1. Mode of Entry into
International Business
CHAPTER 10

2. Foreign Market Analysis
 Assess alternative markets
 Evaluate the respective costs, benefits, and
risks of entering each
 Select those that hold the most potential for
entry or expansion

3. Factors in Assessing New Market
Opportunities
 Product-market •Potential target
dimensions markets
 Major product-market •Relevant trends
differences •Explanation of
 Structural change
characteristics of •Success factors
national market •Strategic options
 Competitor analysis

4. Evaluating Costs, Benefits and
Risks
- Direct cost - Expected sales - Exchange rate
BENEFITS
RISKS
COSTS
the Firm incurs in - Profits from the fluctuations
entering a new market - Additional
foreign market and - Lower acquisition operating
included costs and manufacturing complexity
associated with costs - Direct financial
setting up a - Foreclosing of losses due to
business operation markets to inaccurate
- Opportunity cost competitors assessment of
a firm has a limited - Competitive adv. market potential
resources, entering - Access to new
one market may technology
preclude or delay its - Opportunity to
entry into another achieve synergy
with other
operations

5. Choosing a Mode of Entry
Export
Decision Factors:
*Ownership International
advantages Licensing
*Location advantages
*Internalization
advantages International
Franchising
*Other factors:
-Need for control
-Resource
Specialized modes
availability
-Global strategy
Foreign Direct
Investment (FDI)

6. Ownership • Resources owned by a firm that grant it a
competitive adv.
Advantage • Depends on the nature of the firm
Location • Affect the desirability of the host country
• Compares economic and non economic
Advantages characteristics
• Affect the desirability of a firm’s producing a
Internalization good/services itself
advantage • The amount of transaction costs is critical to any
decision made
• Control and availability of resources
Other factors • Overall global strategy

7. Exporting
Advantages Disadvantages
Relatively low
financial exposure Vulnerability to
tariffs and NTBs
Permit gradual
market entry
Logistical
complexities
Acquire knowledge
about local market
Potential conflicts
with distributors
Avoid restrictions
on foreign
investment

8. Forms of Exporting
Indirect Direct
exporting exporting
Intra-corporated
transfer

9. Indirect Exporting

10. Direct Exporting

11. Intra-corporate Transfer

12. Additional Considerations for
Exporting

13. Types of Export
Intermediaries

14. Export Management
Companies(EMC)
 An export management company (EMC) is a
firm that acts as its client's export
department by managing the legal, financial,
and logistical details of exporting, and
providing advice about consumer needs and
available distribution channels in the foreign
markets the exporter wants to penetrate.

15. Webb-Pomerene Associations
 A Webb-Pomerene association is a group of
U.S. firms that operate within the same
industry and that are allowed by law to
coordinate their export activities without fear
of violating U.S. antitrust laws.

16. International Trading
Company
 Directly involved in importing and exporting a
wide variety of goods for its own business.
Provides the necessary exporting and
importing services. (buying goods in one
country and selling to another country).

17. Other Intermediaries

18. Licensing
 Licensing is when a firm, called the licensor,
leases the right to use its intellectual
property—technology, work methods,
patents, copyrights, brand names, or
trademarks—to another firm, called the
licensee, in return for a fee.

20. Basic Issues in
International Licensing
 Specifying the boundaries of the agreement
 Determining compensation
 Establishing rights, privileges, and constraints
 Specifying the duration of the contract

21. Licensing
Advantages Disadvantages
• Low financial risks • Limited market
• Low-cost way to assess opportunities/profits
market potential • Dependence on
• Avoid tariffs, NTBs, licensee
restrictions on foreign • Potential conflicts with
investment licensee
• Licensee provides • Possibility of creating
knowledge of local future competitor
markets

22. International Franchising
 A franchising agreement allows an
independent entrepreneur or organization,
called the franchisee, to operate a business
under the name of another, called the
franchisor, in return for a fee.

23. Basic Issues in
International Franchising
 Does a differential advantage exist in
domestic market?
 Are these success factors transferable to
foreign locations?
 Has franchising been a successful domestic
strategy?

24. Franchising
Advantages Disadvantages
• Low financial risks • Limited market
• Low-cost way to assess opportunities/profits
market potential • Dependence on franchisee
• Avoid tariffs, NTBs, • Potential conflicts with
restrictions on foreign franchisee
investment • Possibility of creating
• Maintain more control future competitor
than with licensing
• Franchisee provides
knowledge of local market

25. Specialized Entry Modes

26. Contract Manufacturing
Advantages Disadvantages
• Low financial risks • Reduced control
• Minimize resources (may affect quality,
devoted to delivery schedules,
manufacturing etc.)
• Focus firm’s • Reduce learning
resources on other potential
elements of the • Potential public
value chain relations problems

27. Management Contract
• Focus firm’s resources on its
area of contracts
Advantages • Minimal financial exposure
• Potential returns limited by
contract expertise
Disadvantages • May unintentionally transfer
proprietary knowledge and
techniques to contractee

28. Turnkey Project

29. Foreign Direct Investment
 Entering international market through
ownership of assets in host countries. A firm
may first enter the foreign market through
exporting, licensing or franchising.

30. Foreign Direct Investment
• High profit potential
• Maintain control over operations
Advantages • Acquire knowledge of local market
• Avoid tariffs and NTBs
• High financial and managerial investments
• Higher exposure to political risk
Disadvantages • Vulnerability to restrictions on foreign
investment
• Greater managerial complexity

31. FDI Method
 Building new facilities (the Greenfield
strategy)
 Buying existing assets in a foreign country
(acquisition strategy)
 Participating in a joint venture

32. Greenfield Strategy
• Best site
• Modern facilities
• Economic development incentives
Advantages • Clean slate
• Huge time and patience needed
• Expensive
• Comply with local and national
Disadvantages regulation
• Local workforce needed
• Strongly perceived as a foreign worker

33. Acquisition Strategy
Advantages
• Obtains control over the acquired firm such as
factories and brand names
• Integrate the mgt of the firm into its overall
international strategy
Disadvantages
• Assumes all the liabilities such as financial and
managerial

34. Joint Venture
 An arrangement, whereby a new enterprise is
created by two or more firms working
together for mutual benefit.
 Example:
- IBM and Siemens
- Motorola and Toshiba