "high-end brand, large-scale introduction of LCD and plasma flat-panel TVs”.

"In addition, in order to meet the emerging trend by United States family to information technology, many functions are added, such as access to the Internet, TV shopping, home security control, remote video telephony and other functions." A participants of Chinese business representatives said.

By the end of 2011, the LCD TV's overseas sales by TCL which is the top 4 biggest color TV producer in China reached 3.73 million units.

Piggyback

– choosing a back to ride on. It is about the rider ‘s

use of the carrier’s international distribution organizations.

The Strategy of Internationalization of Logitech - with the

technology and the product sets of Performance Mouse MX

and Anywhere Mouse MX, riding on IBM and Compaq, the

revenue of 2011 was $2.32 billion.

Going it Alone: Export

Advantages

• Low initial investment

• Reach customers quickly

• Complete control over

production

• Benefit of learning for

future expansion

Disadvantages

• Potential costs of trade

barriers

– Transportation cost

– Tariffs and quotas

• Foregoes potential

location economies

• Difficult to respond to

customer needs well

When Is Export Appropriate?



Low trade barriers



Home location has cost advantage

Mode of Entry in international Business

Intermediate Entry modes

Contract manufacturing –

is outsourced to an external partner,

specialized in production and production technology.

Licensing

– the licensor gives a right to the licensee against

payment ,e.g. a right to manufacture a certain product based on a

patent against some agreed royalty.

Franchising

– the franchisor gives a right to the franchisee against

payment, e.g. a right to use a total business concept/ system.

Including use of trade marks (brands), against some agreed royalty.

There are two major types of franchising:

1,

Product and trade name franchising

. It is very similar to the trade

mark licensing

Mode of Entry in international Business

2, Business format ‘package ‘franchising.

International business format franchising is a market entry mode that involves a relationship between the entrant ( the franchisor ) and a host country entity.

The package can contain the following items:

Trade marks/trade names, Copyright, designs, patents, trade secrets; Business know how; geographic exclusivity; design of the store;

market research for the are, location selection, and management system

Start with a response to a perceived local business opportunity, the franchisor will more rely on the knowledge and the flexible response to the local market.

Franchisor will try to search a long term cooperation rather than a

conflict. How to develop a monitorial system, a training procedure and adjustment mechanism is very important.

In the early days of the Walt Disney Company, a man to find Walt, said: "I am a furniture

maker, I'll give you $ 300, you make me the image of Mickey Mouse printed on my desk, you can?”. This was the first trademark user fees received by the Walt Disney.

Mode of Entry in international Business

Since then, the Disney company created by a large number of well-known animated characters such as Mickey Mouse, Donald Duck, Snow White Princess, etc., are widely granted a license, printed in a variety of goods such as clothing, toys, purses, by the world consumption of especially children‟s love. Today, the Walt Disney Company has more than 4,000 trademark licensing in the world. its products, including from the most ordinary ball-point pen to a watches, value of $ 20,000. Use permit trade patterns, the business conduct of the Walt Disney Company was a great success.

Licensing Agreement

Advantages

• Low initial investment

• Avoids trade barriers

• Potential for utilizing

location economies

• Access to local

knowledge

• Easier to respond to

customer needs

Disadvantages

• Lack of control over

operations

• Difficulty in transferring tacit

knowledge

– Negotiation of a transfer price

– Monitoring transfer outcome

• Potential for creating a

competitor

When Is Licensing Appropriate?



Well codified knowledge



Strong property rights regime

Location advantage

In November 2003, TCL, the top 6th _Chinese

Electrical Appliances Producer costs € 220 million merged the television manufacturing business with the French consumer electronics giant Thomson, thus forming the world's largest color TV

enterprises of TTE Europe, with estimated annual sales of $ 3.5 billion, TV shipments to more than 18 million units. TCL accounted for 67% of the shares of the combined company.

Before the joint venture, Thomson loss of € 100 million, For answering the arguments, Mr. Li Dongsheng, TCL chairman explained: if it is profitable, it will have no the TCL anything, but this loss gave an opportunity to TCL for the European market entrance. The Chinese market has long been open, how to get the advantage of competition? The attack is the best defense – if the others use global resources to fight you, it is difficult to defense with regional resources only.

Methods for FDI

1

Greenfield strategy:

building new facilities ;the word green-field arises from the image of starting new green site and then building on it

3

creating when two or more firms agree to work together and create a jointly owned separate firm to promote their mutual interests

2

Acquisition strategy:

buying existing assets in a foreign country; the purchaser quickly obtains control over the acquired firms’ factories, employees, technology, brand

names and distribution networks

Going it Alone: “Green Field” Entry

New Subsidiary

Company

Investment

HOME COUNTRY

HOST COUNTRY

MNE

Going it Alone: “Green Field” Entry

Advantages

• Normally feasible

• Avoids risk of

overpayment

• Avoids problem of

integration

• Still retains full control

Disadvantages

• Slower startup

• Requires knowledge of

foreign management

• High risk and high

commitment

When Is “Green Field” Entry Appropriate?



Lack of proper acquisition target

In-house local expertise

Foreign Acquisition

Advantages

• Access to target‟s local

knowledge

• Control over foreign

operations

• Control over own

technology

Disadvantages

• Uncertainty about target‟s

value

• Difficulty in “absorbing”

acquired assets

• Infeasible if local market for

corporate control is

underdeveloped

When Is Acquisition Appropriate?



Developed market for corporate control

Acquirer has high “absorptive” capacity

High synergy

As the big giant of the world's retail industry, Wal-Mart's annual sales are four times the world's second largest

retailer Carrefour. Different with Carrefour to merge Costco and opening his new branches of Costco in Japan grand and lively,

After four years of study, Wal-Mart decided into Japan through a partner. After the search, the target is Japan's fourth largest retail - Seiyu Ltd.

Enter the Japanese market through cooperation with Seiyu in 2002, Wal-Mart made a low profile, regardless of name or store, do not have a local Wal-Mart's logo. In December 2003, Wal-Mart held the shares of Seiyu has reached 38% (2002 entry only held 6%). In November 4, 2005, holding of shares in Seiyu to 56.56%. Wal-Mart in 2007 spent $ 873 million to acquire of the remaining shares of Seiyu.

Joint Venture

Joint Venture

Company

Inputs

MNE

Local Firm

HOME COUNTRY

HOST COUNTRY

Inputs

Share of Profit

Share of

Profit

Joint Venture

Advantages

• Access to partner‟s local

knowledge

• Reduction of concern about

overpayment

• Both parties have some

performance incentives

• Significant control over

operation

Disadvantages

• Potential loss of

proprietary knowledge

• Potential conflicts between

partners

• Neither partner has full

performance incentive

• Neither partner has full

control

When Is a Joint Venture Appropriate?



Both partners contribute hard-to-measure inputs

Large expected mutual gains in the long-run

Haier set up a joint venture with Jordan made his product into the U.S. market

Haier negotiated with the MEC of Jordan in

December 2001. Haier invested $ 5 million to set up a joint venture „Haier Middle East Trading Company‟ with MEC. the two sides began to the construction of the Haier products manufacturing plant in 2002.

The mature sales network of Jordan MEC helps Haier to quickly open up its business in the Middle East market. At the same time, Haier Jordanian exports their products to the U.S. market enjoys the zero-tariff preferential policies. Haier products are exported to the United States finally.

The international Entrance by E-Commerce

B2B or B2C marketing

initially focused on

domestic sales, but

unexpectedly, the foreign

customer orders coming

and resulting in the

concept of Internet

marketing (IIM)

For instance: Dell

Amazon

Shipments through

international freight

services company or

express such

UPS,DHL,TNT,FEDEX,E

MS,NHK

.

Xsdot is a web development company that occupies itself with the dev

elopment of internet, intranet, extranet, e-commerce and custom web based applications.

Management Contract

Management Fees

Local Firm

Technological Inputs

HOME COUNTRY

HOST COUNTRY

Profit

MNE

Wholly-Owned

Subsidiary

Managerial

Service

Management Contract

Advantages

• Access to local

management skills

• Avoids buying unwanted

assets

• Retains strategic control

Disadvantages

• Potential incentive

problem

• Potential adverse

selection problem

– How do you know the

competencies of the

manager?

When Is a Management Contract Appropriate?



Manager has a reputation to protect



Hotels



Consulting companies



Performance-based contract provides no perverse

Foreign Direct Investment

• Now many firms prefer to enter international market through

ownership and control of assets in host countries. Other firms

may first gain knowledge of and expertise in operation in the

host country, and then expand in the market through

ownership of production or distribution facilities.

• FDI affords the firm increased control over its international

business operations, as well as increased profit potential.

• FDI exposes the firm to greater economic and political risks

and operating complexity ,as well as the potential erosion of

the value of its foreign investment if exchange rates change

adversely.

Marketing factors

!. Size of Market 2. Market growth

3. Desire to maintain share of market and to follow competition 4.Desire to advance exports of parent company

5. Need to maintain close customer contact and following them

Cost factors

1. Desire to near labor and lower labor cost 2. Availability to raw materials/capital/technology 3. Lower transport cost

Barriers to trade

1. Government-erected barriers to trade

2. Preference of local customers for local products

Investment Climate

1.Political stability / Tax structure/ Currency exchange regulations 2. Limitations on ownership

Major Determinants of Foreign Direct Investment (FDI)

Forms of FDI

• Ownership

– Wholly owned

operations

• Green-field

investment

• Full acquisition

– Partially owned

operations

• Partial acquisition

• Joint venture

• Relatedness

– Horizontal FDI

– Vertical FDI

– Unrelated

diversification

Host Country

Home Country

Forms of FDI: Ownership

MNE

New Entity

Local Firm

Joint Venture

33

Advantages of vertical FDI

• Coordination advantages through the value chain

• Access to production facilities, sourcing networks and

distribution networks

• Keeping technology and intellectual property in-house

34

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 equipment

for its many operations

)

Mode of Entry in international Business

Mode Primary Advantage Primary Disadvantage

Exporting Relative low financial exposure Vulnerability to tariffs and NTBs Permit gradual market entry Logistical complexities

Acquire knowledge about local market Potential conflicts with distributors Avoid restrictions on foreign investment

Licensing Low financial risk Limited market opportunity/profits

Low-cost way to assess market potential Dependence on licensee Avoid tariffs NTBs restrictions on foreign

investment

Potential conflicts with licensee

Licensee provides knowledge of local market Possibility of creating future competitors

Franchising Low financial risk Limited market opportunity/profits

Maintain more control than with licensing Dependence on franchisee Franchisee provides knowledge of local

market

May be creating future competitors

Low-cost way to assess market potential Potential conflicts with franchisee Avoid tariffs, NTBs, restrictions on foreign

investment

Mode of Entry in international Business

Mode Primary Advantage Primary Disadvantage Contract

Manufacturing

Low financial risk Reduced control (may affect quality, delivery schedules, etc.) Minimize resources devoted to

manufacturing

Reduce learning potential

Focus firm’s resources on other elements of the value chain

Potential public relationship problems-may need more monitor working conditions, etc. Management

contract

Focus firm’s resources on its area of expertise Potential return limited by contract conflicts with licensee

Minimal financial exposure May unintentionally transfer proprietary knowledge and

techniques to contractee Turnkey project Focus firm’s resources on its area of expertise Financial risk (cost over runs, etc.)

Avoid all long-term operational risk Construction risks (delays, problems with supplies, etc.)

Foreign Direct investment

High profit potential

Maintain control over operations

High financial and managerial investments

Acquire knowledge of local market Higher exposure to political risk Avoid tariffs, NTBs Vulnerability to restrictions on

foreign investment Greater managerial complexity