Chapter 4 - Entry Modes for International Markets

Question 1

There are 3 generic forms of entry into foreign markets:

Answer 1

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

Question 2

Localisation effect:

Answer 2

allows differences coming from contractual agreements and foreign direct investment.

Question 3

Internationalisation effect:

Answer 3

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

Question 4

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

Answer 4

• 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

Question 5

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

Answer 5

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

Question 6

Low-control modes:

Answer 6

exporting, countertrade and global sourcing

Question 7

Moderate control modes:

Answer 7

contractual relationships such as licensing, franchising and collaborative agreements

Question 8

High-control modes:

Answer 8

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.

Question 9

Control is related with…

Answer 9

the resource commitment,
the flexibility and
the risk.

Question 10

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

Answer 10

• 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.

Question 11

On Indirect exporting:

Answer 11

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.

Question 12

MOST FREQUENT INTERMEDIARIES in indirect exporting

Answer 12

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

Question 13

Trading company

Answer 13

• 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

Question 14

On Direct exporting:

Answer 14

• 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

Question 15

types of intermediaries in the host country (direct exporting)

Answer 15

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

Question 16

Intellectual property:

Answer 16

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

Question 17

Two common types of contractual entry modes:

Answer 17

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

Question 18

Characteristics of cross-border contractual relationships:

Answer 18

• 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

Question 19

Types of intellectual property:

Answer 19

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

Question 20

Intellectual Property Rights (IPRs)

Answer 20

• 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

Question 21

Licencing

Answer 21

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

Question 22

there are 2 MAJOR TYPES OF LICENSING AGREEMENTS:

Answer 22

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

Question 23

LICENSING: advantages & disadvantages:

Answer 23

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

Question 24

Franchising:

Answer 24

• 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

Question 25

Franchising: advantages & disadvantages

Answer 25

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

Question 26

It is the foreign entry mode in which the firm

Answer 26

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

Question 27

Foreign direct investment is

Answer 27

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

Question 28

FDI has several key features

Answer 28

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

Question 29

factors to consider in choosing FDI locations:

Answer 29

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

Question 30

Modes of foreign direct investment

Answer 30

1. Joint venture 2. Acquisitions 3. Greenfields

Question 31

On joint ventures

Answer 31

- 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

Question 32

Advantages of joint ventures

Answer 32

- share costs and risks of entry - reality of market is checked - take advantage of relationships the partner has with other companies

Question 33

Disadvantages of joint ventures

Answer 33

- difficulties in selecting a suitable partner - possibility of friction between the parties due to cultural differences - possibility of opportunistic behavior by partner

Question 34

merger is

Answer 34

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

Question 35

GREENFIELD INVESTMENT

Answer 35

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

Question 36

advantages of new creation subsidiaries/greenfield

Answer 36

- company is created from the beginning without being subject to restrictions - a new image is created from the beginning - total control

Question 37

disadvantages of new creation subsidiaries/greenfield

Answer 37

- high cost and risk - problems may arise when market is very distant - takes time to start getting ROI

Question 38

Export consorts

Answer 38

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

Question 39

advantage of export consorts

Answer 39

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

Question 40

Types of international cooperative contracts

Answer 40

1. long-term collaboration contracts | 2. piggyback

Question 41

advantages & disadvantages of DIRECT EXPORTING

Answer 41

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