Transcript Chapter 12: The Firm’s Market-Entry Strategies EXPORTING ? FRANCHISING? TURNKEY? DIRECT INVESTMENT ? LICENSING ? SUB-CONTRACTING ? Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides.

Chapter 12:
The Firm’s Market-Entry Strategies
EXPORTING ?
FRANCHISING?
TURNKEY?
DIRECT
INVESTMENT
?
LICENSING
?
SUB-CONTRACTING ?
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
TOPIC PLAN
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The firm’s foreign business strategy
Exporting
Contracting (licensing, leasing etc)
Joint ventures
Wholly-owned company
Advantages and disadvantages of various
market entries
Strategic FDI plan issues
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
Export-import Management

Company business strategies
»
Domestic strategies
–
–
–
»
Investment in product development
Expand domestic market share
Diversify into new industry.
Foreign business strategies
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–
–
Exporting
International contracting
Foreign Direct Investment/Foreign production
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
The Firm’s Foreign Business Strategy
Steps(Figure 12.1)
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1.The firm’s evaluation
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
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Competitive advantages and disadvantages
2.Selection of a target (geographic) market.
3.Selection of product to make/sell in target market
4.Selection of market-entry mode:
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Exporting/Contracting/Foreign Direct Investment
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5.Business plan development and execution.
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6.Monitoring and evaluation of results.
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
Exporting
World Exports of Goods (US $6,1862 billion in
2000) have declined in relative importance
compared to foreign production (US$ 15,680
billion in 2000)
 Most likely mode for serving a foreign market
for a domestic firm starting in international
business.

»
»
The Business Plan (Export marketing plan)
Many global companies combine exports and FDI.
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
EXPORTS : Advantages
Least costly and risky
» L/C payment
 Specialisation, economies of scale.
 Open to any size or kind of firm

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EXPORTS : Disadvantages
Production costs in the home country
may be HIGHER
 Transport costs may make exporting
uneconomical.
 Trade barriers in target markets.
 Divided loyalties of O/S agents.

Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
Types of International Exporters
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The Casual Exporter
»
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The Small Scale Exporter
»
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Domestic firms that do not do international business on a
regular basis(< 5% of T/O)
5-20% of turnover
The Experienced/Global Exporter
»
high ratio of its turnover through involvement in worldwide
business deals(Exports +FDI)
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
Licensing
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Licensor grants rights to intangible property to a
Licensee in exchange for a royalty payment.

Time and territorial limits

Advantages:
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»
»
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Speed of execution.
Low risk/investment cost
Brand recognition
Preliminary cooperation which may be expanded into
FDI
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
Licensing : Disadvantages
Isolation from the market
 Lack of managerial control
 Limited life.
 Risk of technology loss

Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
Franchising
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A Franchisor sells limited brand use rights,products and
services to a Franchisee in return for a lump sum
payment and a share of the Franchisee’s profits.
20% of US franchise systems have foreign operations
(Japan,Canada,UK,Australia)
-Domino vs.Pizza Haven(200 in 7 years);
-Dunkin’Donuts vs.Donut King
Low market entry costs and risks.
Quality control is difficult due to big number of
Franchisees and geographic location.
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
Subcontracting

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Supply arrangement between a principal and
a subcontractor
Advantages:
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»
»
»
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Low investment cost
Speed
Stable processing cost and quality
Control of sales and marketing
Can become the basis for later alliance
Disadvantages:
» Risk of non-delivery or late delivery
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
TURNKEY OPERATIONS

Contract for the
construction of
operating facilities that
are transferred for a
fee to the owner after
commissioning
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
Advantages :
» high economic returns
» less risky than FDI
Disadvantages
» lack of long-term market
presence.
» loss of control over
technology
» the client may turn into a
competitor
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
JOINT VENTURES
A legal entity jointly owned by two or more
legally distinct organisations which share in
the J.V.’s decision-making activities.
 Various options

»
»
»
2 companies from the same country
Foreign/Local
2 or > companies setting a j.v. in a third country
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
JOINT VENTURES(cont.)
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Advantages :
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Partner’s local knowledge
Cost/risk sharing
Host government legislation
Low risk of nationalisation.
Disadvantages :
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»
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Technology control risk .
Less control over subsidiaries .
Management control conflicts
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
Wholly Owned subsidiaries
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A firm owns 100 percent of the stock.
Trend in the motor-car sector(e.g.India,China)
Advantages :
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complete management control.
Optimum security for technology.
“Internalisation” economies.
Disadvantages :
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»
High costs and risks
Long lead time to first sale(especially for" Greenfield”)
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
China:Joint ventures versus Wholly
Owned
25
20
15
US$ Bln
10
5
0
88
90
92
94
96
97
Joint Venture
2
1.7
6
17
21
18
Wholly Owned
0
1
4
8
12
16
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
Strategic FDI Plan Issues
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Investment location evaluation
» See Matrix on next slide

Strategic organisation
» International group
» Business/product units
» Functional units
» Global matrix
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
Investment Location Evaluation
Variable
1
2
3
Weight CountryA CountryB
4
5
1x2
1x3
Political
Economic
1
3
9
5
4
6
9
15
4
18
AutoMotive
Personnel
TOTAL
4
3
4
12
16
2
10
2
19
3
17
4
40
6
44
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
Strategic FDI Plan Issues
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Financial Management and Control
» Investment decisions
» Financing decisions
» Global money management

Global Sourcing Strategy
» Outsourcing

Global Human Resource Strategies
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea