The New

Global Marketing

Modes of Entry

Chapter 7
 Outline
I.The Exporting Mode of Entry
II.Licensing
III.Strategic Alliances (SA) and Joint Ventures (JV)
IV.Foreign Direct Investment (FDI) in Subsidiaries
V.The Internationalization Process
VI.The Role of Entry Barriers
VII.Takeaways
 Four Basic Modes of Entry
• Exporting Lower risk

– Indirect via trading company

– Direct
• Licensing
– Franchising
• Strategic Alliances (SA)
– Joint ventures investment
– Collaborations between companies
• Wholly Owned Manufacturing Subsidiary
Higher risk
– Commit investment capital in plant and machinery
Starbucks Mixed Entry Methods
Starbucks’ Early Market Entries

Country Year Type of Entry Partner

Japan 1996 JV Sazaby Inc.
Malaysia 1998 License Berajaya Group Ltd
New Zealand 1998 License Restaurant Brands
Taiwan 1998 JV President Coffee Company
Kuwait 1999 License Alshaya
Philippines 2000 License Rustan's Coffee Corp
Austria 2001 License Bon Appetit Group
Germany 2002 JV Karstadt Qualle AG
Greece 2002 JV Marinopoulos Brothers
Puerto Rico 2002 JV Puerto Rico Coffee Partners LLC
Spain 2002 JV Grupo Vips
Ex. 7.1: Source: Anna Jonsson and Nicolai J. Foss,
As skills expand, entry mode changes. “International Expansion through Flexible Replication:
• JVs in China and India Learning from the Internationalization Experience of IKEA,"
Journal of International Business Studies, vol. 42, no. 9.
• Acquisition in the U.K.
• FDI in Austria, Switzerland and now Japan
 Starbucks in China

The largest Starbucks in China is near tourist destination

Gulangyu in the city of Xiamen.
Ex. 7.2: Copyright © by Bigstock/elemery.
 Starbucks’ Global Presence

• Starbucks uses mixed modes of entry to balance

business opportunity with country regulations
and risk.

• International stores generated almost 40% of

Starbucks’ revenue in 2016.
 I. The Exporting Mode of Entry
• Indirect Exporting
– Hire export management companies to handle
international transactions.
• Advantage: Avoids overhead costs
• Disadvantage: No international skills developed
• Direct Exporting
– Firm handles its own activities internationally.
• Advantage: Control of operations
 The Exporting Mode of Entry (cont’d)
• Indirect exporting: Piggybacking, consortia, export management
companies, trading companies – no need to go abroad
• Direct exporting: Using market country agent or distributor
• Direct exporting: Using own sales subsidiary
• Direct marketing: Mail order and telemarketing

Fig. 7.8b: Source:

Fig. 7.8a: Source: https://pixabay.com/en/excavator-sand-dirt-industry-
https://pixabay.com/en/film-reel-
2436217/.
cinema-film-movie-reel-147631/.
Middlemen in Direct Exporting
HOME FACTORY
Freight Forwarder

Shipping Company

MARKET COUNTRY
BORDER
 Major Exporting Functions

• Product Shipment • Getting Paid

• Export Pricing • Legal Issues
• Local Distribution • After Sales Support
 Exporting Tasks
Product shipment Getting paid
1. Transportation to the border 1. Checking creditworthiness
2. Clearing through customs 2. Getting paid in local currency
3. Warehousing
3. Hedging against currency losses
4. Converting funds to home currency
Export pricing
5.Repatriating the funds
1. Price quotes
2. Trade credit
Legal issues
3. Price escalation
1. Export license
4. Dumping
2. Hiring an agent
3. Transfer of title/ownership
Local distribution
4.Insurance
1. Finding distributors
2. Screening distributors
After-sales support
3. Personal visit
1. Service
4. Negotiating a contract
2. Parts and supplies
3. Training of locals
4. Creating a sales subsidiary
 Exporting Functions
• Export Pricing
– Price Quotes
• Cost-Insurance Freight (CIF) is an alternative to an export
marketer.
• Seller pays product cost, insurance, and freight.
– Trade Credit
• Counterbalance higher prices
– Price Escalation
• Transportation costs, tariffs, special taxes, and exchange rate
fluctuations drive export prices up.
• Still, overseas prices are often lower than local.
 Exporting: Dumping
• Dumping
– Selling goods in some markets below cost
• Reverse dumping
– Selling products at home below cost
• Countervailing duty
– Penalty for violating antidumping laws that brings prices
back up over production costs and imposes a fine
• Illegal reason for dumping:
– Entry into a new market by selling overproduced goods
at low prices
 Direct Exporting: Payment
• Payment issues
–Local currency
–Creditworthiness
–Letter of credit
–Converting funds
–Repatriation, hedging

Fig. 7.14a: Source: https://pixabay.com/en/money-finance-wealth-currency-163502/.

 How a Letter-of-Credit Works
Exporter 7. Remits payment
seller Exporter’s
beneficiary bank
5. Presents documents

3. Advises of L/C

5. Presents documents
4. Shipment of goods

7. Remits payment
for negotiation
1. Purchase and

3. Opens L/C
agreement

United States
Overseas

2. L/C application
Importer
buyer 6. Sends documents Importer’s
account party bank
7. Pays bank or gets loan
 Logistics? Outsourced to Specialists
• Product Shipment
– Transportation: Independent freight forwarder
ships to country border and unloads
– Clearing customs: Product goes to customs-free
depot before importer processes through
customs
– Warehousing: Led by the distributor

Fig. 7.16b: Source: https://pixabay.com/en/airplane-

Fig. 7.16a: Source: https://pixabay.com/en/car-van-fedex-delivery-
aircraft-commercial-750753/.
transport-438029/.
 Terms of Shipment
• Ex-Works (EXW) at the point of origin: Seller delivers goods,
buyer bears all other charges.
• Free Alongside Ship (FAS) at a named port of export: Price for
goods includes delivery alongside a vessel.
• Free on Board (FOB) at a named port of export: Seller loads the
goods on the vessel.
• Cost & Freight (CFR) to a named overseas port: Price for goods
includes transportation to port.
• Cost, Insurance & Freight (CIF) to a named overseas port: Price
includes insurance, transportation and miscellaneous charges to
the port of disembarkation.
 Exporting: Local Distribution
Importer – Agent –
logistics alone legal/regulations,
do marketing

Can be replaced
by wholly-owned
Independent distributor – sales subsidiary
physical goods,
marketing effort

Distribution channels
Wholesalers

Retailers
 Finding a Distributor
• Use existing channels, found via
– Government agency assistance
– Trade fairs and international
conventions
• Screening distributors Fig. 7.19a: Source:
https://pixabay.com/en/business-deal-smile-
cheerful-2703167/.
– On key performance criteria
– Distributor’s finances are less
important if the firm can support
itself initially
Fig. 7.19b: Copyright © 2011 by Richter Frank-Jurgen, (CC BY-SA 2.0) at
https://commons.wikimedia.org/wiki/File:Sheikh_Saud_meeting_Nicolas_Nahas,_Minister
_of_Economy_&_Trade,_Lebanon,_2011_Horasis_Global_Arab_Business_Meeting_-
_Flickr_-_Horasis.jpg.
Finding Distributors at Trade
Fairs

Ex. 7.9: Copyright © 2013 by Shutterstock/pcruciatti.

 Distributor Screening Criteria
• Previous experience (products handled, area covered, size)
• Services offered (inventory, repairs, after-sales service)
• Marketing support (advertising and promotional support)
• Financial strength
• Relations with government
• Cooperativeness
• Whether or not handling competing products

Finding International Distributors https://vimeo.com/19667436

 Exporting: Legal and Support
Legal After sales support
• Export license? • Service
• Hiring an agent • Parts and supplies
• Transfer of • Training of locals
title/ownership • Sales subsidiary?
• Insurance – Locals with
management from
HQ
 Import/Export Question?
• Chile’s fruit-growing industry has counter
seasonal harvest (summer in Chile is winter in
US).
• Why might the U.S. restrict the importation of
fruit from Chile during the U.S. winter?
• Discuss the likely response of:
– U.S. government
– Chilean government
– U.S. fruit farmers
– Kroger, Publix
– U.S. consumers
 II. Licensing
• Licensing: Offering an intangible asset to a
foreign company for a fee
• Advantages:
– Reduced need for local market research
– Licensee may strongly support the product
• Disadvantages:
– Can lose control of competitive advantage
– Licensee can become a new competitor
 Licensing Mode of Entry
• Technical licensing
• Contract manufacture
• Original equipment manufacture
• Management contracts
• Turnkey contracts
Fig. 7.25a: Copyright © 2015 by McDonald's.
• Franchising

Fig. 7.25b: Copyright © 2008 by JVC.

 Franchising
• Franchising: Franchisor licenses its business
model to a local franchisee.
• Local franchisee:
– Raises capital to establish the business
– Obtains real estate and capital investment
– Hires employees and establishes place of business
• Franchisor:
– Offers use of a well-known brand name
– Contractual promises of co-op advertising
– Helps find promising locations
– Provides training and a blueprint for management

Fig. 7.26: Copyright © 2015 by The Body Shop.

 Subway Franchise
• 34000 locations in
over 90 countries
• Subway in Poznan,
Poland
Subway expansion:
https://www.youtube.com/watch?v=WJOEZGI5
0B8
Ex. 7.14: Copyright © 2014 by Shutterstock/Authentic Creations.
 Franchising Pros and Cons
• Franchisor
– Pro: Earns income as a royalty on gross revenues
– Con: Must establish controls over brand name use and
local quality
• Franchisee
– Pro: Can start a business with limited capital and benefit
from franchiser’s experience.
– Con: Franchiser dictates many facets of business
operation limits local adaptation.

Fig. 7.28: Copyright © 2008 by Yum! Brands, Inc..

 McDonalds and Jollibee in the
Philippines

Fig. 7.29b: Copyright © 2015 by Judgefloro, (CC BY-SA 4.0) at

Fig. 7.29a: Copyright © 2014 by Judgefloro, (CC BY-SA 3.0) at https://commons.wikimedia.org/wiki/File:08368jfSan_Jose_Poblacion_Tenej
https://commons.wikimedia.org/wiki/File:FvfPanPhilHighway7996_24.JPG. ero_College_Capitol_Drive_Balanga_City_Bataanfvf_18.JPG.

• Protecting your franchise

model requires adequate
“rule of law” around trade
secrets.
 III. Strategic Alliances (SA) and Joint
Ventures (JV)
• SAs are contractual collaborations between companies who share
costs and benefits of joint work.
• Most are joint ventures with complementary technologies,
resources, and access to markets.
• Employees come from both parent companies.

Fig. 7.30: Copyright © 2015 by Subhadip Mukherjee, (CC BY-SA 4.0) at

https://commons.wikimedia.org/wiki/File:Women_buying_cosmetics.jpg.
Equity-based SAs: Joint Ventures (JVs)
• Joint ventures: Rank-Xerox, Fuji-Xerox, Xerox-
Russian Vnesghtorgizdat
– Advantages:
• Convenient
• Money saving
– Disadvantages:
• Two principals in charge of production
• Harder to communicate customer feedback
• Constrains future growth

Fig. 7.31: Copyright © 2011 by Fuji Photo Film Co. / Xerox.

 Non-Equity Strategic Alliances
• Distribution alliances: Toyota and VW
(now dissolved)
• Manufacturing alliances: Sony-Ericsson
cell phones since 2002
• Airlines fly each other’s routes
• Lockheed Martin has over
240 alliances in 30 countries

Fig. 7.32: Copyright © 2007 by Rich Niewiroski Jr., (CC BY 2.5) at

https://commons.wikimedia.org/wiki/File:SonyEricssonW810i-001.jpg.
 Coca Cola Distributes Illycaffé
Products

• Italian Illycaffé produces a blend of espresso under a

single brand name.
• Coca-Cola uses its worldwide distribution system.

Fig. 7.33a: Copyright © 2014 by WestportWiki, (CC BY-SA 3.0) at Fig. 7.33b: Source: https://pixabay.com/en/coffee-
https://commons.wikimedia.org/wiki/File:Illy_coffee_jars_beans.jpg. latte-art-espresso-2605196/.
CRH3 in Beijing South Railway Station

Joint venture between Siemens and Beijing Automotive

Industry Holding Co., Ltd. (BAIC) created the CRH3 train with
an operating speed of 220 MPH.
Ex. 7.15: Copyright © 2013 by Bigstock/Markus Mainka.
IV. Foreign Direct Investment (FDI) in
Subsidiaries
The traditional solution to entry barriers
ADVANTAGES DISADVANTAGES

• Local production lessens import- • Higher risk exposure

related costs and taxes
• Guarantees availability of goods
and eliminates delays
•More uniform quality
•Adapts products to local customer
requirements
• Heavier pre-decision
information gathering and
research evaluation
• Political risk
• “Country-of-origin” effects
can be lost
 BMWs Made in Spartanburg, S.C.
• Sole global producer of several BMW
models that are exported to more than 140
countries.
• Why are they made in the U.S. and not
Germany?
• Access to a large market
• US suppliers are more flexible
Fig. 7.36: Source:

• Labor cost?
https://pixabay.com/en/automobile-bmw-car-
luxury-vehicle-1834274/.
 Non-exporting Modes of Entry
LICENSING
Host Country
Home country Blueprint : “how to do it”
Host County

WHOLLY-OWNED SUBSIDIARY STRATEGIC ALLIANCE (JV)

A replica of home A “joint effort”
V. The Internationalization Process
• Cultural distance effect: Firms enter culturally similar
countries first
• Learning effect: Firms use the experience to learn
about doing business across borders
• The result is gradual expansion into increasingly
dissimilar countries as global knowledge grows.
• This sequence is reflected in the modes of entry
chosen.
 Cultural Distance and Learning
AMOUNT OF
LEARNING
Gradual Late Entry
Entry

Early Entry

Learning
More and
Some learning learning unlearning

SIMILAR LESS SIMILAR DISTANT CULTURAL

COUNTRIES MARKETS MARKETS DISTANCE
Waterfall Strategy: Gradual Expansion
• Firm gradually moves into overseas
markets
– Advantages: Orderly expansion with less
demanding resource requirements
– Disadvantage: Too slow in fast-moving market
Home country

New countries
 Sprinkler Strategy
• Entering several country markets
simultaneously or within a limited period
of time
– Advantages: Quicker global market penetration with
first-mover advantages
– Disadvantages: Requires large amount of managerial
and financial resources

New countries
Home country
Traditional Internationalization Stages
• Stage 1 – Indirect exporting via licensing
• Stage 2 – Direct exporter via independent
distributor
• Stage 3 – Establishing foreign sales
subsidiary
• Stage 4 – Local assembly
• Stage 5 – Foreign production
 Today’s Born Globals
• View the world as one market, using the
Internet to reach foreign markets
–Typically small technology businesses, Internet-based
• Red Bull has been global from its beginning
“There is only one market, that is the
world….from zero on we have gone for
global brand philosophy, global pricing,
global media plans.”

Fig. 7.43: Source: https://pixabay.com/en/redbull-energy-drink-blue-sky-924061/.

• In less than 30 years, Red Bull has grown to employ

over 10,000 people in 167 countries.
 VI. The Role of Entry Barriers
ENTRY BARRIERS: Any obstacle making it more difficult for a firm to
enter a product/service market

TARIFF BARRIERS
• Customs duties enforced on imported products
• Different tariff rates for different countries and products
• May be adjusted by political influence from trade associations

NON-TARIFF BARRIERS
• Includes all other entry barriers
• E.g. transportation costs, slow customs procedures, etc.
 United States International Trade
Commission (Customs Duties)
• Harmonized tariff schedule
• Many tariff rates exist for importation into the
U.S. and most countries
– https://www.usitc.gov/tata/hts/bychapter/index.htm

• Determining the rate of duty of a wool suit:

– Does it have darts?
– Did the wool come from a country that qualifies for duty-
free treatment?
– Where was the suit assembled
– Does it have synthetic fibers?
Fig. 7.45: Source: https://commons.wikimedia.org/wiki/File:United_States_International_Trade_Commission_seal.PNG.
 More Entry Barriers
ARTIFICIAL ENTRY BARRIERS

• Limited distribution access

• Bureaucratic inertia
• Government regulations
• Limited access to technology
• Local monopolies
NATURAL ENTRY BARRIERS

• Competition among several differentiated brands

• Strong brand names charging a premium over competitors
• Pro-domestic sentiment favoring local brands
 Entry Barriers (cont’d)

Singapore Airlines flight attendants arriving at Singapore’s Changi airport.

•Airlines have high non-tariff entry barriers such as

access to airports and jet ways.

Fig. 7.47: Copyright © 2004 by Praziquantel, (CC BY 2.0) at

https://commons.wikimedia.org/wiki/File:Singapore_Airlines_flight_attendants.jpg.
Entry Barriers Protect Domestic Turf
Government
regulations,
ARTIFICIAL
limited
ENTRY
distribution
BARRIERS
access, tariff
barriers

Competition
Tariffs
among
differentiated NATURAL
brands, all ENTRY
companies BARRIERS
Pro- compete on
domestic equal footing.
Markets
 Barriers and Mode of Entry
• When barriers are low, firms can enter via
exporting.
• When barriers are high, firms choose
alternative modes of entry:
– License a local producer.
– Create a joint venture (JV).
– Engage in a distribution alliance.
– Invest in a wholly owned subsidiary.
 VII. Takeaways

The four main entry modes are:

• Exporting
• Licensing
• Strategic alliances
• Wholly owned manufacturing
subsidiary
 Takeaways
• Export operations are new to a domestic
marketer and force the firm to either
develop new skills or rely on independent
middlemen.
• The firm chooses between an agent and
distributor or a foreign sales subsidiary to
handle local marketing.
 Takeaways

• Licensing and strategic alliances may

dilute firm-specific advantages.
• Partners with local knowledge and the
need to reduce a firm’s risk exposure
offsets this risk.
 Takeaways

Controlling the local marketing effort:

• By establishing a sales subsidiary
in the market country, the firm can
control the local marketing effort
independent of the chosen entry
mode.
 Takeaways
Barriers to entry include:
• Tariffs, quotas, customs procedures
• Restrictive government regulations
• Limited access to distribution
channels
• Pro-domestic consumer biases
 Takeaways
Entry barriers force firms to either:
• Un-bundle their value chain and engage in
non-exporting modes of entry, such as
licensing or strategic alliances.
• Or invest in a wholly-owned manufacturing
subsidiary.