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International Business Management > Chapter 4 - Entry Modes for International Markets > Flashcards

Chapter 4 - Entry Modes for International Markets Flashcards

1
Q

There are 3 generic forms of entry into foreign markets:

A
  1. Exporting
  2. Contractual agreements
  3. Foreign direct investment
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2
Q

Localisation effect:

A

allows differences coming from contractual agreements and foreign direct investment.

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3
Q

Internationalisation effect:

A

makes it possible to differentiate contractual agreements from exporting and foreign direct investment abroad.

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4
Q

Factors that influence the choice of the way of entering foreign markets:

A
  • objectives and goals of company
  • degree of control the firm wants to maintain
  • the specific financial, organisational and technological resources available
  • the degree of risk that management is willing to tolerate
  • characteristics of product
  • nature and extent of competition
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5
Q

The more relevant and critical factor in the choice of foreign market entry is

A

the degree of control the firm wants to maintain over the venture

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6
Q

Low-control modes:

A

exporting, countertrade and global sourcing

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7
Q

Moderate control modes:

A

contractual relationships such as licensing, franchising and collaborative agreements

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8
Q

High-control modes:

A

equity joint ventures and foreign direct investment.
They require substantial resource commitments by the focal firm. It is physically tied to the foreign market for the long term.

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9
Q

Control is related with…

A

the resource commitment,
the flexibility and
the risk.

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10
Q

In addition to control, the specific characteristics of the product can strongly influence the choice of foreign market entry modes:

A
  • Fragility: Fragile and perishable goods are expensive and impractical to ship long distances.
  • Perishability
  • Ratio of value to weight: Products with a low value/weight ratio are expensive to ship long distances.
  • Complex products require significant support and after-sales services.
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11
Q

On Indirect exporting:

A

The firm sells its products in foreign markets through other companies.

It is the simplest form of exporting.

  • ADVANTAGES: This alternative is the one that presents the least risk to the exporting company.
  • DISADVANTAGES: The exporting company has less control of operations and a very high dependence on its intermediaries.
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12
Q

MOST FREQUENT INTERMEDIARIES in indirect exporting

A
  1. FOREIGN BUYER: natural or legal person, foreigner who buys on his own
  2. MERCHANT: who buys on his own to later place the merchandise to a foreign buyer
  3. BROKER: intermediary responsible for putting sellers and buyers from different countries in contact
  4. AGENT: natural or legal person with functions identical to those of the broker
  5. TRADING COMPANY
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13
Q

Trading company

A
  • companies specialised in a large number of foreign markets, maintaining a wide network of connections in them
  • once they have located the potential suppliers, they put in contact with the buyers, they are responsible for carrying out the relevant administrative procedures
  • Japan is the country in which trading companies have the greatest presence
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14
Q

On Direct exporting:

A
  • assumes the company itself develops most of the activities related to the export process
  • implies greater control by the company, as well as greater investment of resources, both financial and human
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15
Q

types of intermediaries in the host country (direct exporting)

A
  1. IMPORTER: natural or legal person that imports merchandise for later resale, taking care of its distribution, promotion and many activities necessary
  2. AGENT: natural or legal person to which the exporting company grants the rank of representative, empowers him to act on his behalf within certain limits
  3. DISTRIBUTOR: the distributor is a customer for the exporting company
  4. REPRESENTATIVE OFFICE: responsible for providing relevant information on the characteristics of exporting company
  5. COMMERCIAL DELEGATION: responsible for supporting and channeling the relationships of agents and distributors with retailers
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16
Q

Intellectual property:

A

describes ideas or works created by individuals or firms, including discoveries and inventions
- Intellectual property is safeguarded through intellectual property rights

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17
Q

Two common types of contractual entry modes:

A

LICENCING: it is an arrangement in which the owner of intellectual property grants another firm the rights to use that property
FRANCHISING: it is an advanced form of licensing in which one firm allows another the right to use an entire business system in exchange for fees, royalties or other forms of compensation

18
Q

Characteristics of cross-border contractual relationships:

A
  • they are governed by a contract that provides the focal firm a moderate level of control over the foreign partner
  • they typically include exchange of intangibles
  • they often reduce local perceptions of the focal firm as a foreign enterprise
19
Q

Types of intellectual property:

A
  • patent
  • trademark
  • service mark
  • copyright
  • industrial design
  • trade secret
  • geographical indication
20
Q

Intellectual Property Rights (IPRs)

A
  • they are legal claims that protect the proprietary assets of firms and individuals from unauthorised use by other parties
  • they derive from patents, trademarks, copyrights; so they can exploit their inventions in the marketplace free of direct competition
21
Q

Licencing

A

specifies the nature of the relationship between owners of intellectual property, the licensor, the user of the property, the licensee

22
Q

there are 2 MAJOR TYPES OF LICENSING AGREEMENTS:

A
  1. TRADEMARK & COPYRIGHT LICENSING: grants permission to use another firm’s proprietary names, characters, logos for a specified time period in exchange for a royalty
  2. KNOW-HOW LICENSING: a contract in which the focal firm provides technological management & knowledge about how to design, manufacture or deliver a product to a licensee
23
Q

LICENSING: advantages & disadvantages:

A

ADVANTAGES:
- does not require capital investment
- useful when trade barriers reduce the viability of exporting
- useful for testing a foreign market prior to entry
DISADVANTAGES:
- revenues usually more modest
- difficult to maintain control over how licensed asset is used
- not ideal for highly complex products

24
Q

Franchising:

A
  • advanced form of licensing in which the focal firm, the franchisor, allow an entrepreneur, the franchisee, the right to use an entire business system in exchange for compensation
  • MASTER FRANCHISE: some focal firms may chose to work with a single, coordinating franchisee in a particular country or region
25
Q

Franchising: advantages & disadvantages

A

ADVANTAGES
- entry into numerous foreign markets can be accomplished quickly & cost effectively
- no need for substantial capital investment
- gain a well-known, recognizable brand name
- operate an independent business
DISADVANTAGES
- maintaining control over franchisee may be difficult
- conflicts with a franchisee are likely, including legal disputes
- requires monitoring & evaluating performance of franchisees
- the franchisor holds much power, including bargaining
- initial investment may be substantial

26
Q

It is the foreign entry mode in which the firm

A

establishes a physical presence through direct ownership of productive assets such as capital, land, plant, equipment

27
Q

Foreign direct investment is

A

the most advanced & complex & riskiest foreign entry modes: involves establishment of manufacturing plants, marketing subsidiaries or other facilities

28
Q

FDI has several key features

A
  1. represents substantial resource commitment
  2. implies local presence & operations
  3. firms invest in countries that provide specific comparative advantages
  4. entails substantial risk & uncertainty
  5. direct investors must deal more intensively with language & cultural variables in the host market
29
Q

factors to consider in choosing FDI locations:

A
  1. MARKET FACTORS: size & growth of national market
  2. HUMAN RESOURCE FACTORS: cost, availability, productivity of skilled labor
  3. INFRASTRUCTURAL FACTORS: availability & quality of local manufacturing
  4. PROFIT RETENTION FACTORS: types & level of taxes
  5. ECONOMIC FACTORS: cost of land & facilities; state of local economy
  6. LEGAL & REGULATORY FACTORS: regulations on FDI & technology transfer
  7. POLITICAL & GOVERNMENTAL FACTORS
30
Q

Modes of foreign direct investment

A
  1. Joint venture
  2. Acquisitions
  3. Greenfields
31
Q

On joint ventures

A
  • it’s a partnership between 2 or more companies to develop a business
  • decision-making, benefits and risk are shared based on the proportional contribution of each parties
  • the local partner contributes the use of its factory or other facilities, knowledge of the local language & culture, market navigation know-how, useful connections to the host country government
32
Q

Advantages of joint ventures

A
  • share costs and risks of entry
  • reality of market is checked
  • take advantage of relationships the partner has with other companies
33
Q

Disadvantages of joint ventures

A
  • difficulties in selecting a suitable partner
  • possibility of friction between the parties due to cultural differences
  • possibility of opportunistic behavior by partner
34
Q

merger is

A

a special type of acquisition in which 2 companies join to form a new, larger firm
- more common between companies of similar size

35
Q

GREENFIELD INVESTMENT

A

occurs when a firm invests to build a new manufacturing, marketing or administrative facility, as opposed to acquiring existing facilities

  • the name implies the investing firm typically buys an empty plot of land and builds a production plant
  • it’s a form of entry that implies a high resource commitment
36
Q

advantages of new creation subsidiaries/greenfield

A
  • company is created from the beginning without being subject to restrictions
  • a new image is created from the beginning
  • total control
37
Q

disadvantages of new creation subsidiaries/greenfield

A
  • high cost and risk
  • problems may arise when market is very distant
  • takes time to start getting ROI
38
Q

Export consorts

A

temporary groupings of companies with the purpose of promoting or introducing or consolidating their products in foreign markets

39
Q

advantage of export consorts

A

company does not expand its own organizational structure, has a specialized export service

40
Q

Types of international cooperative contracts

A
  1. long-term collaboration contracts

2. piggyback

41
Q

advantages & disadvantages of DIRECT EXPORTING

A

ADVANTAGES: greater sales potential, greater possibility for benefits, important learning and knowledge process

DISADVANTAGES: higher required investment, less flexibility, greater risk assumed, greater resources needed
- although the company controls the evolution of the flow of exports, contact with foreign buyers can be carried out through intermediaries

International Business Management (6 decks)

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