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Chapter 12 - The firm’s market-entry strategies. The main goals of this chapter are to: Examine the main market and entry options for a company starting in international business, identify the main categories of companies involved in international trade, discuss an outline of foreign business plans (export marketing plan and FDI plan),...
Chapter 12 The firm’s market-entry strategies EXPORTING ? FRANCHISING? TURNKEY? DIRECT Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea LICENSING ? 12–1 INVESTMENT ? Lecture plan • The firm’s foreign business strategy • Exporting • Contracting (licensing, leasing etc) • Joint ventures • Wholly-owned company • Advantages and disadvantages of various market entries • Strategic FDI plan issues Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12–2 Export-import management Company business strategies • Domestic strategies – investment in product development – expand domestic market share – diversify into new industry • Foreign business strategies – exporting – international contracting – foreign direct investment/foreign production Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12–3 The firm’s foreign business strategy JV = Joint Venture WOC = Wholly-Owned Company Source: adapted from R Grosse & D Kujawa, International Business, Irwin, 1992 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12–4 Exporting • World exports of goods ($US8880 billion in 2004) have declined in relative importance compared to foreign production ($US17,580 billion in 2003) • Most likely mode for serving a foreign market for a domestic firm starting in international business – the business plan (export marketing plan) – many global companies combine exports and FDI Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12–5 Exports: advantages • Least costly and risky – L/C payment • Specialisation, economies of scale • Open to any size or kind of firm Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12–6 Exports: disadvantages • Production costs in the home country may be higher • Transport costs may make exporting uneconomical • Trade barriers in target markets • Divided loyalties of O/S agents Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12–7 Types of international exporters • Casual exporter – domestic firms that not international business on a regular basis (< 5% of T/O) • Small-scale exporter – 5–20% of turnover • Experienced/global exporter – high ratio of its turnover through involvement in worldwide business deals (exports + FDI) Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12–8 Licensing • Licensor grants rights to intangible property to a Licensee in exchange for a royalty payment • Time and territorial limits • Advantages: – speed of execution – low risk/investment cost – brand recognition – preliminary cooperation which may be expanded into FDI Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12–9 Licensing: disadvantages • Isolation from the market • Lack of managerial control • Limited life • Risk of technology loss Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12–10 Franchising • A franchisor sells limited brand use rights, products and services to a franchisee in return for a lump sum payment and a share of the franchisee’s profits • 20% of US franchise systems have foreign operations (Japan, Canada, UK, Australia) - Domino’s Pizza vs Pizza Haven (200 in years); - Dunkin’ Donuts vs Donut King • Low market entry costs and risks • Quality control is difficult due to big number of franchisees and geographic location Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12–11 Subcontracting • Supply arrangement between a principal and a subcontractor • Advantages – low investment cost – speed – stable processing cost and quality – control of sales and marketing – can become the basis for later alliance • Disadvantages – risk of non-delivery or late delivery Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12–12 Turnkey operations • Contract for the construction of operating facilities that are transferred for a fee to the owner after commissioning • Advantages • high economic returns • less risky than FDI • Disadvantages • lack of long-term market presence • loss of control over technology • client may turn into a competitor Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12–13 Joint ventures • A legal entity jointly owned by two or more legally distinct organisations which share in the JV’s decision-making activities • Various options – companies from the same country – foreign/local – or more companies setting up a JV in a third country Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12–14 Joint ventures cont • Advantages – partner’s local knowledge – cost/risk sharing – host government legislation – low risk of nationalisation • Disadvantages – technology control risk – less control over subsidiaries – management control conflicts Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12–15 Wholly-owned subsidiaries • A firm owns 100% of the stock • Trend in the motor-car sector (e.g India, China) • Advantages – complete management control – optimum security for technology – ‘internalisation’ of operations • Disadvantages – high costs and risks – long lead time to first sale (especially for ‘Greenfield’ operations) Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12–16 China: joint ventures vs wholly owned 25 20 15 US$ Bln 10 88 90 92 94 96 97 Joint Venture 1.7 17 21 18 Wholly Owned 12 16 Source: adapted from UNCTAD, World Investment Report 1999 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12–17 Strategic FDI plan issues • Investment location evaluation – see matrix on next slide • Strategic organisation – international group – business/product units – functional units – global matrix Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12–18 Investment location evaluation Variable Weight Country A Country B 1x2 1x3 Political 9 Economic 15 18 Automotive 4 12 16 Personnel 2 10 19 17 40 44 Total Source: Fig 12.3, p.298 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12–19 Strategic FDI plan issues • Financial management and control – investment decisions – financing decisions – global money management • Global sourcing strategy – outsourcing • Global human resource strategies Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12–20 ... Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12 2 Export-import management... Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12 15 Wholly-owned subsidiaries... Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea Slides prepared by John Gionea 12 18 Investment location evaluation