© 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved

© 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved.

Methods of Entry into Foreign Markets



Entry Strategy Factors

Indirect Exporting

Active Exporting

Production Abroad

Parallel Imports

Counterfeit Goods

FTZs, Maquiladoras

Foreign Corrupt Practices Act




Indirect Exporting

Active Exporting

Production Abroad

Parallel Imports

Counterfeit Goods

FTZs, Maquiladoras




Determinant Factors:

• The size of the market

• The growth of the market

• The potential market share of the exporter

• The type of product

• The market strategy of the firm

• The willingness of the firm to get involved

• The characteristics of the country considered

• The time horizon considered


Entry Strategy Alternatives

Decision

Manufacture Abroad

Manufacture at Home

Indirect Exporting Active Exporting




Indirect Exporting

Active Exporting

Production Abroad

Parallel Imports

Counterfeit Goods

FTZs, Maquiladoras



Indirect Exporting

• When the firm is not actively pursuing sales in foreign markets

Alternative means of indirect exporting:

• Export Trading Companies

• Export Management Corporations

• Piggy-Backing


Indirect Exporting

Export Trading Companies – ETC

• Purchase goods in the exporting country and resell them to a customer in a foreign country

• The seller sees the transaction as a domestic sale.

• The buyer sees the transaction as a domestic purchase.

• ETCs are usually big firms.

• ETCs earn a profit on the transaction.


Indirect Exporting

Export Trading Companies – ETCs

• ETCs are appropriate when: A company doesn’t have expertise in international

transactions A company specializes in another geographical area

• ETCs are inappropriate for companies that have long term goals.


Indirect Exporting

Export Management Corporations – EMCs

• Are located in the exporting country

• Are operating as export-oriented manufacturer’s representatives (agents) for the exporter

• EMCs are usually small firms.

• EMCs operate on a commission basis.

• EMCs can be by-passed by unscrupulous exporters in future sales.


Indirect Exporting

Export Management Corporations – EMCs

• EMCs are appropriate when a company doesn’t have expertise in international transactions.

• EMCs are inappropriate for companies that have long term goals.


Indirect Exporting

Piggy-Backing

• A large company “brings along” its suppliers when it builds a factory abroad.

• A successful exporter involves one of its suppliers in the markets that this exporter has developed.




Indirect Exporting

Active Exporting

Production Abroad

Parallel Imports

Counterfeit Goods

FTZs, Maquiladoras



Active Exporting

• When the firm is actively pursuing sales in foreign markets

Alternative means of active exporting:

• Agents

• Distributors

• Sales Subsidiaries


Active Exporting

Agents

• Agents are usually small firms or individuals.

• Are located in the importing country

• Act as manufacturer’s representatives for the exporter

• Are representing the exporter when negotiating the sale

• Should be considered long-term partners


Active Exporting

Agents (Terminology)

• Principal

The party represented by an agent in an international agency agreement, e.g., the exporter.

• Binding Agent

An agent that can make decisions that are binding on the principal; an exporter should refrain from making its agent a binding agent, since it can be interpreted that the exporter has operations in the importing country that are then taxable.


Active Exporting

Distributors

• Are usually located in the importing country (sometimes in a neighboring country)

• Buy the goods from the exporter

• Take risks (buy the goods) and experience much higher costs

• Should be considered long-term partners


Active Exporting

The Agent-Distributor Decision

• Legality/Regulations Some countries do not allow agents at all. There are stricter regulations about agents than distributors.

• Contract Law vs. Labor Law Disputes with distributors are generally settled under Contract Law

and disputes with agents settled under Labor Law.


Active Exporting

Marketing Subsidiary

• A foreign establishment

• Staffed by employees of the exporting firm

• Sells the goods in the foreign market

• The costs of a marketing subsidiary are higher.

• A company that wants to retain control over its sales in a foreign country would chose sales/marketing subsidiary.


Active Exporting


Active Exporting

Coordinating Direct Export Strategies

• The choice of Export Strategies can be: Market-driven Company/Product–driven

• A “Fits-all” Strategy (agents in all markets, for example): Simplifies Management Might lead to a poor match

• Different Strategies: Allow flexibility for different markets in different countries Will have higher costs


Active Exporting

Foreign Sales Corporations – FSCs

• Can be used with agents, distributors, and sales subsidiaries

• FSCs are US subsidiaries that are designed as a way for corporation located in the United States to lower its income tax,

• WTO ruled against FSCs in March 2006.

• The concept of a tax break to exporters is likely to be reinstated by the US Congress under other legal alternatives.




Indirect Exporting

Active Exporting

Production Abroad

Parallel Imports

Counterfeit Goods

FTZs, Maquiladoras



Production Abroad

• When the firm decides to manufacture its products in foreign markets

Alternative means of production abroad:

• Contract manufacturing – Subcontracting

• Licensing

• Franchising

• Joint Ventures

• Subsidiaries


Production Abroad

Contract Manufacturing – Subcontracting

• Occurs when a company enters an agreement with a producer in the foreign market to manufacture its goods

• Is a way to get the product manufactured in a foreign country

• The method used to market and distribute the product in the foreign market remains to be determined and organized.


Production Abroad

Licensing

• A process by which a firm possessing some intellectual property item (a patent, a copyright, a trademark, a trade secret) grants another company the right to use the intellectual property item in exchange for a payment, called a royalty.

• An Intellectual Property item is an intangible good that an individual or a firm can own, such as copyrights, patents, and trademarks, which are protected by governments, preventing non-owners from using them without authorization, or trade secrets, which are protected by being kept secret.


Production Abroad

Licensing (Vocabulary)

• Licensee The party that is granted the right to use an intellectual property item

owned by another party, the licensor, in exchange for payment of a royalty

• Licensor The owner of an intellectual property item that grants another firm

(the licensee) the right to use that intellectual property in exchange for the payment of a royalty

• In an international environment, the licensor is the “exporting” company and the licensee is the “importing” company.

• Licensing is used when a firm wants to export its intellectual property.


Production Abroad

Licensing (Vocabulary)

• Royalty The amount of money paid by the licensee to the licensor for the

right to use the licensor’s intellectual property Royalty fees are generally determined in function of the number of

times that the licensee or franchisee uses the intellectual property.


Production Abroad

Franchising• Definition

A process by which a firm possessing an array of several intellectual property items grants another company the right to use these intellectual property items in exchange for royalties

In general, the firm that is granted the rights to use the items and the firm that is granting the rights to use the items are, in the eyes of their customers, indistinguishable (e.g. McDonald’s).


Production Abroad

Franchising (Vocabulary)

• Franchisor The owner of an array of several intellectual property items that

grants another firm the rights to use that group of intellectual property items in exchange for the payment of royalties

• Franchisee The party granted the right to use an array of intellectual property

items owned by another party in exchange for the payment of royalties


Production Abroad

Franchising

• Franchising is used when a firm wants to export a “package” of intellectual property items.

• Franchising is more frequently used in retail or consumer markets.

• Franchising is used when the exporting company wants an apparent physical presence in a foreign country without investing capital.


Production Abroad

Joint Ventures

• Joint ventures are characterized by the creation of a new corporation in a foreign country.

• Jointly owned by the joint venture partners in any combination of ownership percentages

• Some joint ventures include three or more partners, but they are less frequent.


Production Abroad

Joint Ventures

• There are several reasons to create JVs: Reduce risk Reduce exposure Take advantage of partner’s (or partners’) strategic advantages

• Joint Ventures are sometimes mandated by the governments of developing countries, looking to create wealth among their citizens by requiring that one of the partners be a local company.


Production Abroad

Joint Ventures

• JVs are less frequently used today than they were in the 1980s or 1990s: Many have been unsuccessful when partners start to diverge on

objectives Many have been unsuccessful when local partners have not been

supportive


Production Abroad

Subsidiaries

• WOFE: Wholly Owned Foreign Enterprise

• A100 percent investment in a foreign venture

• The WOFE strategy allows the firm to retain complete control over its investment.


Production Abroad

Subsidiaries

• Require large investment

• Higher risk and higher exposure

• WOFEs present the disadvantage of having to manage in a foreign country without a good understanding of local customs

and regulations.


Production Abroad




Indirect Exporting

Active Exporting

Production Abroad

Parallel Imports

Counterfeit Goods

FTZs, Maquiladoras



Parallel Imports / Gray Market

• A process by which entrepreneurs buy the products of a company in country A, export them to country B, and resell them to retailers and other intermediaries in country B

• Since the entrepreneurs are operating outside of the normal distribution channels for these products, and since they are not authorized distributors, the products themselves are dubbed parallel imports as well.

• Parallel imports occur in all sorts of product lines.


Parallel Imports

The Gray Market




Indirect Exporting

Active Exporting

Production Abroad

Parallel Imports

Counterfeit Goods

FTZs, Maquiladoras



Counterfeit Goods

• Goods that appear to have been produced by the legitimate manufacturer, but were actually produced by another company intent on deceiving customers and imitating the genuine goods

• Counterfeit goods are generally sold for a much lower price than the authentic goods.

• The existence of such counterfeiting activity is not dependent on the method of entry chosen.

• Since about 2003, many countries have started to crack down seriously on counterfeiting.




Indirect Exporting

Active Exporting

Production Abroad

Parallel Imports

Counterfeit Goods

FTZs, Maquiladoras



Foreign Trade Zones

• Foreign Trade Zones (FTZs) are areas of a country that have acquired a special Customs status.

• FTZs are areas that are physically located in a country, but that are not officially “part” of that country’s territory for Customs’ purposes, and therefore goods that enter an FTZ have not entered the country in which the TTZ is located.

• FTZs are built with the specific purpose of encouraging foreign investments and exports.

• Also called Free Trade Zones


Foreign Trade Zones

• FTZs exist in one form or another in just about every country.

• FTZs are particularly attractive to a manufacturer if the host country has a so-called “inverted tariff structure,” where the tariff on parts is higher than the tariff on the finished product.


Maquiladoras

• Maquiladoras are companies in the country of Mexico with a Customs status similar to the status of an FTZ located both in Mexico and in the United States.

• Products entering a maquiladora are not charged tariffs by the Mexican Government, and are not charged tariffs by the US Government.

• The parts used in a maquiladora are from the U.S.

• The products are assembled in the maquiladora and the final products are sent to the U.S.




Indirect Exporting

Active Exporting

Production Abroad

Parallel Imports

Counterfeit Goods

FTZs, Maquiladoras




• U.S. Law that prohibits a U.S. firm from paying bribes to foreign officials.

• The OECD’s Anti-Bribery Convention has been ratified by 36 countries as of June 2006.

Documents

© 2007 Thomson, a part of the Thomson Corporation. Thomson, the Star logo, and Atomic Dog are trademarks used herein under license. All rights reserved