Chapter 2 - Modes of foreign market entry Flashcards
1
Q
Mode of foreign market entry
Definition
A
Mode of foreign market entry
= definition of the way, that a firm uses for doing business abroad
= the way, that a firm uses to offer its product/services abroad
- > Modes of foreign market entry are also called “international market entry strategies”
- > they are strategic decisions meaning that, if you make this decision you are bound to this decision, it is not that easy to change, it’s a long term decision
- Modes of foreign market entry include the mode used at the beginning, as well as the mode used for the extension of the firm’s international business activities
- The decisions on the modes have to be made individually for each host country
2
Q
International Market entry modes
A
Production in home country (exports):
- direct exporting
- indirect exporting
- joint exporting (export syndicates; export consortia)
Production in host country:
- types of international contracts
- foreign direct investments
3
Q
International market entry modes
Production in host country
Types of international contracts
A
- license agreements
- management contracts
- contract manufacturing
- (offshore outsourcing)
- franchising
4
Q
International market entry modes
Production in host country
Foreign direct investments
A
- wholly-owned foreign subsidiaries vs. international joint ventures (strategic alliances)
- Greenfield vs. acquisition
5
Q
International market entry modes
Production in home country
Exporting
Reasons for the popularity of exports
A
- require very little resource commitment
- > thus minimize the foreign market / environment risk
- they require relatively little knowledge on the host country (only customer-market specific knowledge is needed)
- > therefore, they are frequently used for the first (initial) entry into a host country’s market
- > therefore they are used to collect first initial business experience
- they allow the MNC to become familiar with the host country in a stepwise way
- in the case of exporting, all production is in the home country
- > MNC can end with high levels of economy of scale effects
6
Q
International market entry modes
Production in home country
Exporting
Conditions, under which exports are most appropriate
A
- limited demand in the host country
- MNC is in a monopolistic position because of superior R and D
- if MNC has problems to purchase capital necessary for applications of other foreign market entry forms (e.g. FDI)
- if host country’s political and legal conditions do not allow FDI’s in this country
- no trade barriers between the countries
- exchange rates between home and host country are quite stable
- if the MNC has the possibility to invoice the good’s prices on the basis of the home country currency
- wenn Kurssicherungsmaßnahmen, Gegengeschäfte oder ein export factoring möglich ist
7
Q
International market entry modes
Production in home country
Direct exporting
Definition/characteristics
A
- the MNC interacts directly with the foreign customers or trade intermediaries in the host country
- also direct exporting when the MNC delivers its good/services to its own sales offices/branches/affiliates within the host country: the is also a form of direct exporting
8
Q
International market entry modes
Production in home country
Direct exporting
Advantages (vs. indirect exporting)
A
- the MNC has more influence on the host country market (it can better control the use of marketing strategies (e.g. marketing P’s)
- for the MNC it is possible to focus the marketing activities on its own products
- for the MNC it is easier to protect trademarks, patents, or other immaterial property rights
9
Q
International market entry modes
Production in home country
Direct exporting
Disdvantages (vs. indirect exporting)
A
- causes higher costs and thus higher levels of risk (especially since direct exports often require FDI)
- causes a higher demand of highly qualified personnel (especially managers familiar with export (finance) techniques)
- if the MNC opens a FSub or interacts with local trade intermediaries -> such activities are time consuming and difficult
10
Q
International market entry modes
Production in home country
Indirect exporting
Characteristics
A
- between the MNC and its foreign customers, there acts an external trade intermediary (either a home-country exporting firm (export agent) or a host-country importing firm (foreign importing firm)
- the MNC delivers its goods/services to the trade intermediary in the MNC’s home country
- typically, such trade intermediaries are experienced with respect to the host country market
11
Q
International market entry modes
Production in home country
Indirect exporting
Advantages (vs. direct importing)
A
- the MNC is able to conduct its exporting activities with very little resource commitment and very little international experience
- especially, because of the trade intermediaries often cover a considerable part of the costs and risks
12
Q
International market entry modes
Production in home country
Indirect exporting
Disadvantages (vs. direct importing)
A
- the MNC has little contact with the host country customers
- the MNC has little chance to develop an own internationalization strategy
13
Q
International market entry modes
Production in home country
Joint exporting - export syndicate
A
- ein internationales Unternehmen schließt sich mit anderen internationalen Unternehmen zu einem Exportsyndikat zusammen und zusammen exportieren sie ihre Güter ins Ausland
- long-run partner contracts
- exporting of the whole or of parts of the manufacturer’s production program (you can pick specific products)
- works best if manufacturers have different production programs
14
Q
International market entry modes
Production in host country
International contracts
A
- international firm does not transfer products or services to the host country -> transfers know how (“intellectual core”) residing in these products/services
- the exploitation of this know-how (“intellectual core”) is conducted in the host country by independent firms
- the transferred know-how can be of very different kinds, e.g. technological know-how, management know-how
- many international firms combine international contracts with exporting of FDI activities
- experience shows that international contracts stimulate exporting activities
15
Q
International market entry modes
Production in host country
International licensing
A
- allows foreign firms (licensees) - either exclusively or non-exclusively - to manufacture a proprietor’s product for a fixed term in a specific market
- the licensor in the home country makes limited rights or resources available to the licensee in the host country
- the rights or resources may include patents, registered designs, trademarks, copyrights, and others
Definition 2:
- includes a broad spectrum of contractual arrangements, whereby a domestic firm (licensor) provides intangible resources (patents, business secrets, know-how, trademarks, firm names) for a foreign firm (licensee)
- licensee compensates licensor in a material or an immaterial manner
16
Q
International market entry modes
Production in host country
International licensing
Compensation of the licensor: Questions to be answered
A
Type of fees
Variability of fees
Fees for additional service
17
Q
International market entry modes
Production in host country
International licensing
Compensation of the licensor: Questions to be answered
Type of fees
A
- money
- cross licensing
- charges/fees in the form of capital shares
- return delivery to the licensor on special conditions
18
Q
International market entry modes
Production in host country
International licensing
Compensation of the licensor: Questions to be answered
Variability of fees
A
flat fees:
- fixed flat fees
- periodical flat fees
- downpayment
current charges/fees (royalties)
- turnover-oriented
- input-oriented
- profit-oriented
19
Q
International market entry modes
Production in host country
International licensing
Compensation of the licensor: Questions to be answered
Fees for additional services
A
- receipts from the sale of basic material, machines and equipment to the licensee
- charges/fees for support and service activities
20
Q
International market entry modes
Production in host country
Management contracts
A
- international firm supplies managerial know-how to operate the business of an independent foreign firm (e.g. manufacturing firm, hotel, airport, hospital)
- the international firm provides its unique expertise in running a facility without actually owning it
Examples:
- Senior experts services (SES) into former socialist countries
- Disney’s income from its theme parks in France and Japan comes from providing management services for the parks
- Marriott runs numerous luxury hotels around the world through management contracts
21
Q
International market entry modes
Production in host country
Management contracts
Advantages and disadvantages
A
Advantages:
- foreign firms get help with infrastructure projects; the international firm can generate revenues without having to make a capital overlay
Disadvantage:
- they involve training of foreign firms which may become future competitors
22
Q
International market entry modes
Production in host country
Contract manufacturing (purchase order production, offshore outsourcing)
A
- the international firm purchases products from an independent foreign firm and sells these products afterwards on the market of this firm or on third country markets
- an independent firm is asked to perform some business functions in a country other than the one where the products or services are actually developed or manufactured
- typically, the international firm specifies the technical characteristics of the product
- often the international firm transfers technology to the foreign firm and it also provides technical support
23
Q
International market entry modes
Production in host country
Contract manufacturing (purchase order production, offshore outsourcing) and internet
A
- especially the use and availability of the internet has enabled many international firms to contract foreign firms to get value activities at a lower cost due to lower wages and property prices
24
Q
International market entry modes
Production in host country
Contract manufacturing (purchase order production, offshore outsourcing)
Examples
A
- Apple and Chinese firm Foxconn
- Adidas and textile producers in many low-cost countries
25
International market entry modes
Production in host country
Contract manufacturing (purchase order production, offshore outsourcing)
Evaluation
- protectionists see this market entry form as a potential threat to the domestic job market
- free trade advocates suggest economies as a whole will obtain a net benefit from this market entry strategy
26
International market entry modes
Production in host country
International Franchising
- international firm (=franchisor) allows a foreign firm (=franchisee) the right to use an entire business system in exchange for compensation
- the whole business method, including production and marketing methods, sales systems, procedures, and management know how, as well as the use of its name and usage rights for products, patents and trademarks
- franchisor provides franchisee with training, ongoing support, incentive programs and the right to participate in cooperative marketing programs
27
International market entry modes
Production in host country
International Franchising
"Einschränkungen" für den Franchisee
- may be required to purchase certain equipment and supplies from the franchisor to ensure standardized products and consistent quality
- often the franchisor prescribes all of the business activities of the franchisee
- > international franchising might be understood as an advanced from of international licensing
- > international franchising: vertical cooperation between the partner firms
- > while licensing is often short-lived, franchising can last many years
28
Foreign direct investments
Characteristics
- transfer of resources abroad in order to conduct a business activity
- international firm opens/extends a foreign subsidiary
- foreign business activity can vary: sourcing, sales activities, production of components, assembly of products, R and D, manufacturing of complete products
- the international firm's degree of ownership in a foreign subsidiary can vary -> international joint venture vs. wholly owned subsidiary
29
Foreign direct investments
Foreign directs investments vs. portfolio investments
Foreign direct investments
motives:
transferred resources:
type of investment:
time horizon:
motives:
- profit-oriented, risk-oriented and control-oriented
transferred resources:
- equity, assets, technology, employees, know how, profits earned abroad
type of investment:
- shares of the original (nominal)
- capital of existing firms
time horizon:
- long-term
30
Foreign direct investments
Foreign directs investments vs. portfolio investments
Portfolio investments
motives:
transferred resources:
type of investment:
time horizon:
motives:
- profit-oriented and risk-oriented motives
transferred resources:
- equity
type of investment:
- stocks (shares), bonds, investment fonds
time horizon:
- short- or medium-term
31
Foreign direct investments
Advantages
- international firm can exercise a higher level of influence and control on the host country environment
- FDI allow to bypass trade barriers existing in host countries
- FDI help to reduce exchange rate risks
- a dispersion of business activities over many countries may lead to a risk reduction
- the international firm signals that it is socially responsible
32
Foreign direct investments
Disadvantages
- often the substantial investments pay off slowly
- because of the high level of resource commitment, the international firm is more dependent upon the economic and political risk of the host country
- in many cases, because of the opening of foreign subsidiaries, the international firm hast to modify its organizational structure and its planning systems
- FDI may lead to a reduction of economy of scale effects
33
Foreign direct investments
Dominant motives of foreign direct investments
Before 1980s:
- dominance of resource-oriented motives (esp. access to natural resources -> cheap raw materials, access to cheap labor)
1980:
- market-oriented motives (esp. access to existing markets, opening of future markets)
1990:
- access to specific kinds of knowledge
2000:
- access to cheap labor has gained importance again, but often in external firms (no FDI)
34
Foreign direct investments
Motives of foreign direct investments
- labor-seeking FDI
- resource-seeking FDI
- market-seeking FDI
- knowledge-seeking FDI
- > automotive companies going to Silicon Valley in order to be close to the new knowledge
35
International Joint ventures
Characteristics
- an international firm has only partial ownership in a foreign subsidiary
- international firm collaborates with a foreign partner (firm, state)
- the firms involved in the IJV pool their resources and share costs and risks
- originally developed for business activities in developing countries, IJV's have gained importance
36
International Joint Ventures
Alternative modes of formation
- financial participation in an existing firm
- Greenfield investment (build a new firm from scratch together)
- joint acquisition of a third firm
(- minority, majority, 50:50 joint ventures)
37
International Joint Ventures
Equity Joint Ventures vs. Contractual Joint Ventures
???
38
International Joint Ventures
Traditional International Joint Ventures vs. International Strategic Alliances
Traditional IJV:
- organizational dependencies
International Strategic alliances:
- competitors who decide to cooperate in certain area but in general they are independent
- e.g. Lufthansa customer royalty program together with starlines
39
International Joint Ventures
Reasons, why international Joint Ventures are created
- economical, political and legal peculiarities of the host country
- IJV's facilitate the access to foreign capital and customer markets
40
International Joint Ventures
Alternative Types of vertical IJV's
Forward integration
Backward integration
Buyback Arrangement
41
International Joint Ventures
Alternative Types of vertical IJV's
Forward integration
- both companies supply certain components for the JV who provides the product for the market
42
International Joint Ventures
Alternative Types of vertical IJV's
Backward integration
- both companies benefit from the Joint Venture
43
International Joint Ventures
Alternative Types of vertical IJV's
Buyback Arrangement
???
44
Alternative Strategies to raise foreign direct investments
Greenfield (build up a completely new company)
| Acquisition
45
Alternative Strategies to raise foreign direct investments
Greenfield
```
market access:
market share:
capital investment:
location:
attitude of host country government:
technology:
integration to mother organization:
number of competitors/production capacity:
```
market access:
- delayed access
- > you have to build up structure, administration tasks
market share:
- has to be conquered
capital investment:
- successive, apportioned
location:
- can be selected according to the company's preferences
attitude of host country government:
- often: financial promotion
- > government wants foreigners to invest in the country
- > Arbeitsplätze schaffen
technology:
- new technological standards can be used
integration to mother organization:
- usually: without problems
number of competitors/production capacity:
- will be increased
- > e.g. four competitors in the market: if you go there, there are five competitors on the market
46
Alternative Strategies to raise foreign direct investments
Acquisition
```
market access:
market share:
capital investment:
location:
attitude of host country government:
technology:
integration to mother organization:
number of competitors/production capacity:
```
market access:
- fast access
market share:
- is acquired
capital investment:
- big initial amount
location:
- is given
attitude of host country government:
- often: resentments
- > Angst, dass die Jobs der Arbeiter gefährdet werden
- > z.B. wenn Unternehmen gekauft wird, nur um Know-How abzuschöpfen, aber nicht nachhaltig zu investieren
technology:
- given
integration to mother organization:
- often: difficult
- > seldom manage to make two completely different structures to work together
number of competitors/production capacity:
- remains stable
47
Waterfall strategy
Entering one foreign country after the other -> successively
48
Sprinkler strategy
Entering several foreign countries at the same time
