Going Global

LicensingStrategic AlliancesFDI

Exports is not the only Option Barriers to trade such as Tariffs, quotas

and complex customs procedures discourage exports

Other options are Licensing Strategic Alliances Foreign Direct Investments (FDI)

Optimal mode of entry depends on business strategy, trade barriers & product situation

Entry Barriers Tariff barriers are the most obvious

barriers to entry. Import Tariffs make imports more

expensive when compared to domestic products

High tariffs create local monopolies, which results in higher prices for consumers

Tariffs also increase the cost of doing business in that country

Non Tariff barriers Non Tariff barriers are common & include:

Government Rules & Regulations e.g: FDA rules in US, Purity laws in Germany

Complex Customs Procedures Limited or No access to local distribution

network e.g: Fuji prevented its distributors from carrying Kodak products

Natural Barriers: The local competitors are too competitive, have a dominant market share, have a strong brand name

Developed Vs Developing Countries

Trade barriers in developing countries are often tariffs, Rules, Regulations & lack of infrastructure

Barriers in developed countries are usually natural barriers, Government Rules & regulations

Developed countries are often the learning grounds for firms from developing countries in their global expansion

Exit Barriers Exit barriers are non-recoverable investments

made while operating in a country. Often times it is difficult to lay off people, and

may have to pay a huge compensation to do so. Loss of good will, Brand Value, Brand Image also

acts as an Exit barrier E.g: Peugeot Exited US market in 1992, Philips

is still operating in US even after 15 straight years of losses

Loss of learning opportunity is cited as an exit barrier

Effect of Barriers on Entry Mode

Entry Mode depends heavily on trade barriers Firm must be ready to unbundle its Value chain

to gain entry Compulsory Joint Ventures in China Local Content Requirements in Czech Lack of distribution network in US

Firms often build managerial expertise in one mode of entry & would prefer it over others IBM, Philips, P&G prefer Wholly Owned Subsidiaries Small tech companies may prefer licensing or Joint

Ventures

Managerial Skills & Mode of Entry

Each Mode of entry involves different managerial skills Supervising hundreds of Franchising is

different from Running foreign subsidiaries Joint Ventures & Wholly owned

subsidiaries involve quite a lot of learning, Learning curve effects must be considered while planning the entry mode

Licensing Licensing refers to a firm’s know-how or

other intangible asset to a foreign company for a fee, royalty or some other form of payment

Overcomes tariffs and other trade barriers Licensee will learn FSA from the licensor

and may become a future competitor Loss of FSA can be prevented by proper

contracts & licensing agreements

Licensing – How not to do it Gillette avoided investment in market

research and investments in Europe, so it licensed its razor blade manufacturing technology to Wilkinson of UK – forgetting to exclude continental Europe in the contract

As a result Gillette now has to compete with its own technology in Continental Europe – A long uphill battle

Elements of a licensing Contract

Technology Package Definition, Know-How, Patents, trade marks

Use Conditions Territorial rights, Sublicensing agreements, exclusion

zones, performance/Quality conditions, reporting rules Compensation

Mode of payment, Minimum & maximum fees, Other assistance fees, marketing fees

Other Provisions Contract laws, Arbitration conditions, terminations

conditions

Franchising Franchising is similar to licensing but in addition

franchisor provides a well recognized brand name, marketing support and in some cases raw materials

Franchisor also provides advertising, employee training, production & quality training

In return Franchisee must adhere to the rules of the franchisor and both share revenue based on a preset agreement

Popular for fast foods, Hotels, Auto Repair Shops Franchisor has a greater control over the

operations

Original Equipment Manufacturing

OEM is actually exports Manufacturer sends there parts to another

company which sells the final product under their Brand name Canon provides cartridges for HP printers Canon Provides copiers for Savin

Pro: Avoids expensive marketing efforts Con: Firm fails to learn from foreign

Markets

Strategic Alliances (SA) SA is a collaboration between 2 firms Equity based SA is called Joint Ventures SA is mutually beneficial and takes

advantages of both firm’s FSA Share R&D, Distribute each others products

In some cases SA involves sharing of vital information – A potential loss of FSA

Unlike licensing, there is usually no royalty or fees to be paid

Non-Equity SA SA between competitors is relatively new Need to access each other’s technology,

marketing skills, manufacturing skills to exploit new markets is driving Non-Equity SA

Shortage of resources is one of the reason Control is established by soft skills I.e. the need

for mutual gain First Mover advantage Learn from leading markets Reduce competitive pressures

Distribution Alliances Distribution networks are often expensive to setup A mutual distribution alliance agreement prevents

duplication of efforts while maximizing benefits Airlines typically sell seats in other airlines Mitsubishi joined hands with Chrysler in US

Pro: Saves costs & uses a ready network Con:

Limits growth of the partners via a non-compete agreements

Firm loses learning opportunity

Manufacturing Alliances Manufacturing Alliance is a sharing of

manufacturing facilities to save on investment costs, achieve economies of scale, save on transportation costs

Manufacturing Alliances tend to be unstable as: Limits growth of the partners Potential loss of know-how Priority on manufacturing will always favor one partner

over the other Loss or learning curve economies

R&D Alliances R&D alliances are often between

competitors Such alliances are for:

Developing a common technology Need for accessing each other’s technology Need to stay ahead of other competition Lower R&D costs, Avoid Duplication Need to impose a joint technology standard

Unintended Loss of technology is possible

Joint Ventures Equity Based SA. Usually firms need to

transfer capital, man power, technology and management skills to the new venture

Potential loss of know-how exists Mutually beneficial if partners learn from

each other and their joint experience Usually a first step before setting up a

Wholly Owned subsidiary Care must be taken in selecting partners

FDI FDI is usually for Wholly owned subsidiaries

Greater Control over know-how – I.e Internalization of FSA

Avoid tariff & other barriers Faster response to foreign markets Lowering prices for buyers, gaining market share,

establishing an insider position Carries higher risk than any other mode of entry May suffer from Country-of-origin effects

E.g Sony from Malaysia

FDI – Green Field project or Acquisition

FDI decisions will have to consider a green field venture or an acquisition of a foreign firm

Acquisition of an existing company speeds up entry, gains a ready market share

Benefits from existing facilities, marketing channels etc

Disadvantages are: Incompatible product lines Culture mismatch Political Backlash or resurgence of national pride Loss of Goodwill Struck with existing legacy systems

FDI – Financial Analysis FDI requires rigorous financial analysis Cash flows are subjected to foreign

exchange risks IRR or NPV analysis for a foreign project is

difficult due to lots of unknowns Financial analysis is based on market

forecast. In many cases market forecast will be inaccurate

Optimal Entry Strategy

Closing Thoughts