The Practices of
International Market
Entrance for Chinese
Companies
WHERE and
HOW to Grow?
Growth is top of mind for business executives.
Strong, value creating revenue growth lies
within reach of corporations that pursue best
practice in innovation, strategy, marketing,
operations and organizations.
Internationalization
For companies aspiring to grow, where
to compete is just as important as how.
To choose the right battlegrounds, they
must match their distinctive
capabilities with sectors where
profitability growth is likely to occur.
Major Motivations to Internationalization
Proactive
Reactive
Motivation
Motivation
Profit advantage
Unique products
Technology advantage
Exclusive information
Competitive pressure
Overproduction
Declining domestic sales
Excess capacity
Managerial
commitment
Saturated domestic market
Tax benefit
Proximity to customers
and ports
Economies scale
The Core Competencies
• Denning’s
OLI theory stated in 1988
Ownership advantages – it consist of intangible assets
such as ‘know-how’.
Location advantages - it could be profitable for the
firms to continue these assets with factor endowment
( labor force, energy, materials, transport, and
communication channels) in foreign market.
Internationalization advantages – it must more profitable
for the firms to use its advantages rather than selling
them, or the right to use them to a foreign firm.
• Other Advantages
Choosing a Mode of Entry
Indirect export
Direct export
EXPORTING
Joint Venture
Greenfield
M&A
INVESTMENT
Internet Entry
B2B
B2C
INTERNATIONAL
With the channels
CONTRACTING Licensing
of International
Franchising
Express
Contract manufacturing
Management contract
Turnkey projects
Mode of Entry in international Business
The Value Chain by Professor Michael Porter
Informatio
n Systems
Production
Marketing
and Sales
Human
Resource
Customer
Service
Profit
R&D
Company Infrastructure
Logistics
Profits
Mode of Entry in international Business
Indirect export modes
Manufacturer uses independent export organizations
located in its own country ( third country)
There are five main entry modes of indirect exporting.
Export buying agent – A representative of foreign
buyers who is located in the exporter’s home country.
The agent offers services to the foreign buyers: such as
identifying potential sellers and negotiating prices.
Export management company/export house – are
specialist companies set up to act as the ‘export
department ‘ for a range of companies.
Mode of Entry in international Business
Direct export modes
Manufacturers sells directly to an importer, agent or
distributor located in the foreign target market.
Distributor (Importer) – independent company that stocks
the manufacturer’s products. It will have substantial
freedom to choose own customers and price. It profits from
the difference between its selling price and its buying price
from the manufacturer.
Agent – Independent company that sells on to customers
on behalf of the manufacture( exporter). Usually it will not
see or stock the product. It profits from a commission
(typically 5-10%) paid by the manufacturer on a pre-agreed
basis.
Case Study:How to sale the Color TV Sets in USA market?
CES is the world‘s largest consumer electronics
exhibition, the mainstream of Chinese color TV
enterprises every year at this international fair. In
the year 2005, the achievements of Chinese TV
Legion is far beyond people’s expectations.
The Xiaxin Electronic exhibited a 30 variety of
digital high-definition plasma TVs and highdefinition LCD TV, the only orders signed at the
meeting had more than 100,000 units.
The same excited is Hisense Group, with the agent of the eight regions, including
North America, signed a $ 200 million flat-panel TV orders. In fact, in order to bypass
the high tax levy of anti-dumping restrictions in CRT television which United States
involved, the Chinese color TV providers exhibiting almost invariably played "high-end
brand, large-scale introduction of LCD and plasma flat-panel TVs”.
"In addition, in order to meet the emerging trend by United States family to information
technology, many functions are added, such as access to the Internet, TV shopping,
home security control, remote video telephony and other functions." A participants of
Chinese business representatives said.
By the end of 2011, the LCD TV's overseas sales by TCL which is the top 4 biggest
color TV producer in China reached 3.73 million units.
Piggyback – choosing a back to ride on. It is about the rider ‘s
use of the carrier’s international distribution organizations.
The Strategy of Internationalization of Logitech - with the
technology and the product sets of Performance Mouse MX
and Anywhere Mouse MX, riding on IBM and Compaq, the
revenue of 2011 was $2.32 billion.
A
Home country or third Country
R&D
Produ
ction
Foreign Target Market
C
Border
Sales and
service
A Rider
R&D
B
Export
buying
agent
B
Product
ion
Marketin
g
Sales and
service
B’s international
organization
A
sales
B
R&D
Product
ion
Marketi
ng
Indirect
export
C
Piggyback
C
Sales and
service
Agent,
distributor
Direct
export
A1
R&D
Producti
on
B
C
A2
R&D
Product
ion
A3
R&D
Product
ion
Note: A1, A2, A3, A are n=manufactures of products /services
B: is an independent intermediary/(agent)
C: is the customer
Marketin
g
Sales and
service
Export
marketing
group (with
a local agent
of B
Export Modes
Cooperative
export
Mode of Entry in international Business
Intermediate Entry modes
Contract manufacturing – is outsourced to an external partner,
specialized in production and production technology.
Licensing – the licensor gives a right to the licensee against
payment ,e.g. a right to manufacture a certain product based on a
patent against some agreed royalty.
Franchising – the franchisor gives a right to the franchisee against
payment, e.g. a right to use a total business concept/ system.
Including use of trade marks (brands), against some agreed royalty.
There are two major types of franchising:
1, Product and trade name franchising. It is very similar to the trade
mark licensing
Mode of Entry in international Business
2, Business format ‘package ‘franchising.
International business format franchising is a market entry mode that
involves a relationship between the entrant ( the franchisor ) and a
host country entity.
The package can contain the following items:
Trade marks/trade names, Copyright, designs, patents, trade secrets;
Business know how; geographic exclusivity; design of the store;
market research for the are, location selection, and management
system
Start with a response to a perceived local business opportunity, the
franchisor will more rely on the knowledge and the flexible response to
the local market.
Franchisor will try to search a long term cooperation rather than a
conflict. How to develop a monitorial system, a training procedure and
adjustment mechanism is very important.
Mode of Entry in international Business
In the early days of the Walt Disney Company,
a man to find Walt, said: "I am a furniture
maker, I'll give you $ 300, you make me the
image of Mickey Mouse printed on my desk,
you can?”. This was the first trademark user
fees received by the Walt Disney.
Since then, the Disney company created by a large number
of well-known animated characters such as Mickey Mouse,
Donald Duck, Snow White Princess, etc., are widely granted
a license, printed in a variety of goods such as clothing, toys,
purses, by the world consumption of especially children’s
love. Today, the Walt Disney Company has more than 4,000
trademark licensing in the world. its products, including from
the most ordinary ball-point pen to a watches, value of $
20,000. Use permit trade patterns, the business conduct of
the Walt Disney Company was a great success.
Home country or third Country
Foreign target market
Border
B
Prod
uctio
n
A
Market Sales and
service
ing
R&D
C
B Licensee
A Licensor
Produ
ction
R&D
A Franchisor
R&D
Mar Sales and
ketin service
g
Licensing
C
B Franchisee
Prod
Sales and
uctio
service
n
Marke
ting
R&D
A Upstream
Contract
Manufacturing
C
Franchising
specialist
Produ
ction
A+B (e.g. a joint venture)
C
B Downstream specialist
R&D
Produ
ction
Market
ing
Sales and
service
X Coalition
Marke Sales and
ting
service
A
R&D
Produ
ction
Market
ing
Sales and
service
A+B (e.g. a joint venture)
R&D
B
R&D
Produ
ction
Market
ing
Sales and
service
Produ
ction
Market
ing
Sales and
service
C
Intermediate Modes
Note: A is the manufacture, B: is the partner and C: is the customer
Y Coalition
Mode of Entry in international Business
Franchising Practice of UK Universities in Chinese Market
The motivations of UK universities to recruit International
students worldwide since 1980s.
The Advantages of Higher Education
System: perfect quality control; plenty
of education resources; good
reputations;
Formal successful experience in
Malaysia 20 years ago
WTO committed education
can be a service industry
Former Premier Margaret Thatcher
Called on Privatization and Cut the
budget to UK Universities. The tuitions
to foreign students is 4 times high.
UK universities exported
higher education products
since 1980s in Malaysia; then
China since middle of 1990s.
There were 100,000 Chinese
students in UK by 2009 who
bring 3 Billions Pounds to UK
economy. The plan is 120,000
students this year as
expected by E&S Ministry of
UK
Mode of Entry in international Business
Franchising Practice of UK Universities in Chinese Market
The Franchising Strategies of UK Universities – delivering the
higher education program as a package.
Foundation
Course Delivering
Joint Venture
Business Model
QAA System
Monitoring
The localization
of teaching &
Staffing
Language Entrance
Requirement
Mode of Entry in international Business
Hierarchical Modes
The firm owns and controls the foreign entry mode /organization.
The degree of control that head office can exert on the subsidiary
will depend on how many and which value chain functions can be
transferred to the market.
Domestic based sales representatives – it resides in the home
county of the manufacturer and travel abroad to perform the sales
function.
Foreign branch – An extension of and a legal part of the
manufacturer( often called a sales office), taxation of profits take
place in the manufacturer’s country.
Subsidiary – A local company owned and operated by a foreign
company under the laws and taxation of the host country
Mode of Entry in international Business
Foreign target market
Home country or third Country
R&D
R&D
Prod
uctio
n
Market Sales
and
ing
service
Produ
ction
Direct to customer
Mar
ketin
g
Sales
and
service
Prod
uctio
n
Marke
ting
R&D
R&D
Border
Produ
ction
Sales and
service
Marke Sales
ting
and
service
R&D
Prod
uctio
n
Mark
eting
C
C
Domestic-based sales
representatives/
manufacture’s own
Sales force
Resident
sales
representatives/
sales
subsidiary/ sales branch
C
Sales and production
subsidiary
C
Region
centre
(two variants
Sales
and
service
Corporate identity (image), personnel
R&D Produ
ction
Market Sales
and
ing
service
R&D
Common R&D, finance
Note: C: is the customer
Prod
uctio
n
Market Sales
and
ing
service
C
Transnational
organization
(Globally integrated)
Hierarchical modes
The Research Theory in Mode of Entry
The Transaction Cost Analysis (TCA) Model
Professor Coase offer this theory in 1937. he
argued that ‘a firm will tend to expand until the cost
of organizing an extra transaction within the firm will
become equal to the cost of carrying out the same
transaction by means of an exchange on the open
market’.
Ronald Coase Professor of
University of Chicago
he received the 1991 Nobel
Laureate in Economics (“for his
discovery and clarification of the
significance of transaction costs
and property rights for the
institutional structure and
functioning of the economy.”)
Transaction cost emerge when market fail to
operate under the requirement of perfect
competition (‘friction free’). In the real world there is
always some kind of ‘friction’ between buyer and
seller (can often be explained by opportunistic
behavior), resulting in transaction cost.
The transaction cost analysis (TCA) framework
argues that cost minimization explains structural
decisions. Firms internalize, that is integrate
vertically to reduce transaction cost.
The Research Theory in Mode of Entry
Transaction Cost Analysis Model
Country A
Country B
Seller:
Producer
Buyer: Export
Intermediary
End - customer
’ Friction between seller and buyer
Transaction cost
Ex ante cost – search costs
- contracting costs
Ex post cost – monitoring costs
- enforcement costs
If ‘transaction costs’ are higher than ‘control cost’
through an international ‘hierarchical’ system, then
Country A
Seller:
Producer
Forward integration
Country B
Internal firm:
foreign
subsidiary
Internationalization
End customer
The Research Theory in Mode of Entry
Ex ante Cost:
•Search cost: gathering information to identify evaluate potential
export intermediaries.
•Contracting cost: refer to the cost associated with negotiating and
writing an agreement between seller and buyer.
Ex post Cost:
• Monitoring costs: to ensure that both S and B fulfill the pre
determined set of obligations.
• Enforcement cost: to associated with the sanctions of a trading
partner who does not following the agreement.
Hierarchies:
•Externalization – Doing business through an external partner
( importer, agent, distributor)
•Internalization - Doing business through an external partner
( own subsidiaries)
The Research Theory in Mode of Entry
The Uppsala Model
The basic information: it developed by Johanson &Wiedershiem-Paul in
1975 at Uppsala University.
Complemented by Johanson & Vahlne in 1977.
Empirical bases:
Four Swedish Companies: Volvo, Sandvik, Atlas Copco, and Facit
The model was made in accordance with the entry form and the choice of
the market of these Swedish firms.
The main description:
The Uppsala model is a theory that explains how firms gradually intensify
their activities in foreign markets.
The Research Theory in Mode of Entry
The key features of the model:
1. Firms first gain experience from the domestic market before they
move to foreign markets;
2. Firms start their foreign operations from culturally and/or
geographically close countries and move gradually to culturally and
geographically more distant countries;
3. Firms start their foreign operations by using traditional exports and
gradually move to using more intensive and demanding operation
modes (sales subsidiaries etc.) both at the company and target
country level.
Theoretical Contribution:
-Establishment Chain (International Penetration)
-Psychic Distance (International Expansion-Culturally and
Geographically)
--Dynamic Model (Knowledge Development and increasing Foreign
Market Commitment )
The Research Theory in Mode of Entry
Establishment Chain (Four-Stage Model)
-The firm tends to gradually increase its involvement in a specific foreign
market
-A sequential and successive process is followed from No regular Export,
to Export via Agents, to Establishment of Overseas Subsidiaries, to
Overseas Production.
-The stages both represent the increasing resources commitment and
accumulated market experience.
Stage 1
No Regular
Export
Stage 2
Export via
Agents
Stage 3
Overseas
Subsidiary
Stage 4
Overseas
Production
of Entry
in international
Business
The Mode
Research
Theory
in Mode of Entry
The Uppsala Model
Low
High Market Commitments
Export
Small
Market A
International Market Penetration
Market C
Market D
Market E
Increasing Geographic Market
Market B
Great
Export via Agents Overseas Subsidiary Overseas Production
Increasing Internationalization
Psychic Distance International Market Expansion
Source: Linkopings University
Mode of Entry in international Business
The Uppsala Model
Market
Knowledge
Market
Commitment
-General Knowledge
-Amount of resources
-Marketing methods
-Size of investment
(marketing, organization)
-Common
characteristics of
customers
-Business Culture
-Climate, customer
firms personal
-Degree of commitment
-Alternative use for the
committed resources
and transferring them
into the alternative one
Commitment
Decision
-Perceived
opportunities and
problems in a specific
market
-The economic effect
Uncertainty effect
Source: Johanson & Vahlne
(1977)
Mode of Entry in international Business
Uppsala Model: A Ranked according to psychic distance from Sweden
Profile of establishments, Sanvik
Countries
● - Sales Agency
○ - sales subsidiary
×- manufacturing subsidiary
Year
Mode of Entry in international Business
Uppsala Model: A Ranked According to Psychic Distance from Sweden
Profile of Establishments, Atlas Copco
Year
Countries
● - Sales agency
○ - Sales subsidiary
×- Manufacturing subsidiary
Mode of Entry in international Business
Criticism of the Uppsala Model
The Uppsala Model
1. Establishment Chain
2. Psychic Distance
-The initial step does not
necessarily begin with
exporting
-Firms more interested in entering
markets with greatest
opportunities.
- Frog Leaping
-Greater psychic distance but high
industry similarities
-De-internationalization
-Following-clients-business
-Globalization shorten the psychic
distance
3. Market Penetration Depth
-Localization
-Market commitment beyond overseas
production
Source: Bell& Yong, in Hooley, Loveridge&Wilson(1998),Grady&Lane(1996)
Mode of Entry in international Business
The way of HUAWEI go to
Internationalization
2
4
6
3
1
5
3
2
The main products are programmed telephone exchanger and
telecommunication software and service design
The Strategy of International Entrance by CNOOC
The Construction for new ports are on going
by CHCEC worked for CNOOC (China
National Offshore Oil Corporation ) to build
bases for aviation fuel storage
facilities,liquefield petroleum gas storages...
Gwadar Port
Coco
island
Hambantota port
Pearl Necklace
Strategy to India
Mode of Entry in international Business
Foreign Direct Investment
• Now many firms prefer to enter international market through
ownership and control of assets in host countries. Other firms
may first gain knowledge of and expertise in operation in the
host country, and then expand in the market through
ownership of production or distribution facilities.
• FDI affords the firm increased control over its international
business operations, as well as increased profit potential.
• FDI exposes the firm to greater economic and political risks
and operating complexity ,as well as the potential erosion of
the value of its foreign investment if exchange rates change
adversely.
Mode of Entry in international Business
Marketing factors
!. Size of Market
Major Determinants of
Foreign Direct Investment
2. Market growth
3. Desire to maintain share of market and to follow competition
4.Desire to advance exports of parent company
5. Need to maintain close customer contact and following them
Barriers to trade
1. Government-erected barriers to trade
2. Preference of local customers for local products
Cost factors
1.
Desire to near labor and lower labor cost
2.
Availability to raw materials/capital/technology
3.
Lower transport cost
Investment Climate
1.Political stability / Tax structure/ Currency exchange regulations
2. Limitations on ownership
(FDI)
Mode of Entry in international Business
The DFI Decision Sequence
The firm and Its Competitive Advantages
1 step
Change the Advantages
Exploit Existing Competitive Advantages Abroad
2 step
Production at Home Exporting
Production
Abroad
3 step
Licensing Management Contract
Control Assets Abroad
4 step
Joint Venture
Wholly Owned Affiliate
5 step
Greenfield Investment
Source: Adapted from Gunter Dufey &R. Mirus, University of Michigan
1985
M&A Foreign Enterprises
In November 2003, TCL, the top 6th Chinese
Electrical Appliances Producer costs € 220 million
merged the television manufacturing business with
the French consumer electronics giant Thomson,
thus forming the world's largest color TV
enterprises of TTE Europe, with estimated annual
sales of $ 3.5 billion, TV shipments to more than 18
million units. TCL accounted for 67% of the shares
of the combined company.
Before the joint venture, Thomson loss of € 100 million, For
answering the arguments, Mr. Li Dongsheng, TCL chairman
explained: if it is profitable, it will have no the TCL anything,
but this loss gave an opportunity to TCL for the European
market entrance. The Chinese market has long been open,
how to get the advantage of competition? The attack is the
best defense – if the others use global resources to fight
you, it is difficult to defense with regional resources only.
For acquisition of Thomson, TCL Group continually
losses for two years in 2005, 2006. In April 2007,
TTE Europe filed for bankruptcy liquidation.
On March 10, 2011, the Commercial Court of
Nantes, France, made the first order of court
decision, the TCL Group, TCL Multimedia and its
four wholly-owned subsidiary should pay € 23.1
million in compensation to the statutory liquidator of
TTE European (about RMB 211 million).
The announcement of TCL Multimedia and TCL
Group Annual Report, the Commercial Court of
Nantes, France, will make the judgment of the
second writ in that year , which claims the amount of
up to 34 million euros.
Li Dongsheng said: Chinese enterprises have to go
out whenever sooner or later, and go early is better
to go late. This process is bound to be difficult. For
TCL acquired Thomson, Alcatel, but we can not stop
to internationalization, each way has its risks, the
business war means that the risk of intense.
Mode of Entry in international Business
Methods for FDI
1
Greenfield strategy:
building new facilities
;the word green-field
arises from the image of
starting a virgin green site
and then building on it
2
3
Acquisition strategy:
buying existing assets
in a foreign country;
the purchaser quickly
obtains control over
the acquired firms’
factories, employees,
technology, brand
names and distribution
networks
Joint Venture:
creating when two
or more firms agree
to work together
and create a jointly
owned separate firm
to promote their
mutual interests
Mode of Entry in international Business
The Greenfield Strategy
Advantages :
• The firm can select the site that best meets its needs and
construct modern, up-to-date facilities.
• The firm can start with a clean slate.
• The firm can acclimate itself to the new national business
culture at its own pace, rather than having the instant
responsibility of managing a newly acquired, ongoing business.
Mode of Entry in international Business
The Greenfield Strategy
Disadvantages :
• Successful implementation takes time and patience.
• Land in the desired location may be unavailable or very
expensive.
• The firm may be more strongly perceived as a foreign
enterprise.
Mode of Entry in international Business
The Acquisition Strategy
Advantages :
• It is quick to execute.
• In many cases firms make acquisitions to preempt (move faster
and early than) their competitors.
• Maybe it is less risky than Greenfield.
Mode of Entry in international Business
The Acquisition Strategy
Disadvantages :
• The acquiring firm assumes all the liabilities—financial,
managerial, and otherwise—of the acquired firm.
• The acquiring firm usually must also spend substantial sums
up front.
Mode of Entry in international Business
The Acquisition Strategy
Why do acquisitions fail?
• The acquiring firms often overpay for the assets of the
acquired firm.
• A clash between the cultures of the acquiring and acquired
firm.
• Attempts to realize synergies by integrating the operations of
the acquired and acquiring entities often run into roadblocks
and take much longer than forecast.
• Inadequate pre-acquisition screening.
As the big giant of the world's retail industry, Wal-Mart's
annual sales are four times the world's second largest
retailer Carrefour. Different with Carrefour to merge Costco
and opening his new branches of Costco in Japan grand
and lively,
After four years of study, Wal-Mart decided into Japan
through a partner. After the search, the target is Japan's
fourth largest retail - Seiyu Ltd.
Enter the Japanese market through cooperation with Seiyu
in 2002, Wal-Mart made a low profile, regardless of name
or store, do not have a local Wal-Mart's logo. In December
2003, Wal-Mart held the shares of Seiyu has reached 38%
(2002 entry only held 6%). In November 4, 2005, holding of
shares in Seiyu to 56.56%. Wal-Mart in 2007 spent $ 873
million to acquire of the remaining shares of Seiyu.
Mode of Entry in international Business
China Capital Steel Corp.
acquired a state owned Iron
ore company – Hierro
Company in 1992. It was a
good deal. The company
covered 582 k m2 area with
estimated 1.6 billions tons
iron ore reserve.
Chinese acquirer was
suffered the loss for 15
years due to the strikes
Which was organized by worker’s union and different
cultures.
The company started to make money in 2007, $170
million. The reason is not only by the ore price increasing
but the managers understood how to run an oversea
company appropriately.
Mode of Entry in international Business
Joint Venture
Advantages :
• May facilitate entry into a foreign market.
• Allow firms to share the fixed costs (and associated risks) of
developing new product or processes.
• A way to bring together complementary skills and assets that
neither company could easily develop on its own.
• It can make sense to form an alliance that will help the firm
establish technological standards for the industry than will
benefit the firm.
Mode of Entry in international Business
Joint Venture
• But alliances have risks, and one key to making a strategic
alliance work is to select the right ally.
• The characteristics for a good ally
1.help the firm achieve its strategic goals
2. share the firm’s vision for the purpose of the alliance
3.unlikely to try to opportunistically exploit the alliance for
its own ends
Mode of Entry in international Business
Joint Venture
How to select a good partner
• Collect as much pertinent, publicly available information on
potential allies as possible.
• Gather data from informed third parties, including firms that
have had alliances with the potential partners, investment
bankers who have had dealings with them, and former
employees.
• Get to know the potential partner as well as possible before
committing to an alliance. This process should include face-toface meetings between senior managers to ensure that the
chemistry is right.
Haier set up a joint venture with Jordan made his product into the U.S. market
Haier negotiated with the MEC of Jordan in
December 2001. Haier invested $ 5 million to set up
a joint venture ‘Haier Middle East Trading Company’
with MEC. the two sides began to the construction of
the Haier products manufacturing plant in 2002.
The mature sales network of Jordan MEC helps
Haier to quickly open up its business in the Middle
East market. At the same time, Haier Jordanian
exports their products to the U.S. market enjoys the
zero-tariff preferential policies. Haier products are
exported to the United States finally.
Springboard
The international Entrance by E-Commerce
B2B or B2C marketing
initially focused on
domestic sales, but
unexpectedly, the foreign
customer orders coming
and resulting in the
concept of Internet
marketing (IIM)
For instance: Dell
Amazon
Shipments through
international freight
services company or
express such
UPS,DHL,TNT,FEDEX,E
MS,NHK.
Xsdot is a web development company that occupies itself with the dev
elopment of internet, intranet, extranet, e-commerce and custom web
based applications.
The Comparison of the Four Different Modes of international Entrance
High
Internet
International Investment
Contractual Agreements
Degree of
Risk &
Management
Control for
the Profit
Exporting
Low
Mode of Entry in international Business
Advantages and Disadvantages of Different Modes of Entry
Mode
Exporting
Primary Advantage
Primary Disadvantage
Relative low financial exposure
Vulnerability to tariffs and NTBs
Permit gradual market entry
Logistical complexities
Acquire knowledge about local market
Potential conflicts with distributors
Avoid restrictions on foreign investment
Licensing
Franchising
Low financial risk
Limited market opportunity/profits
Low-cost way to assess market potential
Dependence on licensee
Avoid tariffs NTBs restrictions on foreign
investment
Potential conflicts with licensee
Licensee provides knowledge of local market
Possibility of creating future
competitors
Low financial risk
Limited market opportunity/profits
Maintain more control than with licensing
Dependence on franchisee
Franchisee provides knowledge of local
market
May be creating future competitors
Low-cost way to assess market potential
Potential conflicts with franchisee
Avoid tariffs, NTBs, restrictions on foreign
investment
Mode of Entry in international Business
Advantages and Disadvantages of Different Modes of Entry
Mode
Primary Advantage
Primary Disadvantage
Contract
Manufacturing
Low financial risk
Reduced control (may affect quality,
delivery schedules, etc.)
Minimize resources devoted to
manufacturing
Reduce learning potential
Focus firm’s resources on other elements of
the value chain
Management
contract
Turnkey project
Foreign Direct
investment
Potential public relationship
problems-may need more
monitor working conditions, etc.
Focus firm’s resources on its area of expertise
Potential return limited by contract
conflicts with licensee
Minimal financial exposure
May unintentionally transfer
proprietary knowledge and
techniques to contractee
Focus firm’s resources on its area of expertise
Financial risk (cost over runs, etc.)
Avoid all long-term operational risk
Construction risks (delays, problems
with supplies, etc.)
High profit potential
Maintain control over operations
High financial and managerial
investments
Acquire knowledge of local market
Higher exposure to political risk
Avoid tariffs, NTBs
Vulnerability to restrictions on
foreign investment
Greater managerial complexity
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