Challenge 4: Entry Modes

Exporting

selling domestically produced products to buyers in other countries

Exporting as an Entry Strategy

- usually the firms first foreign entry strategy

- low risk, low cost, and flexible

- popular with SMEs

- when we talk about trade, trade deficits, trade surpluses, we're talking about exporting

- most involve merchandise

Advantages of Exporting

-Increase sales volume; improve market share.

-Generate better profit margins.

-Increase economies of scale.

-Diversify customer base.

-Stabilize sales fluctuations.

-Minimize the cost of foreign market entry.

-Minimize risk.

-Maximize flexibility.

-Leverage the capabilities of foreign distributors and other business partners located abroad.

Disadvantages of Exporting

-requires firm to acquire new capabilities and redirect organizational resources

-sensitive to tariffs and other trade barriers

-sensitive to exchange rate fluctuations

-compared to FDI, firm has fewer opportunities to learn about customers, competitors, and the marketplace

A Systematic Approach to Exporting

1. Assess global market opportunity

2. Organize for exporting

3. Acquire needed skills and competencies

4. Implement exporting strategy

Indirect exporting

Contracting with an intermediary in the firm's home country to perform all export functions, often an Export Management Company or a Trading Company.

(Common among firms new to exporting)

Direct Exporting

Contracting with intermediaries in the foreign market to perform export functions, such as distributors or agents. They perform downstream value-chain activities in the target market.

Company-owned foreign subsidiary

Similar to direct exporting, except the exporter owns the foreign intermediation operation; the most advanced option

Quotation or pro forma invoice

Issued on request to advise a potential buyer about the price and description of the exporter's product or service

Commercial invoice

actual demand for payment issued by the exporter when a sale is concluded

Bill of lading

Basic contract between exporter and shipper. Authorizes the shipping company to transport the goods to the buyer's destination.

Shipper's export declaration

Lists the contact information of the exporter and buyer, full description, declared value, and destination of the products being shipped. Used by governments to collect statistics.

Certificate of origin

The "birth certificate" of the goods, showing country where the product originated

Insurance Certificate

Protects the exported goods against damage, loss, pilferage and, sometimes, delay

Incoterms (International Commerce Terms)

-A system of universal, standard terms of sale and delivery.

-Commonly used in international sales contracts and price lists to specify how the buyer and the seller share the cost of freight and insurance, and at which point the buyer takes title to the goods.

Letter of Credit

A contract between the banks of the buyer and the seller. Largely risk-free, it helps establish instant trust.

Open Account

Easy for the exporter, who simply bills the buyer, who is expected to pay at some future time as agreed.

Cash in Advance

-Best for the seller

-Risky from the buyer's standpoint, and thus unpopular, tends to discourage sales

Countertrade

An international business transaction in which all or partial payments are made in kind rather than cash. Similar to barter.

Barter

Goods are directly exchanged, without the transfer of any money.

Compensation deal

Payment in goods and cash

Counterpurchase

Entails two distinct contracts. In the first, the seller agrees to a set price for goods and receives cash from the buyer, contingent on a second contract in which the seller agrees to purchase goods from the buyer.

Buy-back agreement

Seller agrees to supply technology or equipment to construct a facility and receives payment in the form of goods produced by it.

Licensing

An arrangement in which the owner of intellectual property grants another firm the right to use that property for a specified period of time in exchange for royalties or other compensation.

Franchising

Arrangement in which the firm allows another the right to use an entire business system in exchange for fees, royalties or other compensation

Royalty

A fee paid periodically to compensate a licensor for the temporary use of its intellectual property, often based on a percentage of gross sales generated from the use of the licensed asset

Foreign direct investment (FDI)

Strategy in which the firm establishes a physical presence abroad by acquiring productive assets such as capital, technology, labor, land, plant, and equipment

FDI Motives

- Gain access to new markets or opportunities

- Follow key customers

- Compete with key rivals in their own markets

Global Sourcing

Procurement of products or services from suppliers located abroad for consumption in the home country or a third country

Drivers of Global Sourcing

1. Technological advances in communications, especially the Internet and international telephony.

2. Falling costs of international business.

3. Entrepreneurship and rapid economic transformation in emerging market countries.

Two Key Decisions Regarding Global Sourcing

1. Outsource or not

2. Where in the world should value-adding activities be located?

Business Process Outsourcing (BPO)

Outsourcing of business functions to independent suppliers such as accounting, human resource functions, I T services, and customer service

Contract Manufacturing

Arrangement in which the focal firm contracts with an independent supplier to manufacture goods according to well-defined specifications

In global sourcing, the focal firm has two major choices. It can source from:

(1) Independent suppliers

(2) Company-owned subsidiaries and affiliates.

Offshoring

to the relocation of a business process or entire manufacturing facility to a foreign country

Global supply chain

The firm's integrated network of sourcing, production, and distribution, organized on a world scale, and located in countries where competitive advantage can be maximized

International collaborative venture

A cross-border business alliance in which partnering firms pool their resources and share costs and risks of a venture

Joint venture (JV)

A form of collaboration between two or more firms to create a jointly-owned enterprise

Key Features of Foreign Direct Investment

1. Represents substantial resource commitment.

2. Implies local presence and operations.

3. Firms invest in countries that provide specific comparative advantages.

4. Substantial risk and uncertainty.

5. Direct investors deal more intensively with specific social and cultural variables in the host market.

Types of FDI

- Greenfield investment versus. mergers and acquisitions

- Nature of ownership: Wholly owned direct investment versus. equity joint venture

- Level of integration: Vertical versus. horizontal F D I

Greenfield investment

The firm invests to build a new manufacturing, marketing or administrative facility, as opposed to acquiring existing facilities

Merger

Special type of acquisition in which two firms join to form a new, larger company

Acquisition

Direct investment or purchase an existing company or facility

Vertical integration

The firm owns, or seeks to own, multiple stages of a value chain for producing, selling, and delivering a product.

Horizontal Integration

Arrangement whereby the firm owns, or seeks to own, the activities involved in a single stage of its value chain