MOD 3 Overall

8/3/2019 MOD 3 Overall

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Amity School of Business

MODULE - 3

MODES OF INTERNATIONALENTRY

1


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Exports to the United States


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Step 1 Step 2

Identify a potential

market

Match needs to

abilities

Step 3

Initiate

meetings

Developing an Export StrategyDeveloping an Export Strategy

Step 4

Commit

resources


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Degree of Export InvolvementDegree of Export Involvement

Direct exporting(sell to buyers)

Indirect exporting(sell to intermediary)

Sales representative

Distributor

Agent

Export management company

Export trading company


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Avoiding Export BlundersAvoiding Export Blunders

Conduct market research

Obtain export advice

Hire a freight forwarder


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Amity School of BusinessGoing it Alone: ExportGoing it Alone: Export

HOME COUNTRY HOST COUNTRY

Export of Goods

MNE

Revenues

Customers


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Amity School of BusinessGoing it Alone: ExportAdvantages

Low initial investment

Reach customers quickly

Complete control overproduction

Benefit of learning forfuture expansion

Disadvantages

Potential costs of tradebarriers Transportation cost

Tariffs and quotas

Foregoes potentiallocation economies

Difficult to respond tocustomer needs well

When Is Export Appropriate?When Is Export Appropriate?

Low trade barriersLow trade barriers

Home location has cost advantageHome location has cost advantage

Customization not crucialCustomization not crucial


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Amity School of BusinessLicensing AgreementLicensing Agreement

Local Firm

Licensing of TechnologyHOME COUNTRY HOST COUNTRY

MNE

Fees and Royalties


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LicensingLicensing

Advantages

+ Finance e

xpansion+ Reduce risks

+ Reduce counterfeits

+ Upgrade technologies

Restrict licensors activities Reduce global consistency Lend strategic property

Disadvantages

Company owning intangible property (licensor) grants

another firm (licensee) the right to use it for a specific time


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FranchisingFranchising

Advantages+ Low cost and low risk+ Rapid expansion

+ Local knowledge

Cumbersome Lost flexibility

Disadvantages

Company (franchiser) supplies another (franchisee)

with intangible property over an extended period


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Amity School of BusinessManagement ContractManagement Contract

Management Fees

Local Firm

Technological Inputs


Profit

MNE

Wholly-Owned

Subsidiary

Managerial

Service


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Management Contract

When Is a Management Contract Appropriate?When Is a Management Contract Appropriate? M

anager has a reputation to protectM

anager has a reputation to protect HotelsHotels Consulting companiesConsulting companies

PerformancePerformance--based contract provides nobased contract provides noperverse incentivesperverse incentives


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Turnkey ProjectTurnkey Project

Advantages+ Firms specialize in competency

+ Nations obtain infrastructure

Politicized process

Create competitorDisadvantages

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


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Amity School of BusinessWholly Owned SubsidiaryWholly Owned Subsidiary

Facility entirely owned and controlled by

a single parent company

Advantages+ Day-to-day control

+ Coordinate subsidiaries

Disadvantages Expensive High risk


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Amity School of BusinessJoint VentureJoint Venture

Joint Venture

Company

Inputs

MNE Local Firm


Inputs

Share of Profit

Share of

Profit


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Joint Venture

When Is a Joint Venture Appropriate?When Is a Joint Venture Appropriate? Both partners contribute hardBoth partners contribute hard--toto--measure inputsmeasure inputs

Large expected mutual gains in the longLarge expected mutual gains in the long--runrun

Trade secrets can be walled offTrade secrets can be walled off


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Amity School of BusinessJoint VentureJoint Venture

Company created and jointly owned by two or more

entities to achieve a common objective

AdvantagesReduce risk level

Penetrate markets

Access channels

DisadvantagesPartner conflict

Lose control


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Joint Venture Configurations


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Strategic AllianceStrategic Alliance

DisadvantagesPartner conflict

Create competitor

AdvantagesShare project cost

Tap competitors strengthsGain channel access

Entities cooperate (but do not form a separate

company) to achieve strategic goals of each


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Selecting Partners

Commitment

Trustworthiness

Cultural knowledge

Valuable contribution


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Amity School of BusinessStrategic FactorsStrategic Factors

Cultural environment

Political/Legal environments

Market size

Production and shipping costs

International experience


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Amity School of BusinessInternational modes of entry and value

at risk FDI whether M&A or company growth puts full

value at risk.

Toyota factory, Wal-Mart store

Managers of an international business choose themode of entry based on a trade-off between riskversus control in the particular supplier or customercountry

Joint ventures, not only share knowledge, but alsoshare investment costs and value at risk

Spot or contract sales can substantially reduce value

at risk 23


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International modes of entry and value at risk

M&A

Growth

Alliances/JointVentures

Licenses

Contract

Spot

Increase in

control,

Increase in

commitmen

t

and risk

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Choice of entry mode jointly determinesdegree of control and extent of risk

Degree of commitment depends oncontractual duration and vertical

integration

With less knowledge of other countrysmarket, choose lower degree ofcommitment

As knowledge increases over time, canincrease degree of commitment to getcloser to desired entry mode.

Contractual transactions may give

optimal mix of control and commitment


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Why is FDI so common in international business?

Advantages of FDI

Production or distribution facilities in a country canreduce costs of trade (transportation, tariff and nontariffbarriers, transaction costs, and time) Toyota in US

Production within a country takes advantage of domesticsourcing of parts, components, services

Investment and employment in host country gainpolitical support for the international business:

quid pro quo investment Cemex and Southdown

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Why is FDI so common in international business?

Advantages of FDI

Closer to customers for manufacturers

Necessary for retail and wholesale companies Wal Mart, Carrefour, Ingram Micro

Take advantage of low-cost labor, highly-skilled

labor, and proximity to resources

Reduce costs of trade from import/export

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Advantages of vertical FDI Coordination advantages through the value chain

Access to production facilities, sourcing networks anddistribution networks

Keeping technology and intellectual property in-house

Substitution of internal transactions for market transactions

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Advantages of Horizontal FDI M&A acquisition of competitors for market power

or cost savings

M&A to achieve economies of scale and scope(Daimler/Chrysler, VW)

M&A to purchase of technology

M&A to acquire brand names

Production avoids costs of trade relative to export

As hedge against demand and supply fluctuations --Cemex

Market power in international purchasing (e.g.Vodaphone/Airtouch purchases wireless equipmentfor its many operations)

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Disadvantages of FDI

Risk that firm many not recover investment

and returns to investment in supplier

country

FDI increases capital investment, reduces

flexibility

FDI ties business to particular country

locations for production or distribution29


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Amity School of BusinessFDI Trends

Shift of investment mix toward servicesAbout half in 1990, about two thirds in 2000

Shift of investment to outsourcing abroad(offshoring + outsourcing) reduction in verticalintegration

Globalization (lower costs of trade) leading toreduction in vertical FDI

Globalization (market integration) likely to lead toincreases in horizontal FDI

UNCTAD World Investment Report 2004

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Licensing versus FDIWhy is FDI more prevalent than technology licensing?

Licensing agreements depend heavily oninternational enforcement ofintellectual property

righ

ts International licensing also entails costs of trade

International licensing is quite common amongstdeveloped countries, reaching levels up to 1/3 ofdomestic R&D expenditures

International licensing experiencing rapid growth

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Overview and Take-Away Points FDI a major feature of international business

composition of FDI undergoing transformation fromvertical to horizontal

FDI offers advantages in terms of ownership and controland avoiding trade barriers

Choose target countries based on expected cash flow

and costs of investment and discount using risk adjustedrate of return

Adjust level of investment to reflect expected cash flowand risk-adjusted rate of return 32


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Outsourcing/Offshoring/BP0 Outsourcing: The practice of subcontracting manufacturing work, to outside

and especially foreign or nonunion companies

Offshoring: Outsourcing services/products from any country other than your

own

Business Process Offshore Outsourcing(BPO): The export of IT-related work from the US and other developed

countries to areas of the world where there is both political

stability and lower labor costs or tax savings


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Amity School of BusinessBPO

BPO is the outsourcing of back office and front officefunctions typically performed by white collar and clericalworkers

Examples include accounting, human resources andmedical coding and transcription


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History of the call centereconomy

India in the licence raj (1947-1990)

Nehruvian model of economy Import-substitution

Scientific training and education

Indias liberalized economy (1990- )

Macroeconomic crisis

Foreign Direct Investment

Shining India


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Amity School of BusinessWhy India?

Telecommunications and IT infrastructure

English-speaking urban population

Lower labor costs

Governmental incentives

Post-1990 support for private enterprise


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India: The outsourcing debate"India controls 44 percent of the global offshore outsourcing market for softwareand back-office services, with revenues of US$17.2 billion (euro14.07

billion) in the year ended March 2005..."

- Associated Press, June 2005

"The Indian software and services export is estimated at Rs. 78,230 crore

($17.2 billion) in 2004-05, as compared to Rs 58,240 crore ($12.8 billion) in

2003-04, an increase of 34 per cent.

- NASSCOM, December 2005

"Only 19% of US businesses have an offshore outsourcing strategy, a study by

Ventoro found. However, the percentage skyrockets to 95% if only Fortune

1000 companies are considered."

- ZDNet Research, October 2005


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Issues at hand Business optimization and benefits

Leveraging globalization

India as an emerging force on the world

politico-economic map


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India: The outsourcing debate"The survey of 25 large organizations with a combined $50 billion inoutsourcing contracts found that 70% have had negative experiences with

outsourcing projects and are now taking a more cautious approach. One

in four companies has brought outsourced functions back in-house...

- Associated Press, June 2005

"...a University of California-Berkeley study that warns as many as 14 million

Americans hold jobs at risk of being outsourced."

-Mercury News, October 2004

"...the number of buyers prematurely terminating an outsourcing relationship

has doubled to 51 percent while the number of buyers satisfied with theiroffshoring providers has plummeted from 79 percent to 62 percent."

- DiamondCluster, June 2005


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Issues at hand

Clash of civilizations?

Protectionist voices in neoliberal

economies?

Who benefits from globalization?


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What does the media say?For Economic progress

Benefits of globalization

G

reater access tomodernity and progress

India as the next super-power

Global trickle-down effect

Participation in globalcapital = Participation inglobal politics

Against

Disruption of adolescence

Moral regression

Influx of debauchedWestern lifestyles

Neo-colonization

Health and Sanity

Dangerous city

landscapes Unequal effects of

globalization


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Amity School of BusinessGlocalization

Global Vs. Local

What issues does outsourcing really hit

at? What will the society of the future be?

MOD 3 Overall

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