chapter sixteen

Entry Modes

McGraw-Hill/Irwin
International Business, 11/e

Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives
Explain the international market entry methods
Discuss 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 pioneers
early advantage
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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
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Indirect Exporting, contd.

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

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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

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Exporting, contd
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

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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
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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, contd.

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
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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, contd.

May be Joint Ventures

Pooling alliances driven

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

Future of Alliances
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

16-20

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
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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

16-23

International Channels of Distribution

16-24

Indirect Exporting, contd.

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, contd.

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, contd.

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

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Direct Exporting Distribution Channel

Members
Manufacturers 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