Copyright © 2014 Pearson Education, Inc. 13 Selecting and Managing Entry Modes.

Copyright © 2014 Pearson Education, Inc.

13 Selectingand ManagingEntry Modes

13 - 2Copyright © 2014 Pearson Education, Inc.

Chapter ObjectivesChapter Objectives

• Explain how companies use exporting, importing, and countertrade

• Explain the various means of financing export and import activities

• Describe the different contractual entry modes that are available to companies

• Explain the various types of investment entry modes

• Discuss the important strategic factors in selecting an entry mode


Marvel EnterprisesMarvel Enterprises

• Licenses characters for films and products• Earns royalties from licensing agreements

• Licenses characters for films and products• Earns royalties from licensing agreements


Exports to the United StatesExports to the United States

Source: Based on data contained in International Trade Statistics 2011 (Geneva, Switzerland: World Trade Organization, November 2011), Table II.30, p. 81–82. Source: Based on data contained in International Trade Statistics 2011 (Geneva, Switzerland: World Trade Organization, November 2011), Table II.30, p. 81–82.


Step 1 Step 2

Identify a potential market

Match needs to abilities

Step 3

Initiatemeetings

Developing an Export StrategyDeveloping an Export Strategy

Step 4

Commit resources


Degree of Export InvolvementDegree of Export Involvement

Direct exporting(sell to buyers)

Indirect exporting(sell to intermediary)

• Sales representative

• Distributor

• Sales representative

• Distributor

• Agent• Export management company• Export trading company

• Agent• Export management company• Export trading company


Avoiding Export BlundersAvoiding Export Blunders

Conduct market researchConduct market research

Obtain export adviceObtain export advice

Hire a freight forwarderHire a freight forwarder


Discussion QuestionDiscussion Question

What are the four steps companies can follow when building an export strategy?


Answer to Discussion Answer to Discussion QuestionQuestion

First, a firm should identify a potential market through careful market research and analysis. Second, it should match the needs of the market to its ability to satisfy those needs. Third, it should initiate meetings with potential distributors, buyers, and others. Fourth, it should commit human, financial, and physical resources to get the job done.


Forms of CountertradeForms of Countertrade

Barter

Counterpurchase

Offset agreement

Switch trading

Buyback

Direct exchange without money

Sale to a nation in return for promise of future purchase from that nation

Offset a hard-currency sale to a nationwith future hard-currency purchase

Sale by a company of an obligation to purchase from a country

Export of industrial equipment in return for products that the equipment produces


Barter in ArgentinaBarter in Argentina

Agencia el Universal/El Universal de Mexico/NewscomAgencia el Universal/El Universal de Mexico/Newscom

• Barter (Trueque) in Argentina• Clothing, food, cars, etc.

• Barter (Trueque) in Argentina• Clothing, food, cars, etc.


Export/Import FinancingExport/Import Financing


High Risk MethodsHigh Risk Methods

Exporter bills importer after merchandise ships

Importer pays exporter before merchandise ships

Open account Advance payment


Documentary CollectionDocumentary Collection

Bank acts as intermediary without accepting financial risk

Draft (bill of exchange)

Document that orders an importer to pay an exporter a specificsum of money at a specific time

Bill of lading

Contract between an exporter and shipperspecifying destinationand shipping costsfor merchandise


Documentary Collection Documentary Collection ProcessProcess


Letter of CreditLetter of Credit

Importer’s bank issues a document stating that the bank will pay the exporter when

exporter fulfills document’s terms

Irrevocable Revocable Confirmed


Letter of Credit ProcessLetter of Credit Process



Export/import financing whereby a bank acts as an intermediary without accepting financial risk is called __________.

a. Offset financing

b. Letter of credit

c. Documentary collection


LicensingLicensing

Advantages

+ Finance expansion+ Reduce risks+ Reduce counterfeits+ Upgrade technologies

– Restrict licensor’s activities– Reduce global consistency– Lend strategic property

Disadvantages

Company owning intangible property (licensor) grantsanother firm (licensee) the right to use it for a specific time


FranchisingFranchising

Advantages+ Low cost and low risk+ Rapid expansion+ Local knowledge

– Cumbersome– Lost flexibilityDisadvantages

Company (franchiser) supplies another (franchisee)with intangible property over an extended period


Management ContractManagement Contract

Company supplies another withmanagerial expertise for a

specific period of time

Advantages+ Few assets risked+ Nations finance projects+ Develops local workforce

Disadvantages– Personnel at risk– Create competitor


Turnkey ProjectTurnkey Project

Advantages+ Firms specialize in competency+ Nations obtain infrastructure

– Politicized process– Create competitor

Disadvantages

Company designs, constructs, and testsa production facility for a client



In what ways does franchising differ from licensing?



First, franchising gives a company greater control over the sale of its product in a target market than does licensing. Second, franchising is primarily used in the service sector, whereas licensing is common in manufacturing industries. Third, franchising requires ongoing assistance from the franchiser, but licensing normally involves a one-time transfer of property.


Wholly Owned SubsidiaryWholly Owned Subsidiary

Facility entirely owned and controlled bya single parent company

Advantages+ Day-to-day control+ Coordinate subsidiaries

Disadvantages– Expensive– High risk


Joint VentureJoint Venture

Company created and jointly owned by two or more entities to achieve a common objective

Advantages Reduce risk level

Penetrate markets

Access channels

Disadvantages Partner conflict

Lose control


Joint Venture ConfigurationsJoint Venture Configurations

Source: Based on Peter Buckley and Mark Casson, “A Theory of Cooperation in International Business,” in Farok J. Contractor and Peter Lorange (eds.), Cooperative Strategies in International Business (Lexington, MA: Lexington Books, 1988), pp. 31–53.Source: Based on Peter Buckley and Mark Casson, “A Theory of Cooperation in International Business,” in Farok J. Contractor and Peter Lorange (eds.), Cooperative Strategies in International Business (Lexington, MA: Lexington Books, 1988), pp. 31–53.


Strategic AllianceStrategic Alliance

DisadvantagesPartner conflict

Create competitor

AdvantagesShare project cost

Tap competitors’ strengths Gain channel access

Entities cooperate (but do not form a separate company) to achieve strategic goals of each


Selecting PartnersSelecting Partners

Commitment

Trustworthiness

Cultural knowledge

Valuable contribution


Strategic FactorsStrategic FactorsStrategic FactorsStrategic Factors

Cultural environmentCultural environment

Political/Legal environmentsPolitical/Legal environments

Market sizeMarket size

Production and shipping costsProduction and shipping costs

International experienceInternational experience



An investment entry mode that gives a company the most control over day-to-day activities in a host country is called a __________.

a. Joint venture

b. Strategic alliance

c. Wholly owned subsidiary

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