UNIT TWO (2)

Organizational Participants that Make International Business

Learning Objectives

In this chapter, you’ll learn about:

1. Four types of participants in international business

2. Focal firms in international business

3. International entry strategies of focal firms

4. Distribution channel intermediaries in international

business

5. Facilitators in international business

6. Governments in international business

Four Types of Participants in International Business

1. Focal firm: Initiator of an international business

transaction, e.g., MNEs and SMEs

2. Distribution channel intermediary: Specialist firm that

provides distribution, logistics, and marketing services in

the international value chain

Four Types of Participants in International Business

3. Facilitator: Firm that provides special expertise in

banking, the law, customs clearance, market research, or

another field

4. Governments: Active in international business as

suppliers, buyers, and regulators

Global Value Chain in the Automotive Industry

• Manufacture of the Chevrolet Malibu illustrates the national

& geographic diversity of suppliers in a truly global value

chain

• Suppliers are headquartered in Britain, France, Germany,

Japan, the U.S., and elsewhere. The components are

typically manufactured in low-cost countries & shipped to

the General Motors plant in Fairfax, Kansas, USA

The Multinational Enterprise (MNE)

• A large organization with a network of production plants,

marketing subsidiaries, & regional headquarters in

numerous countries; e.g., Ford, Sony, Unilever, Citibank,

McDonald’s, GE, & the Tata Group

• Historically the most important type of focal firm In China,

Russia, and other countries that emphasize socialism, some

MNEs are state owned

Multinational Enterprises, Ranked by Industry Sector Size

Small and Medium-Sized Enterprise (SME) as a Focal Firm • A relatively small player in its respective industry, usually

defined as a firm with 500 or fewer employees

• SMEs constitute the great majority of firms worldwide; they

usually create the most new jobs

• Characterized by limited resources, which often prevent

internationalizing via FDI. Instead, SMEs usually

internationalize via exporting

• There are many more SMEs doing international business

today than ever before

The Born Global as a Focal Firm

• A relatively new breed of SME that undertakes early and

substantial internationalization

• Usually niche players, typically exhibit a high degree of

innovation, entrepreneurial orientation, & a “borderless” mindset

• Usually leverage information and communications technologies

to internationalize early and operate effectively in world markets

• Make up the fastest-growing segment of exporters in most

countries

A Classification of International Entry Strategies

Foreign Market Entry Strategies of Focal Firms

• Exporting: Sale of products or services to customers

located abroad, from a base in the home country or a

third country

• Importing or Sourcing: Focal firms procure numerous

parts, components, and services from suppliers around

the world

Foreign Market Entry Strategies of Focal Firms

• Licensing: Granting the right to a foreign partner to use

certain intellectual property in exchange for royalties

• Franchising: Granting the right to a foreign partner to

use an entire business system in exchange for fees and

royalties

• Turnkey Contracting: Focal firms that finance and

implement all phases of a construction project & then

hand it over to foreign customers.

Foreign Market Entry Strategies of Focal Firms (cont.)

• Foreign direct investment (FDI): The transfer of assets to

another country or the acquisition of assets in that country

• Equity joint venture: When a focal firm creates and jointly

owns a new legal entity created through an equity

investment or pooling of assets

• Project based, non-equity venture: When focal firms

collaborate on a specific project without creating a new

entity

Distribution Channel Intermediary

• Specializes in physical distribution and marketing;

connects the focal firm with the end user in the foreign

market

• Assists focal firm by providing logistics services such as

warehousing and customer support

• Especially critical to exporters that do not engage in FDI

• Based either in the foreign market or home country

Foreign-Based Intermediaries

Foreign Distributor

• Takes title to the exporter’s goods & performs

marketing functions (sales, promotion, & after-sales

service) on exporter’s behalf

• Serves as the extension of the focal firm in the foreign

market

• Arranges for local transportation and advises focal firm

on how to function effectively in the local market

Foreign-Based Intermediaries (cont.)

Agent

• Also known as a broker

• Does not take title to the goods

• Works on a commission basis to bring the buyer

and seller together

Manufacturer’s Representative

• Works for the exporter under contract to represent and sell its

merchandise in designated territories

• Acts as a contracted salesperson in a designated territory

Domestic-Based Intermediaries Trading Company

• An intermediary that handles imports and exports of various raw

materials, parts, and finished products

• Large trading companies are typically high-volume, low-margin

resellers

• Many deal primarily in commodities such as grains, minerals,

coal, and metals (e.g., Cargill in the U.S.)

• In Japan, trading companies are key players in international trade;

e.g., Mitsubishi, Marubeni, Mitsui, Sumitomo—all firms in

Fortune’s Global 500

Domestic-Based Intermediaries (cont.)

Export Management Company (EMC)

• Common in the U.S. and numerous other countries

• Acts as an export agent on behalf of the focal firm;

finds export customers, negotiates terms of sale, &

arranges for international shipping, typically for smaller

exporters

• Most specialize in specific industries and geographic

areas

Online Intermediaries

• This process of bypassing traditional intermediaries is

made possible by the Internet

• Examples include Amazon, Dell, and eBay

• Traditional retailers, such as Tesco and Walmart, have

also established an online presence

• One negative outcome is unscrupulous marketers that

prey on unsuspecting customers with fake products

(e.g., pharmaceuticals)

Facilitators

• Assist the focal firm with specialized services required

in international transactions

• Examples include logistics service providers (e.g., DHL,

FedEx), banks, international trade lawyers, freight

forwarders, customs brokers, consultants, advertising

agencies, market researchers, insurance companies, &

tax accountants

Types of Facilitators

• Logistics Service Provider: a firm specializing in

transport, distribution, and storage of focal company

products

• Customs Broker: firms that specialize in clearing

products through customs in various destination

countries

Governments

• Governments exist at the local, provincial, national, and

supranational levels to make and enforce laws &

regulations & to provide essential economic security by

devising fiscal and monetary policies.

• Central banks in each country issue currency and regulate

national money supplies

• Sovereign wealth funds are state-owned investment funds

that undertake systematic, global investment activities to

generate income or to achieve policy objectives