Global Trade Management
Beyond ExportingExportingFOREIGN DIRECT INVESTMENT
World Trade Practices
Chapter 23
FDI
Most risky of market entry
strategies
May be necessary to overcome:
–
–
–
Barriers to successful exporting
strategies
Need for more control and feedback
Access to foreign resources
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WTP-Chris Schrage
Barriers to export success
Transportation costs
Import barriers
– Tariff
– Non tariff
Preferences given to
inin-country companies
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WTP-Chris Schrage
College of Business, University of Northern Iowa
1
Global Trade Management
Increased Control/Feedback
Pressure for manufacturers to become
more involved in market region
Once initial success with sales, desire
faster growthgrowth-more profitability
Enhance customer service requirements
Develop longlong-term buyerbuyer-seller
relationships
– B2B
Due to more competitioncompetition-exports stagnate
and renewed efforts may require more
direct involvement
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WTP-Chris Schrage
Scale of Entry
Large scale entry
– Strategic Commitments - a decision that has a
long--term impact and is difficult to reverse.
long
– May cause rivals to rethink market entry.
– May lead to indigenous competitive response.
Small scale entry:
– Time to learn about market.
– Reduces exposure risk.
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Entry Modes
Exporting
Turnkey Projects
Licensing
Franchising
Joint Ventures
Wholly Owned Subsidiaries
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College of Business, University of Northern Iowa
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Global Trade Management
Exporting
Advantages:
– Avoids cost of establishing manufacturing operations.
– May help achieve experience curve and location
economies.
Disadvantages:
–
–
–
–
May compete with lowlow-cost location manufacturers.
Possible high transportation costs.
Tariff barriers.
Possible lack of control over marketing reps.
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WTP-Chris Schrage
Turnkey Projects
Advantages:
– Can earn a return on knowledge asset.
– Less risky than conventional FDI.
Disadvantages:
– No longlong-term interest in the foreign
country.
– May create a competitor.
– Selling process technology may be selling
competitive advantage as well.
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Licensing
Advantages:
– Reduces costs and risks of establishing
enterprise.
– Overcomes restrictive investment barriers.
– Others can develop business applications of
intangible property.
Disadvantages:
– Lack of control.
– Cross
Cross--border licensing may be difficult.
– Creating a competitor
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WTP-Chris Schrage
College of Business, University of Northern Iowa
3
Global Trade Management
Franchising
Advantages:
– Reduces costs and risk of establishing
enterprise.
Disadvantages:
– May prohibit movement of profits from one
country to support operations in another
country.
– Quality control.
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WTP-Chris Schrage
Joint Ventures
Advantages:
– Benefit from local partner’s knowledge.
– Shared costs/risks with partner.
– Reduced political risk.
Disadvantages:
– Risk giving control of technology to partner.
– May not realize experience curve or location
economies
– Shared ownership can lead to conflict. 14-12
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Wholly Owned Subsidiary
Advantages:
– No risk of losing technical competence
to a competitor.
– Tight control of operations.
– Realize learning curve and location
economies.
Disadvantage:
– Bear full cost and risk.
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WTP-Chris Schrage
College of Business, University of Northern Iowa
4
Global Trade Management
Strategic Alliances
Cooperative agreements between potential or
actual competitors.
Advantages:
– Facilitate entry into market.
– Share fixed costs.
– Bring together skills and assets that neither company
has or can develop.
– Establish industry technology standards.
Disadvantage:
– Competitors get low cost route to technology and
markets.
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Alliances Are Popular
High cost of technology development
Company may not have skill, money or
people to go it alone
Good way to learn
Good way to secure access to foreign
markets
Host country may require some local
ownership
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Global Alliances, however, are
different
Companies join to attain world leadership
Each partner has significant strength to
bring to the alliance
A true global vision
Relationship is horizontal not vertical
When competing in markets not part of
alliance, they retain their own identity
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WTP-Chris Schrage
College of Business, University of Northern Iowa
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Global Trade Management
Partner Selection
Get as much information as possible
on the potential partner
Collect data from informed third
parties
– former partners
– investment bankers
– former employees
Get to know the potential partner
before committing
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4 Cs to partner selection
Complementary skills
Cooperative cultures
Compatible goals
Commensurate levels
of risk
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Structuring the Alliance to Reduce
Opportunism
Walling off
critical technology
Establishing
contractual
safeguards
Agreeing to swap
valuable skills
and technologies
Opportunism by partner
reduced by:
Seeking credible
commitments
Figure 14.1
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WTP-Chris Schrage
College of Business, University of Northern Iowa
6
Global Trade Management
Characteristics of a Global
Alliance
Players are independent prior to
the creating of the alliance
Players share
– benefits of the alliance
– control over operations
Players continue to contribute
– technology
– products
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WTP-Chris Schrage
Characteristics of a Strategic
Alliance
Benefits
Independence of
Participants
Technology
Products
Control
Ongoing
Contributions
Shared
Benefits
Markets
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Problems with Strategic
Alliances
Have to give up some authority/control
Could be strengthening a future
competitor
– Technology transfer
– Management practices
– Operating procedures
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College of Business, University of Northern Iowa
7
Global Trade Management
Range of Options
(Foley’s View)
Overseas salesperson
Overseas sales office
Overseas marketing office
Overseas customer support, training, warranty
repair
Overseas joint venture
Overseas product finishing (labeling, packaging)
Overseas assembly
Overseas manufacturing joint venture
Overseas manufacturing, wholly owned facility
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Investment Considerations
Location
Facility size
Staffing
– Levels
– Locals or expats
Market perception
Taxes/accounting
Reporting and
control
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WTP-Chris Schrage
College of Business, University of Northern Iowa
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