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
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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.
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A. Why Companies Export
1. Expand total sales when the domestic market is saturated.
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
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
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
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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
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,
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
Ch 13: Selecting and Managing Entry Modes
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channels, storage facilities, trade and investment
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
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
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.
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a. An irrevocable letter of credit allows the bank issuing the
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
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
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.
6. Disadvantages of Licensing
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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.
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
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
2. Used to transfer two types of knowledge: (1) specialized
3. Advantages of Management Contracts
a. Exploit an international opportunity but risk few physical
assets.
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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
2. Transfer special process technologies or production-facility
3. Advantages of Turnkey Projects
a. Firm specializes in core competency to exploit
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
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.
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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.
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
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
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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
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
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
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
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
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
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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
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,
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
chosen to align well with an organization’s structure.
Quick Study Questions
1. Q: What are the four steps, in order, involved in creating an export strategy?
A: Companies should not simply respond to international requests for their
products, but develop a detailed export strategy. First, they should identify a
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2. Q: When a company sells its products to intermediaries who then resell to buyers
in a target market it is call what?
3. Q: What is the name of a specific type of countertrade?
A: Countertrade is the practice of selling goods or services that are paid for, in
whole or part, with other goods or services. Countertrade can provide access to
markets that are otherwise off-limits because of a lack of hard currency.
1. Barter is the exchange of goods or services directly for other goods or
services without the use of money.
2. Counterpurchase is the sale of goods and services to a country by a company
that promises to make a future purchase of a specific product from that
country.
Quick Study 2
1. Q: Export/import financing that presents the most risk for exporters is called
what? A: Open account is export and import financing in which an exporter ships
2. Q: Export/import financing in which a bank acts as an intermediary without
financial risk is called what?
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Quick Study 5
1. Q: When selecting a partner for cooperation it is important to remember what?
2. Q: What factors may discourage an investment entry mode?
Ethical Challenge
You are chief operating officer of a U.S.-based telecommunications firm considering a
joint venture inside China with a Chinese firm. The consultant you hired to help you
through the negotiations has just informed you that ethical concerns can arise when
international companies consider a cooperative form of market entry (such as a joint
venture) with a local partner in any market. This is especially true when each partner
contributes personnel to the venture because cultural perspectives cause people to see
ethical dilemmas differently. This is of special concern to you because the venture had
planned to employ people from both China and the United States. In light of this recent
information, you are reassessing your entry mode options.
13-5 Do you think your two companies can establish a set of ethical principles before
commencing operations that will guide a potential joint venture?
Ch 13: Selecting and Managing Entry Modes
17
negotiating session, spend 15 minutes comparing the progress of your negotiations with
that of the other pairs of teams.
Practicing International Management Case
Telecom Ventures Unite the World
13-10 Q: What strengths did AT&T bring to its joint venture with Unisource?
13-11 Q: Can you think of any potential complications that could arise in the AT&T–
Unisource joint venture?
13-12 Q: Assess the formation of Global One, Unisource, and other partnerships in this
case. Which strategic factors might have influenced the entry mode choices that
these firms made?