QUESTIONS 1. Briefly explain these market entry strategies: exporting, licensing, joint venture, manufacturing, assembly operations, management contract, turnkey operations, and acquisition. Exporting is a strategy in which a company, without any marketing or production organization overseas, exports a product from its home base. Licensing is an agreement that permits a foreign company to use industrial property (i.e., patents, trademarks, and copyrights), technical knowhow and skills, architectural and engineering designs, or any combination of these in a foreign market. A joint venture is a partnership at corporate level formed for a specific business purpose by two or more investors (from more than one country) sharing ownership and control. Manufacturing is a strategy which involves all or some manufacturing in a foreign country. An assembly operation involves producing parts or components in various countries in order to gain each country's comparative advantage and the subsequent assembly of these parts into a finished product. Management contract is a strategy used by a company with management experience with the idea of managing the business or investment of a foreign owner/government for a fee. A turnkey operation is an agreement by a seller to supply a buyer with a facility fully equipped and ready to be operated by the buyer's personnel, who will be trained by the seller. An acquisition is a direct investment in a foreign country through the purchase of a local company. 2. What is cross-licensing or grantback? Cross-licensing or grantback is a two-way license. It allows an original licensor to gain access to a licensee's technology and product. This is important because the licensee may be able to build on the information supplied by the licensor. A smart licensor may even lower the royalty rate in return for product improvements and potentially profitable new products. An intelligent practice is to stipulate in a contract that licenses for new patents or products covered by the return grant are to be made available at reasonable royalties. 3. What are the factors that should be considered in choosing a country for direct investment? In choosing a country for direct investment, a number of factors must be considered. Some of these factors are product image, competition, local resources (raw materials, manpower,
infrastructure, etc.), labor costs, type of product, taxation, foreign exchange and investment climate. 4. What is an FTZ? What are its benefits? An FTZ (free trade zone) is a secured domestic area in international commerce, considered to be legally outside a country's customs territory. It is an area designated by a government for the duty-free entry of goods. The benefits of FTZ use are numerous. One benefit is job retention and creation. The use of an FTZ improves the cash flow for a company, and it provides a means to circumvent import restrictions. Furthermore, FTZs provide a means to facilitate imports and exports. Finally, FTZs lower production costs, duties, and freight charges.
DISCUSSION ASSIGNMENTS AND MINICASES 1. Since exporting is a relatively risk-free market entry strategy, is there a need for a company to consider other market entry strategies? Exporting, although relatively risk-free and simple, is not always appropriate because of a number of reasons. First, the usual lack of product modification makes the exporting strategy too production oriented and not sufficiently marketing oriented. Second, one should remember that a low degree of market risk is usually accompanied by below-average profit. The exporting strategy does not work well when the company's home-country currency is strong. During the first term of the Reagan administration, the dollar was so strong that U.S. exports were severely depressed. During the last two years of President Reagan's second term, however, the dollar was very weak, thus helping U.S. exports while hurting Japan's exports. 2. Can a service be licensed for market entry purposes? Just like its product counterpart, a service can be licensed. The licensing of the Nikkei stock index for the purpose of trading as mentioned in the chapter is one example. Several U.S. car-rental companies and hotel chains have entered the United States and foreign markets through licensing (franchising). Many well-known designers have also licensed their names. 3. In spite of the advantages of free trade zones, most companies have so far failed to utilize them effectively. What are the reasons? Can anything be done to stimulate the interest? American firms have failed to utilize FTZs effectively because they are relatively inexperienced in this area. Some may also be myopic. U.S. companies must be educated of the many benefits of the FTZs, ranging from tax reduction and cash flow to warehousing and manufacturing. The U.S. government, through its International Trade Administration, should
conduct seminars dealing with FTZs. For those U.S. zones run by private enterprises, these private entities also need to do their share of educating their potential clients. 4. One of the most celebrated joint ventures is NUMMI (New United Motor Manufacturing, Inc.), a joint venture between General Motors and Toyota. It seems surprising that the two largest competitors would even think of joining forces. GM is the number one manufacturer in the United States as well as in the world. Toyota, on the other hand, is number one in Japan and number two worldwide. NUMMI is a fifty-fifty joint venture with the board of directors split equally between the two companies. Initially, the venture was to manufacture the Toyota-designed subcompact, and the name chosen for the car was Nova. The total number of vehicles assembled at NUMMI in 2002 was 369,856: Toyota Tacoma (164,550), Toyota Corolla (137,642), Pontiac Vibe (59,556), Toyota Voltz (8,108). What are the benefits each partner can expect to derive from the NUMMI joint venture? Do you foresee any problems? One benefit of this GM-Toyota is that it substantially reduces the amount of resources in terms of money and personnel which each partner must contribute. The $300 million joint venture saves GM a great deal of time and money in finding a new car to replace its aging Chevette. Designing and tooling a new car can take three years or more and may cost $1.5 billion. The joint venture cut the time requirement in half and cost GM only one-tenth the cost of what it would have taken if GM did it alone. GM also would learn the Japanese methods of managing and manufacturing. In addition, GM could use Toyota's quality reputation and low prices to attract entry-level buyers who previously shopped for only imports. This was important because GM's overpriced J cars did not perform well against imports. For Toyota, the joint venture also offers a number of benefits. The company wanted to find out whether it could build cars in the United States with the same quality in case that it was necessary (due to import quotas) or desirable (due to economic considerations) to do so in the future. It was an insurance against rising protectionism. The joint venture was a low-risk method, and Toyota could gain practice in managing a U.S. plant while safely marketing its cars under GM's well-known name. It was a quick and inexpensive way to learn how to operate in the United States with a knowledgeable partner. Just like any joint ventures, the GM-Toyota deal has problems of double management and incompatibility. The Japanese philosophy is to reinvest profits while U.S. firms prefer to pay a quarterly dividend. The 50-50 board split also makes it difficult to make a decision if a dispute arises. After the expiration of the original agreement in the early 1990s, GM and Toyota have decided to renew its partnership arrangement. 5. Each year, foreign companies generate some $10 billion in capital and 300,000 new jobs for the U.S. economy. As can be expected, U.S. politicians, states, and local governments have aggressively competed for foreign direct investment. Discuss the business of attracting foreign corporations from the viewpoints of both the companies and states. What are the matters of concern to companies which they will take into
consideration when making their location decisions? What are the incentives which states can offer to lure businesses to locate in a particular state? The Spartanburg County of South Carolina has done remarkably well in attracting foreign capital. It has the highest per capita foreign investment in the United States. The foreign manufacturers with operations there include Hoechst Celanese, BASF, BIC, Michelin, Hitachi, Adidas, and Menzel. Statewide, one out of every four manufacturing workers receives a paycheck from a foreign employer. Therefore, it is a good idea to see how South Carolina has been attracting foreign firms and the benefits that the state has received in return. (See “The Boom Belt,” Business Week, 27 September 1993, 98ff.) Let’s consider the case of BMW. The company evaluated 250 locations in 10 countries in its search for a low-cost site for a plant to make its 3-series models. What the company has to offer is significant: $400 million facility, 2,000 jobs, and a $66.5 million annual payroll. South Carolina’s attractions include a temperate climate, year-round golf, and inexpensive mansions. One problem, however, was that there were many middle-class homes on the site that appealed to BMW. Undaunted, the state visited and called the community. Before long, all 140 properties were bought by the state and local governments at a cost of $36.6 million. According to many manufacturers, the area’s cooperation is more important than labor costs. As far as German manufacturers are concerned, the most important incentive is the state’s training programs for new workers (i.e., state-sponsored apprenticeships). South Carolina won the BMW plant by agreeing to screen all job applicants and train the company’s entire work force through the state’s technical schools. The state even raised $2.8 million from private sources to send some of the company’s new engineers to Germany for firsthand instruction. Naturally, there were critics who felt that the state was too generous. The $1-a-year lease on the 1,000 acres, for example, will cost taxpayers $130 million over 30 years. One study revealed MNCs’ incentive preferences (see Robert J. Rolfe et al., “Determinants of FDI Incentive Preferences of MNEs,” Journal of International Business Studies 24 (No. 2, 1993): 335-55). The incentives in terms of their relative importance to manufacturers are as follows: (1) no restrictions on other intercompany payments, (2) no controls on dividend remittances, (3) import duty concessions, (4) exemption from dividend withholding tax, (5) guarantees against expropriation, (6) tax holidays, (7) cash grants for fixed assets, (8) accelerated depreciation, (9) tax treaty with the United States, and (10) subsidized loans.