Lecture 6 Flashcards
How to internationalize
Production options
Where to produce?
Factors that determine home or host market production
- Relative production costs (unit labor costs)
- Trade barriers
- Transportation and inventory cotst
- Need for host market presence
- ‘Made in …’ product images
- Investment barriers and political risk
- Size of host and home market
Who to produce?
How to organize Chinese exports to the USA?
Us firms control distributio and know the market
Chinese firms have cheaper costs but may not know how to adapt product to US conditions
Challenge: how to manufacture goods and services in China taht sell profitably in the US?
Coordination manufacturing and distribution of chinese-made products
- Exports with independent US Distributors
Pros: Scale economies
Con: Potential contracting difficulties
Contracting with independent distributors
- Conflicts of interest
- Transaction-specific investments
- physical
- intellectual
- Marketing feedback
- Performance inseparability
- Consumer cannot seperatie performance of manufacturer from that of distributor
- Quality can be affected by both parties
Coordination manufacturing and distribution of chinese-made products
- Chinese manufacturers integrate into US distribution
Pro: Potential greater control of marketing
Con:
- High management costs, especially if culturally distant country
- Potential sacrifice of scope economies
Coordination manufacturing and distribution of chinese-made products
- US distributors integrate into Chinese manufacture
Pro: greater control of manufacturing
Con: High management costs, especially if culturally distant country
Coordination manufacturing and distribution of chinese-made products
- OEM/ODM contracts
- OEM= original equipment manufacture
- ODM= Original Design manufacture
Contract under which a good is bought from an independent manufacturer and resold under the brand of the buyer
Distributors:
- Provide designs (and hence marketing info)
- Provide technical advice
- Control marketing and are fully responsible
.
- Can potentially solve conflicts of interest between manufacturers and distributors
- Relieves manufacturers from the need to manage distribution
- Teaches manufacturers market and technical knowledge
Determinants of the choice OEM VS Integration
Branding has two functions
- Bonding
- Symbolic Attributes
Requirements for successful branding
OEM vs Own brand
- Own brand gives higher margin and higher differentiation
- Establishing brands is slow, costly, risky and difficult to manage
- Doin both OEM and brand is difficult
Entry modes
- Exporting
- Licensing
- Franchising
- Joint ventures
- Wholly- owned subsidiary
Exporting
- Advantages
- Avoids establishing manufaturing facilities in the host country
- Experience curve economies
- Even small/inexperienced firms can gain acces to markets
- Disadvantages
- Does not allow the firm to benefit from lacational advantages of host nation
- Limits opportunities to gain knowledge of local markets and customers
- High transportation costs
- Exposure to trade barriers
- may limit the ability to respnd quickly to customer demands
Entry modes
Licensing
- Advantages
- No development costs and risks
- Good option for a company that does not want to commit large financial resources to unfamiliar market
- Contractually agreed income through sale of production an marketing rights
- Disadvantages
- Difficulty of identifying approprate partner and agreeing contractual terms
- Lack of Control
- Lack of coordination of startegic moves
- Risk of opportunistic behavior - cross licensing agreements
Entry modes
Franchising
- Advantages
- No development costs and risks
- Good option for a company that wants to build a global presence quickly at low costs
- Disadvantages
- Lack of quility control
Potential problems of franchise contracts
- Franchisee will debase quality
- Solution: quality standards in contract
- Franchisor will fail to enforce
- Solution: Franchisor owns outlets
Entry modes
Joint venture
- Advantages
- Benefit from local partner knowledge
- Sharing costs and risks with a local partner
- In some countries, it is the only feasible entry mode
- Disadvantages
- Difficulty of identifying appropriate contractual terms
- Loosing control over technology
- No tight control over subsidiaries
Entry modes
Wholly owned subsidiary
- Advantages
- Tight control over operations
- Acquisition allows rapid market entry
- Greenfield investments allow development of state of the art facilities and can attract financial support from host government
- Disadvantages
- Very costly
- Acquisition may lead to problems of integration and coordination
- Greenfield entry time consuming and less predictable in terms of cost
Greenfield vs Acquisition/merger
Foreign operations require bundling imported and local factors
Greenfield: The MNE does most of teh bundling
Acquisition/Merger: The MNE buys an already mostly bundled package
Factors that affect the choice between greenfield vs acquisition
- Match between MNE and local assets to be bundled
- Degree of integration desired
- Growth rate of target market
- managerial resources of foreign investor
- Risk aversion of foreign investor
- availability of targets
- legal restrictions
