Modes of Entry in International Business

Topics: Subsidiary, License, Strategic alliances Pages: 13 (2396 words) Published: November 7, 2011
Chapter 6 Modes of Entry

Non-exporting modes of entry
h Three main non-exporting modes of entry non-

• Licensing (including franchising) • Strategic Alliances • Wholly owned manufacturing subsidiaries

Three modes of entry
Host Country Home country LICENSING

Blueprint : “how to do it”

Ho st


A replica of home

Host County

Co un



A “joint effort”


The Impact of Entry Barriers
h The non-exporting modes of entry basically non-

represent alternatives for the firm when entry barriers to a foreign market are high. h These entry barriers involve not only artificial barriers such as tariffs, but also involve lack of knowledge of the foreign market and a need to outsource the marketing to local firms with greater understanding of the market.

Licensing: What Is It?
h A license is a contractual agreement whereby the

licensor transfers to a licensee the right to use a proprietary asset for a fee. h Examples of proprietary assets include… include… • • • • • Process know-how or technology knowTrademarks and tradenames Patents Designs Intellectual property

• Advantages for the new exporter
– Requires little depth of market knowledge – Can be put in place fairly quickly – Requires relatively little investment – The need for local market research is reduced – The licensee may support the product strongly in the new market

• Disadvantages
– Can lose control over the core competitive advantage of the firm. – The licensee can become a new competitor to the firm.


Licensing: When Is It Likely To Be Used?
h In technology-intensive and process industries technologyh When the technology is not central to the licensor’s licensor’

h Between companies in developed countries h When the licensor lacks the capital, managerial

resources, or knowledge of foreign markets required for exporting or FDI h When there is a desire to test and proactively develop a market that can later be exploited with FDI

Licensing: When Is It Likely To Be Used? (Cont’d)
h When prospects for “technology feedback” are high feedback” h When it applies to secondary markets that may be too

small to justify larger investments
h When the host country restricts (or prohibits) imports or

FDI, or when the threat nationalization is too great
h When the licensee is not likely to become a future

h When the pace of technological change (and

obsolescence) are high

Licensing: The Agreement
h Generally, the license agreement specifies the rights to

be granted, the consideration payable, and the duration of the terms. Typically, a license agreement will include the following: • A clear and correct description of the parties to the agreement, identifying the corporate names of each party, its incorporating jurisdiction, and its principal place of business • A preamble describing the parties, their reasons for entering into the agreement, and their respective roles • A list of defined terms, to simplify a complex document and avoid ambiguiity or vagueness


Licensing: The Agreement (Cont’d)
• A set of schedules for implementation • A description of the geographical limitations to be imposed • Terms relating to the duration and any provisions for extension • Provisions for granting of rights to future refinements by the licensor • Provisions for “technological flowback” from the licensee flowback” • Details regarding royalties or periodic payments • Specification of minimum performance requirements to ensure the licensee’s “best efforts” licensee’ efforts”

Licensing: Some Risks
h Leakage” -- The dissipation of one’s proprietary Leakage” one’

advantage h Your reputation now depends on another’s another’ performance h Creation of a new competitor -- Despite best efforts to the contrary

h Original Equipment Manufacturing (OEM)

• A company enters a foreign market by selling its unbranded...
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