Going Global
Licensing
Strategic Alliances
FDI
Exports is not the only Option
Barriers to trade such as Tariffs, quotas
and complex customs procedures
discourage exports
Other options are
 Licensing
 Strategic Alliances
 Foreign Direct Investments (FDI)
Optimal mode of entry depends on
business strategy, trade barriers & product
situation
Entry Barriers
Tariff barriers are the most obvious
barriers to entry.
Import Tariffs make imports more
expensive when compared to domestic
products
High tariffs create local monopolies, which
results in higher prices for consumers
Tariffs also increase the cost of doing
business in that country
Non Tariff barriers
Non Tariff barriers are common & include:
 Government Rules & Regulations e.g: FDA
rules in US, Purity laws in Germany
 Complex Customs Procedures
 Limited or No access to local distribution
network e.g: Fuji prevented its distributors
from carrying Kodak products
 Natural Barriers: The local competitors are too
competitive, have a dominant market share,
have a strong brand name
Developed Vs Developing
Countries
Trade barriers in developing countries are
often tariffs, Rules, Regulations & lack of
infrastructure
Barriers in developed countries are
usually natural barriers, Government Rules
& regulations
Developed countries are often the learning
grounds for firms from developing
countries in their global expansion
Exit Barriers
Exit barriers are non-recoverable investments
made while operating in a country.
Often times it is difficult to lay off people, and
may have to pay a huge compensation to do so.
Loss of good will, Brand Value, Brand Image
also acts as an Exit barrier
E.g: Peugeot Exited US market in 1992, Philips
is still operating in US even after 15 straight
years of losses
Loss of learning opportunity is cited as an exit
barrier
Effect of Barriers on Entry
Mode
Entry Mode depends heavily on trade barriers
Firm must be ready to unbundle its Value chain
to gain entry
 Compulsory Joint Ventures in China
 Local Content Requirements in Czech
 Lack of distribution network in US
Firms often build managerial expertise in one
mode of entry & would prefer it over others
 IBM, Philips, P&G prefer Wholly Owned Subsidiaries
 Small tech companies may prefer licensing or Joint
Ventures
Managerial Skills & Mode of
Entry
Each Mode of entry involves different
managerial skills
 Supervising hundreds of Franchising is
different from Running foreign subsidiaries
Joint Ventures & Wholly owned
subsidiaries involve quite a lot of learning,
Learning curve effects must be considered
while planning the entry mode
Licensing
Licensing refers to a firm’s know-how or
other intangible asset to a foreign company
for a fee, royalty or some other form of
payment
Overcomes tariffs and other trade barriers
Licensee will learn FSA from the licensor
and may become a future competitor
Loss of FSA can be prevented by proper
contracts & licensing agreements
Licensing – How not to do it
Gillette avoided investment in market
research and investments in Europe, so it
licensed its razor blade manufacturing
technology to Wilkinson of UK – forgetting
to exclude continental Europe in the
contract
As a result Gillette now has to compete
with its own technology in Continental
Europe – A long uphill battle
Elements of a licensing
Contract
Technology Package
 Definition, Know-How, Patents, trade marks
Use Conditions
 Territorial rights, Sublicensing agreements, exclusion
zones, performance/Quality conditions, reporting rules
Compensation
 Mode of payment, Minimum & maximum fees, Other
assistance fees, marketing fees
Other Provisions
 Contract laws, Arbitration conditions, terminations
conditions
Franchising
Franchising is similar to licensing but in addition
franchisor provides a well recognized brand
name, marketing support and in some cases raw
materials
Franchisor also provides advertising, employee
training, production & quality training
In return Franchisee must adhere to the rules of
the franchisor and both share revenue based on
a preset agreement
Popular for fast foods, Hotels, Auto Repair
Shops
Franchisor has a greater control over the
Original Equipment
Manufacturing
OEM is actually exports
Manufacturer sends there parts to another
company which sells the final product
under their Brand name
 Canon provides cartridges for HP printers
 Canon Provides copiers for Savin
Pro: Avoids expensive marketing efforts
Con: Firm fails to learn from foreign
Markets
Strategic Alliances (SA)
SA is a collaboration between 2 firms
Equity based SA is called Joint Ventures
SA is mutually beneficial and takes
advantages of both firm’s FSA
 Share R&D, Distribute each others products
In some cases SA involves sharing of vital
information – A potential loss of FSA
Unlike licensing, there is usually no royalty
or fees to be paid
Non-Equity SA
SA between competitors is relatively new
Need to access each other’s technology,
marketing skills, manufacturing skills to exploit
new markets is driving Non-Equity SA
Shortage of resources is one of the reason
Control is established by soft skills I.e. the need
for mutual gain
 First Mover advantage
 Learn from leading markets
 Reduce competitive pressures
Distribution Alliances
Distribution networks are often expensive to
setup
A mutual distribution alliance agreement
prevents duplication of efforts while maximizing
benefits
 Airlines typically sell seats in other airlines
 Mitsubishi joined hands with Chrysler in US
Pro: Saves costs & uses a ready network
Con:
 Limits growth of the partners via a non-compete
agreements
 Firm loses learning opportunity
Manufacturing Alliances
Manufacturing Alliance is a sharing of
manufacturing facilities to save on investment
costs, achieve economies of scale, save on
transportation costs
Manufacturing Alliances tend to be unstable as:
 Limits growth of the partners
 Potential loss of know-how
 Priority on manufacturing will always favor one partner
over the other
 Loss or learning curve economies
R&D Alliances
R&D alliances are often between
competitors
Such alliances are for:
 Developing a common technology
 Need for accessing each other’s technology
 Need to stay ahead of other competition
 Lower R&D costs, Avoid Duplication
 Need to impose a joint technology standard
Unintended Loss of technology is possible
Joint Ventures
Equity Based SA. Usually firms need to
transfer capital, man power, technology
and management skills to the new venture
Potential loss of know-how exists
Mutually beneficial if partners learn from
each other and their joint experience
Usually a first step before setting up a
Wholly Owned subsidiary
Care must be taken in selecting partners
FDI
FDI is usually for Wholly owned subsidiaries
 Greater Control over know-how – I.e Internalization of
FSA
 Avoid tariff & other barriers
 Faster response to foreign markets
 Lowering prices for buyers, gaining market share,
establishing an insider position
Carries higher risk than any other mode of entry
May suffer from Country-of-origin effects
 E.g Sony from Malaysia
FDI – Green Field project or
Acquisition
FDI decisions will have to consider a green field
venture or an acquisition of a foreign firm
Acquisition of an existing company speeds up
entry, gains a ready market share
Benefits from existing facilities, marketing
channels etc
Disadvantages are:
 Incompatible product lines
 Culture mismatch
 Political Backlash or resurgence of national pride
 Loss of Goodwill
 Struck with existing legacy systems
FDI – Financial Analysis
FDI requires rigorous financial analysis
Cash flows are subjected to foreign
exchange risks
IRR or NPV analysis for a foreign project
is difficult due to lots of unknowns
Financial analysis is based on market
forecast. In many cases market forecast
will be inaccurate
Optimal Entry Strategy
Closing Thoughts