International Entry Modes and FDI Theories

Entry Modes:

Exporting: Common first step for many manufacturing firms. Later, firms may switch to another mode.

Advantages:

• Avoids the costs of establishing local manufacturing operations
• Learning

Turnkey projects: The contractor handles every detail of the project for a foreign client, including the training of operating personnel.

Advantages:

• A way of earning economic returns from the know-how required to assemble and run a technologically complex process
• Less risky compared to FDI

Disadvantages:

• No long-term interest in the foreign country
• If the firm's process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors

Licensing: A licensor grants the rights to intangible property to the licensee for a specified time period, and in return, receives a royalty fee from the licensee.

Advantages:

• The firm avoids development costs and risks associated with operating a foreign market
• The firm avoids barriers to investment
• The firm can capitalize on market opportunities without developing those applications itself

Disadvantages:

• No tight control over manufacturing, and marketing, etc.
• Proprietary (or intangible) assets could be lost

Franchising: A specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business.

Advantages:

• It avoids the costs and risks of opening up a foreign market
• Firms can quickly build a global presence

Disadvantages:

• Lack of control over quality

Joint Ventures with a host country firm: A firm that is jointly owned by two or more otherwise independent firms. It is a partnership of two or more participating companies that have joined forces to create a separate legal entity.

Advantages:

• Access to a local partner's knowledge of local conditions, culture, language, political systems, and business system
• Shared development costs and risks
• Political dependency

Disadvantages:

• Lack of control over technology
• Conflicts and battles for control due to shared ownership

FDI Theories:

Strategic behavior theory: Theory suggesting that strategic rivalry between firms in an oligopolistic industry will result in firms closely following and imitating each other’s international investments in order to keep a competitor from gaining an advantage.

Dynamic capability theory: Must have not only ownership of unique knowledge or resources, but also the ability to dynamically create, sustain, and exploit these capabilities over time eclectic paradigm – three factors: ownership, internalization, and location.

Countertrade: Exporters can use countertrade when conventional means of payment are difficult, costly, or nonexistent.

Pros:

• Way for firms to finance an export deal when other means are not available
• May be required by the government of a country to which a firm is exporting goods or services

Cons:

• Most firms prefer to be paid in hard currency
• It may involve the exchange of unusable or poor-quality goods that the firm cannot dispose of profitably
• Countertrade is more attractive to large, diverse multinational enterprises than small & single business firms