Chapter 3
Participants in
International Business
International Business:
Strategy, Management, and the New Realities
by
Cavusgil, Knight and Riesenberger
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Three Types of Participants in IB
1. The focal firm – initiator of IB transaction,
including MNEs and SMEs
2. Distribution channel intermediary –
specialist firm providing logistics and
marketing services in the international supply
chain
3. Facilitator – a firm providing special
expertise in legal advice, banking, customs
clearance, market research, and similar
areas
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Example from the Textbook: Dell Computers
• Dell makes various products, each with its own value chain. The
total supply chain for a notebook computer, including multiple
tiers of suppliers, involves about 400 companies, primarily in
Asia, but also in Europe and the Americas.
• On a typical day, Dell processes orders for 150,000 computers,
which are distributed to customers around the world, with nonU.S. sales accounting for 40%.
• Shipping is handled via air transport, e.g. from the Dell Malaysia
factory to the U.S. Dell charters a China Airlines 747 that flies to
Nashville, Tennessee six days a week, with each jet carries
25,000 Dell notebooks that weigh a total of 110,000 kilograms, or
242,500 pounds.
• One of the hallmarks of Dell’s value chain is collaboration. CEO
Michael Dell and his team constantly work with their suppliers to
improve Dell’s value chain.
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The MNE as a Focal Firm
•
•
•
A Multinational Enterprise (MNE) is a large
organization with a network of production
plants, regional headquarters, and country
subsidiaries in numerous countries.
Examples include: Nestlé, Sony, Unilever,
Nokia, Ford, Citibank, ABB, and Shell Oil.
Some MNEs in countries like China and
Russia may be state owned.
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The SME as a Focal Firm
•
•
•
A Small and Medium-Sized Enterprise (SME) is
a relatively small player in its respective industry
(in the U.S., those with 500 employees or less).
SMEs can be more flexible and quicker to
respond to international opportunities.
As limited resources often prevent them from
engaging in FDI, SMEs internationalize via
exporting, joint ventures, and contractual
arrangements
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The Born Global as a Focal Firm
•
•
•
•
A relatively new breed of the SME that
undertakes early and substantial
internationalization.
Primarily a niche player
Displays high degree of entrepreneurial
orientation, proactiveness, and customer
service.
Now make up the fastest growing segment of
exporters in most countries.
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Evolution of a Born Global Exporter
and Challenges It Overcomes
Some will exceed
$100 million
Manage
Niche
transition
limits
issues early
Size
Small
Create
domestic
international
sales only
position
Product or
Begin exporting
process
early (2 years)
development
Time
Credibility
Finance
Export
Finance
Innovation…
Foreign representation
the next
Export know-how & skills
product
Market information
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Common Characteristics of Born Global Firms
 Early, rapid, and substantial
internationalization
 Fewer financial and other resources than
traditional MNEs
 Often formed by strong entrepreneurs
 Often technically superior in a given product
category
 Internationalize via exporting
 Heavy use of information and communications
technologies
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Foreign Market Entry Strategies of Focal Firms
Cross-border business transactions can be
grouped into three categories:
1. Trade: buying and selling of products (mainly
exporting and importing)
2. Contractual exchange of services or
intangibles (mainly licensing and franchising)
3. Equity ownership in foreign operations:
establishing foreign presence through direct
investment (FDI)
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Examples of Contractual Strategies
Licensor: Focal firm grants the right to the foreign
partner to use certain intellectual property in
exchange for royalties.
• Anheuser-Busch signed a licensing agreement
with Japanese beer brewer Kirin in which Kirin
produces and distributes Budweiser in Japan.
• Mega Bloks (Canadian toymaker) signed an
agreement with Disney that gives the SME the
right to manufacture toys that feature Disney
characters like Winnie the Pooh, Power Rangers.
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Examples of Contractual Strategies (cont’d)
Franchisor: Focal firm grants the right to
the foreign partner to use an entire
business system in exchange for fees
and royalties.
• For firms like Subway or KFC, it’s an
efficient way to internationalize,
• In China, Subway is the third-largest
U.S. fast-food chain.
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Examples of Contractual Strategies (cont’d)
Turnkey Contractor: Provide engineering, design, and
architectural services in the construction of airports,
hospitals, oil refineries, and other types of
infrastructure. E.g., European Channel Tunnel, Three
Gorges Dam in China, Delhi Metro Rail Ltd.
Build-own-transfer venture- an increasingly popular type
of turnkey contract in the developing economies
where contractors acquire an ownership in the facility
for a period of time until it is turned over to the client.
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International Collaborative Venture (ICV)
•
•
•
Arrangement in which partners pool their
resources and share the cost and risks of
the new venture.
Through an ICV, a focal firm can exploit
partner’s complementary technologies and
expertise, avoid trade barriers, connect
with customers abroad, and configure
value chains more effectively.
A middle ground strategy between
exporting and FDI
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Two Types of International Collaborative Ventures
•
•
Joint Venture: One firm creates and jointly
owns a new legal entity together with another
firm. Advantages: share costs and risks; gain
access to needed resources; gain economies of
scale; pursue long-term strategic goals.
Project-Based Collaborative Venture: Firm
collaborates with foreign partners on a project
with a relatively narrow scope and a welldefined timetable, without creating a new legal
entity. Often used to share the cost and risks
of knowledge-intensive R&D projects.
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Example from the Textbook:
Project-Based Collaboration
Cisco Systems has expanded much of its
operations through strategic alliances with key
foreign players.
• With Japan’s Fujitsu to jointly develop routers
and switches that enable clients to build Internet
protocol networks for advanced
telecommunications.
• In Italy, Cisco teamed with the telecom company
Italtel to jointly develop network solutions for the
convergence of voice, data, and video to meet
growing global demands.
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Distribution Channel Intermediary
•
•
•
•
Specialize in physical distribution and
marketing service; connect the focal firm with
the end user in the foreign market.
Assist the focal firm by providing logistics
services such as warehousing and customer
support.
Especially critical to exporters
Based either in the home country or the
foreign market.
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Intermediaries Based in the Foreign Market
•
•
Distributor: Takes title to the exporter’s
goods and performs marketing functions
such as sales, promotion, and after sales
service.
Serves as an extension of the firm in the
foreign market, performing many
downstream marketing functions
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Agent and Manufacturer’s Representative
•
Agent: (also known as a ‘broker’): Does
not take title to the goods. Works on a
commission basis.
•
Manufacturer’s Representative:
Works under contract to the exporter to
represent and sell its goods. Acts as a
contracted salesperson in a designated
territory.
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Retailer
• Stores that mainly serve regular
consumers.
•
•
•
Some, large firms sell directly to retailers,
bypassing distributors (wholesalers)
Retailers provide direct access to retail
customers
Examples: Carrefour, IKEA, Royal Ahold,
Seibu, Toys “R” Us, Wal-Mart, and Zara.
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Top Retailers based on Percent of Sales Outside of Home Country
Retailer
Base
Percent of Sales
in Foreign
Countries
IKEA
Sweden
99.90
Delhaize "Le Lion"
Belgium
83.00
Royal Ahold
Netherlands
76.40
OttoVersand Gmbh & Co
Germany
52.00
Pinault-Printemps-Red
France
48.10
Tengelmann Warenhande
Germany
47.90
IGA
USA
44.90
Kingfisher plc
UK
41.00
MetroAG
Germany
40.00
Carrefour Group
France
37.70
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Trading Company
•
•
•
Based in the home country, a trading
company is an intermediary that
engages in imports and exports of a
variety of products.
Large trading companies such as Cargill
are high-volume, low-margin resellers.
Many trading companies deal primarily in
commodities such as grains, minerals,
coal, and metals.
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The Japanese Sogo Shosha
•
•
•
Large trading companies in Japan are
known as the sogo shosha. Each has
an extensive network of foreign offices
and buyers including governments.
Examples include Mitsubishi, Mitsui,
Marubeni, and Sumitomo
The sogo shosha historically handled
about half of Japanese external trade.
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The Role of Trading Companies in IB
• Trading companies work with remarkably low
margins; they tend to be high-volume, lowmargin resellers.
• Five of the 10 largest trading companies are
based in Japan. Trading companies have
historically played a very important role in
Japan’s external trade.
• Being an island economy and lacking most
raw materials needed for industrialization,
Japan had to import them.
• Trading companies are also more common in
South Korea, India, and Europe.
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Export Management Company (EMC)
•
•
•
Acts as an export agent on behalf of the
focal firm. Based in home country.
An EMC finds export customers,
negotiates terms of sale, and arranges
for international shipping, typically for
smaller exporters.
Most specialize in specific industries and
geographic areas.
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Online Intermediaries
•
•
•
Examples include Amazon, Dell, eBay, and
Alibaba – English-language portal based in
China that specializes in business-tobusiness exchanges.
Traditional retailers such as Wal-Mart and
Tesco have also set up online presence.
One negative aspect is the ease with which
unscrupulous marketers prey on
unsuspecting customers with fake products
(e.g., fake pharmaceuticals).
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Facilitators in IB
•
•
Facilitators assist the focal firm with
specialized services required in crossborder transactions.
Facilitators include: Banks,
international trade lawyers, freight
forwarders, customs brokers,
consultants, ad agencies, and market
researchers.
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Examples of Other Facilitators
• International trade lawyers
• International business consultants
• Tax accountants
• Market research firms
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