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2. 13-2 Learning Objectives • LO1 Explain the pros and cons of market pioneer versus fast follower. • LO2 Explain the international market entry methods. • LO3 Identify two forms of piracy, and discuss how they both help and harm firms doing international business. • LO4 Discuss why firms export and the three challenges of exporting. • LO1 Explain the pros and cons of market pioneer versus fast follower. • LO2 Explain the international market entry methods. • LO3 Identify two forms of piracy, and discuss how they both help and harm firms doing international business. • LO4 Discuss why firms export and the three challenges of exporting.

3. 13-3 Exporting “Pioneer” or “Fast Follower” Which is Better? • Pioneers succeed in exporting when – Insulated from competitor entry – Strong patent protection, proprietary technology – Big investment requirements – Has size, resources and competencies (R&D, marketing) capabilities to leverage pioneering position • Pioneers succeed in exporting when – Insulated from competitor entry – Strong patent protection, proprietary technology – Big investment requirements – Has size, resources and competencies (R&D, marketing) capabilities to leverage pioneering position • Fast Followers will succeed when – Few legal, financial, and cultural barriers – Sufficient resources and competencies to overwhelm pioneer’s early advantage – Larger resource base than pioneer to reduce unit costs and offer lower prices • Fast Followers will succeed when – Few legal, financial, and cultural barriers – Sufficient resources and competencies to overwhelm pioneer’s early advantage – Larger resource base than pioneer to reduce unit costs and offer lower prices

4. 13-4 Nonequity Modes of Entry • Exporting – Selling some regular production overseas – Little investment – Relatively free of risk • The next choices – Indirect Exporting – Direct Exporting • Or – Turnkey Projects – Licensing – Franchising – Management contracts – Contract manufacturing • Exporting – Selling some regular production overseas – Little investment – Relatively free of risk • The next choices – Indirect Exporting – Direct Exporting • Or – Turnkey Projects – Licensing – Franchising – Management contracts – Contract manufacturing

5. 13-5 Nonequity Modes of Entry • Indirect exporting done through home-country based exporters – No special expertise – No large cash outlay • Called in the trades: – Manufacturers’ Export Agents  sell for the manufacturer – Export Commission Agents  buy for overseas customers – Export Merchants  purchase and sell for own accounts – International Firms  Use their own goods abroad • Indirect exporting done through home-country based exporters – No special expertise – No large cash outlay • Called in the trades: – Manufacturers’ Export Agents  sell for the manufacturer – Export Commission Agents  buy for overseas customers – Export Merchants  purchase and sell for own accounts – International Firms  Use their own goods abroad • Costs of indirect exporting: – Commissions – Lost foreign business if exporters change suppliers – Exporters gain little international experience • Costs of indirect exporting: – Commissions – Lost foreign business if exporters change suppliers – Exporters gain little international experience

6. 13-6 Direct Exporting • Direct Exporting: – Exporting of goods and services by firm that produces them – Initial responsibility internal – sales manager – Sales company may be set up – Internet makes direct exporting easier • Significant investment for international presence • Cost of trial low • Direct Exporting: – Exporting of goods and services by firm that produces them – Initial responsibility internal – sales manager – Sales company may be set up – Internet makes direct exporting easier • Significant investment for international presence • Cost of trial low

7. 13-7 Turnkey Projects • Turnkey projects used to export: – technology – management expertise – capital equipment (some cases) • Exporter of a turnkey project may be: – contractor that specializes in designing and erecting plants in a particular industry • After a trial run, the facility is turned over to the purchaser – company that wishes to earn from its expertise – producer of a factory • Turnkey projects used to export: – technology – management expertise – capital equipment (some cases) • Exporter of a turnkey project may be: – contractor that specializes in designing and erecting plants in a particular industry • After a trial run, the facility is turned over to the purchaser – company that wishes to earn from its expertise – producer of a factory

8. 13-8 Licensing • Licensing – Contractual arrangement in which one firm (licensor) grants access to its patents, trade secrets, or technology to another (licensee) for a fee – Licensee pays fixed sum and sales royalties (2%-5%) over life of contract with renewal option • Anything can be licensed – technology, brand and manufacturer names, logos, symbols, colors • Licensing is attractive because: – Courts uphold patent infringement claims – patent holders sue violators – foreign governments enforce patent laws • A Licensee may become a competitor

9. 13-9 Piracy • Patent infringement • Intellectual property protection: – courts have begun upholding patent infringement claims – patent holders have started suing violators – foreign governments have begun enforcement of their patent laws • Patent infringement • Intellectual property protection: – courts have begun upholding patent infringement claims – patent holders have started suing violators – foreign governments have begun enforcement of their patent laws • Traditional Piracy – Attack on defenseless sailing vessels, theft of cargo and/or ship on the high seas • Pirates can be: – International terrorists – Organized crime – Poor local fisherman • Locations: – Waters around Indonesia, Nigeria, Somalia, Bangladesh, Caribbean • Traditional Piracy – Attack on defenseless sailing vessels, theft of cargo and/or ship on the high seas • Pirates can be: – International terrorists – Organized crime – Poor local fisherman • Locations: – Waters around Indonesia, Nigeria, Somalia, Bangladesh, Caribbean

10. 13-10 Franchising • Franchising: – Form of licensing in which one firm contracts with another to operate a business under an established name according to specific rules • Franchisee receives: – Publicized brand name – Well-known set of procedures – Carefully developed & controlled marketing plan • Franchising: – Form of licensing in which one firm contracts with another to operate a business under an established name according to specific rules • Franchisee receives: – Publicized brand name – Well-known set of procedures – Carefully developed & controlled marketing plan

11. 13-11 Management Contract • Management Contract – Arrangement by which one firm provides management in all or specific areas to another firm – Fee typically 2-5% annual sales, tax deductable in U.S. • MNCs make contracts with: – Other firms with no ownership interest – Joint venture partners – Wholly owned subsidiaries • Management Contract – Arrangement by which one firm provides management in all or specific areas to another firm – Fee typically 2-5% annual sales, tax deductable in U.S. • MNCs make contracts with: – Other firms with no ownership interest – Joint venture partners – Wholly owned subsidiaries

12. 13-12 Contract Manufacturing • Contract Manufacturing – Arrangement in which one firm contracts with another to produce products to its specifications but assumes responsibility for marketing • Other types: – Subcontract assembly or parts production – Lend capital to 3rd party foreign contractor •Called “foreign direct investment without investment” • Contract Manufacturing – Arrangement in which one firm contracts with another to produce products to its specifications but assumes responsibility for marketing • Other types: – Subcontract assembly or parts production – Lend capital to 3rd party foreign contractor •Called “foreign direct investment without investment”

13. 13-13 Equity-Based Modes of Entry 1. Wholly Owned Subsidiary 2. Joint Venture 3. Strategic Alliances 1. Wholly Owned Subsidiary 2. Joint Venture 3. Strategic Alliances • Wholly Owned Subsidiary 1. Start from the ground up by building a new plant (greenfield investment) 2. Acquire a going concern 3. Purchase distributor to obtain a distribution network familiar with product • Wholly Owned Subsidiary 1. Start from the ground up by building a new plant (greenfield investment) 2. Acquire a going concern 3. Purchase distributor to obtain a distribution network familiar with product

14. 13-14 Joint Venture 1. Joint Venture – Cooperative effort among two or more organizations that share a common interest in a business enterprise or undertaking 1. Joint Venture – Cooperative effort among two or more organizations that share a common interest in a business enterprise or undertaking Possible forms 1. international company and local owners 2. two international companies for the purpose of doing business in a third market 3. government agency (usually in the country of investment) and an international firm 4. cooperative undertaking between two or more firms of a limited-duration project. Possible forms 1. international company and local owners 2. two international companies for the purpose of doing business in a third market 3. government agency (usually in the country of investment) and an international firm 4. cooperative undertaking between two or more firms of a limited-duration project.

15. 13-15 Issues with Venture Ventures • Strong nationalism • Expertise, tax & other benefits • Disadvantages: – Shared profits – Minority ownership position – Difficulty in share distribution to allow minority owner to be largest stockholder – Lack of control – Local law requiring local majority ownership – Joint venture control through management contracts • Strong nationalism • Expertise, tax & other benefits • Disadvantages: – Shared profits – Minority ownership position – Difficulty in share distribution to allow minority owner to be largest stockholder – Lack of control – Local law requiring local majority ownership – Joint venture control through management contracts

16. 13-16 Strategic Alliances • Strategic Alliances – partnerships between or among competitors, customers, or suppliers that may take one or more various forms, both equity and nonequity • Goals of Strategic Alliances: – Faster market entry and start-up – Access to new products, technologies, and markets – Cost-savings by sharing costs, resources, and risks • Issues with Strategic Alliances: – Alliances may be Joint Ventures – Pooling versus trading alliances – Alliances versus mergers and acquisitions – Future of alliances

17. 13-17 Issues with Strategic Alliances • Strategic Alliances may be Joint Ventures – In manufacturing and marketing • Pooling versus Trading Alliances – Pooling Alliances – driven by similarity and integration – Trading Alliances –driven by the logic of contributing dissimilar resources – Fundamental differences: • Goals (common vs. compatible) • Optimal resources (many vs. few partners) • Managerial challenges (low vs. high coordination needs) • Alliances versus Mergers and Acquisitions – Mergers and acquisitions not considered alliances, but ways to access new technology • Future of Alliances – Many fail or are taken over by a partner – Difficult to manage due to different strategies, operating practices, and organizational cultures – Partner may acquire technological or other competencies and become competitor • Strategic Alliances may be Joint Ventures – In manufacturing and marketing • Pooling versus Trading Alliances – Pooling Alliances – driven by similarity and integration – Trading Alliances –driven by the logic of contributing dissimilar resources – Fundamental differences: • Goals (common vs. compatible) • Optimal resources (many vs. few partners) • Managerial challenges (low vs. high coordination needs) • Alliances versus Mergers and Acquisitions – Mergers and acquisitions not considered alliances, but ways to access new technology • Future of Alliances – Many fail or are taken over by a partner – Difficult to manage due to different strategies, operating practices, and organizational cultures – Partner may acquire technological or other competencies and become competitor

18. 13-18 Reasons to Export • To serve markets where the firm has no or limited production facilities • To satisfy host government’s requirements that local subsidiary have exports • To remain price competitive in home market • To test foreign markets and foreign competition inexpensively • To meet customer requests for exports • To offset cyclical sales in the domestic market • To serve markets where the firm has no or limited production facilities • To satisfy host government’s requirements that local subsidiary have exports • To remain price competitive in home market • To test foreign markets and foreign competition inexpensively • To meet customer requests for exports • To offset cyclical sales in the domestic market

19. 13-19 Reasons to Export • To achieve additional sales, which will allow the firm to use excess production capacity to lower per-unit fixed costs • To extend a product’s life cycle by exporting to currently unserved markets where the product will be at the introduction stage of the life cycle • To respond strategically to foreign competitors in the firm’s home market by entering their home markets • To achieve the success the firm’s management has seen others achieve by exporting • To improve the efficiency of manufacturing equipment, which usually works better at or near full capacity • To achieve additional sales, which will allow the firm to use excess production capacity to lower per-unit fixed costs • To extend a product’s life cycle by exporting to currently unserved markets where the product will be at the introduction stage of the life cycle • To respond strategically to foreign competitors in the firm’s home market by entering their home markets • To achieve the success the firm’s management has seen others achieve by exporting • To improve the efficiency of manufacturing equipment, which usually works better at or near full capacity

20. 13-20 GLOBAL gauntlet • Social Networking – With more businesses using the Internet, it seems that anyone can become an Internet entrepreneur. But it might be more complicated, since many people use both global and local/regional social networking sites. • Social Networking – With more businesses using the Internet, it seems that anyone can become an Internet entrepreneur. But it might be more complicated, since many people use both global and local/regional social networking sites. • Is it important to appeal to local tastes over the Internet? Why? How? • Are exporting obstacles being created by a two- tiered social networking structure? • Should only the largest firms be players? • Is it important to appeal to local tastes over the Internet? Why? How? • Are exporting obstacles being created by a two- tiered social networking structure? • Should only the largest firms be players?

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