chapter 12 the firm’s market-entry strategies

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

12–1

Chapter 12The firm’s market-entry strategies

EXPORTING

? FRANCHISING?

TURNKEY?

LICENSING ?

DIRECT

INVESTMENT

?


12–2

Lecture plan

• 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


12–3

Export-import management

Company business strategies• Domestic strategies

– investment in product development – expand domestic market share – diversify into new industry.

• Foreign business strategies– exporting– international contracting

– foreign direct investment/foreign production


12–4

The firm’s foreign business strategy

1. JV = Joint Venture2. WOC = Wholly-Owned Company Source: adapted from R. Grosse & D. Kujawa,

International Business, Irwin, 1992


12–5

Exporting

• World exports of goods ($US8880 billion in 2004) have declined in relative importance compared to foreign production ($US17,580 billion in 2003).

• 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


12–6

Exports: advantages

• Least costly and risky

– L/C payment• Specialisation, economies of scale.• Open to any size or kind of firm


12–7

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


12–8

Types of international exporters

• Casual exporter– domestic firms that do not do international

business on a regular basis (< 5% of T/O)• Small-scale exporter

– 5–20% of turnover• Experienced/global exporter

– high ratio of its turnover through involvement in worldwide business deals (exports + FDI)


12–9

Licensing

• Licensor grants rights to intangible property to a Licensee in exchange for a royalty payment.

• Time and territorial limits

• Advantages:

– speed of execution

– low risk/investment cost

– brand recognition

– preliminary cooperation which may be expanded

into FDI


12–10

Licensing: disadvantages

• Isolation from the market

• Lack of managerial control

• Limited life

• Risk of technology loss


12–11

Franchising

• 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’s Pizza 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.


12–12

Subcontracting

• Supply arrangement between a principal and a subcontractor

• Advantages

– 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


12–13

Turnkey operations

• Contract for the construction of operating facilities that are transferred for a fee to the owner after commissioning

• Advantages • high economic returns• less risky than FDI

• Disadvantages• lack of long-term

market presence• loss of control over

technology• client may turn into a

competitor


12–14

Joint ventures

• A legal entity jointly owned by two or more legally distinct organisations which share in the JV’s decision-making activities

• Various options

– 2 companies from the same country

– foreign/local

– 2 or more companies setting up a JV ina third country


12–15

Joint ventures cont.

• Advantages– partner’s local knowledge– cost/risk sharing– host government legislation– low risk of nationalisation

• Disadvantages – technology control risk – less control over subsidiaries – management control conflicts


12–16

Wholly-owned subsidiaries

• A firm owns 100% of the stock• Trend in the motor-car sector (e.g. India, China)• Advantages

– complete management control– optimum security for technology– ‘internalisation’ of operations

• Disadvantages – high costs and risks – long lead time to first sale (especially for

‘Greenfield’ operations)


12–17

China: joint ventures vs wholly owned

0

5

10

15

20

25

US$ Bln

Joint Venture 2 1.7 6 17 21 18

Wholly Owned 0 1 4 8 12 16

88 90 92 94 96 97

Source: adapted from UNCTAD, World Investment Report 1999

Helen Topor


12–18

Strategic FDI plan issues

• Investment location evaluation– see matrix on next slide

• Strategic organisation– international group– business/product units– functional units– global matrix


12–19

Investment location evaluation

Variable 1 2 3 4 5

Weight Country A

Country B

1 x 2 1 x 3

Political 1 9 4 9 4

Economic 3 5 6 15 18

Automotive 4 3 4 12 16

Personnel 2 2 3 4 6

Total 10 19 17 40 44

Source: Fig. 12.3, p.298


12–20

Strategic FDI plan issues

• Financial management and control– investment decisions– financing decisions– global money management

• Global sourcing strategy– outsourcing

• Global human resource strategies

chapter 12 the firm’s market-entry strategies

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