Entry Modes

Foreign Market Entry Strategies

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 • 11. Mergers and Acquisitions12. Joint Ventures

Value Chain of an MNE Company Infrastructure R&D

Innovative Capabilities

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Production

Marketing and Sales

Advanced Technology & KnowHow

IndustrySpecific Marketing Expertise

Organization, Coordination & HRM What additional resources may the MNE need to enter a foreign market? Local expertise: marketing, government relations, etc.

Principal Motives for Int‟l Expansion World Market Locations Economies

To seek lower production factor costs

Economies of Scale

To expand sales and production volume

Economies of Scope

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.

• Other Advantages

International modes of entry and value at risk • Choice of entry mode jointly determines degree of control and extent of risk

• M&A • Growth • Alliances/ Joint Ventures • Licenses • Contract • Spot

Increase in control,

• Degree of commitment depends on contractual duration and vertical integration • With less knowledge of other country‟s market, choose lower degree of commitment

Increase in commitment and risk • As knowledge increases over time, can increase degree of commitment to get closer to desired entry mode. • Contractual transactions may give optimal mix of control and commitment 7

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.

Case Study：How to sale the Color TV Sets in USA market？ 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 high-definition plasma TVs and highdefinition LCD TV, the only orders signed at the meeting had more than 100,000 units. 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 • • • •

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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 Customization not crucial

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.

Mode of Entry in international Business 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.

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.

Mode of Entry in international Business

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

2

3

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

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

Going it Alone: “Green Field” Entry HOME COUNTRY

HOST COUNTRY

MNE Profit

Investment

New Subsidiary Company

Going it Alone: “Green Field” Entry • • • •

Advantages Normally feasible Avoids risk of overpayment Avoids problem of integration Still retains full control

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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 Embedded competitive advantage

Foreign Acquisition Advantages • Access to target‟s local knowledge • Control over foreign operations • Control over own technology

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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 HOME COUNTRY

HOST COUNTRY

MNE

Local Firm Share of Profit Joint Venture Company

Inputs Inputs

Share of Profit

Joint Venture •

• • •

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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 Trade secrets can be walled off

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.

Springboard

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 HOME COUNTRY HOST COUNTRY Management Fees

MNE

Local Firm Profit

Technological Inputs

Managerial Service

Wholly-Owned Subsidiary

Management Contract Advantages • Access to local management skills • Avoids buying unwanted assets • Retains strategic control

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– How do you know the competencies of the manager?

When Is a Management Contract Appropriate? Manager has a reputation to protect  

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Disadvantages • Potential incentive problem • Potential adverse selection problem

Hotels Consulting companies

Performance-based contract provides no perverse incentives

Mode of Entry in international Business

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.

Mode of Entry in international Business Marketing factors !. Size of Market

Major Determinants of Foreign Direct Investment

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

Barriers to trade 1. Government-erected barriers to trade 2. Preference of local customers for local products

Cost factors 1.

Desire to near labor and lower labor cost

2.

Availability to raw materials/capital/technology

3.

Lower transport cost

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

(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

Forms of FDI: Ownership Home Country

Green Field 100% Owned

Host Country New Entity

Full Acquisition (i.e., 100%)

MNE

Local Firm Partial Acquisition (e.g., 50%) Ownership = s%

Ownership = (1 - s)%

Joint Venture

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 • Substitution of internal transactions for market transactions

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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)

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Mode of Entry in international Business Advantages and Disadvantages of Different Modes of Entry Mode Exporting

Primary Advantage

Primary Disadvantage

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

Franchising

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

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 Advantages and Disadvantages of Different Modes of Entry 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 Management contract

Turnkey project

Foreign Direct investment

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

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

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.)

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