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International Business: The Challenges of Globalization Tenth Edition Chapter 14 Selecting and Managing Entry Modes Copyright © 2023,...

International Business: The Challenges of Globalization Tenth Edition Chapter 14 Selecting and Managing Entry Modes Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Learning Objectives 14.1 Describe the nature of exporting and countertrade. 14.2 Explain the various methods of export/import financing. 14.3 Describe the different types of contractual entry modes. 14.4 Describe the various kinds of investment entry modes. Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Marvel Entertains Marvel Entertainment – A global character-based entertainment licensing company ▪ Wholly owned subsidiary of The Walt Disney Company – Licenses characters for films and products ▪ Earns royalties from licensing agreements – Now makes its own films Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Entry Mode (1 of 2) Entry mode: Institutional arrangement by which a firm gets its products, technologies, human skills, or other resources into a market Categories: – Exporting, importing, and countertrade – Contractual entry – Investment entry Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Entry Mode (2 of 2) Entry mode Institutional arrangement by which a firm gets its products, technologies, human skills, or other resources into a market – Exporting, importing, and countertrade – Contractual entry – Investment entry Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Figure 14.1: Top US Trade Partners Source: Based on trade data available at International Trade Administration website ( www.trade.gov ). Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Exporting and Countertrade: Why Companies Export Three main reasons why companies begin exporting: – Expand total sales ▪ Achieve economies of scale – Diversify sales ▪ Generate more level cash flow – Gain international business experience Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Exporting and Countertrade: Export Strategy – A Four Step Model Step 1: Identify a potential market – Perform market research and correctly interpret the results Step 2: Match needs to abilities – Determine whether the company is capable of satisfying the needs of the market Step 3: Initiate meetings – Initial contact focuses on building trust and developing a cooperative climate among all parties Step 4: Commit resources – Extend out at least three to five years Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Exporting and Countertrade: Degree of Export Involvement (1 of 3) Direct exporting A company sells its products directly to buyers in a target market – John Deere, Land’s End, Evian ▪ Sales representatives – Represents only its own company’s products, not those of other companies – Do not take title to the merchandise ▪ Distributors – Takes ownership of the merchandise when it enters the target market Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Exporting and Countertrade: Degree of Export Involvement (2 of 3) Indirect exporting A company sells its products to intermediaries who then resell to buyers in a target market – The choice of an intermediary depends on many factors, including the importance of exports in total sales, the company’s available resources, and the growth rate of the target market. Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Exporting and Countertrade: Degree of Export Involvement (3 of 3) Agent Individual or organization that represents one or more indirect exporters in a target market Export management company (EMC) Company that exports products on behalf of indirect exporters Export trading company Company that provides services to indirect exporters in addition to activities related directly to clients’ exporting activities Freight forwarder Specialist in export-related activities such as customs clearing, tariff schedules, and shipping and insurance fees Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Photo and Discussion Question (1 of 2) Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Exporting and Countertrade: Countertrade (1 of 3) Countertrade Selling goods or services that are paid for, in whole or in part, with other goods or services – Developing and emerging markets sometimes rely on countertrade to import goods when they lack adequate hard currency ▪ Pepsi Cola in USSR ▪ Toyota Brazil Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Exporting and Countertrade: Countertrade (2 of 3) Types of countertrade – Barter ▪ Oldest known form of countertrade – Counterpurchase ▪ Designed to allow the country to earn back some of the currency that it paid for the original imports – Offset ▪ Gives a business greater freedom in fulfilling its end of a countertrade deal Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Exporting and Countertrade: Countertrade (3 of 3) – Switch trading ▪ If the trading company has no use for the merchandise, it can arrange for yet another buyer who needs the product to make the purchase. – Buyback ▪ Usually typifies long-term relationships between the companies involved Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Quick Study 14.1 1. What are the four steps, in order, involved in creating an export strategy? 2. What is the main difference between direct and indirect exporting? 3. What are the names of each type of countertrade and how is each one defined? Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Figure 14.2: Risk of Export/Import Financing Methods Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Export/Import Financing: Advance Payment Advance payment Export/import financing in which an importer pays an exporter for merchandise before it is shipped – Common when: ▪ Two parties are unfamiliar with each other ▪ Transaction is relatively small ▪ Buyer has a poor credit rating – Most favorable method for exporters, least favorable for importers Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Export/Import Financing: Documentary Collection Documentary collection Export/import financing in which a bank acts as an intermediary without accepting financial risk Draft (bill of exchange) Document ordering an importer to pay an exporter a specified sum of money at a specified time Bill of lading Contract between an exporter and a shipper that specifies merchandise destination and shipping costs Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Figure 14.3: Documentary Collection Process Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Export/Import Financing: Letter of Credit Letter of credit Export/import financing in which the importer’s bank issues a letter pledging to pay the exporter when the exporter fulfills the terms listed in the letter – The most common type is an irrevocable letter of credit ▪ Allows the bank issuing the letter to modify its terms only after obtaining the approval of both exporter and importer – Confirmed irrevocable letter of credit ▪ For a fee, an exporter can request its bank to “confirm” the letter of credit, thereby adding the creditworthiness of the exporter’s bank to the pledge made by the importer’s bank Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Figure 14.4: Letter of Credit Process Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Export/Import Financing: Open Account Open account Export/import financing in which an exporter ships merchandise and later bills the importer for its value – Often used when: ▪ Parties are very familiar with one another ▪ Sales are between two subsidiaries within an international company – Least favorable for exporters, but most favorable for importers Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Global Manager: Collecting International Debts Here are several pointers on what businesses can do to reduce the likelihood of not receiving payment: Knowledge of the market you are exporting to is your first and best defense. Be aware of countries that commonly cause problems when it comes to debt collection. To prevent later collection problems, it is essential that both parties clearly understand the payment terms in the export sales agreement. Do not wait too long to begin collecting a past-due account. Consult an international trade attorney or hire an international debt- collection agency if necessary. Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Quick Study 14.2 1. What is the name for export/import financing that presents the greatest risk for exporters? 2. What do we call export/import financing in which a bank acts as an intermediary without accepting financial risk? 3. What is the name for export/import financing in which the importer’s bank issues a letter pledging to pay the exporter when the exporter fulfills the terms listed in the letter? 4. Which export/import financing approach presents the greatest risk for importers? Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Contractual Entry Modes: Licensing (1 of 2) Licensing One company owning intangible property (the licensor) grants another firm (the licensee) the right to use that property for a limited period of time – Licensors typically receive royalty payments based on a percentage of the licensee’s sales revenue generated by the licensed property ▪ Hitachi/ Duales System Deutschland – Exclusive v nonexclusive Cross licensing Companies use licensing agreements to exchange intangible property with one another Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Contractual Entry Modes: Licensing (2 of 2) Advantages – Finance expansion – Reduce risks – Reduce counterfeits – Upgrade technologies Disadvantages – Restrict licensor’s activities – Reduce global consistency – Lend strategic property Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Contractual Entry Modes: Franchising (1 of 2) Franchising One company (the franchiser) supplies another (the franchisee) with intangible property and other assistance over an extended period – The brand name or trademark of a company is normally the single most important item desired by the franchisee. ▪ K FC ▪ Starbucks Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Contractual Entry Modes: Franchising (2 of 2) Advantages – Low cost and low risk – Rapid expansion ▪ Microtel – Local knowledge Disadvantages – Cumbersome ▪ Master franchise – Lost flexibility ▪ Requirement that Pepsi be served in Pizza Hut, Taco Bell, and KFC Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Photo and Discussion Question (2 of 2) Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Contractual Entry Modes: Management Contract (1 of 2) Management contract A company supplies another with managerial expertise for a specific period of time – Two types of knowledge can be transferred through management contracts: ▪ The specialized knowledge of technical managers ▪ The business-management skills of general managers Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Contractual Entry Modes: Management Contract (2 of 2) Advantages – Few assets risked – Nations finance projects ▪ Kazakhstan national electricity grid – Develops local workforce ▪ EBS International Disadvantages – Personnel at risk – Creates competitor Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Contractual Entry Modes: Turnkey Project (1 of 2) Turnkey (Build–Operate–Transfer) Project A company designs, constructs, and tests a production facility for a client – Transfer ownership of special process technologies or production-facility designs to the client. – Typically involve the construction of power plants, airports, seaports, telecommunication systems, and petrochemical facilities ▪ Telecommunications Consultants India Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Contractual Entry Modes: Turnkey Project (2 of 2) Advantages – Firms specialize in competency – Nations obtain infrastructure ▪ Coruh River dams in Turkey ▪ Sweden’s Ericsson’s mobile telecom system Disadvantages – Politicized process – Create competitor Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Quick Study 14.3 1. What is it called when a company grants another the right to use intangible property for a limited period of time? 2. What is it called when a company supplies intangible property and other assistance over an extended period of time? 3. What do we call the practice in which one company supplies another with managerial expertise over a specific period of time? 4. What is the name of the practice in which a company designs, constructs, and tests a production facility for a client and then transfers its ownership to the client? Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Investment Entry Modes: Wholly Owned Subsidiary (1 of 2) Wholly owned subsidiary Facility entirely owned and controlled by a single parent company – Can be established by forming a new company and constructing entirely new facilities from the ground up ▪ Takes time – Can also be established by purchasing an existing company and internalizing its facilities Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Investment Entry Modes: Wholly Owned Subsidiary (2 of 2) Advantages – Day-to-day control – Coordination of subsidiaries Disadvantages – Expensive – High risk Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Investment Entry Modes: Joint Venture (1 of 2) Joint venture Separate company that is created and jointly owned by two or more independent entities to achieve a common business objective – Four main joint venture configurations ▪ Forward integration joint venture ▪ Backward integration joint venture ▪ Buyback joint venture ▪ Multistage joint venture Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Figure 14.5: Alternative Joint Venture Configurations Source: 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, M A: Lexington Books, 1988), p p. 31–53. Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Investment Entry Modes: Joint Venture (2 of 2) Advantages – Reduced risk level – Penetration of markets – Access to channels ▪ Caterpillar-Mitsubishi – Defensive reasons Disadvantages – Partner conflict – Loss of control Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Investment Entry Modes: Strategic Alliance (1 of 2) Strategic alliance Relationship whereby two or more entities cooperate (but do not form a separate company) to achieve the strategic goals of each – Can be established between a company and its suppliers, its buyers, and even its competitors – Partners in a strategic alliance will sometimes purchase a portion of each other’s stock Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Investment Entry Modes: Strategic Alliance (2 of 2) Advantages – Share project cost ▪ Toshiba-Siemens-IBM – Tap competitors’ strengths ▪ Gain channel access Disadvantages – Partner conflict – Create competitor Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Investment Entry Modes: Partner Selection Above all, a suitable partner has something valuable to offer – Selecting a trustworthy partner is a crucial ingredient for success – Each party’s managers must be comfortable working with people of other cultures and with traveling to (even perhaps living in) other cultures – Each partner must firmly commit to the goals of the agreement Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Cultural Insights: Negotiating Market Entry Managers also should be aware of key cultural and political factors in negotiations: – Stage 1: Preparation – Stage 2: Opening Positions – Stage 3: Hard Bargaining – Stage 4: Agreement and Follow-Up Key Cultural Elements Key Political Elements Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Quick Study 14.4 1. What is the name for a facility that is entirely owned and controlled by a single parent company? 2. What do we call a company that is created and jointly owned by two or more independent entities to achieve a common business objective? 3. What is the name for a relationship between two or more entities to cooperate to achieve the strategic goals of each but not form a separate entity? 4. Why should companies choose partners carefully when joining forces in global markets? Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Copyright This work is protected by United States copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials. Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved