chapter sixteen

Entry Modes

McGraw-Hill/Irwin
International Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserv
 Learning Objectives

 Understand the international market entry

methods

 Appreciate 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
16-4
 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

16-6
 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
16-7
 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

16-8
 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

16-9
 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

16-10
 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

16-11
 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

16-12
 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

16-14
 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

16-15
 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

16-16
 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

16-17
 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 • Future of Alliances

• Pooling alliances driven
by similarity and
integration
• Trading alliances driven
by contribution of
dissimilar resources
• Alternatives to mergers
and acquisitions
– 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

16-22
 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

16-24
 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

16-27
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

16-28