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International Management. Chapter 7. Modes of Entry into Foreign Markets. Exporting Countertrade Contract Manufacturing Licensing Franchising. Management Service Contracts Turnkey Projects Non-Equity Strategic Alliances Equity-based Joint Ventures Wholly-Owned Subsidiaries .

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chapter 7

Chapter 7

Modes of Entry into Foreign Markets

modes of entry into foreign markets


Contract Manufacturing



Management Service Contracts

Turnkey Projects

Non-Equity Strategic Alliances

Equity-based Joint Ventures

Wholly-Owned Subsidiaries

Modes of Entry into Foreign Markets
fig 7 1 foreign mode of entry choices
Fig 7-1: Foreign Mode of Entry Choices

Decision to



International Choices


International Choices




Equity Joint



Strategic Alliances/

Licensing Contracts


Arrangements whereby the flow of goods or services in both directions is an integral element of the specific terms of the business transaction

fig 7 2 licensing as a foreign entry choice
Fig 7-2:Licensing as a Foreign Entry Choice

Cost Advantage

Risk Deflection





Strategic Rationale

Profit-driven Rationale

Revenue Source

Knowledge Source

table 7 1 foreign licensing factors for success and failure
Table 7-1 Foreign Licensing: Factors for Success and Failure

Factors Leading to Success

1. Choice of reliable and competent partner

2. Inherent value of patent, trademark

or know-how licensed

3. Goal congruence with partner

4. Some participation in ownership

5. Close personal contact with licensee

6. Appropriate level of control by licensor

7. Reputation of licensor and licensed asset

8. Sales assistance to licensee

9. Support of licensor’s top management

10. Flexibility by both partners

11. Correct timing and pacing of activity

12. Detailed spelling out of contract

obligations and responsibilities

13. Effective coordination with other parts

of licensor’s overseas activities

14. Thorough research and market knowledge

Factors Leading to Failure

1. Inadequate market analysis by licensor

2. Higher start-up costs than anticipated by


3. Insufficient attention paid to activity by top

management of licensor

4. Poor timing

5. Lack of goal congruence with partner

6. Unanticipated competition from home, host

and third country competitors

7. Inadequate licensee after sales effort

8. Partner rigidity

9. Insufficient marketing effort by both licensor

and licensee

10. Weak licensee market research

11. Lack of fit with other licensor activities

12. Lack of sales assistance to licensee

questions to be asked in a licensing contract
Questions to be Asked in a Licensing Contract
  • How many patents, processes, or trademarks will be used?
  • How will technical assistance be rendered?
  • Which products are included in the agreement, and to what extent?
  • What territory is to be covered by the license?
  • How should the licensee be compensated?
  • The currency in which payments will be made to the licensor
  • What happens if compensation cannot be paid by the licensee?
  • If sublicensing is permitted, how should it be carried out?
  • Geographical limitations on the marketing of the licensed product or service
  • What are the provisions as to duration of the agreement and its cancellation?
  • What rights does the licensor have in developments by the licensee?
questions to be asked contd
Questions to be Asked … (contd.)
  • What visitation and inspection privileges are held by the licensor?
  • Can the parent company inspect accounts?
  • What provisions are there for satisfactory promotional/sales performance and adequate quality control?
  • What home and host government approvals are required?
  • What tax factors are involved?
  • How will disputes be settled?
areas covered in a franchise agreement
Areas Covered in a Franchise Agreement
  • A detailed list of issues to consider regarding the cost of the franchise
  • A detailed list of issues to consider regarding the location of the franchise
  • A detailed list of issues pertaining to the buildings, equipment and supply terms
  • A detailed list of issues pertaining to the operating practices terms
table 7 2 type and degree of parent company control over foreign operations
Table 7-2: Type and Degree of Parent Company Control over Foreign Operations

A = Daily Management Control

B = Control over Physical assets

C = Control over Tacit Expertise and Knowledge

D = Control over Codified assets