Analyzing Strategies

CHAPTER 12Strategies for Analyzing and Entering

Foreign Markets

After studying this chapter, students should be able to:

> Discuss how firms analyze foreign markets.> Outline the process by which firms choose their mode of entry into a foreign

market.> Describe forms of exporting and the types of intermediaries available to assist

firms in exporting their goods. > Identify the basic issues in international licensing and discuss the advantages

and disadvantages of licensing.> Identify the basic issues in international franchising and discuss the advantages

and disadvantages of franchising.> Analyze contract manufacturing, management contracts, and turnkey projects

as specialized entry modes for international business.> Characterize the greenfield strategies and acquisition as forms of FDI.

LECTURE OUTLINE

OPENING CASE: Starbucks Brews Up a Global Strategy

The opening case describes Starbucks’ growth since its inception in 1971. Today, Starbucks is not only the largest coffee importer and roaster of specialty beans, it is also the largest specialty coffee bean retailer in the United States. By the end of 2002, Starbucks had opened 900 coffeehouses in 22 markets outside North America.

Key Points

Starbucks, through its promotional campaigns and commitment to quality has elevated coffee-drinking tastes and fueled a significant increase in demand.

Starbucks treats its employees very well, offering health insurance to part-timers and lucrative stock-option plans.

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Howard Schultz, the owner since 1987, refuses to franchise Starbucks stores to individuals, fearing a loss of control and a potential deterioration of quality.

Starbucks opened coffee shops in Japan and Singapore in 1996, and moved into the U.K. in a big way in 1997.

Starbucks expands its operations in three ways. Depending on circumstances, the firm relies on licensing agreements (in Australia, for example), company-owned stores (in the U.K., for example), and joint ventures (in China, for example).

CHAPTER SUMMARY

Chapter Twelve examines the various entry modes available to companies as they expand internationally. The chapter begins with the choice of entry modes, and then proceeds to discuss the advantages and disadvantages of each one.

I. FOREIGN MARKET ANALYSIS

To successfully increase foreign market share, firms must assess alternative markets; evaluate the respective costs, benefits, and risks of entering each; and select those that hold the most potential for entry or expansion.

Assessing Alternative Foreign Markets

A firm must consider a variety of factors, including market potential, levels of competition, the legal and political environment, and sociocultural influences when

assessing alternative foreign markets. Discuss Table 12.1 here. Information on some of the factors is easily obtainable from published sources in

the firm’s home country. Other information may be subjective and difficult to obtain. In fact, it may be necessary to visit the foreign location in question.

Market Potential. The first step in foreign market selection is assessing market potential. Variables a firm might wish to consider include population, GDP, per capita GDP, public infrastructure, and ownership of goods such as automobiles and televisions. Students should refer to Building Global Skills in Chapter 2 for a list of publications that provide this type of information.Next, a firm must collect information relating to the specific product line under consideration. It may be necessary for a firm to use proxy data in some cases. The potential for growth in a particular market can be estimated using both objective and

subjective measures. Show map 12.1 here.

Cracking the Beer MarketThis Bringing the World into Focus discusses the growth of the beer market in Brazil. Brahma, Brazil’s oldest and largest brewery acquired smaller breweries and merged with the second largest producer. This powerhouse has expanded into Argentina, Venezuela, and Central America. Anheuser-Busch now has its eye on the Brazilian market.

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Levels of Competition. Firms must also consider the current and future level of competition in foreign markets. Firms assessing their competitive environment should identify the number and size of firms already competing in the potential market, their relative market shares, their pricing and distribution strategies, and their relative strengths and weaknesses. Continual monitoring can help firms identify new opportunities. (See Chapter 10's closing case, The New Conquistador.)

Legal and Political Environment. It is important that a firm understand the host country’s policies toward trade as well as its general legal and political environment prior to making an investment. Trade barriers, for example, might induce a firm to enter a market via FDI as opposed to exporting. In some countries, legal and political issues will impact both entry methods and the repatriation of profits. A country’s tax policies and government stability may also affect a firm’s strategy. The text provides specific examples of how these factors affected the international

strategies of various firms. Map 12.1 fits in well here as well . Sociocultural Influences. Sociocultural influences should also be considered

when assessing foreign market opportunities. In many cases, firms will attempt to minimize the potential impact of sociocultural differences by initially focusing on countries that are culturally similar to their home markets.Depending on the proposed type of internationalization effort, certain sociocultural variables may be more important than others. For example, if the proposed strategy is to export goods to a new market, the sociocultural factors of most importance are those that relate to consumers. In contrast, if a firm is considering establishing a factory or distribution center in a foreign country, the firm should evaluate sociocultural factors associated with its potential employees.

Evaluating Costs, Benefits, and Risks

Costs. There are two types of relevant costs at this point: direct and opportunity. Direct costs are incurred when entering the foreign market in question and include costs associated with setting up a business operation, transferring managers to run it, and shipping equipment and merchandise. A firm incurs opportunity costs when entering one market precludes or delays its entry into another. The profits it would have earned in the second market are opportunity costs.

Benefits. Benefits from entering a foreign market include expected sales and profits, lower acquisition and manufacturing costs, foreclosing of markets to competitors, competitive advantage, access to new technology, and the opportunity to achieve synergy with other operations.

Risks. A firm entering a new market incurs the risks of opportunity costs, additional operating complexity, and direct financial loss due to misassessment of market potential. In some extreme cases, a firm may also risk loss due to government seizure of property, war, or terrorism.

It is important that firms carefully assess foreign markets prior to making strategic decisions. Poor strategic judgments may rob a firm of profitable operations, while a continued inability to reach the right strategic decisions may threaten the firm’s existence.

Teaching Note:

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Instructors may want to begin their discussion of entry methods by asking students how a hypothetical (or real) firm should sell its product in other markets. Students can usually quickly name the various choices, but are uncertain as to the pros and cons of each method.

II. CHOOSING A MODE OF ENTRY

Dunning’s eclectic theory (see Chapter 6) can be helpful in providing insight as to the best means of penetrating foreign markets. The theory considers three factors: ownership advantages, location advantages, and internalization factors, which in addition to other factors such as the firm’s need for control, the availability of resources, and the firm’s global strategy, help a firm decide between exporting, FDI,

joint ventures, licensing, and franchising. Show Figure 12.1 here. Ownership advantages are the tangible or intangible resources owned by a firm

that grant it a competitive advantage over industry rivals. The text provides examples of both tangible (Inco, Ltd’s nickel-bearing ore) and intangible (the luxury appeal of LVMH Moet Hennessy Louis Vuitton’s products) ownership advantages. The nature of a firm’s ownership advantage will play a role in the firm’s selection of entry mode.

Location advantages are those factors that affect the desirability of host country production relative to home country production. The choice of home country versus host country production is affected by factors such as relative wage rates, land acquisition costs, capacity in existing plants, access to R&D facilities, logistical requirements, customer needs, the administrative costs of managing a foreign

subsidiary, political risk, and government restrictions. Present Map 12.2 here. Internalization advantages are factors that affect the desirability of a firm

producing a good or service itself rather than relying on an existing local firm to handle production. If transaction costs are high, the firm may select FDI or a joint venture as an entry method. If transaction costs are low, franchising, contract manufacturing, or licensing may be a better choice. The text illustrates this concept with an example of the factors affecting choice of entry mode in the pharmaceutical industry.

Other factors that affect a firm’s choice of entry method include its need for control, the availability of resources, and the firm’s overall global strategy. In sum, the choice of an entry mode will be a tradeoff between risk and reward, the level of resource commitment necessary, and the level of control the firm seeks.

Learning the Ropes about PickupsThis section describes Toyota’s success in the American market. It discusses ways in which Toyota has adapted to the American environment, and ways in which it has not. American designers employed by Toyota were unable to persuade top Toyota managers that a full-sized pickup truck should be added to the company’s product line. That is, until the Americans took them to a Dallas Cowboys football game. One look at the parking lot was enough to convince the Toyota executives that a full-size pickup was a winning idea.

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III. EXPORTING TO FOREIGN MARKETS

The most common international business activity is exporting, or the process of sending goods or services from one country to other countries for use or sale there.

Discuss Table 12.2 here. There are many advantages to exporting. It allows a firm to control its financial

exposure in the host country; in fact, in most situations, the risk is limited to basic start-up costs and the value of the goods or services involved in the transaction. Exporting also allows a firm to enter a market on a gradual basis, gain experience in operating internationally, and obtain information about certain markets without any investment expense.

Firms may have a proactive motivation for entering a foreign market, and in effect be pulled into the market as a result of the opportunities available there. The text provides several examples of firms that have exported as a result of a proactive motivation.

Firms may also export as a result of a reactive motivation whereby they are pushed into exporting because domestic opportunities are shrinking, or production lines are running below capacity, or they are seeking higher profit margins.

Jumping on a Japanese Jam DealChivers Hartley, a U.K. firm producing fruit preserves, after two years of negotiation landed a deal to export its products to Japan. The deal required changes in recipes and packaging, as well as the creation of a new brand name.

Forms of Exporting

There are three forms of exporting: indirect exporting, direct exporting, and

intracorporate transfer. Discuss Figure 12.2 here.

Indirect exporting occurs when a firm sells its products to a domestic customer, who in turn exports the product, in either its original form or a modified form. Because indirect exporting is usually not done on a conscious basis, the process does not provide the firm with experience in international business and does not allow the firm to capitalize on potential export profits.

Direct exporting involves sales to customers located outside the firm’s home country. Although one-third of firms exporting for the first time are responding to an unsolicited order, subsequent efforts are usually the result of a deliberate effort, allowing a firm to gain valuable international business experience.

An intracorporate transfer is the selling of goods by a firm in one country to an affiliated firm in another. Intracorporate transfer has become more important as the sizes of MNCs have increased, and today represents some 35 percent of all U.S. merchandise exports and imports. The text provides several examples of intracorporate transfer, and the topic will also be discussed in more depth in Chapter 17.

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Trade in IvoryOverview: Since 1989, the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) has banned trade in ivory, the material found in elephant tusks. The CITES ban has been so effective that in many countries the elephant is no longer an endangered species. The question is whether the CITES ban should be continued or lifted.

Point: Lift the ban. Trade in ivory promotes healthy elephant herds. Herds have grown significantly. Botswana's elephant population has grown

from 20,000 in 1981 to 106,000 in 1999 and Zimbabwe's has grown from 49,000 to 70,000.

Countries that can demonstrate that their elephants are no longer endangered should be allowed to sell limited amounts of elephant tusks to fund environmental projects.

Allowing trade in ivory, with appropriate controls, will ensure the survival of the elephants and enrich the habitat for many other species of African flora and fauna.

Counterpoint: Continuing the ban is the right policy. Though elephant herds are being restored in some countries, that is not true

throughout Africa. Even limited legal trade in ivory will create new opportunities for poachers.

Previous attempts at limited trade in ivory (such as the quota rules adopted in 1986) did not work. They simply allowed merchants to explore loopholes in the quota system.

The ban is working and achieving its objective. One shouldn't meddle with a policy that is working well.

Answers to questions:

1. Should the southern African countries like Botswana, South Africa, and Zimbabwe that have restored their elephant herds be allowed to sell surplus ivory?This question is at the heart of the point-counterpoint issue. Students will likely have different opinions based on the positions outlined above. A wide-ranging discussion should be encouraged. If a majority of the students seem to advocate continuing the ban, the instructor should explore how such a position relates to free trade theory and national sovereignty in order to ensure broad coverage of topics related to the class.

2. Will allowing limited ivory exports encourage or discourage poachers?While arguments can be made for either side, students will probably feel that limited ivory exports will serve to encourage poaching. Limited legal exports would make it easier for poachers to market illegal ivory, since it would be possible to provide falsified documentation claiming that the ivory was obtained legally.

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3. Is permitting ivory exports the best way to encourage countries to protect their elephant herds?It is unlikely that trade in ivory would lead to greater protection of elephant herds. Legal trade in ivory is likely to encourage additional poaching, especially in countries where governments have the least resources available to devote to elephant protection.

Additional Considerations

In additional to considering which form of exporting to use, a firm must also assess government policies, marketing considerations, logistical considerations, and distribution issues.

Government policies such as export promotion policies, export financing programs, and other forms of home country subsidization encourage exporting. However, tariff and nontariff barriers may discourage firms from selecting exporting as an entry mode. The text illustrates this concept with the example of how voluntary export restraints on Japanese automobile exports encourage Japanese producers to manufacture in the United States.

Marketing concerns including image, logistics, distribution, responsiveness to the customer, and the need for quick feedback may also affect a firm’s choice of entry method. The text provides several examples of products, which are successful as exports because of their image.

Logistical Considerations. A firm must consider the logistical costs of exporting such as the physical distribution costs of warehousing, packaging, transporting and distributing goods, and inventory carrying costs when selecting an entry mode.

Distribution issues may also influence a firm’s decision to export. Many firms are forced to use distributors in foreign markets, and the selection of the distributor can be critical to the firm’s international success. In some cases, the best distributor may already be handling a competitor’s products and a firm will be forced to weigh the costs of using a less experienced distributor with the costs of using a distributor that will not handle its products on an exclusive basis. In addition, compensation decisions must be made, the firm may find that its business judgment differs from the distributor’s business judgment, and pricing strategies may differ.

Export Intermediaries

A firm may market and distribute its goods via an intermediary, a third party specializing in the facilitation of exports and imports. There are several types of export intermediaries, including export management companies, Webb-Pomerene associations, and international trading companies.

An export management company (EMC) is a firm that acts as its client’s export department. Several thousand EMCs operate in the United States, providing clients with information about the legal, financial, and logistical details of exporting. Some EMCs act as commission agents, while others take title to the good.

A Webb-Pomerene association is a group of U.S. firms that operate within the same basic industry and that are allowed by law to coordinate their export activities without fear of violating U.S. antitrust laws. Fewer than 25 associations exist today,

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providing market research, overseas promotional activities, freight consolidation, contract negotiations, and other services for members.

An international trading company is a firm directly engaged in trading a wide variety of goods for its own account. Unlike an EMC, an international trading company participates in both exporting and importing. Japan’s sogo sosha are the most important trading companies in the world. The success of the sogo soshas is a result of several factors. First, they are able to continuously obtain information about economic conditions and business opportunities anywhere in the world. Second, they have a ready source of financing from the keiretsu, and a built-in

source of customers (fellow keiretsu members.) Discuss Table 12. 3 here. Other Intermediaries. Manufacturers’ agents solicit domestic orders for foreign

manufacturers while manufacturers’ export agents act as an export department for domestic manufacturers. Finally, export and import brokers bring together international buyers and sellers of standardized commodities, and freight forwarders specialize in the physical transportation of goods.

IV. INTERNATIONAL LICENSING

Licensing is an arrangement whereby a firm, the licensor, sells the rights to use its intellectual property to another firm, the licensee, in return for a fee. Firms operating in countries with weak intellectual property protection are not advised to use licensing. However, in cases where tariff and nontariff barriers, restrictions on the repatriation of profits, or restrictions on FDI discourage other alternatives, licensing may be the only option. Show Figure 12.3 here.

Licensing is attractive because it requires few out-of-pocket costs, and because it allows a firm to capitalize on location advantages of foreign production without incurring any ownership, managerial, or investment obligations. The text provides an example of why the Kirin Brewery company chose licensing as a means of international expansion.

Basic Issues in International Licensing

The actual licensing agreement is a critical part of the licensing process, and reflects the bargaining power and skills of the licensor and licensee. The contract should consider the boundaries of the agreement; compensation, rights, privileges, and constraints; dispute resolution; and duration of the contract.

Specifying the Agreement’s Boundaries. The first step in negotiating a licensing contract is specifying the boundaries of the agreement. The text provides an example of how Pepsi sets the boundaries in its licensing agreement with Heineken.

Determining Compensation. Compensation under a licensing agreement is called a royalty. Both parties have an interest but opposing views in the determination of an agreement’s compensation. The licensor wants to receive as much compensation as possible, while the licensee wants to pay as little as possible. Royalties of 3-5 percent are common.

Establishing Rights, Privileges, and Constraints. A licensing contract should spell out the rights and privileges of the licensee and the constraints the licensor may impose. Typically, licensees are prohibited from divulging information learned

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from the licensor to third parties, are required to keep specific records on the sale of products or services, and must follow specified standards regarding product and service quality.

Specifying the Agreement’s Duration. Finally, a licensing agreement specifies the duration of the arrangement. Licensors who have chosen licensing as a low-cost means of gaining information about a foreign market may seek a short-term agreement. However, a licensee will seek an agreement that is long enough for it to recoup its investments in market research, the establishment of distribution networks, and/or production facilities. The text notes, for example, that the licensees that built Tokyo Disneyland required a 100-year agreement with Walt Disney Company.

Advantages and Disadvantages of International Licensing

A primary advantage of licensing is its relatively low financial risk. In addition, licensing permits a company to investigate foreign market sales potential without making significant investment in financial and managerial resources. Licensees benefit from the arrangement by being able to make and sell products with a proven track record, yet incur relatively little R&D cost.

A primary disadvantage of licensing is that it limits market opportunities for both the licensee and the licensor. In addition, there is mutual dependence between the licensor and the licensee, and costly and tedious litigation to resolve disputes may hurt both parties. Finally, firms must carefully word their licensing agreements to minimize problems and misunderstandings, and also guard against creating a future competitor.

V. INTERNATIONAL FRANCHISING

A franchising agreement allows an independent entrepreneur or organization, called the franchisee, to operate a business under the name of another, called the franchisor, in return for a fee. Franchising is one of the fastest growing forms of international business today.

Basic Issues in International Franchising

International franchising is more likely to succeed when the franchisor has already achieved considerable success in franchising in its domestic market; the franchisor has been successful domestically because of unique products and advantageous operating systems; the factors that contributed to its domestic success are transferable to foreign locations; and there are foreign investors who are interested in entering into franchise agreements. The text illustrates this concept by examining the franchise agreements of McDonald’s.

A formal contract is associated with franchise agreements. A typical contract specifies the fee and royalties paid by the franchisee for the rights to use the name, trademarks, formulas, and operating procedures of the franchisor. In addition, under a franchise contract, the franchisee typically agrees to adhere to the

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franchisor’s requirements for appearance, reporting, and operating procedures. Usually, the franchisor agrees to help the franchisee establish the new business.

U.S. firms are the leaders in the international franchise business, perhaps because franchising is more common in the U.S. than in other countries. The text provides examples of U.S. and non-U.S. firms that have been successful at franchising.

Advantages and Disadvantages of International Franchising

Primary advantages of international franchising are that it allows franchisees to enter a business with a proven track record, and allows franchisors to expand internationally at relatively low cost and risk. Franchisors also have the opportunity to obtain information about local markets that they might otherwise have difficulty acquiring.

As with licensing, a primary disadvantage of franchising is that profits are shared between the franchisor and the franchisee. International franchising may also be more complex than domestic franchising. The text provides an example of some of the problems McDonald’s had with a franchisee in Moscow.

VI. SPECIALIZED ENTRY MODES FOR INTERNATIONAL BUSINESS

Firms may also use specialized entry modes such as contract manufacturing, management contracts, and turnkey projects.

Contract Manufacturing is used by firms that outsource most or all of their manufacturing needs to other companies in an effort to reduce the amount of resources needed in the physical production of their products. The text notes that both Nike and Mega Toys use contract manufacturing in the production of their goods.

A management contract is an agreement whereby one firm provides managerial assistance, technical expertise, or specialized services to a second firm for some agreed-upon time in return for a fee. In many cases, management contracts are arranged as a result of government activities. For example, the text notes that when Saudi Arabia nationalized Aramco, it hired the former owners to manage the firm. Management contracts are attractive because they allow firms to earn additional revenues without incurring investment risks or obligations. The text illustrates this concept with an example of Hilton Hotel’s management contracts.

A turnkey project is a contract under which a firm agrees to fully design, construct, and equip a facility and then turn the project over to the purchaser when it is ready for operation. International turnkey projects typically involve large, complex, multiyear projects, such as the construction of a nuclear power plant or airport. In some cases, turnkey projects are used when firms fear difficulties in procuring resources locally. The text provides an example of the latter concept by exploring PepsiCo’s operations in the former Soviet Union.

Some firms today are using a B-O-T project in which the firm builds a facility, operates it, and later transfers ownership of the project to another party. The text provides an example of such a project involving the country of Gabon.

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VII. FOREIGN DIRECT INVESTMENT

Some firms choose to establish operations in a host country at the beginning of their internationalization effort, while others prefer to use one of the other entry methods initially, and later invest in facilities in the host country.

FDI is attractive not only for its profit potential, but also because a firm has increased control over its foreign operations. Control is important to firms because it allows firms to closely coordinate the activities of its foreign subsidiaries to achieve strategic synergies, and because control may be necessary to fully exploit the economic potential of an ownership advantage. FDI is also attractive if host country customers prefer to deal with local factories.

However, FDI is riskier and more complex than other types of entry strategies. In some cases, government actions encourage firms to invest in local operations (through such policies as the availability of political risk insurance), while in other cases, government actions discourage FDI (through direct controls on foreign capital or repatriation of profits).

The three basic methods of FDI are greenfield strategies, whereby a firm builds new facilities; acquisitions strategies (also known as "brownfield strategies"), whereby a firm buys existing assets in a foreign country; and joint ventures.

A greenfield strategy involves starting from scratch: buying or leasing and constructing new facilities, hiring and/or transferring managers and employees, and launching the new operation. The greenfield strategy is attractive because the firm can select the site that meets its needs best, the firm starts with a clean slate, and the firm can acclimate itself to the new national business culture at its own pace. The main disadvantages of the greenfield strategy include the time and patience necessary for successful implementation; the fact that land in the desired location is not available, or is only available at an unreasonable price; local and national regulations must be complied with during the building of the new factory; the firm must recruit and train a local workforce; and the firm may be perceived as a foreign enterprise. The text provides an example of the difficulties Disney had with some of these issues when it opened its European operations.

Acquisition strategies (or brownfield strategies) are popular because, unlike other entry methods, an acquisition quickly gives the purchaser control over the firm’s factories, employees, technology, brand names, and distribution networks. The text provides examples of several recent acquisitions made by firms including Procter and Gamble, Arabia Oil Co., and Komomklijke PTT Netherland. The main disadvantage of an acquisition strategy is that the purchaser assumes all liabilities of the acquired firm. In addition, the purchasing firm must also spend substantial sums up front. In contrast, a greenfield strategy allows a firm to spread its investment over an extended period of time.

The joint venture involves an arrangement whereby a new enterprise is created by two or more firms working together for mutual benefit. Joint venture creation is on the rise, in part because of rapid changes in technology, telecommunications, and government policies. Joint ventures will be explored in more depth in Chapter 13.

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CHAPTER REVIEW

1. What are the steps in conducting a foreign market analysis?

A market analysis usually is comprised of three steps: (1) assessing alternative markets; (2) evaluating respective costs, benefits, and risks of entering each; and, (3) selecting those that hold the most potential for entry or expansion.

2. What are some of the basic issues a firm must confront when choosing an entry mode for a new foreign market?

When choosing an entry mode for a new foreign market, a firm must confront issues relating to ownership advantages, location advantages, internalization advantages, the need for control, the availability of resources, and the firm’s global strategy.

3. What is exporting? Why has it increased so dramatically in recent years?

Exporting, the most common form of international business activity, is the process of sending goods or services from one country to other countries for use or sale there. There are three forms of exporting: indirect exporting, direct exporting, and intracorporate transfer. Many firms are pushed into exporting because of shrinking domestic marketplaces, but other firms are pulled into exporting because of foreign market opportunities.

4. What are the primary advantages and disadvantages of exporting?

One of the primary advantages of exporting is its relatively low level of financial exposure. A second advantage of exporting is related to speed of entry. Exporting allows a firm to expand into a foreign market gradually, and therefore allows a company to assess the local environment and adapt its products to local consumers. The disadvantages of exporting include a lack of presence in the local marketplace, vulnerability to trade barriers, and potential problems with trade intermediaries.

5. What are the three forms of exporting?

The three forms of exporting are indirect exporting, direct exporting, and intracorporate transfer. Indirect exporting involves selling a product to a domestic customer, which then exports the product in its original form or a modified form. Direct exporting involves selling directly to distributors or end-users in other markets. Intracorporate transfer occurs when a company sells its product to a foreign affiliate.

6. What is an export intermediary? What is its role? What are the various types of export intermediaries?

An export intermediary is a third party that specializes in facilitating imports and exports. There are various types of export intermediaries, including export management companies, the Webb-Pomerene association, international trading companies, manufacturer’s agents, and export and import brokers. The role of an export intermediary can range from simply handling transportation and documentation to taking ownership of foreign-bound goods

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and/or assuming total responsibility for marketing or financing exports. Export intermediaries are third parties that specialize in facilitating trade. There are several types of export intermediaries. An export management company is a firm that acts as the client’s export department, while a Webb-Pomerene association handles market research, overseas promotion, freight consolidation, contract negotiations, and other services for its members. An international trading company trades a variety of goods for its own account. A manufacturer’s agent, acting on a commission basis, solicits domestic orders for foreign manufacturers, while a manufacturer’s export agent acts as an export department for domestic manufacturers. Export and import brokers bring together buyers and sellers of standardized commodities, and freight forwarders handle the physical transportation of goods.

7. What is international licensing? What are its advantages and disadvantages?

International licensing occurs when a firm, the licensor, sells the right to use its intellectual property to another firm, the licensee. The primary advantages of international licensing are its relatively low financial risk and the opportunity it provides the licensor to learn about sales potential in foreign markets. Licensees like the arrangements because they are able to make and sell products with proven success tracks, yet incur low R&D costs. However, the agreements limit market opportunities for both the licensor and the licensee, and there is mutual dependency between the two parties. Further, there is potential for problems and misunderstandings. Finally, licensors must be careful to avoid creating a future competitor.

8. What is international franchising? What are its advantages and disadvantages?

International franchising involves an agreement whereby the franchisee operates a business under the name of the franchisor in return for a fee. International franchising agreements are attractive because they allow franchisees to enter a business that is established and has a proven track record. Franchisors benefit from the agreements because they can expand internationally at relatively low cost and risk. In addition, they can obtain critical information about the local marketplace from franchisees. However, an international franchising agreement requires both parties to share profits and may be more complicated than domestic franchisee agreements.

9. What are three specialized entry modes for international business, and how do they work?

Three specialized entry modes for international business are management contracts, turnkey projects, and contract manufacturing. Under a management contract agreement, one firm provides managerial assistance, technical expertise, or specialized services to a second firm in exchange for a fee. A turnkey project is an agreement whereby a firm agrees to fully design, construct, and equip a facility and then turn the key over to the purchaser when it is ready for operation. Contract manufacturing involves outsourcing manufacturing needs to other companies.

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10. What is FDI? What are its three basic forms? What are the relative advantages and disadvantages of each?

FDI is foreign direct investment. The three basic forms of FDI are greenfield investments, acquisitions, and joint ventures. Greenfield investments involve the construction of new facilities. It is attractive because it allows a firm to select the most suitable site for construction, the firm starts with a clean slate, and the firm can adapt to its new surroundings at its own pace. However, greenfield investments take time and patience, may be expensive, require the firm to comply with local regulations and recruit a workforce, and may result in a firm being perceived as a foreigner. Acquisitions, in contrast, allow a firm to generate profits even as it integrates the new company into its overall strategy. However, acquisition requires a firm to assume all of the acquired firm’s liabilities, and spend substantial money up front. Joint ventures involve the creation of a new firm by two or more companies working together for mutual benefit.

QUESTIONS FOR DISCUSSION

1. Do you think it is possible for someone to make a decision about entering a particular foreign market without having visited that market? Why or why not?

The response to this question probably depends in part on the market in question and the degree of risk one is willing to assume. Typically, managers will not be able to obtain all of the information needed to make a decision about a foreign market from secondary sources. Thus, managers have two options: they can visit the market in person and obtain information directly from local experts, embassy staff, and chamber of commerce officials, or, hire consulting firms to provide the necessary information.

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2.2. How difficult or easy do you think it is for managers to gauge the costs, benefits, and risks

of a particular foreign market?

In general, it is probably easier to gauge the costs, benefits, and risks of developed country markets than it is to gauge the same variables in a developing economy. However, there is a fair amount of subjectivity involved regardless of the market in question. For example, managers must estimate not only the costs involved in establishing a foreign operation, but also opportunity costs. In addition, future benefits and risks must be estimated.

3. How does each advantage in Dunning’s eclectic theory specifically affect a firm’s decision regarding entry mode?

Dunning’s eclectic theory considers three factors: ownership advantages, location advantages, and internalization advantages. Ownership advantages affect a firm’s decision regarding entry mode in that certain types of advantages are more easily transferred through certain modes than others. For example, imbedded technologies are best transferred through equity modes, while simple technology is more suited to a licensing mode. In addition, ownership advantages will affect a firm’s bargaining power, and therefore the outcome of entry mode negotiations. Location advantages affect a firm’s decision regarding entry mode because they affect the desirability of host country production relative to home country production. For example, if home country production is more desirable, perhaps because of low wage rates, a firm will probably choose exporting as an entry mode. Finally, internalization advantages affect a firm’s decision regarding entry mode because they affect the desirability of producing a good or service in-house versus farming it out to another firm. For example, when transaction costs are low, and the firm believes that it can farm out production without jeopardizing its interests, the firm may use licensing as an entry mode.

4. Why is exporting the most popular initial entry mode?

Exporting is the most popular initial entry mode because of its simplicity and its low risk relative to other types of entry modes. Exporting typically requires little or no capital investment, and the dollar amount of risk is limited to the value of a particular transaction. Exporting also allows a firm to enter a foreign market on a gradual basis, and gain experience in the market.

5. What specific factors could cause a firm to reject exporting as an entry mode?

There are several factors that could cause firms to reject exporting as an entry mode, including the presence of trade barriers, logistical issues, and distribution issues. Firms facing high tariff or nontariff barriers may find host country production preferable to home country production. Logistical considerations may also affect the desirability of exporting. For example, the higher transportation costs associated with exporting, and the longer supply channel and difficulty communicating with customers may encourage a firm to choose an alternative entry method. Finally, firms that face difficulty finding appropriate distributors may turn to one of the other entry modes.

6. What conditions must exist for an intracorporate transfer to be cost-effective?

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An intracorporate transfer occurs when one firm sells goods to an affiliate in another country. Firms engage in intracorporate transfers to lower their production costs and use their facilities more effectively. Therefore, for an intracorporate transfer to be cost-effective, it must be cheaper to buy the product in question from the affiliate firm than from an alternative source, and the affiliate firm must have the capacity necessary to produce the product in question, while the buying firm does not.

7. Your firm is about to begin exporting. In selecting an export intermediary, what characteristics would you look for?

Export intermediaries are third parties that specialize in the facilitation of trade. Depending on the particular circumstances of a firm, employing certain types of intermediaries is more appropriate than employing others. For example, a small firm may select an export management company because it will essentially act as the firm’s export department. However, a larger firm that has an in-house export department might engage a freight forwarder on a product-by-product basis.

8. Do you think trading companies like Japan’s sogo sosha will ever become common in the United States? Why or why not?

Sogo soshas acquire goods either by importing them or having them produced, and then resell them in both domestic and foreign markets. Most students will probably agree that sogo soshas will never become common in the United States, in part because of antitrust laws in effect, and in part because the close relationships with other firms that the sogo soshas imply go against the individualistic culture of the United States. Other students, however, may point to export trading companies in the United States that provide many of the same services as a sogo sosha, and suggest that a form of sogo sosha is already common in the United States.

9. What factors could cause you to reject an offer from a potential licensee to make and market your firm’s products in a foreign market?

There are several reasons why a firm might reject the offer of a potential licensee to make and market the firm’s product in a foreign market. First, such an arrangement would limit the market opportunities for the firm, and create a situation of mutual dependency. Second, if the licensee violated the licensing agreement, the licensing firm could face costly and time-consuming litigation. Third, the firm would face a risk of problems and misunderstandings related to the agreement, which could affect the speed of entry into the foreign market. Finally, the firm may be concerned that if it licensed its proprietary information, it may create a future competitor.

10. Under what conditions should a firm consider a greenfield strategy for FDI? An acquisition strategy?

A greenfield strategy involves setting up an operation from scratch. It is attractive to firms because it allows them to select the site that is most appropriate for their needs, start with a clean slate, and acclimate to the local environment at a gradual pace. However, because successful implementation takes time and patience, firms that are facing time constraints

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should probably select an alternative option. In addition, firms using this method of expansion may find that the desired location is too expensive, or even unavailable; that workforces must be hired and trained; and that various governmental regulations must be complied with. Finally, greenfield investment is probably not appropriate in cases where it is important for a firm to be perceived as a local firm. Under an acquisition strategy, a firm acquires an existing firm doing business in a foreign country. This strategy makes sense when the purchaser needs to generate revenues from its expansion immediately. Through acquisition, a purchasing firm has an immediate market presence, a distribution system in place, as well as trained employees, brand names, and technology. This strategy would not make sense for a company that is short of capital since it requires substantial sums up front.

BUILDING GLOBAL SKILLS

Essence of the exerciseThis exercise begins with a description of Heineken’s global strategy, and then asks students to identify other products or brands that could or could not use Heineken’s strategy for entering markets. Students should be assigned to groups for this exercise because it requires that groups exchange lists of companies that could or could not use the Heineken approach to international expansion.

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Answers to the follow-up questions:

1. What are the specific factors that enable Heineken to use the approach described and simultaneously make it difficult for some other firms to copy it? What types of firms are most and least likely to be able to use this approach?

Students will probably identify several factors that enable Heineken to use its three-step approach to foreign market expansion, including its international experience, its deep pockets, its ability to enter a market on a gradual basis, and the presence of local producers in most markets. In addition to certain consumer products, students will probably identify other beer companies that could use this approach. Firms that would find this approach difficult include auto producers, steel producers, and clothing producers.

2. What does this exercise teach you about international business?

Students should recognize from this exercise that an international strategy that works well for some companies might not be effective for other companies. Students should also recognize that successful global companies such as Heineken might achieve their success in a very methodical manner, first by testing a market and then learning about it before actually investing in it. In addition, students should recognize that firms might use a variety of modes to enter a foreign market. Finally, through the exchange of lists (steps 3 and 4 of the exercise), students should recognize that not all managers think alike.

CLOSING CASE

Heineken’s Global Reach

The closing case explores Heineken NV’s global strategy. In particular, it considers the strategic moves and selection of entry modes Heineken is making in the United States and Europe to increase its competitiveness.

Key Points

Heineken NV, the world’s third largest beer producer, earns more than 85 percent of its revenues outside of the Netherlands. The company is a market leader in every European country, and sells its beer in North and South America, Africa, and Asia (170 countries in all).

Heineken began exporting beer to the United States in 1914, temporarily halted its sales during Prohibition, and successfully reestablished sales after Prohibition. Heineken’s distributor in the United States was Van Munching & Company.

Today, Heineken brews beer in more than 50 countries. The company expanded into the soft drink and wine businesses in the 1970s to exploit its bottling technology and global distribution networks.

Heineken’s current strategy is to achieve in Europe the same sort of market dominance Anheuser-Busch has in the United States. To that end, Heineken has

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bought breweries in several European countries as a way of expanding its product lines and facilitating distribution throughout Europe. In addition, the company has closed or modernized older breweries.

Heineken has avoided establishing a brewery in the United States, however, because it wants to retain its imported image. Heineken knows that from a cost standpoint, local production might make sense, but notes that Lowenbrau actually saw a decrease in sales after establishing a U.S. operation.

Heineken has, however, bought its U.S. distributor, Van Munching & Company, to cut costs and increase profits. The move also enables Heineken to coordinate its U.S. marketing campaigns with its global ones.

In 2002 Heineken bought Egypt’s sole brewery – which also brews a popular line of nonalcoholic beer (Islam forbids the consumption of alcohol) that can be marketed by Heineken to the 1.3 billion Muslims around the world.

Case Questions

1. Describe the fundamental issues in foreign market analysis for a firm like Heineken.

First, it must assess the potential for sales of its product in different markets. Next, it must assess the level of local competition. Next, it must evaluate the legal and political environment. Finally, it must consider sociocultural influences. For example, in the huge U.S. market, the level of local competition may have led Heineken to use an export strategy (thereby differentiating its product from those of the established American breweries). Similarly in Egypt, sociocultural (as well as legal) issues have led Heineken into the nonalcoholic beer market.

2. Discuss the advantages and disadvantages of Heineken’s exporting its beer from one country to another.

One key advantage is Heineken’s ability to differentiate its product (especially in the United States) as an imported beer. This allows it to avoid head-to-head competition with Anheuser-Busch. This focus strategy has been key to Heineken’s success in the U.S. market. By restricting itself to exporting, however, Heineken limits its ability to be a dominant force in the U.S. market and faces all the issues associated with restrictions on imports.

3. Heineken earns the majority of its revenues outside of its home country, yet both Anheuser-Busch and Miller sell 95 percent of their output locally. What factors could explain this difference?

Naturally, the limited size of the Netherlands market plays a role. To achieve growth, Heineken early on needed to expand into foreign markets. Being present in the European Common Market also made international sales a profitable venue for the firm. American firms achieved profitability, growth, and economies of scale within their large domestic market.

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4. Use the Internet to learn more about FDI by Heineken as compared to FDI by Anheuser-Busch.

Depending which sites students visit, they may come up with a wide range of observations. The key on this question is to use the information gathered by students to emphasize the contrast between Anheuser-Busch’s approach and that pursued by Heineken.

Chapter 12: Strategies for Analyzing and Entering Foreign Markets

Suggestions on incorporating the Multimedia exploration into the lesson plan

The key objectives of Chapter 12 are:

Learning about how firms analyze foreign markets and select the best mode of entry Understanding exporting, licensing, and franchising Analyzing other specialized entry modes for international business Reviewing foreign direct investment

The following are some suggestions on how best to utilize the CultureQuest materials to achieve these objectives.

1. Global Business Video: Understanding Entry Modes into the Chinese Market explores the different ways that companies enter the Chinese market.

Show the Video as you review the section entitled, Choosing a Mode of Entry.

2. Review the questions in class and use the following suggested responses to initiate class discussion.

Responses to end of the chapter CultureQuest questions (for video related sections only)

The complete video narration for the video titled, CultureQuest: Global Business Video, is noted at the end of this chapter guide. Please reference it for a full review of the responses to the following questions from the textbook. Below, we’ve noted suggested answers for your quick reference

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Textbook Question: This chapter has profiled the different types of arrangements that companies consider when setting up global operations. Answer the following questions based on the materials in the chapter and the accompanying video your instructor may choose to show you.

(Please refer to narration below and Chapter 12 in text)

1. What factors do companies consider when determining the best form ofoperation to use when entering a new market?

There are four key ways to enter the Chinese market:

exporting to China licensing, including franchising Equity joint ventures Wholly owned foreign enterprises (WOFEs or Woofies)

These are not mutually exclusive ways to enter.

Companies have to consider a number of financial, operational and resource factors. Some of the key factors that companies consider when determining the best way to enter a market include:

1. How much control they wish to retain while for others2. The extent of resources, financial and other, that they are willing to commit to the new

market. 3. Physical and social factors4. Market nuances5. Prior experience in foreign collaborations

2. What have been the challenges and opportunities for foreign companies in establishing collaborative arrangements in China?

Opportunities1. Large domestic market of consumers for products and services2. Cheap labor pool for manufacturing collaborations

Challenges1. Language and culture2. Need for guanxi (connections)3. Previous government restrictions on ownership and repatriation of gains4. Previous lack of convertibility of currency5. Unwieldy bureaucracy 6. Lack of disclosure of corporate accounting practices and governance7. Protection of intellectual property

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3. How have Chinese government policies and attitudes towards foreign businesses evolved? How have these changes affected foreign companies' forms of operations in China?

The Chinese government has become more open to foreign companies over the past two decades. However, foreign companies are sometimes concerned about the protecting their intellectual property. In fact, until 1992, any technology that was part of a joint venture could be accessed by a local Chinese company through a government agency. Though today there’s still concern over the protection of intellectual property, China’s inclusion in the World Trade Organization has encouraged the government to focus attention on how best to protect property rights for everything from software, videos and DVDs to brand names for consumer products.

Prior to 1986, foreign companies could not wholly own a local subsidiary. The Chinese government began to allow equity joint ventures only since 1979, which marked the beginning of the Open Door Policy, an economic liberalization initiative. The Chinese government strongly encouraged equity joint ventures as a great way to gain access to the technology, capital, equipment and know-how of foreign companies. The risk to the foreign company was that if the venture soured, the Chinese company could end up keeping all of these assets. Often Chinese companies only contributed things like land or tax concessions that foreign companies couldn’t keep if the venture ended.

In 1986, the government began to permit wholly-owned foreign enterprises -- WOFEs – sometimes called woofies – as an alternative to joint ventures. Even then, the government banned wholly owned enterprises that were either strategic, like utilities or transportation, or were in industries where Chinese companies already had sufficient capabilities, like production of blue porcelain. The government also traditionally required woofies to be high tech companies that export at least 50% of their production. In reality, this rule has not always been uniformly enforced.

Additional Exercises for Exploring Ethics in Global Business

1. Student Activity and Discussion:

Have the students pick a global company, American or other, and one country in which it operates. Ask them to research how the company is currently performing in that market and what factors the company most likely considered when first entering that market.

Operating conditions change over time. Would the students evaluate the market differently if they were to enter it now versus when the company originally entered that market? Has the company’s strategy in that market changed over time?

2. Team Activity and Discussion:

Group the students into teams of two or three people. Have each team select one market and determine what factors are important in reviewing market entry strategies

Market entry strategies Export/import

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Management contracts Licensing Franchising Joint ventures/strategic alliances Turnkey operations wholly owned subsidiaries (DFI = direct foreign investment)

Discussion Questions1. Why would a company choose a particular market strategy over another? Can a company have more than one strategy? Why or why not?

2. In the country and market selected above, what are the local cultural nuances to doing business?

Additional test questions on this information can be found in the Test Item File.

Video Narration: Global Business Video

Guanxi and Woofies: Understanding Entry Modes into the Chinese Market

With a population exceeding 1.3 billion, continued economic growth, and a large supply of inexpensive and productive labor, China lures businesses from around the world. Despite criticisms of its unwieldy bureaucracy or lack of disclosure of corporate accounting practices and governance, most global companies agree that you can’t be globally successful if you ignore this emerging market.

It’s clear that the Chinese business landscape is changing. As economic and political reforms continue, China is charging ahead in its efforts to become one of the key global economies. At the same time, companies looking to do business in China need to keep in mind the impact of its long and complex history as well as its rich cultural traditions, all of which continue to exert a strong influence on virtually every aspect of Chinese life, including how business is conducted. The key to doing business in China is flexibility, patience and persistence, much as you’d need in most emerging markets, but with a few unique twists.

Companies considering doing business with China have to first determine the best way to enter the market. Most foreign firms utilize some form of collaborative arrangement with local firms when entering China.

In this segment, we’ll talk about how companies can enter the Chinese market; the various factors they need to consider if they enter into a collaborative arrangement, and some of the tactical steps they need to take in the early stages of their Chinese operations.



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These are not mutually exclusive ways to enter.

It’s clear for those experienced in dealing with China that there isn’t one best way to enter China. Companies have to consider a number of financial, operational and resource factors. For example, some companies start by considering how much control they wish to retain while for others, the primary concern is how much of their own resources they're willing to commit. As companies develop more experience doing business with China, they’re likely to reassess the way they do business in the country, particularly in terms of collaborative arrangements. Companies that aim to have a stronger and more profitable presence in the Chinese market need to increase their commitment of resources.

Exporting to China

Exporting may be effective, especially for smaller and mid-size companies that can’t or won’t make any significant financial investment in the Chinese market. Companies can sell into China either through a local distributor or through their own salespeople. Many government export trade offices can help a company find a local Chinese distributor or producer. Increasingly, the internet has provided a more efficient way for foreign and Chinese companies to find one another and enter into commercial transactions.

Using distributors can have its own challenges. For example, some companies find that if they have a dedicated salesperson who travels frequently to China, they’re likely to get more sales than by relying on a China-based distributor. Often, Chinese distributors sell multiple products and sometimes even competing ones. Making sure that the Chinese distributor favors your product over another can be hard to monitor. Further, some companies often find that culturally, Chinese consumers may be more likely buy a product from a foreign company than from a local distributor, particularly in the case of a complicated, high-tech product. Simply, the Chinese are more likely to trust that the overseas salesperson knows their product better.

There are risks with relying on the export option. If you merely export to China, the Chinese distributor or buyer might switch purchases to a cheaper supplier or even just threaten to in order to get a better price from you. Or, someone might start making the product within China and take the market from you. Also, local Chinese buyers sometimes believe that a company which only exports to them is not very committed to provide long-term service and support once a sale is complete. Thus they may prefer to buy from someone who is producing within China. At this point, many companies begin to consider having a local presence, which moves them towards one of the other three entry options.

Licensing and Franchising

Under a licensing or franchising agreement, a foreign company grants rights on its intangible property, like technology or a brand name, to a Chinese company for a specified period of time. In return, it receives a royalty. The Chinese sometimes call this a contractual joint venture. While the foreign company usually has no ownership interests, they often provide ongoing support and advice.

Most companies still consider this market entry option of licensing and franchising -- a low risk option because there’s typically no upfront investment. However, foreign companies are

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sometimes concerned about the protecting their intellectual property. In fact, until 1992, any technology that was part of a joint venture could be accessed by a local Chinese company through a government agency. Though today there’s still concern over the protection of intellectual property, China’s inclusion in the World Trade Organization has encouraged the government to focus attention on how best to protect property rights for everything from software, videos and DVDs to brand names for consumer products.

Equity Joint Ventures

The next option for companies entering China is some form of equity joint ventures. In the past, joint ventures were the only relationship foreign companies could form with Chinese companies. In fact prior to 1986, foreign companies could not wholly own a local subsidiary.

The Chinese government began to allow equity joint ventures only since 1979, which marked the beginning of the Open Door Policy, an economic liberalization initiative. The Chinese government strongly encouraged equity joint ventures as a great way to gain access to the technology, capital, equipment and know-how of foreign companies. The risk to the foreign company was that if the venture soured, the Chinese company could end up keeping all of these assets. Often Chinese companies only contributed things like land or tax concessions that foreign companies couldn’t keep if the venture ended.

Equity joint ventures pose both opportunities and challenges for the companies that choose this option. First and foremost is the challenge of finding the right Chinese partner – not just in terms of business focus, but also in terms of compatible cultural perspectives and management practices. We’ll talk more about these kinds of factors companies need to consider later.

Wholly Owned Foreign Enterprises

The last entry option requires the highest commitment by the foreign company, which also must assume all of the risk, financial and otherwise. In 1986, the government began to permit wholly-owned foreign enterprises -- WOFEs – sometimes called woofies – as an alternative to joint ventures. Even then, the government banned wholly owned enterprises that were either strategic, like utilities or transportation, or were in industries where Chinese companies already had sufficient capabilities, like production of blue porcelain. The government also traditionally required woofies to be high tech companies that export at least 50% of their production. In reality, this rule has not always been uniformly enforced.

Some foreign companies believe that owning their own operations in China is an easier option than having to deal with a Chinese partner. For example, many foreign companies still fear that their Chinese partners will learn too much from them and become competitors. However, in most cases the Chinese partner knows the local culture – both that of the customers and workers -- and is better equipped to deal with Chinese bureaucracy and regulations. Additionally, even woofies cannot be totally independent of Chinese firms, who they might have to rely on for raw materials and shipping as well as maintenance of government contracts and distribution channels.

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Collaborations offer different kinds of opportunities and challenges than self-handling Chinese operations. For most companies, the local nuances of the Chinese market make some form of collaboration desirable. The companies that opt to self-handle their Chinese operations tend to be very large and / or have a proprietary technology base such as companies in high-tech or aerospace – for example Boeing or Microsoft. Even then, these companies tend to hire senior Chinese managers and consultants to facilitate their market entry and then help manage their expansion. Nevertheless, navigating the local Chinese bureaucracy is tough, even for the most experienced companies.

Just about any large venture in China will at some point comes into contact with the Ministry of Foreign Trade and Economic Development. China has a vast bureaucracy, although it’s being revamped, and a maze of government agencies and regulations.

Many foreign companies choose to enter China via Hong Kong. They may set up a Hong Kong company or use a Hong Kong based Chinese company as a partner. For decades, this was the only legally permitted option as the Chinese government strictly controlled access to its local markets. Even with China’s liberalization, many companies continue to enter via Hong Kong because Hong Kong places very few restrictions and red tape on foreign investment, is well-regulated, offers operating efficiencies, and has transparent operating rules and regulations. However, the handover of Hong Kong to China on July 1st, 1997 has weakened some of these attributes.

Entering through Hong Kong does have its problems. These days, some mainland Chinese, especially those from Beijing, complain that Hong Kong Chinese have taken advantage of them, and thus are reluctant to deal with them. In such cases, foreign companies are better off choosing a different way to enter the Chinese market. Further, most people in China speak Mandarin, which is not the primary language in Hong Kong. But over 400 million speak one of the other seven dialects such as Cantonese, which is the main language in Hong Kong and is commonly spoken throughout the southern part of China.

Regardless of which entry strategy a company chooses, several factors are always important.

Cultural and linguistic differences (pause) – these affect all relationships and interactions inside the company, with customers and with the government. Understanding the local business culture is critical to success

Quality and training of local contacts and / or employees (pause) – evaluating the skill sets and determining if the local staff is qualified is a key factor for success

Political and economic issues (pause) – policy can change frequently and companies need to determine what level of investment they are willing to make, what is required to make this investment and how much of earnings they can repatriate

Experience of the partner company (pause) – assessing the experience of the Chinese company in the market, with the product and in dealing with foreign companies is essential in selecting the right local partner

One of the most important cultural factors in China is guanxi , which is loosely defined as a connection based on reciprocity. Even when just meeting a new company or partner, it’s best to have an introduction from a common business partner, vendor or supplier – someone the

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Chinese will respect. China is a relationship-based society. Relationships extend well beyond the personal side and can drive business as well. This stands in sharp contrast to the West where relationships have less importance. With guanxi, a person invests with relationships much like one would invest with capital. In a sense, it's akin to the Western phrase, "You owe me one."

Guanxi can potentially be beneficial or harmful. At its best, it can help foster strong, harmonious relationships with corporate and government contacts. In its worst, it can encourage bribery and corruption. Whatever the case, companies without guanxi won’t accomplish much in the Chinese market. Many companies address this need for guanxi by entering into the Chinese market in a collaborative arrangement with a local Chinese company. This entry option has also been a useful way to circumvent regulations governing bribery and corruption, but it can raise ethical questions, particularly for American and Western companies that have a different cultural perspective of gift-giving and bribery

Once a meeting has been set up, foreign companies need to understand the local cultural nuances that govern first meetings, from physical and verbal gestures to seating order. Selecting an entry strategy for China is easier said than done. We’ve covered the structural options as well as some of the issues that foreign companies need to consider when they decide to enter the Chinese market.

Overall, foreign companies need to:

Research the Chinese market thoroughly and learn about the country and its culture (pause)

Understand the unique business and regulatory relationships that impact their industry, whether its consumer products or mining and forestry (pause)

Use the Internet to identify and communicate with appropriate foreign trade corporations in China or their own government’s embassy in China. Each embassy has its own trade and commercial desk. For example, the U.S. embassy has a foreign commercial service desk and officer who assists American companies on how best to enter the local market. These resources are best for smaller companies. Larger companies who have more money and resources usually hire top consultants to do this for them. They’re also able to have a dedicated team assigned to China who can travel there frequently in the beginning of the relationship to meet with government representatives. (pause)

Once a company has decided to enter the Chinese market, it needs to spend some time to understand the local business culture and how to operate within it. (pause)

China joined the World Trade Organization in December 2001 and it’s clear that it will be drawn even more into the global economy as companies continue to vie for access to its 1.3 billion consumers and cheap and productive labor pool. Most companies expect that dealing

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with China will now become more straightforward if not easier. Whatever the future brings, the Chinese economy continues to be a powerhouse of growth and opportunity.

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Chapter 12: Test Questions

1. List four ways to enter the Chinese market.



2. True or False.

Most global companies entering China will deal with the Ministry of Foreign Trade and Economic Development.

True. Just about any large venture in China will at some point comes into contact with the Ministry of Foreign Trade and Economic Development. China has a vast bureaucracy, although it’s being revamped, and a maze of government agencies and regulations.

3. List two factors that are important to consider when entering a new market.

Regardless of which entry strategy a company chooses, several factors are always important.

Cultural and linguistic differences – these affect all relationships and interactions inside the company, with customers and with the government. Understanding the local business culture is critical to success

Quality and training of local contacts and / or employees – evaluating the skill sets and determining if the local staff is qualified is a key factor for success

Political and economic issues – policy can change frequently and companies need to determine what level of investment they are willing to make, what is required to make this investment and how much of earnings they can repatriate

Experience of the partner company – assessing the experience of the Chinese company in the market, with the product and in dealing with foreign companies is essential in selecting the right local partner

4. Which statement best describes the concept of guanxi in Chinese business culture?

a. Guanxi are connections based on reciprocity.b. Guanxi is like giving or receiving an “I owe you”.c. Guanxi can be harmful and beneficial.d. All of the above.

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D. All of the above. One of the most important cultural factors in China is guanxi, which is loosely defined as a connection based on reciprocity. Even when just meeting a new company or partner, it’s best to have an introduction from a common business partner, vendor or supplier – someone the Chinese will respect. China is a relationship-based society. Relationships extend well beyond the personal side and can drive business as well. This stands in sharp contrast to the West where relationships have less importance. With guanxi, a person invests with relationships much like one would invest with capital. In a sense, it's akin to the Western phrase, "You owe me one."

Guanxi can potentially be beneficial or harmful. At its best, it can help foster strong, harmonious relationships with corporate and government contacts. In its worst, it can encourage bribery and corruption. Whatever the case, companies without guanxi won’t accomplish much in the Chinese market. Many companies address this need for guanxi by entering into the Chinese market in a collaborative arrangement with a local Chinese company. This entry option has also been a useful way to circumvent regulations governing bribery and corruption, but it can raise ethical questions, particularly for American and Western companies that have a different cultural perspective of gift-giving and bribery

Resources for additional information

http://www.tdctrade.com/chinaguide/index_e.htm – Hong Kong TDC is the global marketing arm and service hub for Hong Kong-based manufacturers, traders and service exporters.

http://www.usatrade.gov/website/ForOffices.nsf/(CountryList)/China?OpenDocument – U.S. government information on doing business with China.

www.worldinformation.com – overview per continent/region; current events; trade, etc.

www.nationsonline.org – general information on countries/regions/continents; history, business and finance information

www.executiveplanet.com – information on business etiquettes/protocols per country

www.nationbynation.com – information on geography, history and people of each country

www.culture-quest.com – business and cultural information on countries and regions around the world

www.businesstravelogue.com – information on business etiquettes for each country

www.economist.com – search for global ethics to see most recent articles

http://www.countrybriefings.com/?showPage&PAGE=atmaGlobal.tml&RID=4196 – current economic information on major economies around the world

www.culture-quest.com – business and cultural information on countries and regions around the world

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http://www.culture-quest.com/

http://www.countrybriefings.com/?showPage&PAGE=atmaGlobal.tml&RID=4196

http://www.economist.com/

http://www.businesstravelogue.com/

http://www.culture-quest.com/

http://www.nationbynation.com/

http://www.executiveplanet.com/

http://www.nationsonline.org/

http://www.worldinformation.com/

http://www.usatrade.gov/website/ForOffices.nsf/(CountryList)/China?OpenDocument

http://www.tdctrade.com/chinaguide/index_e.htm

Analyzing Strategies

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