In this chapter, you will learn how a firm can achieve its objectives through exporting, importing, and countertrade. You will also: Understand the ways in which a firm finances its import and export activities, explore various contractual and investment entry modes, and examine the strategic factors in selecting an entry mode.
13 Selecting and Managing Entry Modes Copyright © 2014 Pearson Education, Inc Chapter 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 Copyright © 2014 Pearson Education, Inc 13 - Marvel Enterprises • Licenses characters for films and products Earns royalties from licensing agreements Copyright â 2014 Pearson Education, Inc 13 - Exports 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 Copyright © 2014 Pearson Education, Inc 13 - Developing an Export Strategy Step Step Step Step Identify a potential market Match needs to abilities Initiate meetings Commit resources Copyright © 2014 Pearson Education, Inc 13 - Degree of Export Involvement Direct exporting Indirect exporting (sell to buyers) (sell to intermediary) •• Agent •• Sales representative Sales representative Agent •• Export Export management management company company •• Distributor Distributor •• Export Export trading trading company company Copyright © 2014 Pearson Education, Inc 13 - Avoiding Export Blunders Conduct market research Obtain export advice Hire a freight forwarder Copyright © 2014 Pearson Education, Inc 13 - Discussion Question What are the four steps companies can follow when building an export strategy? Copyright © 2014 Pearson Education, Inc 13 - Answer to Discussion Question 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 Copyright © 2014 Pearson Education, Inc 13 - Forms of Countertrade Barter Direct exchange without money Counterpurchase Sale to a nation in return for promise of future purchase from that nation Offset agreement Offset a hard-currency sale to a nation with future hard-currency purchase Switch trading Sale by a company of an obligation to purchase from a country Buyback Export of industrial equipment in return for products that the equipment produces Copyright © 2014 Pearson Education, Inc 13 - 10 Licensing Company owning intangible property (licensor) grants other firm (licensee) the right to use it for a specific tim Advantages Disadvantages Copyright © 2014 Pearson Education, Inc + + + + Finance expansion Reduce risks Reduce counterfeits Upgrade technologies – Restrict licensor’s activities – Reduce global consistency – Lend strategic property 13 - 20 Franchising Company (franchiser) supplies another (franchisee) with intangible property over an extended period Advantages Disadvantages Copyright © 2014 Pearson Education, Inc + Low cost and low risk + Rapid expansion + Local knowledge – Cumbersome – Lost flexibility 13 - 21 Management Contract Company supplies another with managerial expertise for a specific period of time Advantages + Few assets risked + Nations finance projects + Develops local Disadvantages workforce – Personnel at risk – Create competitor Copyright © 2014 Pearson Education, Inc 13 - 22 Turnkey Project Company designs, constructs, and tests a production facility for a client + Firms specialize in competency Advantages + Nations obtain infrastructure Disadvantages Copyright © 2014 Pearson Education, Inc – Politicized process – Create competitor 13 - 23 Discussion Question In what ways does franchising differ from licensing? Copyright © 2014 Pearson Education, Inc 13 - 24 Answer to Discussion Question 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 Copyright © 2014 Pearson Education, Inc 13 - 25 Wholly Owned Subsidiary Facility entirely owned and controlled by a single parent company Advantages + Day-to-day control + Coordinate subsidiaries Disadvantages – Expensive – High risk Copyright © 2014 Pearson Education, Inc 13 - 26 Joint Venture Company created and jointly owned by two or more entities to achieve a common objective Advantages Disadvantages Reduce risk level Partner conflict Penetrate markets Lose control Access channels Copyright © 2014 Pearson Education, Inc 13 - 27 Joint 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 Copyright © 2014 Pearson Education, Inc 13 - 28 Strategic Alliance Entities cooperate (but not form a separate company) to achieve strategic goals of each Advantages Share project cost Tap competitors’ strengths Gain channel access Copyright © 2014 Pearson Education, Inc Disadvantages Partner conflict Create competitor 13 - 29 Selecting Partners Commitment Trustworthiness Cultural knowledge Valuable contribution Copyright © 2014 Pearson Education, Inc 13 - 30 Strategic Factors Strategic Factors Cultural environment Political/Legal environments Market size Production and shipping costs International experience Copyright © 2014 Pearson Education, Inc 13 - 31 Discussion Question An investment entry mode that gives a company the most control over day-today activities in a host country is called a a Joint venture b Strategic alliance c Wholly owned subsidiary Copyright © 2014 Pearson Education, Inc 13 - 32 Answer to Discussion Question An investment entry mode that gives a company the most control over day-today activities in a host country is called a a Joint venture b Strategic alliance c Wholly owned subsidiary Copyright © 2014 Pearson Education, Inc 13 - 33 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher Printed in the United States of America Copyright © 2014 Pearson Education, Inc 13 - 34 ... 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 Copyright... between an exporter and shipper specifying destination and shipping costs for merchandise 13 - 14 Documentary Collection Process Copyright © 2014 Pearson Education, Inc 13 - 15 Letter of Credit... one-time transfer of property Copyright © 2014 Pearson Education, Inc 13 - 25 Wholly Owned Subsidiary Facility entirely owned and controlled by a single parent company Advantages + Day-to-day