Chapter

2. 6 Chapter Licensing, Strategic Alliances, FDI

3. Introduction • Three main non-exporting modes of entry • Licensing (including franchising) • Strategic Alliances • Wholly owned manufacturing subsidiaries

4. The Impact of Entry Barriers • Entry Barriers • Any obstacle making it more difficult for a firm to enter a product market • Tariff Barriers • Tariff Barriers are obvious obstacles to entry into the country • Nontarrif Barriers • Less visible nontariff barriers (e.g. slow customs procedure) can also make entry into the country difficult

5. The Impact of Entry Barriers • The Cost of Barriers • The inefficiency created by barriers translates into higher prices for consumers • Gatekeepers hold the key to the market and have a chance to profit from a monopolistic position • The Importer’s View • An importer will support the existence of barriers especially when combined with exclusive distribution contracts

6. The Impact of Entry Barriers • Tariff and Nontariff Barriers • Reductions can be made • By lobbying home or host governments • When the imported product has a certain level of “local content” or when imports involve production for reexport • Establishing manufacturing in a member country in the regional group • Is increasingly used as regional trade agreements proliferate • The firm can then export to the market country in the region at lower tariff rates from the transplant operation inside the region

7. The Impact of Entry Barriers • Government Regulations • The foreign firm can do little when addressing government regulations of business • Study of the specific regulations affecting its industry and the sales of its product • The company may need a native partner who can carry out negotiations with government authorities and local regulators

8. The Impact of Entry Barriers • Distribution Access • In many countries it is very difficult to get members of the distribution channels to carry the firm’s product • The firm might compete with a disadvantage • The firm may have to consider a strategic alliance • The firm may sell the product unbranded in an OEM arrangement with a firm already established • The firm may not be able to hire capable local talent

9. The Impact of Entry Barriers • Natural Barriers • Competition among brands tends to create natural barriers • Allowing strong brand names to charge a premium price over more generic or no-name competitors • Market success and customer allegiance are the factors behind natural barriers

10. The Impact of Entry Barriers • Advanced versus Developing Nations • In developing countries • The important barriers are usually tariffs and other government interventions into the free market system • In advanced countries • It is usually natural barriers that are high

11. The Impact of Entry Barriers • Exit Barriers • The firm usually faces exit barriers after entry • If there is likelihood of a forced exit • A firm will be reluctant to commit investment in the country

12. The Impact of Entry Barriers • Effect on Entry Mode • Create a joint venture • Engage in a distribution alliance • Develop managerial expertise with a particular mode of entry

13. Licensing • Licensing • Refers to offering a firm’s know-how or other intangible asset to a foreign company for a fee, royalty, and/or other type of payment • Advantages for the new exporter • The need for market research is reduced • The licensee may support the product strongly in the new market

14. Licensing • Franchising • Advantages • The basic “product” sold is a well-recognized brand name. • The franchisor provides various market support services to the franchisee • The local franchisee raises the necessary capital and manages the franchise • A disadvantage • Careful and continuous quality control is necessary

15. Licensing • Original Equipment Manufacturing (OEM) • A company enters a foreign market by selling its unbranded product or component to another company in the market country • Examples • Canon provides cartridges for Hewlett-Packard’s laser printers • Samsung sells unbranded television sets , microwaves, and VCRs to resellers such as Sears, Amana, and Emerson in the U.S.

16. Strategic Alliances • Strategic Alliances (SAs) • Typically a collaborative arrangement between firms, sometimes competitors, across borders • Based on sharing of vital information, assets, and technology between the partners • Have the effect of weakening the tie between potential ownership advantages and company control

17. Strategic Alliances • Rationale for Nonequity SAs • Economic gains are tangible • Speed with which market presence is seen • Lessened risk exposure • Recent lessened emphasis on the value of control • Urgent need to compete in several country markets at once

18. Strategic Alliances: Distribution Alliances • Distribution Alliances • Also called “piggybacking”, “consortium marketing”, and liscensing • Examples • Chrysler and Mitsubishi Motors • SAS, KLM, Austrian Air, and Swiss Air • STAR Alliance (United Airlines, Lufthansa, Air Canada, SAS, Thai Airways, and Varig Brazilian Airlines)

19. Advantages Improved capacity load Wider product line Inexpensive access to a market Quick access to a market Assets are complimentary Each partner can concentrate on what they do best Disadvantages Time arrangement can limit growth for the partners Can hinder learning more about the market, creating obstacles to further inroads Advantages and Disadvantages of Distribution Alliances for Both Partners

20. Strategic Alliances: Manufacturing Alliances • Shared manufacturing examples • Volvo and Renault share body parts and components • Saab engines made by GM Europe • Advantages • Convenient • Money saving • Disadvantages • The organization must deal with two principals in charge of production, harder to communicate customer feedback • Can put constraints on future growth

21. Strategic Alliances • R&D Alliances • Provide favorable economics, speed of access, and managerial resources and are intended to solve critical survival questions for the firm • Joint Ventures • Involve the transfer of capital, manpower, and usually some technology from the foreign partner to an existing local firm

22. Manufacturing Subsidiaries • Wholly Owned Manufacturing Subsidiaries • Undertaken by the international firm for several reasons • To acquire raw materials • To operate at lower manufacturing costs • To avoid tariff barriers • To satisfy local content requirements

23. Advantages Price escalation can be nullified or drastically reduced Production in the market country may lead to more uniform quality Disadvantages The risk exposure with a resource commitment is usually high The predecision information gathering and research evaluation is heavy Manufacturing Subsidiaries Advantages and Disadvantages

24. Manufacturing Subsidiaries: Financial Analysis • Financial Analysis • The economic analysis of the investment project usually takes the form of a discounted cash flow analysis • Where political risk is low enough for the FDI project to get started it is still customary to incorporate a risk premium into the hurdle rate • Acquisitions

25. Manufacturing Alliances: Acquisitions • Advantages • Speed of penetration • Quick market penetration of the company’s products • Disadvantages • Existing product line and new products to be introduced might not be compatible • Can be looked at unfavorably by the government, employees, or others • Necessary re-education of the sales force and distribution channels

26. Optimal Entry Strategy: Entry Mode Matrix Exhibit 6.2: An Optimal Entry Mode Matrix Product/market situation

27. Optimal Entry Strategy • Exhibit 6.3 Entries under Different Conditions Product/market situation