Amity School of Business

MODULE 3 MODES OF INTERNATIONAL ENTRY

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Exports to the United States

Developing an Export Strategy

Step 1 Step 2 Step 3 Step 4

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Identify a potential market

Match needs to abilities

Initiate meetings

Commit resources

Degree of Export Involvement

Direct exporting
(sell to buyers)

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Indirect exporting
(sell to intermediary)

Sales representative Distributor

Agent Export management company Export trading company

Avoiding Export Blunders

Conduct market research

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Obtain export advice

Hire a freight forwarder

Going it Alone: Export

HOME COUNTRY Revenues

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HOST COUNTRY

MNE

Customers

Export of Goods

Going it Alone: Export

Advantages Low initial investment Reach customers quickly Complete control over production Benefit of learning for future expansion

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Disadvantages Potential costs of trade barriers

Transportation cost Tariffs and quotas

Foregoes potential location economies Difficult to respond to customer needs well

  

When Is Export Appropriate? Low trade barriers Home location has cost advantage Customization not crucial

Licensing Agreement

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HOME COUNTRY HOST COUNTRY Licensing of Technology

MNE

Local Firm
Fees and Royalties

Licensing

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Company owning intangible property (licensor) grants another firm (licensee) the right to use it for a specific time

Advantages

+ + + +

Finance expansion Reduce risks Reduce counterfeits Upgrade technologies

Disadvantages

Restrict licensors activities Reduce global consistency Lend strategic property

Franchising

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Company (franchiser) supplies another (franchisee) with intangible property over an extended period

Advantages

+ Low cost and low risk + Rapid expansion + Local knowledge

Disadvantages

Cumbersome Lost flexibility

Management Contract

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HOME COUNTRY HOST COUNTRY Management Fees

MNE
Profit

Local Firm
Managerial Service

Technological Inputs

Wholly-Owned Subsidiary

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Management Contract
When Is a Management Contract Appropriate? Manager has a reputation to protect
 

Hotels Consulting companies

PerformancePerformance-based contract provides no perverse incentives

Management Contract

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Company supplies another with managerial expertise for a specific period of time

Advantages

+ Few assets risked + Nations finance projects + Develops local workforce

Disadvantages

Personnel at risk Create competitor

Turnkey Project

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Company designs, constructs, and tests a production facility for a client

Advantages

+ Firms specialize in competency + Nations obtain infrastructure

Disadvantages

Politicized process Create competitor

Wholly Owned Subsidiary

Facility entirely owned and controlled by a single parent company
Advantages
+ Day-to-day control + Coordinate subsidiaries

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Disadvantages
Expensive High risk

Joint Venture
HOME COUNTRY

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HOST COUNTRY

MNE
Inputs

Local Firm
Inputs Share of Profit Joint Venture Company

Share of Profit

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Joint Venture

  

When Is a Joint Venture Appropriate? Both partners contribute hard-to-measure inputs hard-toLarge expected mutual gains in the long-run longTrade secrets can be walled off

Joint Venture

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Company created and jointly owned by two or more entities to achieve a common objective Advantages
  

Disadvantages
 

Reduce risk level Penetrate markets Access channels

Partner conflict Lose control

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Joint Venture Configurations

Strategic Alliance

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Entities cooperate (but do not form a separate company) to achieve strategic goals of each

Advantages
Share project cost Tap competitors strengths Gain channel access

Disadvantages
Partner conflict Create competitor

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Selecting Partners
 Commitment  Trustworthiness  Cultural knowledge  Valuable contribution

Strategic Factors
Cultural environment

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Political/Legal environments Market size Production and shipping costs International experience

International modes of entry and value at risk

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FDI whether M&A or company growth puts full value at risk. Toyota factory, Wal-Mart store Managers of an international business choose the mode of entry based on a trade-off between risk versus control in the particular supplier or customer country Joint ventures, not only share knowledge, but also share investment costs and value at risk Spot or contract sales can substantially reduce value at risk
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International modes of entry and value at risk

M&A Growth Alliances/ Joint Ventures Licenses Contract Spot
Choice of entry mode jointly determines degree of control and extent of risk Increase in control, Degree of commitment depends on contractual duration and vertical integration

Increase in With less knowledge of other countrys market, choose lower degree of commitmen commitment t and risk As knowledge increases over time, can increase degree of commitment to get closer to desired entry mode. Contractual transactions may give optimal mix of control and commitment
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Why is FDI so common in international business? Advantages of FDI

Production or distribution facilities in a country can reduce costs of trade (transportation, tariff and nontariff barriers, transaction costs, and time) Toyota in US Production within a country takes advantage of domestic sourcing of parts, components, services Investment and employment in host country gain political support for the international business: quid pro quo investment Cemex and Southdown
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Why is FDI so common in international business? Advantages of FDI Closer to customers for manufacturers Necessary for retail and wholesale companies Wal Mart, Carrefour, Ingram Micro Take advantage of low-cost labor, highly-skilled labor, and proximity to resources Reduce costs of trade from import/export
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Advantages of vertical FDI

Coordination advantages through the value chain Access to production facilities, sourcing networks and distribution networks Keeping technology and intellectual property in-house Substitution of internal transactions for market transactions

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Advantages of Horizontal FDI

M&A acquisition of competitors for market power or cost savings M&A to achieve economies of scale and scope (Daimler/Chrysler, VW) M&A to purchase of technology M&A to acquire brand names Production avoids costs of trade relative to export As hedge against demand and supply fluctuations -Cemex Market power in international purchasing (e.g. Vodaphone/Airtouch purchases wireless equipment for its many operations)
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Disadvantages of FDI
Risk that firm many not recover investment and returns to investment in supplier country FDI increases capital investment, reduces flexibility FDI ties business to particular country locations for production or distribution
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FDI Trends

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Shift of investment mix toward services About half in 1990, about two thirds in 2000 Shift of investment to outsourcing abroad (offshoring + outsourcing) reduction in vertical integration Globalization (lower costs of trade) leading to reduction in vertical FDI Globalization (market integration) likely to lead to increases in horizontal FDI
UNCTAD World Investment Report 2004

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Licensing versus FDI

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Why is FDI more prevalent than technology licensing? Licensing agreements depend heavily on international enforcement of intellectual property rights International licensing also entails costs of trade International licensing is quite common amongst developed countries, reaching levels up to 1/3 of domestic R&D expenditures International licensing experiencing rapid growth

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Overview and Take-Away Points

FDI a major feature of international business composition of FDI undergoing transformation from vertical to horizontal FDI offers advantages in terms of ownership and control and avoiding trade barriers Choose target countries based on expected cash flow and costs of investment and discount using risk adjusted rate of return Adjust level of investment to reflect expected cash flow and risk-adjusted rate of return

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Outsourcing/Offshoring/BP0
Outsourcing:
The practice of subcontracting manufacturing work, to outside and especially foreign or nonunion companies

Offshoring:
Outsourcing services/products from any country other than your own

Business Process Offshore Outsourcing (BPO):

The export of IT-related work from the US and other developed countries to areas of the world where there is both political stability and lower labor costs or tax savings

BPO

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BPO is the outsourcing of back office and front office functions typically performed by white collar and clerical workers Examples include accounting, human resources and medical coding and transcription

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History of the call center economy

India in the licence raj (1947-1990)
Nehruvian model of economy Import-substitution Scientific training and education

Indias liberalized economy (1990- )

Macroeconomic crisis Foreign Direct Investment Shining India

Why India?

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Telecommunications and IT infrastructure English-speaking urban population Lower labor costs Governmental incentives Post-1990 support for private enterprise

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India: The outsourcing debate

"India controls 44 percent of the global offshore outsourcing market for software and back-office services, with revenues of US$17.2 billion (euro14.07 billion) in the year ended March 2005..." Associated Press, June 2005 "The Indian software and services export is estimated at Rs. 78,230 crore ($17.2 billion) in 2004-05, as compared to Rs 58,240 crore ($12.8 billion) in 2003-04, an increase of 34 per cent. NASSCOM, December 2005 "Only 19% of US businesses have an offshore outsourcing strategy, a study by Ventoro found. However, the percentage skyrockets to 95% if only Fortune 1000 companies are considered." ZDNet Research, October 2005

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Issues at hand
Business optimization and benefits Leveraging globalization India as an emerging force on the world politico-economic map

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India: The outsourcing debate

"The survey of 25 large organizations with a combined $50 billion in outsourcing contracts found that 70% have had negative experiences with outsourcing projects and are now taking a more cautious approach. One in four companies has brought outsourced functions back in-house...
- Associated Press, June 2005

"...a University of California-Berkeley study that warns as many as 14 million Americans hold jobs at risk of being outsourced."
-Mercury News, October 2004

"...the number of buyers prematurely terminating an outsourcing relationship has doubled to 51 percent while the number of buyers satisfied with their offshoring providers has plummeted from 79 percent to 62 percent."
- DiamondCluster, June 2005

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Issues at hand
Clash of civilizations? Protectionist voices in neoliberal economies? Who benefits from globalization?

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What does the media say?

For Economic progress Benefits of globalization Greater access to modernity and progress India as the next superpower Global trickle-down effect Participation in global capital = Participation in global politics Against Disruption of adolescence Moral regression Influx of debauched Western lifestyles Neo-colonization Health and Sanity Dangerous city landscapes Unequal effects of globalization

Glocalization

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Global Vs. Local What issues does outsourcing really hit at? What will the society of the future be?