Chapter 4 International Methods of Entry

Chapter 4 International Methods of Entry

1. Entry strategy factors.

   • Size of the market
   • The growth of the market
   • The potential market share of the exporter
     • Mayor or not mayor player
   • The type of product
     • -After sale service or parts
   • The Market strategy of the firm
   • The willingness of the firm to get involved
   • The characteristics of the country considered
     • Development
     • Infrastructure
     • Business sophistication potential trade partners
     • Business climate
     • Culture of the market
     • Culture of the customers
   • The horizon considered.
     • Life cycle

2. Indirect exporting

   • Export Trading Company (ETC)
     • Intermediary... A company that purchases goods in one country for the purpose of reselling them in another country at a profit. Specialized in one geographical area or one product line. -Great for novice exporter. -Offices abroad.
   • Export Management Corporation (EMC)
     • Company that puts suppliers in touch with potential buyers and earns a commisssion if sale is completed. -Located in the exporting country -Small firms (-15 employees). -No(rarely) offices abroad -Contacts and potential importers and send people to promote the exporting. -Kind of Agent (the overseas representative of a manufacturer) Novice exporters
   • Piggy Backing
     • When a manufacturer goeas overseas and asks its suppliers to continue doing business abroad with him, the suppliers are said to be piggy backing on that customer efforts.

3. Active exporting

   • Agent
     • The overseas representative of a manufacturer. The agent represents the manufacturer in sales negotiations.  ->Uses terms of sale (price delivery and discounts). >Sales brochure and proces list, products characteristic, anlysis of competitors products, information on sales and service philosophy, sales support in the form of samples, catologs, trade advertising and financial support. ->After the sale, the agent finishes with the job. And he gets paid unil the exporter has been paid by the importer.
     • Binding agent
       • Agent who is allowed to make decisions that are binding on the principal. The prinicipal must abide by whatever statements the agent has made, and negociate terms of trade.
     • Driven factors
       • -Long term relationship
       • Small potential in sales (5-10% of domestic sales)
       • No stock item
         • Specifically designed for that market
       • Expensive item
         • Machinery
       • Short product life cycle
       • No frequent afeter-sale service
       • No become dominant in the market
       • Company that handle exports
       • No top of the line strategy, no premium prices
       • Reasonable control over prices and delivery process
     • Labor Law
       • Compesation to the agent based on the law, overruling terms of contract.
   • Distributor
     • Overseas company that purchases a manufacturer´s products with the goal of reseling them at profit. ->Inventory-After sale service-Complementary parts. +Responsability (Inventory risk, no sold items, Advertising, trade show attendance..) +Benefits: Setting prices, negotiating terms. ->Long term partner
     • Invoices
       • International invoices
       • Domestic invoices
     • Driven factors
       • Substancial market (20-25% domestic sales)
       • Stock item
       • Moderately price item
       • Fairly long product life cycle
       • Frequent after sale service/maintenance parts
       • Minor player in the market
       • One customer handle exports sales
       • Pursuing prestige pricing strategy and premium prices and service
       • Company comfortable not having control of price and delivery terms
     • Contract law
       • Set of laws thet gobern relationships established by contracts between two parties.
   • Marketing subsidiary
     • An overseas firm owned by an exporter that is responsible for selling the exportes products in a foreign market All are domestic sales +Costs: Rented building, inventory built and employees (less variable-cost).
     • Driven factors
       • Considerable market potential (+25% domestic sales)
       • Techology driven, with substantial intellectual property
       • Rather complicate to sell
       • Long run (+products to be introduced)
       • Sophisticted after-sale service/maitenance parts
       • Expects major player in market
       • Exacting premium proces from customers
       • Uncomfortable not having control of products and $
   • Coordinating DIRECT EXPORT STRATEGIES
     • Factors
       • Consider changing from one entry strategy.
       • Market driven
         • Different strategies in each country (Agent, Distributor, EMC, etc.)} -Difficult in coordinating prices and after sale service. -Parallel imports looms. -Greatest profits can be extracted
       • Product driven
         • Same strategy in different countries (always agents) -Simplify management of its exports. -Unified front to its customers. -Prices and bounds coordinated. -After sale policies policies controlled. -Poor match with the market. -Stablish sales subsidiary in small markets.
   • Foreign Sales Corporation
     • A subsidiary, created for tax-reduction purposes only, that handles an exporter´s overseas sales.

4. Production Abroad

   • Contract Manufacturing(Subcontracting)
     • An arregement between two companies where one maufactorers for the other. Not a method for entry. +Barriers +Tariffs and quotas
   • Licesing
     • An arrangement between two companies where one uses the other´s intellectual property (secret or know how) in exchange of royalty (fee paid to use IP)
   • Franchising
     • An arrangement between two companies where one licenses an array of related intellectial property items (business model). ->Trademarks ->Copyrights ->Patents ->Know-how ->training ->methods of operation ->Substancial amount of piggy-backing 
   • Joint venture
     • An overseas company that is jointly owned by two or more companies (share costs of venture.
     • Minimize its exposure in a foreign investment
     • Complementary partner
     • Local way partnership
     • Politically conected
   • Subsidiary (WOFE)
     • Company owned entirely by another company (Wholly-owned foreign enterprise). -Total control of investment and take the risk for this venture (no share). -Beneficial for host countries (creates jobs). -Manage a company in a foreign country without a very good understanding of local customs and regulations.

5. Parallel Imports/Gray market goods

   • Goods purchased in one country by unauthorized inetermediaries and sold to unautorized retailers in another country.

6. Counterfeit Goods

   • Goods manufactured to look like original products, but whose manufacturing was not approved by the brand owners. -Lower quality and price

7. Other Issues in Methods of Entry

   • Foreign Trade Zones
     • Ana area that is physically within the borders of a country but that is considered outside of its borders for customs purposes. 
   • Maquiladoras
     • A plant located in Mexico that have the same status as a foreign trade zone located both in ther US and Mexico.  -Import goods from us, transform in Mexico and re-export to the US
   • Anti-Bribery Convenions
     • 2013 OECD convention that requires countries to penaize companies engaging in bribery.