Lecture International trade and investment (2/e): Chapter 12 - John Gionea

Chapter 12
The firm’s market-entry strategies
EXPORTING  
      
           ?

FRANCHISING?

TURNKEY?

   DIRECT  
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

   LICENSING ?    

12–1

INVESTMENT
        ?           


Lecture plan
• The firm’s foreign business strategy
• Exporting
• Contracting (licensing, leasing etc)
• Joint ventures
• Wholly-owned company
• Advantages and disadvantages of various

market entries
• Strategic FDI plan issues
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

12–2


Export-import management
Company business strategies
• Domestic strategies
– investment in product development
– expand domestic market share
– diversify into new industry.
• Foreign business strategies
– exporting
– international contracting
– foreign direct investment/foreign production
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

12–3


The firm’s foreign business strategy

1. JV = Joint Venture
2. WOC = Wholly-Owned Company

Source: adapted from R. Grosse & D. Kujawa,
International Business, Irwin, 1992

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

12–4


Exporting
• World exports of goods ($US8880 billion in
2004) have declined in relative importance
compared to foreign production ($US17,580
billion in 2003).
• Most likely mode for serving a foreign market for
a domestic firm starting in international business.
– the business plan (export marketing plan)
– many global companies combine exports and
FDI

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

12–5


Exports: advantages
• Least costly and risky
– L/C payment
• Specialisation, economies of scale.
• Open to any size or kind of firm

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

12–6


Exports: disadvantages
• Production costs in the home country may
be higher.
• Transport costs may make exporting
uneconomical.
• Trade barriers in target markets
• Divided loyalties of O/S agents

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

12–7


Types of international exporters
• Casual exporter
– domestic firms that do not do
international business on a regular basis
(< 5% of T/O)
• Small-scale exporter
– 5–20% of turnover
• Experienced/global exporter
– high ratio of its turnover through
involvement in worldwide business deals
(exports + FDI)
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

12–8


Licensing
• Licensor grants rights to intangible property to a
Licensee in exchange for a royalty payment.
• Time and territorial limits
• Advantages:
– speed of execution
– low risk/investment cost
– brand recognition

– preliminary cooperation which may be expanded
into FDI
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

12–9


Licensing: disadvantages
• Isolation from the market
• Lack of managerial control
• Limited life
• Risk of technology loss

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

12–10


Franchising
• A franchisor sells limited brand use rights,
products and services to a franchisee in return for
a lump sum payment and a share of the
franchisee’s profits.
• 20% of US franchise systems have foreign

operations (Japan, Canada, UK, Australia)
- Domino’s Pizza vs Pizza Haven (200 in 7 years);
- Dunkin’ Donuts vs Donut King
• Low market entry costs and risks
• Quality control is difficult due to big number of
franchisees and geographic location.
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

12–11


Subcontracting
• Supply arrangement between a principal and a
subcontractor
• Advantages
– low investment cost
– speed
– stable processing cost and quality
– control of sales and marketing
– can become the basis for later alliance
• Disadvantages
– risk of non-delivery or late delivery
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

12–12


Turnkey operations
• Contract for the
construction of
operating facilities
that are transferred
for a fee to the owner
after commissioning

• Advantages
• high economic returns
• less risky than FDI
• Disadvantages
• lack of long-term
market presence
• loss of control over
technology
• client may turn into a
competitor

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

12–13

Joint ventures
• A legal entity jointly owned by two or more
legally distinct organisations which share in
the JV’s decision-making activities
• Various options
– 2 companies from the same country
– foreign/local
– 2 or more companies setting up a JV in
a third country
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

12–14


Joint ventures cont.
• Advantages
– partner’s local knowledge
– cost/risk sharing
– host government legislation
– low risk of nationalisation
• Disadvantages
– technology control risk
– less control over subsidiaries
– management control conflicts
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

12–15


Wholly-owned subsidiaries
• A firm owns 100% of the stock
• Trend in the motor-car sector (e.g. India, China)
• Advantages
– complete management control
– optimum security for technology
– ‘internalisation’ of operations
• Disadvantages
– high costs and risks
– long lead time to first sale (especially for
‘Greenfield’ operations)
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

12–16


China: joint ventures vs wholly
owned
25
20
15
US$ Bln

10
5
0

88

90

92

94

96

97

Joint Venture

2

1.7

6

17

21

18

Wholly Owned

0

1

4

8

12

16

Source: adapted from UNCTAD, World Investment Report 1999
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

12–17


Strategic FDI plan issues
• Investment location evaluation
– see matrix on next slide
• Strategic organisation
– international group
– business/product units
– functional units

– global matrix

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

12–18


Investment location evaluation
Variable

1

2

3

4

5

Weight

Country
A

Country
B

1x2

1x3

Political

1

9

4

9

4

Economic

3

5

6

15

18

Automotive

4

3

4

12

16

Personnel

2

2

3

4

6

10

19

17

40

44

Total

Source: Fig. 12.3, p.298
Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

12–19


Strategic FDI plan issues
• Financial management and control
– investment decisions
– financing decisions
– global money management
• Global sourcing strategy
– outsourcing
• Global human resource strategies

Copyright 2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment:
An Asia-Pacific Perspective 2e by Gionea. Slides prepared by John Gionea..

 

12–20