Chapter 12:

The Firms Market-Entry Strategies

EXPORTING ?

FRANCHISING?

TURNKEY?

DIRECT
INVESTMENT

?
LICENSING ?

SUB-CONTRACTING
Copyright 2003 McGraw-Hill Australia Pty Ltd
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International Trade and Investment by John Gionea
Slides prepared by John Gionea

TOPIC PLAN
The firms 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

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 Firms Foreign Business

Strategy Steps(Figure 12.1)

1.The firms evaluation

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:
Exporting/Contracting/Foreign Direct Investment

5.Business plan development and execution.

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

Copyright 2003 McGraw-Hill Australia Pty Ltd PPTs t/a

International Trade and Investment by John Gionea
Slides prepared by John Gionea

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

The Casual Exporter

The Small Scale Exporter

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

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
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

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 Franchisees profits.
20% of US franchise systems have foreign operations
(Japan,Canada,UK,Australia)
-Domino vs.Pizza Haven(200 in 7 years);
-DunkinDonuts 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

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
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

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

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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.)

Advantages :

Partners local knowledge

Cost/risk sharing
Host government legislation
Low risk of nationalisation.

Disadvantages :

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

A firm owns 100 percent of the stock.

Trend in the motor-car sector(e.g.India,China)
Advantages :
complete management control.
Optimum security for technology.
Internalisation economies.

Disadvantages :
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

1.7

17

21

18

Wholly Owned

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

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

Weight CountryA CountryB

1x2

1x3

Political
Economic

1
3

9
5

4
6

9
15

4
18

AutoMotive

12

16

Personnel
TOTAL

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

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