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Going Global

Going Global. Licensing Strategic Alliances FDI. 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)

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Going Global

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  1. Going Global Licensing Strategic Alliances FDI

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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

  17. 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

  18. 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

  19. 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

  20. 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

  21. 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

  22. 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

  23. Optimal Entry Strategy

  24. Closing Thoughts

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