strategies for analyzing and entering foreign markets international business, 5th edition chapter 12 Chapter Objectives • Discuss how firms analyze foreign markets • Outline the process by which firms choose their mode of entry into a foreign market • Describe forms of exporting and the types of intermediaries available to assist firms in exporting their goods 12-2 Chapter Objectives • Identify the basic issues in international licensing and discuss the advantages and disadvantages of licensing • Identify the basic issues in international franchising and discuss the advantages and disadvantages of franchising 12-3 Chapter Objectives • Analyze contract manufacturing, management contracts, and turnkey projects as specialized entry modes for international business • Characterize the greenfield and acquisition forms of FDI 12-4 Foreign Market Analysis • Assess alternative markets • Evaluate the respective costs, benefits, and risks of entering each • Select those that hold the most potential for entry or expansion 12-5 Table 12.1 Factors in Assessing New Market Opportunities • Product-market dimensions • Potential target markets • Major product-market differences • Relevant trends • Structural characteristics of national market • Competitor analysis 12-6 • Explanation of change • Success factors • Strategic options Map 12.1 A Tale of Two Chinas 12-7 Dole Food Company’s international operations are subject to a variety of costs, benefits, and risks 12-8 Figure12.1 Choosing a Mode of Entry Exporting Decision Factors: Ownership advantages Location advantages Internalization advantages Other factors Need for control Resource availability Global strategy International Licensing International Franchising Specialized Modes Foreign Direct Investment 12-9 Exporting Advantages Disadvantages • Relatively 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 12-10 Licensing Licensing is when a firm, called the licensor, leases the right to use its intellectual property— technology, work methods, patents, copyrights, brand names, or trademarks—to another firm, called the licensee, in return for a fee 12-22 Figure 12.3 The Licensing Process Licensor leases the rights to use intellectual property Earns new revenues with low investment 12-23 Licensee uses the intellectual property to create products $$$ Pays a royalty to licensor Basic Issues in International Licensing • Specifying the boundaries of the agreement • Determining compensation • Establishing rights, privileges, and constraints • Specifying the duration of the contract 12-24 Licensing Advantages Disadvantages • Low financial risks • Limited market opportunities/profits • Low-cost way to assess market potential • Avoid tariffs, NTBs, restrictions on foreign investment • Licensee provides knowledge of local markets 12-25 • Dependence on licensee • Potential conflicts with licensee • Possibility of creating future competitor Franchising A franchising agreement allows an independent entrepreneur or organization, called the franchisee, to operate a business under the name of another, called the franchisor, in return for a fee 12-26 Basic Issues in International Franchising • Does a differential advantage exist in domestic market? • Are these success factors transferable to foreign locations? • Has franchising been a successful domestic strategy? 12-27 Yum! Brands Franchise Opportunities 12-28 Franchising Advantages Disadvantages • Low financial risks • • Low-cost way to assess market potential Limited market opportunities/profits • Avoid tariffs, NTBs, restrictions on foreign investment Dependence on franchisee • Potential conflicts with franchisee • Maintain more control than with licensing • Possibility of creating future competitor • Franchisee provides knowledge of local market • 12-29 Specialized Entry Modes Contract manufacturing Management contract Turnkey project 12-30 Contract Manufacturing Advantages Disadvantages • Low financial risks • Reduced control (may affect quality, delivery schedules, etc.) • Minimize resources devoted to manufacturing • Focus firm’s resources on other elements of the value chain 12-31 • Reduce learning potential • Potential public relations problems Management Contracts 12-32 Advantages Disadvantages • Focus firm’s resources on its area of contracts • Potential returns limited by contract expertise • Minimal financial exposure • May unintentionally transfer proprietary knowledge and techniques to contractee Turnkey Projects Advantages Disadvantages • Focus firm’s resources on its area of expertise • Financial risks • Avoid all long-term operational risks – Cost overruns • Construction risks – Delays – Problems with suppliers 12-33 Foreign Direct Investment Advantages Disadvantages • High profit potential • High financial and managerial investments • Maintain control over operations • Acquire knowledge of local market • Avoid tariffs and NTBs 12-34 • Higher exposure to political risk • Vulnerability to restrictions on foreign investment • Greater managerial complexity Foreign Direct Investment • Building new facilities (the greenfield strategy) • Buying existing assets in a foreign country (acquisition strategy) • Participating in a joint venture 12-35 Greenfield Strategy • Best site • Modern facilities • Economic development incentives • Clean slate 12-36 ... investment 12- 10 Motivations for Exporting Proactive 12- 11 Reactive Forms of Exporting Indirect exporting Direct exporting 12- 12 Intracorporate transfers Figure 12. 2a Indirect Exporting 12- 13 Figure 12. 2b... disadvantages of franchising 12- 3 Chapter Objectives • Analyze contract manufacturing, management contracts, and turnkey projects as specialized entry modes for international business • Characterize... national market • Competitor analysis 12- 6 • Explanation of change • Success factors • Strategic options Map 12. 1 A Tale of Two Chinas 12- 7 Dole Food Company’s international operations are subject