Chap 13

International Business: The Challenges
of Globalization
Eighth Edition
Chapter 13
Selecting and
Managing Entry
Modes
Copyright © 2016, 2014, 2012 Pearson Education, Inc. All Rights Reserved.
Learning Objectives
13.1 Describe how companies use exporting, importing, and
countertrade.
13.2 Explain the various methods of export/import financing.
13.3 Describe the different types of contractual entry modes.
13.4 Describe the various kinds of investment entry modes.
13.5 Outline key strategic factors in selecting an entry mode.
License to Thrill
• Marvel Enterprises
(www.marvel.com)
– A global character-
based entertainment
licensing company
• Licenses characters for
films and products
• Earns royalties from
licensing agreements
• Marvel International:
licensing in strategic
international markets
Entry Mode
• Entry Mode: Institutional arrangement by which a firm
gets its products, technologies, human skills, or other
resources into a market
• Categories:
– Exporting, importing, and countertrade
– Contractual entry
– Investment entry
Exporting, Importing, and
Countertrade (1 of 6)
Top 10 Exporters to the United States
Figure 13.1 Top Exporters to the United States
Source: International Trade Statistics 2013 (Geneva, Switzerland: World Trade Organization,
November 2013), Table II.30, p. 82–83.
Why Companies Export
• Achieve economies of scale
• Diversify sales
• Gain international business experience
Developing an Export Strategy: A Four-Step Model
Four-Step Model
• Identify a potential market.
• Match needs to abilities.
• Initiate meetings.
• Commit resources.
Degree of Export Involvement
Forms of Export Involvement
• Direct Exporting
– Local Sales Representatives
– Distributors
• Indirect Exporting
– Agents
– Export Management Companies
– Export Trading Companies
Avoiding Export and Import Blunders
• Common reasons for export and import blunders:
– Failure to conduct adequate market research
– Failure to obtain adequate export advice
• To avoid committing such blunders
– Hire a freight forwarder: a specialist in export-related
activities
Countertrade
Types of Countertrade
• Barter
• Counterpurchase
• Offset
• Switch Trading
• Buyback
Quick Study 1
1. What are the four steps, in order, involved in creating an
export strategy?
2. When a company sells its products to intermediaries who
then resell to buyers in a target market it is called what?
3. What is the name of a specific type of countertrade?
Export/Import Financing (1 of 5)
Figure 13.2 Risk of Alternative Export/Import Financing Methods
Advance Payment
• Advance Payment: Export/import financing in which an
importer pays an exporter for merchandise before it is shipped
• Common when:
– Two parties are unfamiliar with each other
– Transaction is relatively small
– Buyer with poor credit rating
• Most favorable method for exporters
• Least favorable for importers
Documentary Collection: Figure 13.3 Documentary Collection Process
Export/import financing in which
a bank acts as an intermediary
without accepting financial risk
Draft (Bill of Exchange):
Document ordering an importer
to pay an exporter a specified
sum of money at a specified time
Bill of Lading: Contract
between an exporter and a
shipper that specifies
merchandise destination and
shipping costs
Letter of Credit: Export/import Figure 13.4 Letter of Credit Process
financing in which the importer’s
bank issues a document stating
that the bank will pay the
exporter when the exporter
fulfills the terms of the document
Types: Irrevocable, Revocable,
and Confirmed
• Open Account: Export/import financing in which an exporter
ships merchandise and later bills the importer for its value
• Often used when
– Parties are very familiar with one another
– Sales between two subsidiaries within an international
company.
• Least favorable for exporters
• Most favorable for importers
Quick Study 2
1. Export/import financing that presents the most risk for
exporters is called what?
2. Export/import financing in which a bank acts as an
intermediary without financial risk is called what?
3. Export/import financing in which the importer’s bank
issues a document stating that the exporter will get paid
when it fulfills the terms of the document is called what?
Contractual Entry Modes (1 of 4)
• Licensing: Practice by which • Advantages
one company owning intangible – Finance expansion
property (the licensor) grants
– Reduce risks
another firm (the licensee) the
right to use that property for a – Reduce counterfeits
specified period of time – Upgrade technologies
• Cross Licensing: Practice by • Disadvantages
which companies use licensing – Restrict licensor’s
agreements to exchange activities
intangible property with one – Reduce global
another consistency
– Lend strategic property
• Franchising: Practice by • Advantages
which one company (the – Low cost and low risk
franchiser) supplies another
– Rapid expansion
(the franchisee) with intangible
property and other assistance – Local knowledge
over an extended period • Disadvantages
• Companies based in the – Cumbersome
United States dominate the – Lost flexibility
world of international
franchising
• Management Contract: • Advantages
Practice by which one – Few assets risked
company supplies another with
– Nations finance projects
managerial expertise for a
specific period of time – Develops local
workforce
• Knowledge Transferred
• Disadvantages
– Specialized knowledge of
technical managers – Personnel at risk
– Business-management – Create competitor
skills of general managers.
Turnkey projects • Advantages
– Firms specialize in
• Turnkey (Build–Operate–
competency
Transfer) Project: Practice
by which one company – Nations obtain
designs, constructs, and infrastructure
tests a production facility for • Disadvantages
a client firm
– Politicized process
– Create competitor
Quick Study 3
1. What is the name of a specific type of contractual
entry mode?
2. What is it called when companies use agreements
to exchange intangible property?
3. A disadvantage of both management contracts and
turnkey projects is what?
Investment Entry Modes (1 of 4)
• Wholly Owned Subsidiary: • Advantages
Facility entirely owned and – Day-to-day control
controlled by a single parent
– Coordinate subsidiaries
company
• Disadvantages
– Expensive
– High risk
• Joint Venture: Separate • Advantages
company that is created and – Reduce risk level
jointly owned by two or more
– Penetrate markets
independent entities to achieve
a common business objective – Access channels
• Disadvantages
– Partner conflict
– Lose control
Figure 13.5 Alternative Joint Venture Configurations
Source: Based on Peter Buckley and Mark Casson, “A Theory of Cooperation in International Business,”
in Farok J.Contractor and Peter Lorange (eds.), Cooperative Strategies in International Business
(Lexington, MA: Lexington Books, 1988), pp. 31–53.
• Strategic Alliance: • Advantages
Relationship whereby two or – Share project cost
more entities cooperate (but
– Tap competitors’
do not form a separate
strengths
company) to achieve the
strategic goals of each – Gain channel access
• Disadvantages
– Partner conflict
– Create competitor
Quick Study 4
1. What is the name of a specific type of investment
entry mode?
2. A wholly owned subsidiary is a facility owned and
controlled by what?
3. What is the name of a specific type of joint venture?
4. A strategic alliance is similar to a joint venture except
for that it doesn’t involve what?
Strategic Factors in Selecting an
Entry Mode
• Selecting Partners for Cooperation
• Cultural Environment
• Political and Legal Environments
• Market Size
• Production and Shipping Costs
• International Experience
Quick Study 5
1. When selecting a partner for cooperation it is important to
remember what?
2. What factors may discourage an investment entry mode?
3. What factors may encourage an investment entry mode?
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International Business: The Challenges

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