Chapter 15

Pioneering Costs

Costs that an early entrant has to bear that a later entrant can avoid; the firm must dedicate considerable time, effort, and expense to learn the rules of the game

Exporting

A common first step for many manufacturing firms represented by the sale of products produced in one country to residents of another country

Advantages of Exporting (2)

(1) Avoids the substantial costs of establishing a manufacturing operations in the host country; (2) may help a firm achieve experience curve and location economies

Advantages of Franchising (2)

(1) Firm is relieved of many of the costs and risks of opening a foreign market on its own because the franchisee assumes those; (2) allows a firm to build a global presence quickly and a a relatively low cost and risk

Disadvantages of Exporting (3)

(1) May not be appropriate if lower-cost locations for manufacturing the product can be found abroad; (2) high transport costs can make this uneconomical, particularly for bulk products; (3) tariff barriers by the host-country government can make it very risky

First-mover disavantages (3)

(1) Pioneering costs; (2) the costs of business failure of the firm, due to its ignorance of the foreign environment, makes some major mistakes; (3) the costs of promoting and establishing a product offering, including the cost of educating customers

First-mover advantages (3)

(1) The ability to preempt rivals by establishing a strong brand name; (2) the ability to build up sales volume and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants; (3) the ability to create switching costs that tie the customers into the products or services making it difficult for later entrants to win business

Disadvantages of Licensing

(1) does not give a firm the tight control over manufacturing, marketing, and strategy that is required for realizing experience curve and location economies; (2) limits firm's availability to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another; (3) risk associated with technological know-how

Advantages of Joint Ventures

(1) firms benefit from a local partner's knowledge of the local market, culture, language, political systems, and business systems; (2) the costs and risks of opening a foreign market are shared; (3) they satisfy political considerations for market entry

Disadvantages of Franchising (2)

(1) inhibits the firm's ability to take profits out of one country to support competitive attacks in another; (2) the geographic distance of the firm from its franchisees can make it difficult to detect poor quality

Disadvantage of Wholly Owned Subsidiary

(1) the firm bears the full cost and risk of setting up overseas operations

Advantages of Licensing

(1) the firm does not have to bear the development costs and risks associated with opening a foreign market; (2) helps firms that lack the capital to develop operations overseas, or those unwilling to commit substantial financial resources to an unfamiliar or politically volatile foreign market; (3) helps firms who have barriers to investment; (4) used when a firm possesses some intangible property that might have business applications, but it does not want to develop those applications itself.

Disadvantages of Joint Ventures

(1) the firm risks giving control of its technology to its partner; (2) the firm may not have the tight control to realize experience curve or location economies; (3) shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time.

Disadvantages of a Turnkey Project (3)

(1) the firm that enters into a deal will have no long-term interest in the foreign country; (2) the firm that enters into a project with a foreign enterprise may inadvertently create a competitor; (3) if the firm's process technology is a source of competitive advantage, then selling this technology through a project is also selling competitive advantage to potential and/or actual competitors

Advantages of Wholly Owned Subsidiary

(1) they reduce the risk of losing control over core competencies; (2) they give a firm the tight control in different countries necessary for global strategic coordination; (3) they may be required in order to realize location and experience curve economies

Advantages of a Turnkey Project (2)

(1) useful where foreign direct investment (FDI) is limited by host-government regulations; (2) can be less risky than conventional FDI

Timing of Entry

Entry is early when a firm enters a foreign market before other foreign firms and late when a firm enters after other international businesses have established themselves

Turnkey Project

The contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel. At completion of the project the client is handed the "key" to a plant that is ready for full operation

Joint Venture

a firm that is jointly owned by two or more otherwise independent firms

Franchising

a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business (used primarily by service firms)

Licensing Agreement

arrangement where a licensor grants the rights to intangible property (patents, to another entity for a specified period, and in return, the licensor receives a royalty fee from the licensee.

Strategic Alliances

cooperative agreements between potential or actual competitors; embraces a variety of agreements

Wholly Owned Subsidiary

the firm owns 100 percent of thh stock; set up a new operation; acquire an established firm