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International Business Relations
Session 5
Choosing a Mode of Entry
Exporting
DECISION FACTORS
•
•
•
•
Ownership advantages
Location advantages
Internalization advantages
Other factors
1. Need for control
2. Resource availability
3. Global strategy
International
Licensing
International
Franchising
Specialized
Modes
Foreign Direct
Investment
FDI Based Explanations:
Dunning’s Eclectic Paradigm
Three conditions determine whether or not a company
will internalize via FDI:
1.
Ownership-specific advantages – knowledge, skills,
capabilities, relationships, or physical assets that form the
basis for the firm’s competitive advantage
2.
Location-specific advantages – advantages
associated with the country in which the MNE is invested,
including natural resources, skilled or low cost labor, and
inexpensive capital
3.
Internalization advantages – control derived from
internalizing foreign-based manufacturing, distribution, or
other value chain activities
Factors Relevant to Choice of
Foreign Market Entry Strategy
1.
2.
3.
4.
5.
6.
The goals and objectives of the firm, such as desired
profitability, market share, or competitive positioning;
The particular financial, organizational, and
technological resources and capabilities available to the
firm;
Unique conditions in the target country, such as legal,
cultural, and economic circumstances, as well as
distribution and transportation systems;
Risks inherent in each proposed foreign venture in
relation to the firm’s goals and objectives in pursuing
internationalization;
The nature and extent of competition from existing
rivals, and from firms that may enter the market later;
The characteristics of the product or service to be
offered to customers in the market.
Exporting
Advantages
Disadvantages
Relatively low financial exposure
 Permit gradual market entry
 Acquire knowledge about local
market
 Avoid restrictions on foreign
investment




Vulnerability to tariffs and NTBs
Logistical complexities
Potential conflicts with
distributors
Figure 12.2
Forms of Exporting
Export Documentation







quotation or pro forma invoice
commercial invoice is the actual demand for payment
issued by the exporter. It includes a description of the
goods, the exporter’s address, delivery address, and
payment terms.
A packing list, indicates the exact contents of the
shipment.
The bill of lading is the basic contract between
exporter and shipper.
The shipper's export declaration ("ex-dec”) lists the
contact information of the exporter and the buyer (or
importer), as well as a full description, declared value,
and destination of the products being shipped.
The certificate of origin indicates the country where
the product originates.
insurance certificate
Incoterms
Who pays for what?
EXW
Load to
truck
Unload
Unload
Landing
Landing onto
Transport from truck charges at Transport charges at trucks
Transport
Exportto
at the
origin's
to
importer's from the to
Entry duty
exporter's origin's
port,
import's port,
importers' destinatio
Customs Entry payment port
port
Loading port
Unloading port
n
Insurance clearance Taxation
No
No
No
No
No
No
No
No
No
No
No
No
Main Carriage NOT Paid By Seller (Free… Carrier/Alongside Ship/On Board)
FCA
Yes
Yes
Yes
No
No
No
No
No
No
No
No
No
FAS*
Yes
Yes
Yes
Yes
No
No
No
No
No
No
No
No
FOB*
Yes
Yes
Yes
Yes
Yes
No
No
No
No
No
No
No
Main Carriage Paid By Seller (Cost and Freight … and Insurance… / Carriage Paid to … and Insurance… )
CFR*
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
No
No
No
CIF*
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
Yes
No
No
CPT
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
No
No
No
CIP
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
Yes
No
No
Arrival (Delivery Duty….. Unpaid/Paid)
DEQ*
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
Yes
No
No
DDU
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
DDP
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
* for ship only (+ named Port), others for all carriers (+ named Place)
Methods of Payment -- Export
Cash in Advance
 Letter of Credit
 Draft (Documentary Collection)
 Open Account

Documentary Collection
Sight Draft
payment on the transfer of title of the goods from
exporter to importer
Time Draft
payment at some time after goods are received by
importer (30, 60 days, or specific date = Date
Draft)
Bill of lading
an international trade document that serves (1) as a
contract between the exporter and the transporter,
and (2) as a title to the exported goods.
Documentary Collection
1. Exporter Ships goods (title
not transferred until step 6)
Exporter
2. Exporter
submits draft
(bill of
exchange),
packing list, and
bill of lading
8.
Payment
Importer
6. Importer’s
Bank releases
bill of lading
transferring title
of goods to
importer
5.
Payment
7. Payment
Exporter’s Bank
3. Exporter’s bank
transfers documents to
Importer’s Bank informs
Importer’s Bank
4. Importer’s
bank notifies
Importer that
the documents
have been
received
Types of Letters of Credit
Advised letter of credit
 Confirmed letter of credit
 Irrevocable letter of credit
 Revocable letter of credit

Letters of Credit
Exporter
4. Exporter’s
Bank advises
or confirms
letter of credit
1. Sales contract
specifies
payment using
letter of credit
5. Exporter ships
goods
11. Exporter
receives payment
9. Amount
due is paid
(or bank
extends
credit)
6. Exporter
sends
documents
to its bank
Importer
8. Bank
sends docs
to importer
10. Funds are transferred
7. Documents sent for review
Exporter’s Bank
3. Importer’s Bank
informs Exporter’s Bank
when a letter of credit has
been issued
Importer’s Bank
2. Importer
applies to bank
for a letter of
credit
Countertrade
Payments are made in kind rather than cash.
The focal firm is engaged simultaneously in
exporting and importing.
 Also known as “two-way” or “reciprocal” trade
 Used when conventional means of payment are
difficult, costly, or nonexistent.


◦ Hard currency unavailable
◦ Developing country doesn’t have expertise to sell in
foreign markets
16
Types of Countertrade
Barter refers to the direct exchange of goods
without any money. Or a mixture of goods and
cash is a compensation deal.
 Back-to-back transaction, offset agreements,
or counterpurchase involves two distinct
contracts, contingent on each other.
 Buy-back agreement, the seller agrees to
supply technology or equipment to construct a
facility and receives payment in the form of
goods produced by the facility.

17
Licensing and Franchising
Contractual Agreements
Licensing is an arrangement in which the
owner of intellectual property (IP) grants
another firm the right to use that
property for a specified period of time in
exchange for royalties or other
compensation.
 Franchising is an arrangement in which
the firm allows another the right to use
an entire business system in exchange for
fees, royalties or other forms of
compensation.

What is licensed?
Trademarks
 Copyrights
 Know-how
 Patents

International Licensing Process
Basic Issues
1. Set the boundaries of
the agreement
2. Establish
compensation rates (25% gross sales)
3. Agree on the rights,
privileges, and
constraints
4. Specify the duration of
the agreement (5-7
years)
Franchising
Foreign Direct Investment
Building new facilities (the greenfield
strategy)
 Buying existing assets in a foreign country
(acquisition strategy)
 Participating in a joint venture

vs. Portfolio Investment
 Minority stake, no control
Foreign Direct Investment
Advantages
+ High profit potential
+ Maintain control over operations
+ Acquire knowledge of local
market
+ Avoid tariffs and NTBs
Disadvantages
- High financial and managerial
investments
- Higher exposure to political risk
- Vulnerability to restrictions on
foreign investment
- Greater managerial complexity
Strategic Alliances and
Joint Ventures

Strategic Alliances
◦ One or several functional areas
◦ Shared or assigned managment

Joint Venture
◦ Separately incorporated
◦ Independently managed (delegated
management)
◦ Can have tax advantages, protects other
assets, allows creative ownership
arrangements
The Scope of
Strategic
Alliances
Figure 13.1 Benefits of Strategic Alliances
Potential Benefits
of Strategic Alliances
Ease of
Market
Entry
Shared
Risk
Shared
Knowledge
and
Expertise
Synergy
and
Competitive
Advantage
Figure 13.4 Pitfalls of Strategic Alliances
Pitfalls
of Strategic Alliances
Incompatibility
of
partners
Access
to
Information
Distribution
of
Earnings
Loss
of
Autonomy
Changing
Circumstances
1/--страниц
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