Learning Objectives
Welcome to class of
International Market Entry Modes
Dr. Satyendra Singh
Objectives:
Learning Objectives
• Explain the international market entry methods
• Discuss whether being a market pioneer or a fast
follower is more useful
• Identify two different forms of piracy and discuss
which might be helpful and harmful to firms doing
international business
• Discuss channel members available to companies
that export or manufacture overseas
Pioneers vs. Fast Followers
• Pioneers
– Can gain and maintain
competitive edge in new
market
– Overall pioneers may not
perform as well in the long
run as followers
• Most successful when
– High entry barriers exist
– Firm has sufficient size,
resources, and
competencies
• Followers
– Many become followers
by default
– May be advantage to let
pioneer take initial risks
• Most successful when
– Few legal,
technological, cultural,
or financial barriers
– Sufficient resources or
competencies to
overwhelm the
pioneer’s early
advantage
Entering Foreign Markets
• Nonequity modes of market entry
– Exporting
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Selling some regular production overseas
Requires little investment
Relatively free of risk
Indirect exporting
Direct exporting
• Equity modes of market entry
– Wholly owned subsidiary
– Joint venture
– Strategic alliance
Summary: Modes of Entry
Indirect Exporting…
• Exporting of goods and services through
various home-based exporters
– Manufacturers’ export agents
• sell for manufacturer
– Export commission agents
• buy for overseas customers
– Export merchants
• purchase and sell for own accounts
– International firms
• use the goods overseas
Indirect Exporting
• Disadvantages
– Commission to export agents, commission agents,
export merchants
– Foreign business can be lost if exporters decide to
change their sources and supply
– Firm gains little experience from transactions
Direct Exporting
• Exporting of goods and services by the producing
firm
• Sales company option
• Business established to market goods and services
• Internet has made direct exporting much easier
• Cost of trial low
Exporting…
• Turnkey Project used for export of
– Technology
– Management expertise
– Capital equipment (some cases)
• After trial run, facility is turned over to
purchaser
• Exporter of a turnkey project may be
– Contractor that specializes in designing and
erecting plants in a particular industry
– Company that wishes to earn money from its
expertise
– Producer of a factory
Exporting
• Licensing
– A contractual arrangement: one firm sells access to its patents,
trade secrets, or technology to another
– Licensee pays fixed sum and sales royalties (2%-5%)
• Popular because
– Courts have begun upholding patent infringement claims
– Patent holders have become vigilant in suing violators
– Foreign governments have been pressed to enforce their
patent laws
Franchising
• Franchising
– Form of licensing in which one firm
contracts with another to operate a certain
type of business under an established
name according to specific rules
Contracts
• Management Contract
– Arrangement by which one firm provides management in all
or specific areas to another firm
• Contract Manufacturing
– Arrangement in which one firm contracts with another to
produce products to its specifications but assumes
responsibility for marketing
Equity-Based Modes of Entry
• Wholly Owned Subsidiary
• Joint Venture
• Strategic Alliance
Wholly Owned Subsidiary
• Wholly Owned Subsidiary
• build a new plant (greenfield investment)
• acquire a going concern
• purchase distributor, to obtain a distribution network
familiar with products
Joint Venture…
• Joint Venture
– Cooperative effort among two or more organizations that
share common interest in business enterprise
• corporate entity formed by international company and local
owners
• corporate entity formed by two international companies for the
purpose of doing business in a third market
• a corporate entity formed by a government
Joint Venture
• Disadvantages
– Profits shared
– If law allows no more than 49% foreign ownership,
lose control
– Control with minority ownership is possible if
• Take 49% of shares and give 2% to local law firm or
trusted national
• Take in local majority partner (sleeping partner)
• Management contract
– Can enable the global partner to control many aspects of a
joint venture even when holding only a minority position
Strategic Alliances…
• Partnerships between competitor, customers,
or suppliers that may take various forms
• Aims to achieve
– Faster market entry and start-up
– Access to new
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Products
Technologies
Markets
– Cost-savings by sharing
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Costs
Resources
Risks
Strategic Alliances
• May be Joint Ventures
• Pooling alliances driven
by similarity and
integration
• Trading alliances driven
by contribution of
dissimilar resources
• Alternatives to mergers
and acquisitions
• Future of Alliances
– Many fail or are taken
over by a partner
– Difficult to manage
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•
•
Different strategies
Different operating practices
Different organizational cultures
– Allow partner to acquire
technological or other
competencies
– Regardless, will continue
to be important strategic
tool
Channel of Distribution
• Links producer with foreign user
• Product and its title pass from producer
to user
Channel of Distribution Members:
Indirect Exporting
– Indirect Export Channel Members
• Sell for manufacturer
• Buy for overseas customers
• Buy and sell for own account
• Purchase on behalf of foreign middlemen or users
Indirect Exporting
• Exporters that sell for the manufacturer
– Manufacturers’ export agent
• Acts as the international representative for various
noncompeting domestic manufacturers
– Export management companies (EMC)
• Acts as the export department for noncompeting
manufacturers
– International trading companies
• Acts as agent for some companies and as wholesaler for
others
Indirect Exporting: International
Trading Companies
• International Trading Companies
– Japan: Sogo Shosha
• Originally established by the zaibatsu, centralized, familydominated economic groups
– Korean: chaebol
– Owned by Korean conglomerates
• Export trading companies (ETC)
– U.S. firm established principally to export domestic
goods and services
Indirect Exporting…
• Exporters that buy for their overseas
customers
– Export commission agents
• Represent overseas purchasers, such as import firms
and large industrial users
• Paid commission by the purchaser for acting as resident
buyer
Indirect Exporting…
• Exporters that buy and sell for their own
account
– Export merchants
• Purchase products directly from the manufacturer and
then sell, invoice, and ship them in their own names
– Cooperative exporters/piggyback exporters
• Established international manufacturers that export other
manufacturers’ goods as well as their own
– Webb-Pomerene Associations
• Organizations of competing firms that have joined together
for the sole purpose of export trade
Indirect Exporting
• Exporters that purchase for foreign users and
middlemen
– Large foreign users
• Buy for their own use overseas
– Export resident buyers
• Perform essentially the same functions as export
commission agents but more closely associated with a
foreign firm
Direct Exporting Distribution
Channel Members
• Manufacturer’s agent
– Independent sales representative of noncompeting
suppliers
• Distributor/wholesale importer
– Independent importer that buys for own account for
resale
• Retailer
– Frequently direct importer
• Trading company
– Firm that develops international trade and serves
as intermediary between foreign buyers and
domestic sellers and vice versa