Advantages and disadvantages of entry modes PDF

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GLOBAL MARKET ENTRY MODES INTERNATIONAL MARKETING

WONKWANG UNIVERSITY Professor In Woo Jun / Bcom, MBA, Ph.D. 2015 1

CONTENTS I. GLOBAL MARKET ENTRY MODES 1. Modes of Global Market Entry

II. EXPORTING 1. Exporting to Global Markets 2. Advantages and Disadvantages of Exporting 3. Types of Exporting 4. Export/Import Intermediaries 5. Major Functions of Sogo Shosha and GTC 6. Major Sogo Shosha in Japan 7. Major GTC in Korea

III. INTERNATIONAL LICENSING 1. International Licensing 2. The Process of International Licensing 3. Advantages and Disadvantages of International Licensing 2

CONTENTS IV. INTERNATIONAL FRANCHISING 1. International Franchising 2. Advantages and Disadvantages of International Franchising

V. SPECIALIZED ENTRY MODES 1. Contract Manufacturing 2. Management Contract 3. Turnkey Project

VI. FDI (FOREIGN DIRECT INVESTMENT) 1. FDI (Foreign Direct Investment) 2. Greenfield Strategy 3. Acquisition Strategy 4. Joint Ventures

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GLOBAL MARKET ENTRY MODES 1. Modes of Global Market Entry

Decision Factors 1) Firm-specific Advantage (e.g. Capability, etc.) 2) Location Advantage 3) Other Factors - Resource Availability - Global Strategy - Core Competence

Source : Adapted from Griffin, R. W., and Pustay, M. W. (2013), “International Business”, Pearson, p. 346

Exporting - Direct Exports - Indirect Export - Intra-corporate transaction International Licensing International Franchising Specialized Modes - Contract Manufacturing - Management Contract - Turnkey Projects FDI - Greenfield Strategy - Acquisition Strategy - Joint Venture

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EXPORTING

1. Exporting to Global Markets  Exporting is the simplest and the most common mode of entering global market.  Exporting is the initial entry, but it would gradually evolve towards more developed modes.  Merchandise exports in the world economy totaled approximately U$15trillion in 2010, and 22% of the world’s total economic activity.

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EXPORTING

2. Advantages and Disadvantages of Exporting Advantages

Disadvantages

- Relatively low financial exposure - Trade barriers (e.g. tariffs and - Permit gradual market entry non-tariff barriers (NTBs)) - Avoid restrictions on foreign - Logistical complexities investment - Potential conflicts with - Acquire knowledge and distributors information about local market

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EXPORTING 3. Types of Exporting Indirect Exporting Country 1

Country 2

Company A Sell to domestic customers Company B

Sell to foreign customers

Company C

Direct Exporting Country 1

Country 2

Company A

Company C Sell directly to foreign customers

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EXPORTING

Intra-corporate Transactions

Country 1

Country 2

Company A

Company A Sell to affiliated company

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EXPORTING

3.1) Indirect Export  Several types of sales intermediaries are ready to collaborate with a manufacturer.  They are familiar with and have extensive knowledge in local markets. - Advantage to manufacturer: Possibility of market expansion, Timesaving, etc. - Disadvantage to manufacturer: Payment of commission, No accurate information about market, price, consumer behaviour, competitors movements, etc. 9

EXPORTING

3.2) Direct Export  A firm sells its product by itself, and controls and manage everything by itself. - Advantage : Direct negotiation, Direct pricing, Direct contract, No commission, Knowing accurate market information and situation, etc. - Disadvantage : Time-consuming, Costs may be high, Limitation of market expansion, Limitation of knowing business customs in local market, etc.

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EXPORTING

3.3) Intra-corporate Transactions  Intra-corporate transaction is the sale of goods by a firm in one country to an affiliated firm in another.  It is an important part of international trade.  Intra-corporate transactions account for about 40% of all US merchandise exports and imports.  Many MNEs engage in intra-corporate transactions - Advantage : Lower production cost 11

EXPORTING 4. Export/Import Intermediaries  Export/Import intermediaries : The third parties specialized in facilitating exports and imports.  Roles : Some offer limited roles such as handling documentation or transportation. Others perform more extensive roles such as transportation, documentation, warehousing, financial assistance, L/C handling, etc.  Types of intermediaries : Export Management Company (EMC), Freight Forwarder, Export/Import Broker, Manufacturers’ Export Agents, and International Trading Company  International Trading Company : Sogo Shosha (Japan), General 12 Trading Company (GTC, Korea)

EXPORTING 5. Major Functions of Sogo Shosha and GTC Primary Functions 1) Trading and transactional intermediation functions (e.g. Export, import, domestic sales and third country trade intermediation) 2) Finance function (e.g. Extend credit, make loans, provide loan guarantees and develop venture capital

Auxiliary Functions 1) Distribution function (Warehousing and logistics management) 2) Organizing and coordination functions 3) New resources development function 4) Joint venture function 5) Planning function 6) Investment function

Information and Intelligence Gathering Functions

Source : In Woo Jun (2009), “The Strategic Management of Korean and Japanese Big Business Groups”, Ph.D. Thesis, The University Of Birmingham , p. 24

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EXPORTING 6. Major Sogo Shosha in Japan Name Mitsubishi Corporation

2010 Revenue (U$ Millions) 60,793 (KRW68,392,125,000,000)

Mitsui Co., & Ltd.

54,635

Marubeni

43,011

Itochu Corporation

42,612

Sumitomo Corporation

36,218

Others : - Sojitz Corporation (Nissho Iwai + Nichimen) - Toyota Tsusho Corporation (Tomen + Toyota) Source : Each Company’s Internet Websites

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EXPORTING

7. Major GTC in Korea Name

2012 Revenue (KRW Trillions)

Samsung Corporation

25.3

SK Networks

27.9

LG International

12.7

Others : - Daewoo International - Hyosung Corporation - Hyundai Corporation - Lotte Corporation - GS Global (Former Ssangyong Corporation) Source : Each Company’s Internet Websites

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INTERNATIONAL LICENSING

1. International Licensing  International Licensing is a contract/agreement between Licensor and Licensee.  Licensor : A firm who has its own intellectual property (e.g. technology, work methods, patents, copyrights, brand names or trade marks, etc.)  Licensee : A firm who uses the licensor’s intellectual property, and pays compensation fees to the licensor.  Compensation fees : Royalty 16

INTERNATIONAL LICENSING 2. The Process of International Licensing

Licensor

Lease

- Leases the rights to use its intellectual property - Earns new revenues with relatively low investments

Royalty

Licensee - Uses the intellectual property to create products for local sale - Pays a compensation fees

Basic Issues to be Considered 1) Set the boundaries of the contract/agreement 2) Decide compensation rates 3) Agree on the rights, obligations, and constraints 4) Specify the duration of the contract/agreement 17

INTERNATIONAL LICENSING 3. Advantages and Disadvantages of International Licensing Advantages

Disadvantages

Licensor

- Carry relatively low financial risk - Don’t need to invest much financial and managerial resources - Obtain knowledge and information about local market

- Carry opportunity costs (e.g. PepsiCo and Heineken in the Netherlands) - Potential conflict with the Licensee - Risk of creating a future competitor - Risk of misusing intellectual property by the Licensee

Licensee

-Take the opportunity to make and sell products and services with relatively little R&D costs

- Carry opportunity costs (e.g. PepsiCo and Heineken in the Netherlands) - Potential conflict with the Licensor 18

INTERNATIONAL FRANCHISING 1. International Franchising  International Franchising allows an independent entrepreneur or organization (i.e. Franchisee) to operate a business under the name of another (i.e. Franchisor).  The franchisor provides its franchisee with name, trademarks, operating system, and well-known product reputation.  The franchisor also provides continuous support services such as advertising, training, and quality assurance programs.  Many MNEs rely on franchising to expand their products in global markets (e.g. McDonald’s, Dunkin Donuts, Baskin-Robbins, Pizza Hut, KFC, etc.) 19

INTERNATIONAL FRANCHISING 2. Advantages and Disadvantages of International Franchising Advantages

Disadvantages

Franchisor

- Can expand market to global markets with relatively low risk & cost - Don’t need to invest much financial & managerial resources - Obtain knowledge and information about local market

- Carry opportunity costs - Share profit with the franchisee - Potential conflict with the franchisee - Risk of creating a future competitor

Franchisee

- Can enter a business that has an established and proven product and operating system

- Carry opportunity costs - Share profit with the franchisor - Potential conflict with the franchisor 20

SPECIALIZED ENTRY MODES 1. Contract Manufacturing  Companies use contract manufacturing to outsource most or all of their manufacturing needs to other companies.  This strategy reduces companies’ financial and human resources.  Nike, for example, has been using this strategy, and contracted with numerous companies throughout Southeast Asia to produce its footwear and apparel. 2. Management Contract  Management contract is an agreement whereby one firm provides managerial assistance, technical expertise or specialized services to another firm. (Receive monetary compensation). 21

SPECIALIZED ENTRY MODES 3. Turnkey Project  Turnkey project is a contract that a firm agrees to fully carry out all works from designing, civil engineering, construction to facility installation.  Then, a firm turns the project over to the purchase when it is ready for operation.  Example : Nuclear power plant, oil refinery facility, road construction, air port construction, etc.  BOT Project : A firm builds a facility, operates it, and later transfers ownership of the project to some other party. 22

FDI (FOREIGN DIRECT INVESTMENT)

1. FDI (Foreign Direct Investment)  Exporting, international licensing, international franchising and other specialized methods allow a firm to enter global markets without investing in foreign factories or facilities.  However, some big business groups prefer to invest or establish their own production facilities or factories in foreign countries (i.e. host countries)  They also want to control all works (e.g. assets, sales, profit, human resource, purchase, procurement, etc.) with ownership.  FDI is an ultimate foreign market entry mode for a company. 23

FDI (FOREIGN DIRECT INVESTMENT) 2. Greenfield Strategy  Greenfield strategy is a starting a new operation from new land.  A firm buys or leases land, builds new facilities, hires managers and employees and launches the new operation.  Advantages : A firm can select the site that best meets its needs; Local government and community often offer incentives to the firm because they want to create new job opportunity.  Disadvantages : Successful implementation takes time and patience (e.g. time-consuming) ; Desired land may be unavailable ; A firm needs to comply with various local and national regulations 24

FDI (FOREIGN DIRECT INVESTMENT) 3. Acquisition Strategy  It is a strategy to acquire or take over of an existing firm in order to conduct business in the host country.  Advantages : A firm quickly obtains operation facilities, employees, technology, brand names and distribution networks.  Disadvantages : The acquiring firm takes all liabilities of the acquired firm (e.g. financial and managerial liabilities, labor relation issues, environmental issues, etc.)

4. Joint Ventures  Two or more firms agree to work together with shared ownership for mutual benefits.

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