CHOICE OF INTERNATIONAL ENTRY

MODE

CHARACTERISTICS OF DIFFERENT ENTRY MODES

ENTRY MODE

Exporting

Licensing

Joint Venture

Wholly Owned Subsidiary

CONTROL

High

Low

Medium

High

RESOURCECOMMITMENT

Low

Low

Medium

High

DISSEMINATION RISK

Low

Low

Medium

High

COUNTRY ENVIRONMENT

ECONOMIC

POLITICAL FACTORS

CULTURAL

COMPETITIVE SITUATION

INDUSTRY CHARACTERISTICS

ENTRY MODE DECISION

COMPANY CHARACTERISTICS

PRODUCTTECHNOLGOY

RESOURCESGLOBALIZATION

CONDITION OF VARIABLESCOUNTRY ENVIRONMENT LOW HIGH

ECONOMIC FACTORS

Market Size and Growth LIC WOSLabor Cost WOS LICLabor Skill LIC WOSLocal Managerial Capacity WOS LICInfrastructure Adequacy LIC WOC

POLITICAL FACTORSRisk WOS LICGovernment Receptivity to WOS LIC WOSImport Controls (Final Product) LIC WOSCapital Controls WOS LICPrice Controls WOS LICImport Controls (Raw Materials) WOS LIC

CULTURAL FACTORSCompatibility LIC WOS

CONDITION OF VARIABLES

COMPETITIVE SITUATION LOW HIGH

Industry Concentration LIC WOSRelative Competitive Strength LIC WOSLocal Barriers To Entry WOS LICCannibalization Risk LIC LIC

CONDITION OF VARIABLES

COMPANY CHARACTERISTICS LOW HIGH

PRODUCT

Maturity WOS LICBrand Differentiation LIC WOSLine Diversity WOS LICService Intensity WOS LIC

TECHNOLOGYMatutity WOS LICStability LIC WOSComplexity LIC WOSPatentability WOS LIC

GLOBALIZATIONTransnational Strategy LIC WOS

IDEAL ENVIRONMENT FOR WOS

• FIRM CAN AFFORD INVESTMENT IN PRODUCTION FACILITIES

• NOT MUCH FISK IN COUNTRY AND MARKET ENVIRONMENT

• PROFITABLE OPPORTUNITY OF SUBSTANTIAL PROPORTIONS

• NEED FOR SIGNIFICANT CONTROL OVER OPERATIONS TO ENSURE SUCCESS

• FIRMS WITH PROPRIETARY KNOWLEDGE IN PRODUCT OR PROCESS TECHNOLGY

• LARGE FIRMS THAT PURSUE STRONG/AGGRESSIVE MOVES IN OLIGOPOLISTIC ENVIRONMENTS

IDEAL ENVIRONMENT FOR LICENSING

• INVESTMENT IN PRODUCTION FACILITIES TOO HIGH FOR THE FIRM

• COUNTRY AND MARKET ENVIRONMENT PRESENT SUBSTANTIAL RISK

• SIZABLE PROFIT OPPORTUNITY

• LOCAL WORKER SKILLS AND MANAGERIAL TALENT ADEQUATE TO HANDLE OPERATIONS THROUGH A TRANSFER OF TECHNOLOGY PROGRAM

• DISSEMINATION RISK NOT SIGNIFICANT

• SMALLER FIRMS OR FIRMS THAT PURSUE LESS AGGRESSIVE STRATEGIES

THE STRATEGIC ROLE OF JOINT VENTURES “Synergy”

• RESOURCE MOBILIZER– Capital sharing

– Access to local financing

– Sharing of managerial resources

– Sharing of technology and operating environment knowledge

– Access to raw materials and markets

– Preferential government treatment

• POLITICAL INSURANCE

• CULTURAL GUIDE– Trust relationship of an equity venture

• COMPETITIVE TOOL– Create barriers to entry

– Preferential market access

– Accelerate expansion

– Reduce competitors’ local advantages

DRAWBACKS OF JOINT VENTURES

• CONFLICTING PRIORITIES– Profitability of global system vs. profitability of JV

– Supplier selection

– Transfer pricing

– Disposition of profits

• LOSS OF CONTROL– Loss of control in decision making

– Important for firms with high quality products and strong brand names

• INTERACTION COSTS– Communication across organizations

– Reconciliation of• Management styles

• Administrative systems

• Cultural norms

• Languages

MANAGING THE RELATIONSHIP

• CAREFULLY ASSESS COMPLEMENTARITY

• KNOW YOUR PARTNER

• ACHIEVE GOAL AND STRATEGY CONGRUENCY

• IDENTIFY CONFLICT POINTS

• MAKE CLEAR RULES

• MAKE TRANSACTIONS TRANSPARENT

• COMMUNICATE CLEARLY AND OFTEN

• CONTROL CREATIVELY

• SHARE EQUITABLY

• BE FLEXIBLE

• REVIEW AND REVISE

• KNOW WHEN TO EXIT

SUMMARIZING

PROPOSITIONS ON THE CHOICE OF

INTERNATIONAL ENTRY MODE

• PROPOSITION ONE:– OTHER THINGS BEING EQUAL, FIRMS THAT PURSUE A MULTI-

DOMESTIC STRATEGY WILL FAVOR LOW-CONTROL ENTRY MODES

• PROPOSITION TWO:– OTHER THINGS BEING EQUAL, FIRMS THAT PRUSUE A GLOBAL

(TRANSNATIONAL) STRATEGY WILL PREFER HIGH CONTROL ENTRY MODES

• PROPOSITION THREE:– OTHER THINGS BEING EUQAL, WHEN COUNTRY RISK IS HIGH FIRMS

WILL FAVOR ENTRY MODES THAT INVOLVE RELATIVELY LOW RESOURCE COMMITMENTS

• PROPOSITION FOUR:– OTHER THINGS BEING EQUAL, WHEN “PERCEIVED DISTANCE” IS

GREAT FIRMS WILL FAVOR ENTRY MODES THAT INVOLVE RELATIVELY LOW RESOURCE COMMITTMENTS

• PROPOSITION FIVE– OTHER THINGS BEING EQUAL, WHEN DEMAND IS UNCERTAIN (AS

IN EMBRYONIC OR DECLINING HOST MARKETS) FIRMS WILL FAVOR ENTRY MODES THAT INVOLVE LOW RESOURCE COMMITMENTS.

• PROPOSITION SIX:– OTHER THINGS BEING EQUAL, THE GREATER THE VOLATILITY OF

COMPETITION IN THE HOST MARKET, THE MORE FIRMS WILL FAVOR ENTRY MODES THAT REQUIRE LOW RESOURCE COMMITMENTS.

• PROPOSITION SEVEN:– OTHER THINGS BEING EQUAL, THE GREATER THE QUASI-RENT

STREAM GENERATED BY A FIRM’S PROPRIETARY KNOW-HOW, THE GREATER THE PROBABILITY THAT A FIRM WILL FAVOR AN ENTRY MODE THAT MINIMIZES DISSEMINATION RISK.

• PORPOSITION EIGHT:– OTHER THINGS BEING EQUAL, THE GREATER THE TACIT

COMPONENT OF FIRM-SPECIFIC KNOW-HOW, THE MORE A FIRM WILL FAVOR HIGH CONTROL ENTRY MODES.

COUNTERTRADE IN INTERNATIONAL OPERATIONS

• HAS THE WORLD GONE CRAZY?

• IS CASH NOT AN ACCEPTABLE FORM OF PAYMENT ANYMORE?

COUNTERTRADE

• WHAT IS COUNTERTRADE:– All international and domestic trade in which goods are exchanged for

goods.

• EXAMPLES:– Saudi Arabia and Boeing - jets for oil

– Hungary and Levi Strauss - designs and materials for jeans in exchange for manufacturing and distribution

– Venezuela and Caterpillar Tractor - iron ore for equipment

• HOW SERIOUS IS THE COUNTERTRADE ACTIVITY?– Close to 10% of world trade

– 150 B$ activity

FORMS OF COUNTERTRADE• BARTER

– Direct exchange of goods or services, no cash transaction

– Used for one-time deals

• COUNTERPURCHASE– Reciprocal buying

– A company agrees to buy a certain amount of material from a country in which a sale is made

– All cash transactions

• OFFSET– Similar to counterpurchase

– Transaction with any company in the country sale is made

• COMPENSATION (BUYBACK)– Exchange of technology for a certain percentage of produced output

• SWITCH TRADING– use of a specialized third-party trading house in a countertrade agreement

• Most Popular Forms: Counterpurchase, offset Compensation

• Less Popular Forms: Barter, switch trading

EXPERT ADVICE FOR COUNTERTRADING

• RESTRICT COUNTERTRADE SALES TO NO MORETHAN 15% OF GROSS REVENUES

• SELL ONLY AFTER YOU FOUND SOMETHING FOR WHICH TO COUNTERTRADE

• STANDARDIZE COUNTERTRADE PROCEDURES

• QUALITY, ON-TIME DELIVERY AND WARRANTY OF GOODS AND SERVICES AS IMPORTANT AS PRICE

• COUNTERTRADE CUTS ACROSS FUNCTIONS AND REQUIRES CAREFUL COORDINATION

• BE IMAGINATIVE (EVERYTHING IS NEGOTIABLE)

• FEW COUNTERTRADE PARTNERS BARTER GOODS OR SERVICES THEY CAN SELL FOR CASH

• REPORT ALL INCOME TO IRS (IT’S THE LAW)

PROS AND CONS OF USING A THIRD PARTY TRADING COMPANY

ADVANTAGES

DISADVANTAGES

IN HOUSE

•Lower cost

•Control

•Flexibility

•Direct contact

THIRD PARTY

•Countertrade expertise

•Contacts

•Network in place

•Legal acumen

•Close department coordination

•Training

•Extra Manpower

•Impersonal

•Self interested

•Lack of confidentiality

•Commission

INTEGRATED COUNTERTRADE AND OFFSHORE COURCING

• MAIN MOTIVATION– Many countries impose countertrade requirements

• COUNTRY BENEFITS– Multinationals as marketers of country’s products

– Technology transfer from industrialized nations

– Competitive pressure helpful for manufacturing improvements

– Employment increase and economic development

• THE MULTINAITONAL’S VIEW– Use these countries as offshore sources

– Future sales opportunities

– Strong supplier links

SOME IMPORTANT LESSONS

• THINK COUNTERTRADE WHEN YOU THINK OFFSHORE SOURCING

• THINK COUNTERTRADE WHEN YOU THINK ENTRY TO A NEW MARKET

• A RECIPE FOR FAILURE TO COUNTERTRADE DEALS: DO NOT INOVLE YOUR OPERATIONS MANAGERS

• THINK OF COUNTERTRADE AS ALONG-TERM ALTERNATIVE THAT FOSTERS SUCCESSFUL PARTNERSHIPS