13 Selecting and Managing Entry Modes Chapter Objectives

13 Selecting and Managing Entry Modes

Chapter Objectives Explain how companies use exporting, importing, and countertrade Explain the various means of financing export and import activities Describe the different contractual entry modes that are available to companies Explain the various types of investment entry modes Discuss the important strategic factors in selecting an entry mode 13 - 2

Marvel Enterprises • Licenses characters for films and products • Earns royalties from licensing agreements 13 - 3

Exports to the United States China EU (27) Mexico Canada Japan S. Korea Taiwan India Malaysia Switzerland 0 50 100 150 200 250 300 350 400 450 500 Source: WTO statistics 2013, $ Billions 13 - 4

Developing an Export Strategy Step 1 Step 2 Step 3 Step 4 Identify a potential market Match needs to abilities Initiate meetings Commit resources 13 - 5

Degree of Export Involvement Direct exporting Indirect exporting (sell to buyers) (sell to intermediary) • Sales representative • Distributor • Agent • Export management company • Export trading company 13 - 6

Avoiding Export Blunders Conduct market research Obtain export advice Hire a freight forwarder 13 - 7

Discussion Question What are the four steps companies can follow when building an export strategy? 13 - 8

Answer to Discussion Question First, a firm should identify a potential market through careful market research and analysis. Second, it should match the needs of the market to its ability to satisfy those needs. Third, it should initiate meetings with potential distributors, buyers, and others. Fourth, it should commit human, financial, and physical resources to get the job done. 13 - 9

Forms of Countertrade Barter Direct exchange without money Counterpurchase Sale to a nation in return for promise of future purchase from that nation Offset agreement Offset a hard-currency sale to a nation with future hard-currency purchase Switch trading Sale by a company of an obligation to purchase from a country Buyback Export of industrial equipment in return for products that the equipment produces 13 - 10

Barter in Argentina • Barter (Trueque) in Argentina • Clothing, food, cars, etc. Agencia el Universal/El Universal de Mexico/Newscom 13 - 11

Export/Import Financing 13 - 12

High Risk Methods Open account Exporter bills importer after merchandise ships Advance payment Importer pays exporter before merchandise ships 13 - 13

Documentary Collection Bank acts as intermediary without accepting financial risk Draft (bill of exchange) Document that orders an importer to pay an exporter a specific sum of money at a specific time Bill of lading Contract between an exporter and shipper specifying destination and shipping costs for merchandise 13 - 14

Documentary Collection Process 13 - 15

Letter of Credit Importer’s bank issues a document stating that the bank will pay the exporter when exporter fulfills document’s terms è Irrevocable è Revoca ble è Confirm ed 13 - 16

Letter of Credit Process 13 - 17

Discussion Question Export/import financing whereby a bank acts as an intermediary without accepting financial risk is called _____. a. Offset financing b. Letter of credit c. Documentary collection 13 - 18

Answer to Discussion Question Export/import financing whereby a bank acts as an intermediary without accepting financial risk is called _____. a. Offset financing b. Letter of credit c. Documentary collection 13 - 19

Licensing Company owning intangible property (licensor) grants another firm (licensee) the right to use it for a specific time Advantages Disadvantages + + Finance expansion Reduce risks Reduce counterfeits Upgrade technologies – Restrict licensor’s activities – Reduce global consistency – Lend strategic property 13 - 20

Franchising Company (franchiser) supplies another (franchisee) with intangible property over an extended period Advantages Disadvantages + Low cost and low risk + Rapid expansion + Local knowledge – Cumbersome – Lost flexibility 13 - 21

Management Contract Company supplies another with managerial expertise for a specific period of time Advantages + Few assets risked + Nations finance projects + Develops local Disadvantages workforce – Personnel at risk – Create competitor 13 - 22

Turnkey Project Company designs, constructs, and tests a production facility for a client Advantages Disadvantages + Firms specialize in competen + Nations obtain infrastructure – Politicized process – Create competitor 13 - 23

Discussion Question In what ways does franchising differ from licensing? 13 - 24

Answer to Discussion Question First, franchising gives a company greater control over the sale of its product in a target market than does licensing. Second, franchising is primarily used in the service sector, whereas licensing is common in manufacturing industries. Third, franchising requires ongoing assistance from the franchiser, but licensing normally involves a one-time transfer of property. 13 - 25

Wholly Owned Subsidiary Facility entirely owned and controlled by a single parent company Advantages + Day-to-day control + Coordinate subsidiaries Disadvantages – Expensive – High risk 13 - 26

Joint Venture Company created and jointly owned by two or more entities to achieve a common objective Advantages Disadvantages Ø Reduce risk level Ø Partner conflict Ø Penetrate markets Ø Lose control Ø Access channels 13 - 27

Joint Venture Configurations Source: Based on Peter Buckley and Mark Casson, “A Theory of Cooperation in International Business, ” in Farok J. Contractor and Peter Lorange (eds. ), Cooperative Strategies in International Business (Lexington, MA: Lexington Books, 1988), pp. 31– 53. 13 - 28

Strategic Alliance Entities cooperate (but do not form a separate company) to achieve strategic goals of each Advantages Share project cost Tap competitors’ strengths Gain channel access Disadvantages Partner conflict Create competitor 13 - 29

Selecting Partners Ø Commitment Ø Trustworthiness Ø Cultural knowledge Ø Valuable contribution 13 - 30

Strategic Factors Cultural environment Political/Legal environments Market size Production and shipping costs International experience 13 - 31

Discussion Question An investment entry mode that gives a company the most control over day-today activities in a host country is called a _____. a. Joint venture b. Strategic alliance c. Wholly owned subsidiary 13 - 32

Answer to Discussion Question An investment entry mode that gives a company the most control over day-today activities in a host country is called a _____. a. Joint venture b. Strategic alliance c. Wholly owned subsidiary 13 - 33