GLOBAL MARKET ENTRY MODES INTERNATIONAL MARKETING WONKWANG UNIVERSITY Professor In Woo Jun / Bcom, MBA, Ph.D. 2015 1
CONTENTS I. GLOBAL MARKET ENTRY MODES 1. Modes of Global Market Entry II. EXPORTING 1. Exporting to Global Markets 2. Advantages and Disadvantages of Exporting 3. Types of Exporting 4. Export/Import Intermediaries 5. Major Functions of Sogo Shosha and GTC 6. Major Sogo Shosha in Japan 7. Major GTC in Korea III. INTERNATIONAL LICENSING 1. International Licensing 2. The Process of International Licensing 3. Advantages and Disadvantages of International Licensing 2
CONTENTS IV. INTERNATIONAL FRANCHISING 1. International Franchising 2. Advantages and Disadvantages of International Franchising V. SPECIALIZED ENTRY MODES 1. Contract Manufacturing 2. Management Contract 3. Turnkey Project VI. FDI (FOREIGN DIRECT INVESTMENT) 1. FDI (Foreign Direct Investment) 2. Greenfield Strategy 3. Acquisition Strategy 4. Joint Ventures 3
GLOBAL MARKET ENTRY MODES 1. Modes of Global Market Entry Decision Factors 1) Firm-specific Advantage (e.g. Capability, etc.) 2) Location Advantage 3) Other Factors - Resource Availability - Global Strategy - Core Competence Source : Adapted from Griffin, R. W., and Pustay, M. W. (2013), International Business, Pearson, p. 346 Exporting - Direct Exports - Indirect Export - Intra-corporate transaction International Licensing International Franchising Specialized Modes - Contract Manufacturing - Management Contract - Turnkey Projects FDI - Greenfield Strategy - Acquisition Strategy - Joint Venture 4
EXPORTING 1. Exporting to Global Markets Exporting is the simplest and the most common mode of entering global market. Exporting is the initial entry, but it would gradually evolve towards more developed modes. Merchandise exports in the world economy totaled approximately U$15trillion in 2010, and 22% of the world s total economic activity. 5
EXPORTING 2. Advantages and Disadvantages of Exporting Advantages - Relatively low financial exposure - Permit gradual market entry - Avoid restrictions on foreign investment - Acquire knowledge and information about local market Disadvantages - Trade barriers (e.g. tariffs and non-tariff barriers (NTBs)) - Logistical complexities - Potential conflicts with distributors 6
EXPORTING 3. Types of Exporting Indirect Exporting Country 1 Country 2 Company A Sell to domestic customers Company B Sell to foreign customers Company C Direct Exporting Country 1 Country 2 Company A Company C Sell directly to foreign customers 7
EXPORTING Intra-corporate Transactions Country 1 Country 2 Company A Company A Sell to affiliated company 8
EXPORTING 3.1) Indirect Export Several types of sales intermediaries are ready to collaborate with a manufacturer. They are familiar with and have extensive knowledge in local markets. - Advantage to manufacturer: Possibility of market expansion, Timesaving, etc. - Disadvantage to manufacturer: Payment of commission, No accurate information about market, price, consumer behaviour, competitors movements, etc. 9
EXPORTING 3.2) Direct Export A firm sells its product by itself, and controls and manage everything by itself. - Advantage : Direct negotiation, Direct pricing, Direct contract, No commission, Knowing accurate market information and situation, etc. - Disadvantage : Time-consuming, Costs may be high, Limitation of market expansion, Limitation of knowing business customs in local market, etc. 10
EXPORTING 3.3) Intra-corporate Transactions Intra-corporate transaction is the sale of goods by a firm in one country to an affiliated firm in another. It is an important part of international trade. Intra-corporate transactions account for about 40% of all US merchandise exports and imports. Many MNEs engage in intra-corporate transactions - Advantage : Lower production cost 11
EXPORTING 4. Export/Import Intermediaries Export/Import intermediaries : The third parties specialized in facilitating exports and imports. Roles : Some offer limited roles such as handling documentation or transportation. Others perform more extensive roles such as transportation, documentation, warehousing, financial assistance, L/C handling, etc. Types of intermediaries : Export Management Company (EMC), Freight Forwarder, Export/Import Broker, Manufacturers Export Agents, and International Trading Company International Trading Company : Sogo Shosha (Japan), General Trading Company (GTC, Korea) 12
EXPORTING 5. Major Functions of Sogo Shosha and GTC Primary Functions Auxiliary Functions 1) Trading and transactional intermediation functions (e.g. Export, import, domestic sales and third country trade intermediation) 2) Finance function (e.g. Extend credit, make loans, provide loan guarantees and develop venture capital 1) Distribution function (Warehousing and logistics management) 2) Organizing and coordination functions 3) New resources development function 4) Joint venture function 5) Planning function 6) Investment function Information and Intelligence Gathering Functions Source : In Woo Jun (2009), The Strategic Management of Korean and Japanese Big Business Groups, Ph.D. Thesis, The University Of Birmingham, p. 24 13
EXPORTING 6. Major Sogo Shosha in Japan Name 2010 Revenue (U$ Millions) Mitsubishi Corporation 60,793 (KRW68,392,125,000,000) Mitsui Co., & Ltd. 54,635 Marubeni 43,011 Itochu Corporation 42,612 Sumitomo Corporation 36,218 Others : - Sojitz Corporation (Nissho Iwai + Nichimen) - Toyota Tsusho Corporation (Tomen + Toyota) Source : Each Company s Internet Websites 14
EXPORTING 7. Major GTC in Korea Name 2012 Revenue (KRW Trillions) Samsung Corporation 25.3 SK Networks 27.9 LG International 12.7 Others : - Daewoo International - Hyosung Corporation - Hyundai Corporation - Lotte Corporation - GS Global (Former Ssangyong Corporation) Source : Each Company s Internet Websites 15
INTERNATIONAL LICENSING 1. International Licensing International Licensing is a contract/agreement between Licensor and Licensee. Licensor : A firm who has its own intellectual property (e.g. technology, work methods, patents, copyrights, brand names or trade marks, etc.) Licensee : A firm who uses the licensor s intellectual property, and pays compensation fees to the licensor. Compensation fees : Royalty 16
INTERNATIONAL LICENSING 2. The Process of International Licensing Licensor - Leases the rights to use its intellectual property - Earns new revenues with relatively low investments Lease Royalty Licensee - Uses the intellectual property to create products for local sale - Pays a compensation fees Basic Issues to be Considered 1) Set the boundaries of the contract/agreement 2) Decide compensation rates 3) Agree on the rights, obligations, and constraints 4) Specify the duration of the contract/agreement 17
INTERNATIONAL LICENSING 3. Advantages and Disadvantages of International Licensing Licensor Licensee Advantages - Carry relatively low financial risk - Don t need to invest much financial and managerial resources - Obtain knowledge and information about local market -Take the opportunity to make and sell products and services with relatively little R&D costs Disadvantages - Carry opportunity costs (e.g. PepsiCo and Heineken in the Netherlands) - Potential conflict with the Licensee - Risk of creating a future competitor - Risk of misusing intellectual property by the Licensee - Carry opportunity costs (e.g. PepsiCo and Heineken in the Netherlands) - Potential conflict with the Licensor 18
INTERNATIONAL FRANCHISING 1. International Franchising International Franchising allows an independent entrepreneur or organization (i.e. Franchisee) to operate a business under the name of another (i.e. Franchisor). The franchisor provides its franchisee with name, trademarks, operating system, and well-known product reputation. The franchisor also provides continuous support services such as advertising, training, and quality assurance programs. Many MNEs rely on franchising to expand their products in global markets (e.g. McDonald s, Dunkin Donuts, Baskin-Robbins, Pizza Hut, KFC, etc.) 19
INTERNATIONAL FRANCHISING 2. Advantages and Disadvantages of International Franchising Franchisor Franchisee Advantages - Can expand market to global markets with relatively low risk & cost - Don t need to invest much financial & managerial resources - Obtain knowledge and information about local market - Can enter a business that has an established and proven product and operating system Disadvantages - Carry opportunity costs - Share profit with the franchisee - Potential conflict with the franchisee - Risk of creating a future competitor - Carry opportunity costs - Share profit with the franchisor - Potential conflict with the franchisor 20
SPECIALIZED ENTRY MODES 1. Contract Manufacturing Companies use contract manufacturing to outsource most or all of their manufacturing needs to other companies. This strategy reduces companies financial and human resources. Nike, for example, has been using this strategy, and contracted with numerous companies throughout Southeast Asia to produce its footwear and apparel. 2. Management Contract Management contract is an agreement whereby one firm provides managerial assistance, technical expertise or specialized services to another firm. (Receive monetary compensation). 21
SPECIALIZED ENTRY MODES 3. Turnkey Project Turnkey project is a contract that a firm agrees to fully carry out all works from designing, civil engineering, construction to facility installation. Then, a firm turns the project over to the purchase when it is ready for operation. Example : Nuclear power plant, oil refinery facility, road construction, air port construction, etc. BOT Project : A firm builds a facility, operates it, and later transfers ownership of the project to some other party. 22
FDI (FOREIGN DIRECT INVESTMENT) 1. FDI (Foreign Direct Investment) Exporting, international licensing, international franchising and other specialized methods allow a firm to enter global markets without investing in foreign factories or facilities. However, some big business groups prefer to invest or establish their own production facilities or factories in foreign countries (i.e. host countries) They also want to control all works (e.g. assets, sales, profit, human resource, purchase, procurement, etc.) with ownership. FDI is an ultimate foreign market entry mode for a company. 23
FDI (FOREIGN DIRECT INVESTMENT) 2. Greenfield Strategy Greenfield strategy is a starting a new operation from new land. A firm buys or leases land, builds new facilities, hires managers and employees and launches the new operation. Advantages : A firm can select the site that best meets its needs; Local government and community often offer incentives to the firm because they want to create new job opportunity. Disadvantages : Successful implementation takes time and patience (e.g. time-consuming) ; Desired land may be unavailable ; A firm needs to comply with various local and national regulations 24
FDI (FOREIGN DIRECT INVESTMENT) 3. Acquisition Strategy It is a strategy to acquire or take over of an existing firm in order to conduct business in the host country. Advantages : A firm quickly obtains operation facilities, employees, technology, brand names and distribution networks. Disadvantages : The acquiring firm takes all liabilities of the acquired firm (e.g. financial and managerial liabilities, labor relation issues, environmental issues, etc.) 4. Joint Ventures Two or more firms agree to work together with shared ownership for mutual benefits. 25