METHOD OF DOING BUSINESS ABROAD (Exporting (Advantages of Exporting…
METHOD OF DOING BUSINESS ABROAD
Strategy in which the firm establishes a physical presence abroad by acquiring productive assets
International collaborative venture: A cross-border business alliance in which partnering firms pool their resources and share costs and risks of a venture.
Joint venture (JV): A form of collaboration between two or more firms to create a jointly-owned enterprise.
Examples of FDI
Volkswagen spent $1 billion to build a factory in Poland to manufacture delivery vans
The British pharmaceutical firm GlaxoSmithKline purchased the global Vaccines division of Switzerland’s Novartis for $5.25 billion.
Denmark’s Lego Group spent more than 100 million euros to build a toy factory in China.
agreement specifies the nature of the relationship between the licensor (owner of intellectual property) and the licensee (the user).
example 1:<3:Intel licensed the right to a new process for manufacturing computer chips to a firm in Germany.
example 2 :<3:Warner licenses images from the Harry Potter books and movies to companies worldwide.
In a typical deal, the licensee pays the licensor a fixed amount upfront and an ongoing royalty (usually 2-5%) on gross sales generated from using the licensed asset.
The fixed amount covers the licensor’s initial costs of transferring the licensed asset to the licensee, including training, engineering, or adaptation.
Certain types of licensable assets, such as copyrights and trademarks, have much lower transfer costs.
Most typical arrangement is business format franchising, in which franchisor transfers to the franchisee a total business method – including production and marketing methods, sales systems, procedures, training, and the use of its name.
More comprehensive and longer-term than licensing
Master franchiser: An independent company authorized to establish, develop, and manage the entire franchising network in its market. E.g., McDonald's in Japan.
Franchisor & Franchisee
Advantages for franchiser:
Can internationalize quickly to many markets;
Low effort, once established; and
Can leverage franchisees’ local knowledge.
Disadvantages for franchiser:
Maintaining control over franchisees may be difficult;
Franchiser has limited control over its assets abroad; and
Risks creating a future competitor.
Usually the firm’s first foreign entry strategy
Low risk, low cost, and flexible
Popular with SMEs
Advantages of Exporting
Generate better profit margins
Increase sales volume; improve market share
Increase economies of scale
Diversify customer base
Minimize the cost of foreign market entry
Stabilize sales fluctuations
Disadvantages of Exporting
Compared to FDI, exporting offers fewer opportunities to learn about customers, competitors, and other aspects of foreign markets
Firm must acquire and dedicate new capabilities in international sales contracts and transactions, international financing methods, and logistics and documentation, all of which can strain organizational resources
Exposes the firm to tariffs and other trade barriers as well as fluctuating exchange rates
Procurement of products or services from suppliers located abroad for consumption in the home country or a third country
Also called global outsourcing, global procurement or global purchasing; it amounts to importing
Involves a contractual relationship between the buyer and the foreign supplier, in which the performance of a specific value-chain activity is subcontracted to the firm's own subsidiary or to an independent supplier
Drivers of Global Sourcing
Falling costs of international business
Entrepreneurship and rapid economic transformation in emerging market countries
Technological advances in communications