International Market Entry Strategies

International Entry Strategies

Exporting Importing

Licensing

Franchising

Foreign Direct Investment

Interfirm Cooperation
2

Exporting and Importing

Firms can export and import using two methods:
Indirect involvement means that the firm participates in international business through an intermediary and does not deal with foreign customers or markets. Direct involvement means that the firm works with foreign customers or markets with the opportunity to develop a relationship.

Export Management Companies

Firms that specialize in performing international business services for other companies are known as export management companies (EMCs) The two primary roles of EMCs are:
Agents Distributors
5

Exporting-is appropriate if

1. The volume of foreign business is not large enough to justify production in the foreign market. 2. Cost of production in foreign market is high. 3. There are political or other risks investment in foreign country. 4. Foreign investment is not favoured by foreign country concerned. 5. Licencing or contract manufacturing is not a better alternative.
6

Contd.. Exporting

is attractive than other modes particularly when underutilised capacity exists even when there is no excess capacity, expansion of existing facility may sometimes be easier & less costly then the setting up production facilities abroad. Govt. provides incentives for estabilishing facilities for export production. Ways of exporting can be both direct & indirect.
7

LICENSING

Licensing
Under a licensing agreement, one firm permits another to use its intellectual property for compensation designated as royalty. The property licensed may include:
Patents Trademarks Copyrights Technology Technical know-how Specific business skills
9

Assessment of Licensing
1. No capital investment or detailed involvement with foreign customers is required. 2. Licensing provides a means by which foreign market can be tested without major involvement of capital. 3. Licensors can make millions of dollars with little effort, while licensees can produce a brand or product that consumers will recognise immediately. 4. A special form of licensee is trademark licensing, which has become a substantial source of worldwide revenue for cos that can trade on well known names & characters.
10

Licensing
Licensor and the licensee Benefits: Appealing to small companies that lack resources Faster access to the market Rapid penetration of the global markets Caveats: Other entry mode choices may be affected Licensee may not be committed Lack of enthusiasm on the part of a licensee

Licensing (contd.)
Biggest danger is the risk of opportunism Licensee may become a future competitor How to seek a good licensing agreement: Seek patent or trademark protection Thorough profitability analysis Careful selection of prospective licensees Contract parameter (technology package, use conditions, compensation, and provisions for the settlement of disputes)

Franchising
Franchising is the granting of the right by a parent company to another independent entity to do business in a prescribed manner. The major forms of franchising are:
Manufacturer-retailer systems such as car dealerships, Manufacturer-wholesaler systems such as soft drink, companies Service-firm retailer systems such as fast-food outlets.

To be successful, the firm must offer unique products or propositions, and a high degree of standardization.
13

Franchising

1. Right can take form of selling franchisors products, using its name, production & marketing techniques.

14

Contd..
4. Firms must be able to offer unique products or unique selling proposition. 5. Problem can be foreign govt interventions.

As an entry strategy in requires neither capital investment nor knowledge & marketing strength in foreign markets.
15

Franchising
Franchisor and the franchisee Master franchising Benefits: Overseas expansion with a minimum investment Franchisees profits tied to their efforts Availability of local franchisees knowledge Caveats: Revenues may not be adequate Availability of a master franchisee
16

Franchising (contd.)
Limited franchising opportunities overseas Lack of control over the franchisees operations Problem in performance standards Cultural problems

17

Key Reasons for Franchising

Market Potential

Financial Gain

Saturated Domestic Markets

18

International Intermediaries
Importers and exporters often use international intermediaries who provide assistance in:
Documentation Financing Transportation Identification of foreign suppliers and trading companies Providing business contacts

19

Trading Companies
Trading companies help firms by importing, exporting, countertrading, investing, and manufacturing. The sogashosha of Japan are the most powerful trading companies in the world for four reasons:
They efficiently gather, evaluate, and translate market information into business opportunities. Economies of scale give them preferential treatment. They operate around the world, not just Japan. They have vast quantities of capital.

In the U.S., export trading company legislation is designed to improve the export performance of small and medium-sized firms.
20

Facilitators
Facilitators are entities outside the firm that assist in the process of going international by supplying knowledge and information. Private sector facilitators include:
Banks Accounting firms Consulting firms

Public sector facilitators include:

Departments of commerce Export-Import Banks Educational Institutions
21

Interfirm Cooperation
A strategic alliance is an arrangement between two or more companies with a common business objective. To better compete, many companies form strategic alliances with suppliers, customers, competitors, and companies in other industries to achieve goals. Reasons for interfirm cooperation include:
Market development To share risk or resources To block and co-opt competitors
22

NTT DOCOMO and Tata Agree on Strategic Alliance in India NTT DOCOMO, INC. (DOCOMO), Tata Teleservices Limited (TTSL) and Tata Sons Limited, the prime promoter for Tata companies including TTSL, announced their agreement on a strategic alliance in India, under which DOCOMO will acquire 26 percent of TTSL's common shares for approximately 130.7 billion Indian rupees(US$2.7 billion). In addition, DOCOMO, in accordance with regulations of the Securities and Exchange Board of India*, expects to make an open offer to acquire up to 20 percent of the outstanding common shares of Tata Teleservices (Maharashtra) Limited (TTML), a Tata telecommunications company, through a joint tender offer with Tata Sons
23

As a result of the capital alliance, the partners expect to expand mobile communication operations in the fastgrowing Indian mobile market, aiming to increase operating revenue and achieve steady business growth.

24

Contractual Agreements
Strategic alliance partners may join forces for R&D, marketing, production, licensing, crosslicensing, cross-market activities, or outsourcing. Contract manufacturing allows the corporation to separate the physical production of goods from the R&D and marketing stages. Management contracts involve selling one s expertise in running a company while avoiding the risk or benefit of ownership. A turnkey operation is a contractual agreement that permits a client to acquire a complete system following its completion.
25

Joint Ventures
A joint venture involves the participation of two or more companies in an enterprise in which each party contributes assets, has some equity, and shares risk. The 3 reasons for establishing a joint venture are:
Government policy or legislation. One partner s needs for another partner s skills. One partner s needs for another partner s attributes or assets.

The key to a joint venture is the sharing of a common business objective.

26

JV are not necessarily meant to be permanent. They are meant to serve specific objectives within a period of time & once the objectives are achieved the continuation depends on the reassessment of the situation by partners. A JV can succeed only if both partners have something definite to offer to the advantage of the other & reap definite advantages & have mutual trust & respect.
27

Joint Ventures
Cooperative joint venture Equity joint venture Benefits: Higher rate of return and more control over the operations Creation of synergy Sharing of resources Access to distribution network Contact with local suppliers and government officials
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

Chapter 9

28

Joint Ventures (contd.)

Caveats: Lack of control Lack of trust Conflicts arising over matters such as strategies, resource allocation, transfer pricing, ownership of critical assets like technologies and brand names Drivers Behind Successful International Joint Ventures : Pick the right partner Marketing Kotabe & Helsen's Global
Chapter 9 Management, Third Edition, 2004 29

Joint Ventures (contd.)

Establish clear objectives from the beginning Bridge cultural gaps Gain top managerial commitment and respect Use incremental approach

Chapter 9

Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

30

Managerial Considerations
Issues to address before the formation of a venture include:

1. clear definition of the venture and its duration, 2. ownership, control, and management, 3. financial structure and policies, 4. taxation and fiscal obligation, 5. employment and training, 6. production,

7. government assistance, 8. transfer of technology, 9. marketing arrangements, 10. environmental protection, 11. record keeping and inspection, and 12. settlement of disputes.

31

M&A

M&A have been very important market entry strategy as well as expansion strategy. Several Industries such as automobiles, pharmaceuticals, banking telecom have undergone a global restructuring as a result of cross border M&As.

32

Advantages of M & A 1. It provides instant access to markets & distribution. 2. Imp objective is to obtain access to new technology or a patent right. 3. M&A also has the advantage of reducing competition.
33

Problems of M & A 1. Evaluation of case for Acquisition 2. Cost of acquisition may be unrealistic high. 3. Financial crunch 4. Cultural clash 5. Employees unsecurity 6. Integration problems
34

Foreign Direct Investment (FDI)

Foreign Direct Investment

It is long-term investment 1.Investment in physical assets 2.Aim is to increase enterprise capacity or productivity or change management control 3. Leads to technology transfer, access to markets and management inputs 4.FDI flows into the primary market 5.Entry and exit is relatively difficult 6.FDI is eligible for profits of the company 7.Does not tend be speculative 8.Direct impact on employment of labour and wages

Eg.Toyota exports cars to U.S.A. Government of U.S imposed tariffs on imported cars 200%. Which resulted in decline of demand. Then toyota adopted a strategy of locating its manufacturing unit in U.S by direct investment
37

Foreign Direct Investment

 Involves ownership of entity abroad for
production Marketing/service R&D Access of raw materials or other resource

 Parent has direct managerial control

Depending on its extent of ownership and On other contractual terms of the FDI

 No managerial involvement = portfolio investment

Forms of FDI
 FDI forms
Purchase of assets: why? why not?
Quick entry, local market know-how, local financing may be possible, eliminate competitor, buying problems

New investment: why? why not?

No local entity is available for sale, local financial incentives, no inherited problems, long lead time to generation of sales

International joint-venture
Shared ownership with local and/or other non-local partner Shared risk

Why FDI?
FDI over exporting
High transportation costs, trade barriers

FDI over licensing or franchising

Need to retain strategic control Need to protect technological know-how Capabilities not suitable for licensing/franchising

Follow few main competitors

Immediate strategic responses

Foreign investment in India is regulated by Government of India s FDI policy. The FDI guidelines administered by the Ministry of Commerce and Industry. Department of Industrial Policy & Promotion ( DIPP ), Foreign Investment Promotion Board ( FIPB ) and Secretariat of Industrial Assistance ( SIA ) regulate the FDI Policy

41

 Administrative Since

and compliance aspects of FDI monitored by RBI 1991, policy has been liberalized substantially to facilitate foreign investment

42

Foreign Direct Investment Snapshot

30000 24579 25000 20000 15730 22963 27309

Figures in Million US$

15000 10000 5549 5000 0 2005-06 2006-07 2007-08 2008-09 2009-10*

* April 2009

Janu

Mauritius, Singapore and Cyprus are the favorite jurisdictions for investment into India Foreign investment ( FI ) from Mauritius constituting 43%* of India s total FI

43

*as per information in the Press

India's Hottest FDI Destinations

1. Maharashtra Maharashtra received the lion's share of the FDI $2.43 billion (Rs 11,154 crore), which is 35% of the total FDI inflows in to the country,. 2. National Capital Region NCR received $1.85 billion (Rs 8,476 crore) in FDI during the period. The region accounted for 20% of the total FDI. 3. West Bengal, Sikkim, Andaman & Nicobar Islands These states attracted the third highest FDI inflows worth $1.416 billion (Rs 6,050 crore) 4. Karnataka - $936 million (Rs 4,333 crore) 5. Punjab, Haryana, Himachal Pradesh - $904 million (Rs 4,141 crore) Data: Jan Jun 2010

44

The Roadmap so far

Sectoral caps raised; Conditions relaxed;
Up to 100% under Automatic Route in all sectors except a small negative list Up to 74/51/50% in 111 Sectors under Automatic Route 100% in some sectors Up to 51% under Automatic Route for 35 Priority Sectors Allowed selectively up to 40% Pre 1991 1991 199 7 45 2000 Post 2000

Foreign Direct Investment FDI limits Illustrative list Policy

Automatic Route (Illustrative) Prior Approval (Illustrative)

Negative List (Illustrative)

(b)

          

NBFC (minimum capitalization norms) IT / ITes Financial services Telecom Sector (74% cap)(a) Insurance (26 % cap) Real Estate Special Economic Zones Infrastructure Shipping Hotels and tourism Manufacturing sector

       

Existing Airports

100%

Asset Reconstruction Companies 49% Titanium Minerals 100% Broadcasting Cigars & Cigarettes 100% Courier Print Media
(a)

     

Agriculture

Atomic energy Retail trading (except single brand up to 51%) Lottery, betting and gambling Chit fund, Nidhi company Trading in Transferable Development Rights

100% 26%

Single brand retailing 51%

Note: (a) Sector specific guidelines 46 (b) Subject to certain exceptions

FDI not

Sector Specific Guidelines Prohibited sectors

allowed in the following:

Retail trading (except single brand) Atomic Energy Lottery business Gambling & Betting Chit fund and Nidhi company Trading in Transferable Development Rights Real Estate business or construction of Farm Houses Sectors not opened for private sector investments

Prohibition extended to foreign technology collaboration including licensing for franchisee, trademark, brand name or management contract for lottery, betting and gambling business

47

Sector Specific Guidelines Telecommunication

Basic and cellular Unified Access Services Global Mobile Personal Services (GMPCS)

FDI allowed in the following (illustrative):

National/ International Long Distance Communications

Other value added telecom services

Subject to guidelines issued DOT FDI Limits:

Automatic Route Upto 49%

48

Approval Route Upto 74%

Sector Specific Guidelines

Banks No change in existing conditions FDI permitted under automatic route upto 49% and thereafter upto 74% under Approval Route Civil Aviation No change in existing conditions FDI in Non-scheduled air transport services/ non-schedule airlines, Chartered and Cargo airlines permitted under automatic route upto 49% and thereafter upto 74% under Approval Route

49

Sector Specific Guidelines Broadcasting

In the Broadcasting sector, all FDI are under the Approval route Subject to guidelines issued by I&B ministry FDI permitted in broadcasting sector:

Activity Radio Cable Networks Direct to Home* Uplinking news/ current affair TV channel** Uplinking non news/ current affair TV channel
* FDI component not to exceed 20%

Limit 20% 49% 49% 26% 100%

** May be raised to 49% as per recent press reports 50

Sector Specific Guidelines Print Media

FDI is permitted under Approval route based on nature of publication Investment subject to sectoral policy issued by Ministry of Information and Broadcasting FDI limits on publications:
Activity Newspapers/ periodicals dealing with news and current affairs* Scientific magazines/ specialty journals/ periodicals
* May be raised to 49% as per recent press reports

Limit 26% 100%

51

INSURANCE
FDI upto 26% allowed on the automatic route However, license from the IRDA has to be obtained & There is a proposal to increase this limit to 49%.

DRUGS & PHARMACEUTICALS

FDI upto 100% is permitted under the automatic route for manufacture of drugs and pharmaceuticals (The following is the current position) i. FDI upto 74% in the case of bulk drugs, their intermediates Pharmaceuticals and formulations (except those produced by the use of recombinant DNA technology) would be covered under automatic route. ii. FDI above 74% for manufacture of bulk drugs will be considered on case to case basis.

AIRPORTS
Foreign Investment up to 100% is allowed in green field projects under automatic route Foreign Direct Investment is allowed in existing projects - up to 74% under automatic route - beyond 74% and up to 100% subject to Government approval
52

INFRASTRUCTURE
w 100% FDI is permitted for
the following activities:

w Electricity Generation (except Atomic energy) w Electricity Transmission w Electricity Distribution w Mass Rapid Transport System w Roads & Highways w Toll Roads w Vehicular Bridges w Ports & Harbors w Hotel & Tourism w FDI in Investing companies in infrastructure/service sector (except telecom
sector) will not be counted towards sectoral cap provided: - Such investment is up to 49% & - The management of the company is in Indian hands. FDI in such companies will be through the FIPB route
53

w w w

Globalization and the MNC

Globalization is the integration of markets, transportation systems, and communication systems to a degree never witnessed before -- in a way that is enabling corporations, countries, and individuals to reach around the world farther, faster, deeper, and cheaper than ever before...

Globalizations Two Main Trends

The contemporary globalization process can be divided into two main trends: (1) The globalization of the markets for goods and non-financial services. (2) The globalization of financial markets and financial services.
Recent trend began in the 1980s with developed countries liberalizing their capital markets followed by developing countries in the 1990s.

U.S. Globalization
Many U.S. companies have made the world their market.

Selling Globaly
McDonalds operates in 118 Countries. - 66% of 2008 sales were from international operations. - 42% of 2008 sales were from Europe. Starbucks in 2008, had 5,115 international retail coffee stores (1,979 company owned and 3,134 licensed stores) operating in 34 countries. - These represented 31% of their stores. - International operations accounted for about 20% of Starbucks 2008 earnings (compared to 16% in 2005). Major markets included Japan, U.K. and Canada

Globalizations Potential Impacts on Business Firms

Impacts on mergers and acquisitions.
Firms can now be the target of or acquirer of foreign firms ( cross-border mergers).
Expands the opportunity set for acquiring firms. Buying other firm s technology, market share, patents, etc.
Taiwan headquartered ACER Inc acquiring U.S. PC maker Gateway (which was the parent of Packard Bell) for $710 million in August 2007. In doing so, ACER, became the thirdlargest PC maker in the world, after Dell and Hewlett Packard.

Impacts on types and degree of risk associated with an increasingly global enterprise.
Associated with the unique business and financial risks that confront firms in a global environment.
Exchange rates, global competition, cultural differences, foreign governments ( political risk ), variations in economic environments.