CHAPTER 13
SELECTING AND MANAGING ENTRY MODES
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.
CHAPTER OUTLINE:
Introduction
Exporting, Importing, and Countertrade
Why Companies Export
Developing an Export Strategy: A Four-Step Model
Step 1: Identify a Potential Market
Step 2: Match Needs to Abilities
Step 3: Initiate Meetings
Step 4: Commit Resources
Degree of Export Involvement
Direct Exporting
Sales Representatives
Distributors
Indirect Exporting
Agents
Export Management Companies
Export Trading Companies
Avoiding Export and Import Blunders
Countertrade
Types of Countertrade
Export/Import Financing
Advance Payment
Documentary Collection
Letter of Credit
Open Account
Contractual Entry Modes
Licensing
Advantages of Licensing
Disadvantages of Licensing
Franchising
Advantages of Franchising
Disadvantages of Franchising
Management Contracts
Copyright © 2019 Pearson Education, Inc.
Advantages of Management Contracts
Disadvantages of Management Contracts
Turnkey Projects
Advantages of Turnkey Projects
Disadvantages of Turnkey Projects
Investment Entry Modes
Wholly Owned Subsidiaries
Advantages of Wholly Owned Subsidiaries
Disadvantages of Wholly Owned Subsidiaries
Joint Ventures
Joint Venture Configurations
Forward Integration Joint Venture
Backward Integration Joint Venture
Buyback Joint Venture
Multistage Joint Venture
Advantages of Joint Ventures
Disadvantages of Joint Ventures
Strategic Alliances
Advantages of Strategic Alliances
Disadvantages of Strategic Alliances
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
A Final Word
A comprehensive set of specially designed PowerPoint slides is available for use with Chapter 13.
These slides and the lecture outline below form a completely integrated package that simplifies the
teaching of this chapter’s material.
Lecture Outline
I. INTRODUCTION
An entry mode is the institutional arrangement by which a firm gets its products, technologies,
human skills, or other resources into a market. Companies seek entry to new marketplaces for
manufacturing or selling products. Entry mode selection depends on market experience, level of
control desired, and market size.
II. EXPORTING, IMPORTING, AND COUNTERTRADE
The most common method of buying and selling goods internationally is exporting and
importing. Companies use countertrade when exporting and importing products when using
currencies is not an option.
A. Why Companies Export
1. Expand total sales when the domestic market is saturated.
2. Diversify sales to level off cash flow, making it easier to coordinate payments to
creditors with receipts from customers.
3. Owners and managers with little or no knowledge of how to conduct business in
other cultures, use exporting as a low-cost, low-risk way of gaining valuable
international experience.
B. Developing an Export Strategy: A Four-Step Model
A logical approach to exporting is to research and analyze international opportunities
and develop a coherent export strategy. A firm with such a strategy pursues export
markets rather than waiting for orders to arrive.
1. Step 1: Identify a potential market (See Chapter 12)
a. To identify clearly whether demand exists in a target market, market
research should be performed and results interpreted.
b. Novice exporters should focus on one or a few markets that are culturally
understood.
c. A new exporter should seek advice on regulations, exporting in general
and to a target market in particular.
2. Step 2: Match needs to abilities
a. Assess a company’s ability to satisfy market needs.
3. Step 3: Initiate meetings
a. Early meetings with potential distributors, buyers, and others. Initial
contact should focus on building trust and cooperation.
b. Later meetings can estimate potential success of an agreement.
c. In the most advanced stage, negotiations take place and details of
agreements are finalized.
4. Step 4: Commit resources
a. After all the meetings and negotiations, it is time to put the company’s
human, financial, and physical resources to work.
b. The objectives of the export program must be clearly stated and should
extend out at least 3 to 5 years.
c. As companies expand activities, they discover the need for an export
department or division. See Chapter 11 for a detailed discussion of
organizational design issues to consider at this stage.
C. Degree of Export Involvement
Some companies use intermediaries to get their products in a market abroad. Other
companies perform all of their export activities themselves, with an infrastructure that
bridges the gap between the two markets.
1. Direct exporting
Company sells directly to buyers in a target market. Need not sell directly to
end-users; can rely on local representatives or distributors.
a. Sales representatives represent their own company’s products, not those
of other companies. Promote products by attending trade fairs and
making personal visits to local retailers and wholesalers. Do not take title
to the merchandise.
b. Distributors take ownership of merchandise when it enters their country,
accept risks associated with local sales, and sell to retailers, wholesalers,
or end users through their own channels of distribution. This reduces an
exporter’s risk and its control.
2. Indirect exporting
Company sells to intermediaries who resell to buyers in a target market. The
choice of intermediary depends on the ratio of international sales to total sales,
available resources, and the growth rate of the target market.
a. Agents
i. Individuals or organizations that represent one or more indirect
exporters in a target market. Compensated with commissions on
sales.
ii. Represent several indirect exporters and might focus their
promotional efforts on the products of the company paying the
highest commission.
b. Export management companies
i. EMC exports on behalf of indirect exporters, operating
contractually, either as an agent or as a distributor.
ii. Provides services on a retainer basis: gather market information,
formulate promotional strategies, perform promotional duties,
research customer credit, arrange shipping, and coordinate export
documents.
iii. Advantage: deep understanding of the cultural, political, legal,
and economic conditions of target market. Disadvantage: breadth
and depth of an EMC’s service hinders exporter’s international
skills development.
iv. After the EMC contract expires, a company can go at it alone in
exporting its products.
c. Export trading companies
i. ETC provides services in addition to those directly related to
clients’ exporting activities: import, export, and countertrade
services, distribution channels, storage facilities, trade and
investment projects, and manufacturing.
ii. Concept met limited success in the United States; remain small
and are dwarfed by Asian counterparts.
iii. Governments, financial institutions, and companies have closer
working relationships in Asia. The U.S. regulatory environment is
wary of such arrangements, and the lines between companies and
industries are clearly drawn.
D. Avoiding Export and Import Blunders
1. Companies new to exporting often make errors; many fail to conduct adequate
market research and obtain adequate export advice.
2. Companies can hire a freight forwarder—a specialist in such export-related
activities as customs clearing, tariff schedules, and shipping and insurance fees.
Can pack shipments for export and take responsibility for getting a shipment
from the port of export to the port of import.
E. Countertrade
Selling goods or services that are paid for, in whole or part, with other goods or services.
Developing and emerging markets often rely on countertrade to import goods due to
lack of hard currency. Formerly communist countries in Eastern and Central Europe use
countertrade as well as nations in Africa, Asia, and the Middle East. Requires an
extensive network of international contacts, but smaller companies can take advantage
of its benefits.
1. Types of countertrade
a. Barter: Exchange of goods or services directly for other goods or
services without the use of money.
b. Counterpurchase: Sale of goods or services to a country by a company
that promises to make a future purchase of a country’s product.
c. Offset: Agreement that a company will offset a hard-currency sale to a
nation by making a hard-currency purchase of an unspecified product
from that nation in the future.
d. Switch trading: One company sells to another its obligation to make a
purchase in a given country.
e. Buyback: Export of industrial equipment in return for products produced
by that equipment.
2. Countertrade can provide access to markets otherwise off-limits because of a
lack of hard currency. Typically involves commodity and agricultural products
such as oil, wheat, or corn—products whose prices on world markets fluctuate.
3. Problems arise when the price of a product declines between the barter time and
the selling time; fluctuating prices generate the same type of risk as in currency
markets. Managers might hedge this risk on commodity futures markets as they
hedge against currency fluctuations in currency markets (See Chapter 9).
III. EXPORT/IMPORT FINANCING
International trade poses risks for both exporters and importers. Exporters risk not receiving
payment after delivery, whereas importers fear that delivery might not occur once payment is
made. (See Figure 13.2) Export and import financing methods:
A. Advance Payment
1. Importer pays for merchandise before it is shipped. Used when two parties are
unfamiliar with each other, the transaction is small, or the buyer has a poor credit
rating.
2. Prior payment eliminates the risk of nonpayment, but creates the complementary
risk of non-shipment—importers might pay for goods but not receive them.
B. Documentary Collection
1. Bank acts as an intermediary without accepting financial risk. Used in ongoing
business relationships between two parties. The documentary collection process
can be broken into three main stages and nine smaller steps (see Figure 13.3).
2. A draft (bill of exchange) is a document ordering an importer to pay an exporter
a specified sum of money at a specified time. A bill of lading is a contract
between an exporter and a shipper that specifies merchandise destination and
shipping costs.
3. After receiving the appropriate documents from the exporter, the exporter’s bank
sends the documents to the importer’s bank.
4. Documentary collection reduces the risk of non-shipment because the packing
list details the contents of the shipment, and the bill of lading is proof that the
merchandise was shipped. The risk of nonpayment is increased because the
importer does not pay until he receives the necessary documents.
C. Letter of Credit (See Figure 13.4)
1. Importer’s bank issues a document stating that the bank will pay the exporter
when the exporter fulfills the terms of the document.
2. Used when an importer’s credit rating is questionable, when the exporter needs it
to obtain financing, or when a market’s regulations require it.
3. Banks issue letters of credit after an importer has deposited a sum equal to the
value of the imported merchandise. The bank pays the exporter, but the deposit
protects the bank if the importer fails to pay for the merchandise.
4. Several types of letters of credit:
a. An irrevocable letter of credit allows the bank issuing the letter to
modify its terms only after obtaining the approval of both exporter and
importer.
b. A revocable letter of credit can be modified by the issuing bank without
obtaining approval from either the exporter or the importer.
c. A confirmed letter of credit is guaranteed by both the exporter’s bank in
the country of export and the importer’s bank in the country of import.
5. Letter of credit reduces the risk of non- shipment because of proof of shipment
before payment.
6. Although risk of nonpayment is increased, this is more secure because the
importer’s bank accepts nonpayment risk when it pays the exporter’s bank.
D. Open Account
1. Exporter ships merchandise and later bills the importer.
2. Used for sales between two subsidiaries within an international company and
when the parties are familiar with each other.
3. Reduces risk of non-shipment for importer but increases the risk of nonpayment
for exporter.
IV. CONTRACTUAL ENTRY MODES
Some products simply cannot be traded in open markets because they are intangible. Companies
can use a variety of contracts to market highly specialized assets and skills in international
markets.
A. Licensing
1. Contractual entry mode in which a company owning intangible property (the
licensor) grants another firm (the licensee) the right to use that property for a
specified period of time.
2. Licensors receive royalty payments based on a percentage of revenue generated
by the property. Commonly licensed intangible property includes patents,
copyrights, special formulas and designs, trademarks, and brand names.
3. Licensing often involves granting companies the right to use process
technologies inherent to production.
4. Cross-licensing occurs when companies employ licensing agreements to swap
intangible property (e.g., Fujitsu and Texas Instruments use cross-licensing to
use each other’s technology, saving R&D costs).
5. Advantages of Licensing
a. Finance international expansion.
b. Less risky method of international expansion.
c. Can reduce likelihood of product appearing on black market.
d. Licensees can upgrade existing production technologies.
6. Disadvantages of Licensing
a. Can restrict a licensor’s future activities.
b. Might reduce the global consistency of the quality and marketing of a
product.
c. Might amount to “lending” strategically important property to future
competitors.
B. Franchising
1. Contractual entry mode in which one company (the franchiser) supplies another
(the franchisee) with intangible property and assistance over an extended period
of time. Franchisers typically receive compensation as flat fees, royalty
payments, or both.
2. The brand name or trademark of a company is normally the single most
important item desired by the franchisee.
3. Franchising differs from licensing in three ways:
a. Gives greater control over sale of a product in a target market.
b. Although licensing is fairly common in manufacturing industries,
franchising is primarily used in the service sector.
c. Although licensing normally involves a one-time transfer of property,
franchising requires ongoing assistance from the franchiser.
4. Companies based in the United States dominate the world of international
franchising. Franchising is growing in the EU with the single currency and a
unified set of franchise laws. In Eastern Europe, expansion suffers from a lack of
capital, high interest rates and taxes, bureaucracy, restrictive laws, and
corruption.
5. Advantages of Franchising
a. Low-cost, low-risk mode of entry into new markets.
b. Allows for rapid geographic expansion.
c. Uses cultural knowledge and know-how of local managers.
6. Disadvantages of Franchising
a. Cumbersome to manage many franchisees in several nations.
b. Franchisees can experience a loss of organizational flexibility in
franchising agreements.
C. Management Contracts
1. One company supplies another with managerial expertise for a specific period of
time. The supplier of expertise is compensated with either a lump-sum payment
or a fee based on sales.
2. Used to transfer two types of knowledge: (1) specialized knowledge of technical
managers and (2) business-management skills.
3. Advantages of Management Contracts
a. Exploit an international opportunity but risk few physical assets.
b. Nation can award contract to operate and upgrade public utilities when a
nation is short of investment financing.
c. Help nations develop skills of local workers and managers.
4. Disadvantages of Management Contracts
a. Places the lives of managers in danger in developing or emerging nations
undergoing political or social turmoil.
b. Suppliers of expertise may nurture a formidable new competitor in the
local market.
D. Turnkey Projects
1. Designing, constructing, and testing a production facility for a client. They are
often large-scale and often involve government agencies.
2. Transfer special process technologies or production-facility designs to a client
(e.g., power plants, telecommunications, petrochemical facilities).
3. Advantages of Turnkey Projects
a. Firm specializes in core competency to exploit opportunities.
b. Governments can obtain designs for infrastructure from the world’s
leading companies.
4. Disadvantages of Turnkey Projects
a. Company may be awarded a project for political reasons rather than for
technological know-how.
b. Can create future competitors.
V. INVESTMENT ENTRY MODES
Investment entry modes entail the direct investment in plant and equipment in a country
coupled with ongoing involvement in the local operation.
A. Wholly Owned Subsidiaries
1. Facility entirely owned and controlled by a single parent company. Can establish
by purchasing an existing company or by forming a new company from the
ground up.
2. Whether an international subsidiary is purchased or newly created depends on its
operations; for high-tech products, a company may build new facilities because
state-of-the-art operations are hard to locate.
3. Major drawback of “greenfield” is the time it takes to construct new facilities,
hire and train employees, and launch production.
4. Advantages of a Wholly Owned Subsidiary
a. Managers have complete control over day-to-day operations in the target
market and over access to valuable technologies, processes, and other
intangible properties within the subsidiary.
b. Firm can coordinate activities of its national subsidiaries.
5. Disadvantages of a Wholly Owned Subsidiary
a. Expensive, so difficult for small- and medium-size firms.
b. Requires substantial resources so risk exposure is high.
B. Joint Ventures
Separate company is created and jointly owned by two or more independent entities to
achieve an objective.
1. Joint venture configurations (See Figure 13.5)
a. Forward integration joint venture
Parties invest together in downstream business activities.
b. Backward integration joint venture
Parties invest together in upstream business activities.
c. Buyback joint venture
Input provided by, and output absorbed by, each partner.
d. Multistage joint venture
One partner integrates downstream, and the other, upstream.
2. Advantages of Joint Ventures
a. Can reduce risk. A joint venture exposes fewer of a partner’s assets to
risk than would a wholly owned subsidiary—each partner risks only its
own contribution.
b. Penetrate international markets that are otherwise off-limits.
c. Access another company’s international distribution network.
d. Defensiveness: local government or government-controlled company
gives authorities a direct stake in venture’s success.
3. Disadvantages of Joint Ventures
a. Can result in conflict between partners.
b. Loss of control over a joint venture’s operations can also result when the
local government is a partner in the joint venture.
C. Strategic Alliances
1. Two or more entities cooperate (but do not form a separate company) to achieve
the strategic goals of each.
2. Like joint ventures, can be formed for short or long periods, depending on the
goals of the participants.
3. Can be established between a company and its suppliers, its buyers, and even
competitors; sometimes each partner purchases the other’s stock.
4. Advantages of Strategic Alliances
a. Share the cost of an international investment project.
b. Tap into competitors’ specific strengths.
c. Similar reasons as for entering into joint ventures.
5. Disadvantages of Strategic Alliances
a. Can create a future local or even global competitor.
b. Conflict can arise and eventually undermine cooperation.
VI. STRATEGIC FACTORS IN SELECTING AN ENTRY MODE
Because entering a new market requires an investment of time and money, and because of the
strategic implications of the entry mode, selection must be done carefully.
A. Selecting Partners for Cooperation
1. Each partner must be firmly committed to the stated goals of the cooperative
arrangement. Detailing duties and contributions of each party through prior
negotiations helps ensure continued cooperation.
2. Although the importance of locating a trustworthy partner seems obvious,
cooperation should be approached with caution.
3. Each party’s managers must be comfortable working with people of other
cultures and traveling to (perhaps even living in) other cultures.
4. A suitable partner must have something valuable to offer. Managers must
evaluate the benefits of a potential international cooperative arrangement as they
would any other investment opportunity.
B. Cultural Environment (See Chapter 2)
1. Culture can differ greatly, and managers can feel less confident in their ability to
manage operations in the host country.
2. Company may avoid investment entry modes in favor of exporting or a
contractual mode; cultural similarity encourages manager confidence and thus
the likelihood of investment.
3. Importance of cultural differences diminishes when managers are knowledgeable
about the culture of the target market.
C. Political and Legal Environment
1. Political instability in a target market increases the risk exposure of assets.
Significant political differences and instability cause companies to avoid large
investments in favor of entry modes that shelter assets.
2. Target market’s legal system influences the choice of entry mode: certain import
regulations such as high tariffs or low quota limits can encourage investment.
3. Company producing locally avoids tariffs that increase product cost; it does not
have to worry about making it into the market below quota.
4. Governments may enact laws that ban certain types of investment.
D. Market Size
1. Size of a potential market influences choice of entry mode. Rising incomes
encourage investment entry because a firm can prepare for growing demand and
better understand the target market.
2. Growing demand in China is attracting investment in joint ventures, strategic
alliances, and wholly owned subsidiaries. Investors believing a market will
remain small may prefer exporting or contractual entry.
E. Production and Shipping Costs
1. By helping to control total costs, low-cost production and shipping can give a
company an advantage.
2. Setting up production in a market is desirable when the total cost of production is
lower than at home. Low-cost local production might encourage contractual
entry through licensing or franchising.
3. Companies producing products with high shipping costs prefer local production;
exporting is feasible when products have low shipping costs.
F. International Experience
1. As companies gain international experience, they select entry modes that require
deeper involvement. This also means that they must accept greater risk in return
for greater control over operations and strategy.
2. They initially explore the advantages of licensing, franchising, management
contracts, and turnkey projects.
3. Once they become comfortable in a market, joint ventures, strategic alliances,
and wholly owned subsidiaries become viable options.
4. Advances in technology and transportation allow small companies to undertake
entry modes requiring more commitment to the local market.
VII. A FINAL WORD
This chapter explains important factors in selecting entry modes and key aspects in their
management. It details the circumstances in which each entry mode is most appropriate and the
advantages and disadvantages that each provides. The choice of which entry mode(s) to use in
entering international markets should match a company’s international strategy. Some
companies want entry modes that give them tight control over activities abroad because they are
pursuing a global strategy. Another company might not require an entry mode with central
control because it is pursuing a multinational strategy. The entry mode must also be chosen to
align well with an organization’s structure.