Going Global Licensing Strategic Alliances FDI
Exports is not the only Option • Barriers to trade such as Tariffs, quotas and complex customs procedures discourage exports • Other options are • Licensing • Strategic Alliances • Foreign Direct Investments (FDI) • Optimal mode of entry depends on business strategy, trade barriers & product situation
Entry Barriers • Tariff barriers are the most obvious barriers to entry. • Import Tariffs make imports more expensive when compared to domestic products • High tariffs create local monopolies, which results in higher prices for consumers • Tariffs also increase the cost of doing business in that country
Non Tariff barriers • Non Tariff barriers are common & include: • Government Rules & Regulations e.g: FDA rules in US, Purity laws in Germany • Complex Customs Procedures • Limited or No access to local distribution network e.g: Fuji prevented its distributors from carrying Kodak products • Natural Barriers: The local competitors are too competitive, have a dominant market share, have a strong brand name
Developed Vs Developing Countries • Trade barriers in developing countries are often tariffs, Rules, Regulations & lack of infrastructure • Barriers in developed countries are usually natural barriers, Government Rules & regulations • Developed countries are often the learning grounds for firms from developing countries in their global expansion
Exit Barriers • Exit barriers are non-recoverable investments made while operating in a country. • Often times it is difficult to lay off people, and may have to pay a huge compensation to do so. • Loss of good will, Brand Value, Brand Image also acts as an Exit barrier • E.g: Peugeot Exited US market in 1992, Philips is still operating in US even after 15 straight years of losses • Loss of learning opportunity is cited as an exit barrier
Effect of Barriers on Entry Mode • Entry Mode depends heavily on trade barriers • Firm must be ready to unbundle its Value chain to gain entry • Compulsory Joint Ventures in China • Local Content Requirements in Czech • Lack of distribution network in US • Firms often build managerial expertise in one mode of entry & would prefer it over others • IBM, Philips, P&G prefer Wholly Owned Subsidiaries • Small tech companies may prefer licensing or Joint Ventures
Managerial Skills & Mode of Entry • Each Mode of entry involves different managerial skills • Supervising hundreds of Franchising is different from Running foreign subsidiaries • Joint Ventures & Wholly owned subsidiaries involve quite a lot of learning, Learning curve effects must be considered while planning the entry mode
Licensing • Licensing refers to a firm’s know-how or other intangible asset to a foreign company for a fee, royalty or some other form of payment • Overcomes tariffs and other trade barriers • Licensee will learn FSA from the licensor and may become a future competitor • Loss of FSA can be prevented by proper contracts & licensing agreements
Licensing – How not to do it • Gillette avoided investment in market research and investments in Europe, so it licensed its razor blade manufacturing technology to Wilkinson of UK – forgetting to exclude continental Europe in the contract • As a result Gillette now has to compete with its own technology in Continental Europe – A long uphill battle
Elements of a licensing Contract • Technology Package • Definition, Know-How, Patents, trade marks • Use Conditions • Territorial rights, Sublicensing agreements, exclusion zones, performance/Quality conditions, reporting rules • Compensation • Mode of payment, Minimum & maximum fees, Other assistance fees, marketing fees • Other Provisions • Contract laws, Arbitration conditions, terminations conditions
Franchising • Franchising is similar to licensing but in addition franchisor provides a well recognized brand name, marketing support and in some cases raw materials • Franchisor also provides advertising, employee training, production & quality training • In return Franchisee must adhere to the rules of the franchisor and both share revenue based on a preset agreement • Popular for fast foods, Hotels, Auto Repair Shops • Franchisor has a greater control over the operations
Original Equipment Manufacturing • OEM is actually exports • Manufacturer sends there parts to another company which sells the final product under their Brand name • Canon provides cartridges for HP printers • Canon Provides copiers for Savin • Pro: Avoids expensive marketing efforts • Con: Firm fails to learn from foreign Markets
Strategic Alliances (SA) • SA is a collaboration between 2 firms • Equity based SA is called Joint Ventures • SA is mutually beneficial and takes advantages of both firm’s FSA • Share R&D, Distribute each others products • In some cases SA involves sharing of vital information – A potential loss of FSA • Unlike licensing, there is usually no royalty or fees to be paid
Non-Equity SA • SA between competitors is relatively new • Need to access each other’s technology, marketing skills, manufacturing skills to exploit new markets is driving Non-Equity SA • Shortage of resources is one of the reason • Control is established by soft skills I.e. the need for mutual gain • First Mover advantage • Learn from leading markets • Reduce competitive pressures
Distribution Alliances • Distribution networks are often expensive to setup • A mutual distribution alliance agreement prevents duplication of efforts while maximizing benefits • Airlines typically sell seats in other airlines • Mitsubishi joined hands with Chrysler in US • Pro: Saves costs & uses a ready network • Con: • Limits growth of the partners via a non-compete agreements • Firm loses learning opportunity
Manufacturing Alliances • Manufacturing Alliance is a sharing of manufacturing facilities to save on investment costs, achieve economies of scale, save on transportation costs • Manufacturing Alliances tend to be unstable as: • Limits growth of the partners • Potential loss of know-how • Priority on manufacturing will always favor one partner over the other • Loss or learning curve economies
R&D Alliances • R&D alliances are often between competitors • Such alliances are for: • Developing a common technology • Need for accessing each other’s technology • Need to stay ahead of other competition • Lower R&D costs, Avoid Duplication • Need to impose a joint technology standard • Unintended Loss of technology is possible
Joint Ventures • Equity Based SA. Usually firms need to transfer capital, man power, technology and management skills to the new venture • Potential loss of know-how exists • Mutually beneficial if partners learn from each other and their joint experience • Usually a first step before setting up a Wholly Owned subsidiary • Care must be taken in selecting partners
FDI • FDI is usually for Wholly owned subsidiaries • Greater Control over know-how – I.e Internalization of FSA • Avoid tariff & other barriers • Faster response to foreign markets • Lowering prices for buyers, gaining market share, establishing an insider position • Carries higher risk than any other mode of entry • May suffer from Country-of-origin effects • E.g Sony from Malaysia
FDI – Green Field project or Acquisition • FDI decisions will have to consider a green field venture or an acquisition of a foreign firm • Acquisition of an existing company speeds up entry, gains a ready market share • Benefits from existing facilities, marketing channels etc • Disadvantages are: • Incompatible product lines • Culture mismatch • Political Backlash or resurgence of national pride • Loss of Goodwill • Struck with existing legacy systems
FDI – Financial Analysis • FDI requires rigorous financial analysis • Cash flows are subjected to foreign exchange risks • IRR or NPV analysis for a foreign project is difficult due to lots of unknowns • Financial analysis is based on market forecast. In many cases market forecast will be inaccurate
Optimal Entry Strategy
Closing Thoughts
