4. foreign market entry modes.
- manufacturing at home.
// exporting. The easiest, simplest, and most common method of selling goods internationally; the first step to enter international market just by exporting from the home market. The exported product is fundamentally the same as the one marketed in the home market. There are 2 forms of export: direct and indirect exporting.
\ direct exporting: occurs when a firm sells its product directly to buyers in a target market. Note that ‘direct exporters’ need not sell directly to end users. Rather, they take their full responsibility for getting their products into the target market by selling directly to local (foreign) buyers and not going through intermediary companies. Typically, they rely on 2 channels: either local sales representatives or distributors.
* sales representatives.
** whether individuals or organizations represent only its own company’s products, not those other companies.
** they promote those products in many ways such as by attending trade fairs and making personal visits to local retailers and wholesalers.
** they do not take title to the merchandise. Rather, they are hired by a company and compensated with a fixed salary plus commissions based on the value of their sales.
* distributors.
** who take ownership of the merchandise when it enters their country.
** as owners of the products, they accept all the risks associated with generating local sales.
** they sell either to retailers and wholesalers or to end users through their own channels of distribution.
** although using a distributor reduces an exporter’s risk, it also weakens an exporter’s control over the price buyers are charged.
\ indirect exporting: occurs when a firm sells its products to intermediaries (facilitators) who then resell to buyers in a target market. 2 common types of intermediaries: export management companies and export trading companies.
* advantages: least risky mode of international market entry, especially low investment. Reach foreign customers quickly. Benefits of testing the foreign market for future investment.
* disadvantages: inflexible and unresponsive to local needs. Potential costs of trade barriers .g. transport costs, especially bulk products (low value- to- volume products) and tariffs. Forgoing potential location economies.Limited learning on foreign market characteristics.
* note: export is appropriate when: low trade barriers, cost advantage at home location, customization not crucial.
- manufacturing abroad
// contractual.
\ licensing
* a contractual arrangement in which a company owns intangible or intellectual property (the licensor) grants another firm (the licensee) the rights to use that property or a specified period of time, in turn the licensor receives royalty payments based on a percentage of the licensee’s sales revenue generated by the licensed property.
* licensed intangible or intellectual property includes patent, copyrights, trademarks, brand names, formulas, processes, designs, technical know- how and skills.
* an exclusive license grants a company the exclusive rights to produce and market a property, or product made from that property in a specific geographic region. The region can be the licensee’s country or may extend to worldwide market.
* anonexclusive license grants a company the right to use a property but does not grant it sole access to market. Then the licensor can grant several companies the right to use the property in the same region.
* licensing is appropriate when: small companies that lack resources but have well knowledge and strong property rights.
* advantages: spread out r&d and investment cost. Avoid trade barriers. Allows a quick and easy way to enter the market.Easy to response local needs.Low investment and capital requirement.Potential for utilizing location economies. Protect counterfeit products.
* disadvantages: lack of control over productions and marketing activities. Potential for creating a competitor.Potential for damaging a product’s image.May be the least profitable of all entry modes. Time limit (additional extensions may not be permitted by host government) or difficulty for terminating the contract.
\ turnkey projects.
** a turnkey project or build- operate- transfer operation refers to when one company designs, constructs and tests a production facility for a client.
** this facility is fully equipped and ready to be operated by the buyer’s personnel (whom are trained by the seller).
** the client, who normally pays a flat fee for the project, is expected to do nothing more than simply ‘turn a key’ to get the facility operating.
* advantages: minimum investment. Significant amount of supplier’s operational control. Permit a firm to specialize in its core competencies.
* disadvantages: potential termination of a project. Create potential new competitors. Projects tend to be awarded for political reasons rather than for technological know- how and expertise.
\ franchising.
* a contractual entry mode in which one company (the franchisor) supplies another company (the franchisee) with intangible or intellectual property and business format and other packaged assistances over a specified period.
* franchisors receive compensation as flat fees, royalty payments, or both
* master franchising system:
** franchisor gives authority to a franchisee (acting as the second franchisor in its local market) to resell the franchise to many other franchisees in the foreign market.
** franchising is appropriate when: companies have a strong brand image, a highly standardized production processes and standardized products.
* differences between franchising and licensing:
** franchising gives a company greater control over the sale of its products in a target market. Franchisees must meet strict guidelines on product quality, day- to- day management duties, and marketing promotions.
** licensing normally involves a one- time transfer of property, franchising requires ongoing assistance from the franchisor.
** franchisors usually offer start- up capital, management training. Location advice, advertising assistance to their franchisees.
\ management contracts.
* advantages: low investment and minimal transfer of assets. Gain local management practices. Host government is welcome for developing the skills of local workers and managers.
* disadvantages: training potential new competitors. Potential incentive problem, especially the supplier of expertise is compensated by a lump- sum payment (not continuing fee based on sales volume or performance- based contracts). Potential adverse selection problem e.g. competencies of the supplier of expertise may not enough.
- investment entry.
// joint venture.
\ formed for a specific business purpose by two or more investors sharing ownership and control.
\ a separate company is crated and jointly owned by two or more independent entities to achieve a common business objective. Each party contribute anything valued by its partners including managerial skills, marketing expertise, market access, production technologies, financial capital, and superior knowledge or techniques of r&d.
\ jv is appropriate when 100% ownership is prohibited. Large expected mutual gains in the long run. Trade secrets can e divided.
* advantages: share resource- utilize the local knowledge and gain access to local facilities and distribution networks. Learn the local business environment. Suitable if the firm lacks the capital or personnel capabilities to expand its international activities. Substantial reduction of political and economic risks. Create a more ‘local image’ with local government and local people.
* disadvantages: conflicts between partners – most common when management is shared equally (a 50- 50 jv). Shared profits. Lack of control (neither partner has full of control, normally, majority partner makes a decision). Need to consider antitrust (antimonopoly) issues.
// wholly owned subsidiary.
\ a facility entirely owned and controlled by a single parent company.
\ companies can establish a wholly owned subsidiary either by
* (1) green- field investment – forming a new company from the ground up and constructing an entirely new facilities (e.g. factories, plants, machineries, equipment, offices) or.
* (2) acquisitions – purchasing an existing company in that host nation and internalizing its facilities.
\ apporpriate when a firm is familiar with external environment and has a huge capital and management resources.
\ advantages: protection of technological competency and management expertise. High profitability. No conflict of interest. Greater experience in international operations and better market control.
\ disadvantages: high initial investment – most costly entry mode. High economic and political/legal risks.Problems with local cultures.
4. foreign market entry modes.
- manufacturing at home.
// exporting. The easiest, simplest, and most common method of selling goods internationally; the first step to enter international market just by exporting from the home market. The exported product is fundamentally the same as the one marketed in the home market. There are 2 forms of export: direct and indirect exporting.
\ direct exporting: occurs when a firm sells its product directly to buyers in a target market. Note that ‘direct exporters’ need not sell directly to end users. Rather, they take their full responsibility for getting their products into the target market by selling directly to local (foreign) buyers and not going through intermediary companies. Typically, they rely on 2 channels: either local sales representatives or distributors.
* sales representatives.
** whether individuals or organizations represent only its own company’s products, not those other companies.
** they promote those products in many ways such as by attending trade fairs and making personal visits to local retailers and wholesalers.
** they do not take title to the merchandise. Rather, they are hired by a company and compensated with a fixed salary plus commissions based on the value of their sales.
* distributors.
** who take ownership of the merchandise when it enters their country.
** as owners of the products, they accept all the risks associated with generating local sales.
** they sell either to retailers and wholesalers or to end users through their own channels of distribution.
** although using a distributor reduces an exporter’s risk, it also weakens an exporter’s control over the price buyers are charged.
\ indirect exporting: occurs when a firm sells its products to intermediaries (facilitators) who then resell to buyers in a target market. 2 common types of intermediaries: export management companies and export trading companies.
* advantages: least risky mode of international market entry, especially low investment. Reach foreign customers quickly. Benefits of testing the foreign market for future investment.
* disadvantages: inflexible and unresponsive to local needs. Potential costs of trade barriers .g. transport costs, especially bulk products (low value- to- volume products) and tariffs. Forgoing potential location economies.Limited learning on foreign market characteristics.
* note: export is appropriate when: low trade barriers, cost advantage at home location, customization not crucial.
- manufacturing abroad
// contractual.
\ licensing
* a contractual arrangement in which a company owns intangible or intellectual property (the licensor) grants another firm (the licensee) the rights to use that property or a specified period of time, in turn the licensor receives royalty payments based on a percentage of the licensee’s sales revenue generated by the licensed property.
* licensed intangible or intellectual property includes patent, copyrights, trademarks, brand names, formulas, processes, designs, technical know- how and skills.
* an exclusive license grants a company the exclusive rights to produce and market a property, or product made from that property in a specific geographic region. The region can be the licensee’s country or may extend to worldwide market.
* anonexclusive license grants a company the right to use a property but does not grant it sole access to market. Then the licensor can grant several companies the right to use the property in the same region.
* licensing is appropriate when: small companies that lack resources but have well knowledge and strong property rights.
* advantages: spread out r&d and investment cost. Avoid trade barriers. Allows a quick and easy way to enter the market.Easy to response local needs.Low investment and capital requirement.Potential for utilizing location economies. Protect counterfeit products.
* disadvantages: lack of control over productions and marketing activities. Potential for creating a competitor.Potential for damaging a product’s image.May be the least profitable of all entry modes. Time limit (additional extensions may not be permitted by host government) or difficulty for terminating the contract.
\ turnkey projects.
** a turnkey project or build- operate- transfer operation refers to when one company designs, constructs and tests a production facility for a client.
** this facility is fully equipped and ready to be operated by the buyer’s personnel (whom are trained by the seller).
** the client, who normally pays a flat fee for the project, is expected to do nothing more than simply ‘turn a key’ to get the facility operating.
* advantages: minimum investment. Significant amount of supplier’s operational control. Permit a firm to specialize in its core competencies.
* disadvantages: potential termination of a project. Create potential new competitors. Projects tend to be awarded for political reasons rather than for technological know- how and expertise.
\ franchising.
* a contractual entry mode in which one company (the franchisor) supplies another company (the franchisee) with intangible or intellectual property and business format and other packaged assistances over a specified period.
* franchisors receive compensation as flat fees, royalty payments, or both
* master franchising system:
** franchisor gives authority to a franchisee (acting as the second franchisor in its local market) to resell the franchise to many other franchisees in the foreign market.
** franchising is appropriate when: companies have a strong brand image, a highly standardized production processes and standardized products.
* differences between franchising and licensing:
** franchising gives a company greater control over the sale of its products in a target market. Franchisees must meet strict guidelines on product quality, day- to- day management duties, and marketing promotions.
** licensing normally involves a one- time transfer of property, franchising requires ongoing assistance from the franchisor.
** franchisors usually offer start- up capital, management training. Location advice, advertising assistance to their franchisees.
\ management contracts.
* advantages: low investment and minimal transfer of assets. Gain local management practices. Host government is welcome for developing the skills of local workers and managers.
* disadvantages: training potential new competitors. Potential incentive problem, especially the supplier of expertise is compensated by a lump- sum payment (not continuing fee based on sales volume or performance- based contracts). Potential adverse selection problem e.g. competencies of the supplier of expertise may not enough.
- investment entry.
// joint venture.
\ formed for a specific business purpose by two or more investors sharing ownership and control.
\ a separate company is crated and jointly owned by two or more independent entities to achieve a common business objective. Each party contribute anything valued by its partners including managerial skills, marketing expertise, market access, production technologies, financial capital, and superior knowledge or techniques of r&d.
\ jv is appropriate when 100% ownership is prohibited. Large expected mutual gains in the long run. Trade secrets can e divided.
* advantages: share resource- utilize the local knowledge and gain access to local facilities and distribution networks. Learn the local business environment. Suitable if the firm lacks the capital or personnel capabilities to expand its international activities. Substantial reduction of political and economic risks. Create a more ‘local image’ with local government and local people.
* disadvantages: conflicts between partners – most common when management is shared equally (a 50- 50 jv). Shared profits. Lack of control (neither partner has full of control, normally, majority partner makes a decision). Need to consider antitrust (antimonopoly) issues.
// wholly owned subsidiary.
\ a facility entirely owned and controlled by a single parent company.
\ companies can establish a wholly owned subsidiary either by
* (1) green- field investment – forming a new company from the ground up and constructing an entirely new facilities (e.g. factories, plants, machineries, equipment, offices) or.
* (2) acquisitions – purchasing an existing company in that host nation and internalizing its facilities.
\ apporpriate when a firm is familiar with external environment and has a huge capital and management resources.
\ advantages: protection of technological competency and management expertise. High profitability. No conflict of interest. Greater experience in international operations and better market control.
\ disadvantages: high initial investment – most costly entry mode. High economic and political/legal risks.Problems with local cultures.
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