Chapter 9

1. Chapter 9 Market Entry and Expansion

2. PROACTIVE Motivators Profit Unique products Technological advantages Exclusive information Managerial urge Tax Benefit Economies of scale REACTIVE Motivators Competitive pressures Overproduction Declining domestic sales Excess capacity Saturated domestic markets Proximity to customers and ports Why Firms Go International

3. FIRM INTERNAL Enlightened management New management Significant internal event FIRM EXTERNAL Demand Other firms Domestic Distributors Banks Chamber of commerce Governmental activities Export Intermediaries Export Management Companies Trading Companies Change Agents in The Internationalization Process

4. Export Intermediaries • Specialize in bringing firms or their products and services to the global market. • Cover the international marketing knowledge and performance gaps of firms. • Provide contacts with buyers abroad, call on customers, and handle delivery of goods. • Examples of facilitating intermediaries • Export Management Companies • Trading Companies

5. Export Management Companies • Domestic firms that specialize in performing international marketing services as commission representatives or distributors. • Two primary forms of operation • Take title to goods and operate internationally. • Perform service as agents.

6. Trading Companies • The sogoshosha of Japan • Sumitomo, Mitsubishi, Mitsui • Reasons for the success of the sogoshosha • Development of information systems to identify market opportunities. • Economies of scale in the vast transaction volume to obtain preferential treatment. • Large internal global markets creating opportunities for barter trade. • Access to vast quantities of capital on a global scale.

7. Export Trading Companies in the U.S. • Bank participation in ETCs allows • better access to capital. • more trading transactions. • easier receipt of title to goods. • a wide variety of possible structures. • ETC legislation has improved the performance of small- and medium-sized firms. • ETC can • deliver a wide variety of services. • be an agent. • purchase products. • act as a distributor abroad. • ETC must balance the demands of the market and the supply of the members to be successful.

8. Licensing • The licensor permits the licensee to use its intellectual property (an intangible) in exchange for a royalty payment. • Advantages of licensing • No capital investment, knowledge, or marketing strength. • Huge profit potential, recovered costs. • Minimal risk of government intervention. • A stage in internationalization. • Preempt market entry before competition. • Increasing intellectual property rights protection.

9. Licensing Compensation Issues • Transfer costs • R & D costs • Opportunity costs

10. Reasons for Global Franchising • Market potential • Financial gain • Saturated domestic markets

11. Franchising In 2002 global franchise sales by almost 16,000 franchisors and more than 1 million franchisees were estimated to be close to $1.5 trillion. A licensing arrangement where the licensor grants the licensee the right to do business in a prescribed manner. The franchisee benefits from the reduced risk of implementing a proven concept.

12. Franchising Concerns • Companies need to know what their special capabilities are. • The need for standardization. • Protection of the total business system. • Government intervention. • Selection and training.

13. Foreign Direct Investment • Firms invest to enter markets or assure themselves of sources of supply. • Foreign direct investment • An equity investment to create or expand a permanent interest in a foreign enterprise. Protection of the total business system. • Portfolio investment • The purchase of stocks and bonds internationally. Selection and training. • Major foreign investors • More than 45,000 multinational corporations with 280,000 affiliates globally. • The terms “foreign” and “domestic” may no longer apply.

14. Reasons for Foreign Direct Investment • Marketing factors • Growth and profit motivations. • Circumventing government-erected barriers to trade. • Access to low-cost resources and supply. • Local customers preference for domestic goods and services. • Attempts to obtain low-cost resources and ensure their supply.

15. Categories of International Firms • Resource seekers • are searching for natural and human resources. • Market seekers • are searching for better opportunities to enter or expand within markets. • Efficiency seekers • are attempting to obtain the most economic sources of production.

16. Reasons for Foreign Direct Investment • Derived demand • Results when businesses move abroad and encourage their suppliers to follow them, creating chain or pattern of direct investment in a market. • Government incentives • Fiscal incentives • tax holidays, allowances, credits and rebates. • Financial incentives • special funding for land or buildings, loans and guarantees, wage subsidies. • Non-financial incentives • guaranteed purchases, protective tariffs, import quotas, local content requirements, infrastructure.

17. Foreign Direct Investors • Positive perspectives • Bring in capital, economic activity, and employment. • Transfer technology and managerial skills. • Competition, market choice, and competitiveness are enhanced. • Negative perspectives • Drain resources from host countries. • Starve smaller capital markets. • Discourage local technology development. • Bring in outmoded technology. • Create new competition for local firms.

18. Types of Ownership • Ownership patterns may be based on past experiences with similar ownership models. • Full ownership • Full control, full assumption of all risks. • May be desirable, but is not necessary for success internationally. • Joint ventures • Shared control, shared investment risks. • Reasons for joint ventures: • governmental pressure to join with local partners. • mutually beneficial commercial considerations in sharing markets, pooling resources, and local suppliers.

19. ADVANTAGES Pooling of resources Better relationships with local organizations Knowledge the partner brings of the local market Minimizing exposure risk of long-term capital Maximizing leverage of invested capital DISADVANTAGES Different levels of control are permitted or required Difficulty in maintaining the relationship Disagreements over business decisions Disagreements over profit accumulation, and distribution (profit repatriation) Joint Ventures • Recommendations for joint ventures: • Find the right partner. • Negotiate the joint venture agreement carefully. • Maintain flexibility to adjust to changing market conditions.

20. Types of Ownership continued • Strategic alliances • “…more than the traditional customer-vendor relationship, but less than an outright acquisition.” • Government consortia • Public-private relationship in a specific project. • Typically government supported or subsidized.