Notes on International Sourcing, Location Decisions, and Entry Modes
International Sourcing, Location Decisions, and Entry Modes
Overview: Companies face two key existential questions in international operations
What to manufacture (produce) domestically vs abroad
What to buy (source) from other producers (outsourcing) vs what to produce in-house (insourcing)
Illy as a running example: roasts coffee (core step) but sources packaging, machinery, logistics, and complementary products globally; sourcing is international for Italy as well as other elements.
The sourcing network of a country or company spans multiple actors and geographies, not just coffee beans.
Drivers and motivations (from a survey of >8,000 European firms):
Cost is the main driver of internationalization (cost advantages persist, but have evolved).
Over time, the cost differential between Western and Eastern countries has shrunk; transport costs are variable and can spike due to events (virus, war, Suez disruption, etc.).
Other drivers include proximity to culture, language, and suppliers; access to technology; market size; policy exposure; and risk diversification.
Key questions in configuring the international network: what to keep domestic vs foreign, where to locate, how to enter foreign markets, and how many steps of the supply chain to cover in each location.
Framework for location decisions: combination of hard data, soft factors, and managerial judgment
A framework uses multiple dimensions (cost, workforce, distance, infrastructure, business environment, economy and society, culture, etc.).
Data sources (illustrative):
Ease of Doing Business (World Bank) – measures ease of starting and operating a business; source for several sub-dimensions.
Logistics Performance Index (World Bank) – measures infrastructure quality, trade facilitation, logistics services, timeliness, tracking, etc.
Human Development Index (United Nations) – life expectancy, education, income, etc.
Additional national/international sources (ECE, ILO, Hofstede) for workforce, culture, and economic context.
Hofstede cultural dimensions and distance concepts:
Six Hofstede dimensions to gauge cultural distance between countries:
Power Distance, Individualism vs. Collectivism, Uncertainty Avoidance, Masculinity vs. Femininity, Long-term vs. Short-term Orientation, Indulgence vs. Restraints.
Purpose: to quantify cultural distance that might affect supplier-customer relationships, negotiations, and management practices.
Note: Cultural distance is a debated, imperfect measure; there is ongoing scholarly critique of its precision and applicability.
Practical use: compare a target country against a domestic reference to anticipate management challenges and collaboration dynamics.
Data-driven evaluation: a concrete, example exercise with three candidate locations (Hungary, Croatia, Czech Republic)
Case context: Long-standing Italian espresso machine maker (Long Leg) evaluating where to establish a manufacturing unit vs a commercial unit in Eastern Europe.
Data collected for each country on:
Ease of Doing Business (World Bank): sub-dimensions include starting a business (time, cost, min capital, procedures), dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency.
Logistics Performance Index (LPI): efficiency of customs, infrastructure quality, trade and transport, ease of arranging shipments, tracking, timeliness.
Human Development Index (HDI).
Export/Investment indices relevant to Europe (institutional sources; SACCE in the example).
Workforce availability and average hourly labor costs.
Cultural distance (Hofstede indices) and a calculated distance metric between Italy and each candidate country. Example distances (illustrative):
Italy to Croatia: ~12 hours by container shipment time (carrier-based estimate)
Italy to Hungary: ~22 hours
Italy to Czech Republic: ~26 hours
Example country rankings and data points used in the lecture (illustrative):
Ease of Doing Business – rank (where a lower rank is better in most rankings): Czech Republic ≈ 41, Croatia ≈ 51, Hungary ≈ 52 (labelled as best/worst within the set).
Logistics Performance Index (LPI) – country positions: Czech Republic ≈ 43, Croatia ≈ 43, Hungary ≈ 51.
Human Development Index (HDI): Czechia ≈ 32, Croatia ≈ 40, Hungary ≈ 46.
Cultural distance index (Hofstede-based): Hungary closest to Italy in the measured set, Croatia farthest among the three in the example.
Distances (logistic and geographic): Italy→Croatia ≈ 12 hours, Italy→Hungary ≈ 22 hours, Italy→Czech Republic ≈ 26 hours.
Turning data into a decision: multi-criteria decision analysis (MCDA)
The main idea: collect information on several dimensions and aggregate with weights to obtain a final score for each location.
Simple MCDA structure used in the lecture:
For production site: weights for each criterion (illustrative example):
Production site weight:
Workforce:
Distance:
Infrastructure:
Business environment:
Economy & society:
Note: these weights are illustrative; in practice you would normalize weights to sum to 1 and adjust to reflect priorities.
For commercial unit (sales focus): a different set of weights (illustrative):
Example weights: for the seven criteria considered.
Scoring mechanism: convert each country’s rank on each criterion into a score (best = 3, next = 2, worst = 1) and compute a weighted sum:
ext{Score}i = igl(w1 igr) r{i1} + igl(w2 igr) r{i2} + \n dots + igl(wm igr) r{im} where
In the example: the Czech Republic finished first in the production-focused MCDA and Hungary last, yielding Czech as the best location for a manufacturing unit; for a commercial unit, the ranking could shift depending on the weights, potentially placing Croatia ahead of Hungary in some scenarios.
The message: collect information from reputable sources, apply an MCDA with transparent weights, and then let data guide the decision while still allowing managerial judgment and experience to influence final choice.
Key interpretation and managerial takeaway:
The algorithm helps structure a decision by organizing data and revealing trade-offs across factors (costs, infrastructure, business climate, culture, and geography).
The final choice should reflect both calculated scores and managerial insight/instinct. The lecturer emphasized blending data with experience and intuition: “instincts are important, but must be informed by information.”
The approach can highlight country strengths/weaknesses to guide negotiation, risk assessment, and implementation planning.
Entry modes: a spectrum from least to most integrated and control
Distinguish between domestic production vs foreign production.
Indirect exports (low direct involvement):
Agent buyers (foreign buyers approach you indirectly)
Import/export companies and trading companies (specialize in moving goods internationally)
Consortia and networks (small firms pool resources to access foreign markets; e.g., a ham consortium)
Piggyback and franchising (two forms of trading agreements sharing distribution networks)
Direct exports (more control):
Independent sales agents, local distributors, and sales representatives (agents with signing authority on behalf of your company)
Representative offices (non-fiscal/legal entity; only representation)
Subsidiaries and branches (permanent establishments with tax and legal personality)
Outsourcing vs insourcing
Outsourcing = sourcing from third-party producers; insourcing = producing in-house or via wholly-owned facilities
Sourcing modes: imposed sourcing (supplier chosen by the client), intermediate sourcing (use an intermediary), direct sourcing (direct link to foreign producer)
Non-equity agreements: contract manufacturing, contract farming, and licensing; equity vs non-equity considerations
Equity-based entry modes (higher control, higher risk, higher capital):
Wholly owned foreign enterprises (WOFEs): full equity owned by the home company
Joint ventures (JV): new entity created with local partner sharing equity
Licensing and franchising (non-equity but IP-based control):
Licensing: licensor grants usage rights to IP/brand/know-how
Franchising: franchisor grants a business model/brand to a franchisee for royalties
Contract farming and sourcing examples (coffee industry):
Contract farming: a buyer (transnational company) contracts with farmers/cooperatives for supply; risk and revenue shared; includes technical assistance, quality control, and guaranteed marketing of coffee; common in coffee supply chains (e.g., Illy, Nestle scenarios)
Contract manufacturing: contract-based production with a foreign producer while maintaining control over IP and branding
Notable real-world patterns:
Starbucks: multiple modes across markets (joint ventures, wholly owned, licensing, exclusive distribution, and alliances) with diverse country-specific arrangements (e.g., 80% ownership in Australia; minority JV in Austria; licensing in China; wholly owned in the UK)
Nestlé: sourcing through buying centers in some countries; relies on intermediaries in others; emphasizes supply reliability rather than owning plantations
Illy: coordinates supply chain quality with direct grower relationships; does not own plantations; focuses on coordination, not vertical integration
Decision-tree for entry modes (a simplified view):
Step 1: Domestic production or foreign production?
Step 2: If foreign, outsource or insource?
Step 3: If insource, go it alone or form a joint venture?
Step 4: If going alone, pursue Greenfield investment or acquire an existing unit?
Step 5: Consider non-equity alliances (sourcing agreements, licensing) vs equity arrangements (JV, WOFEs)
Practical advice and philosophy for international expansion
Gather data from reputable sources for a sound baseline; supplement with field due diligence, local market knowledge, and expert guidance.
Use MCDA to structure decisions, but preserve a space for intuition and experiential learning.
Be mindful of country-specific peculiarities (e.g., Chaebol in Korea vs Keiretsu in Japan) and how these power structures influence markets and supply chains.
Recognize that data sources have strengths and limitations; use multiple indices to cross-check and triangulate.
Cultural distance matters but is not determinative; it interacts with other factors (legal, economic, infrastructure, and operational risks).
Ethical, philosophical, and practical implications
Sourcing from farmers and small producers (e.g., contract farming) can reduce risk for buyers but may shift risk to farmers; ensure fair terms, transparency, and capacity-building.
Global supply chains are exposed to political, environmental, and social risks; diversifying supply and maintaining contingency plans is prudent.
Intellectual property and brand protection become central in licensing, franchising, and strategic alliances; choose partners with strong governance.
Economic polarization and power concentration (e.g., Keiretsu/Chaebol-like systems) may influence market dynamics; consider antitrust, competition, and local regulatory environments when forming alliances.
Ethical sourcing raises questions about labor practices, environmental sustainability, and community impact; integrate ESG considerations into the decision framework.
Key formulas and equations (summary):
MCDA score (production-focused example):
where each depending on the country’s rank on criterion j, and the weights sum to 1 (after normalization).General MCDA aggregation (seven criteria example for commercial unit):
with the weights as chosen by the analyst (illustrative set provided above).Distances (logistics Times example):
t{ ext{Italy} ightarrow ext{Croatia}} = 12 ext{ h}, \n t{ ext{Italy}
ightarrow ext{Hungary}} = 22 ext{ h},
t_{ ext{Italy}
ightarrow ext{Czech}} = 26 ext{ h}.
Final takeaways from the instructor’s closing message
Knowledge is the first investment: collect information about the foreign markets, their nature, and their context before committing capital.
Combine data with experience and instinct to guide strategic choices; data informs but does not replace strategic judgment.
The Greek case studies will be discussed next time; prepare by reading about entry modes and related questions (why, what, where, how).
Recurring questions and discussion prompts (from the session)
How would you weigh different factors if your goal were production-centric vs sales-centric?
How might Chaebol/Keiretsu-like systems influence supplier networks in Korea or Japan compared to Western markets?
How would you design an MCDA if you wanted to include ESG criteria (environmental, social, governance) alongside economic factors?
How can contract farming and licensing agreements be structured to balance risk and reward for both buyers and producers?
Real-world references mentioned in the talk
World Bank: Ease of Doing Business; Logistics Performance Index
United Nations Development Programme (HDI)
Hofstede Institute (cultural dimensions)
Industry examples: Illy, Nestlé, Starbucks, Tata Coffee (India), Illy-JAB licensing, Nestlé buying centers in the Philippines, contract farming in coffee supply chains, and Sun Tzu’s Art of War as a guiding metaphor for knowledge and strategic planning
Next steps suggested by the instructor
Open and work with the Excel file for the Exercise (country comparisons)
Practice collecting country data, applying MCDA weights, and interpreting results
Prepare to discuss the Greek case studies in the next session
Note on scope and context
The session emphasizes a practical, data-informed approach to international expansion, with attention to both quantitative indices and qualitative factors (culture, politics, geography, and strategic partnerships).
Quick recap of the core ideas
Two core questions: what to produce vs buy; where to locate and how to enter.
Use reputable data sources to quantify costs, infrastructure, and business environment.
Apply an MCDA with clearly stated weights to compare locations for different objectives (manufacturing vs commercial).
Understand entry modes ranging from exporting and intermediaries to wholly owned subsidiaries, joint ventures, licensing, and contract farming.
Always blend data with judgment, experience, and a risk-aware mindset.
Final reminder from the instructor
If you want to succeed abroad, know the market and know yourself; knowledge reduces risk and increases triumph potential. "Know yourself and know the situation".