Contractual Entry Modes: [Essay Example], 1653 words (2024)

These types of entry modes consist of several similar, but get different contractual arrangements between the firms form the domestic market and the company that licenses the intangible assets in the foreign market (Bradley 2005:243).Root (1994:86) mention licensing, franchising, technical agreements, service contracts, management contracts, construction/turnkey contracts, co-production contracts and other. As a firm you go into some sort of partnership with another firm which is located in a different market than yourself. The goal is to enhance the long-run competitiveness for the partners in the alliance and it is built on the belief that each party has something unique to contribute to the partnership. For this to work it must be mutual benefits, shared control and power (Albaum & Duerr 2008:373).

Licensing: Root (1994:86) describes licensing as transferring intangible assets that are not a subject for import restrictions. Licensing is when a firm provides others companies on a foreign market with technology that they need, for e fee or royalty (Bradley 2005:243). This form of licensing involves one or a combination of brand name, operations expertise, manufacturing process technology, access to a patents and trade secrets according to Bradley (2005:243). The firm who is in a licensing partnership gain access to a foreign market with very low investment cost and obtains the market knowledge from established and competent local firm. According to him there are two way of licensing agreements, which are a current technology license and a current and future technology license. The differences between the two are that in the first one only gives access to current technology advancement to the licensee. The second one gives access to existing and future technology development within their agreement field. The companies using this entry mode need to be careful not to get robbed of what is rightfully theirs and then lose the excluding right to it due to high legal costs and unclear laws.

Franchising: Franchising is a derivative of licensing where the business format is licenses instead of the technology (Bradley 2005:246). Bradley (2005:246) also explains that this business form is nothing new, even if it has gained a lot of publicity in recent times. On the other hand it is a well-established way of doing business in United States. Franchising is so called intellectual property right, and intellectual property rights (IPR) are formal regulations which have the power to establish property as intellectual assets. Maskus (1998:186) define intellectual property as; “Intellectual property (IP) is an asset, developed by inventive or creative work, to which rights to exclude its unauthorized use have been granted by law. The international exploitation of IP is central for trade, foreign direct investment (FDI) and technology licensing across borders”. Furthermore Maskus (1998:187-188) states that this type of regulations are needed to protect the vulnerable information from overuse and free-riders. In the franchising packages trademarks, copyright, patents and other things often are included. It is a form of distribution and marketing in which the company gives the other firm the right to do business in their protected way (Bradley 2005:246).

Contract Manufacturing: – This entry mode is a cross between licensing and investment entry. The company contracts a firm in the foreign market to assemble or manufacture the products but they still have the responsibility for marketing and distribution of the products according to Root (1994:113);

Albaum & Duerr (2008:380). This entry mode requires minimum investment of cash, time and executive talent; it also provides fast entry to a new market Albaum & Duerr (2008:380). On the other hand it also has potential as formidable drawbacks like: training of potential competitor that have access to know-how and high quality products (Root 1994:113), more over the profit from the manufacturing is transferred to the contractor.

Management contracts: – The international management contract gives the company the right to control the day-to-day operations in a firm located in a foreign market. Often this contract do not give them the right to take decisions on new capital investment, policy changes, assume long-term debt or alter ownership arrangement according to Root (1994:114); When a manufacturer want to enter a management contract they seldom do so isolated from other arrangements (Root 1994:114).

Turnkey projects:- In a turnkey project, the contractor designs and builds a plant, sets up production activities, sources raw materials and trains employees. The whole project is then handed over to the contracting company after a trial run (Ball et al., 2008).

Turnkey projects allow companies to utilize their competencies and use other companies to fulfil tasks they cannot accomplish alone. Due to high value of such projects, there is often involvement of government and political reasons. There is always a threat of transferring competencies to other companies and giving rise to competition in existing as well as other foreign markets (Wild, Wild & Han, 2008).

Investment Modes

When a firm decides to shift most or all of its operations into foreign markets, it goes through different internationalization stages. An investment entry modes have several names in the business management, like sole venture, foreign direct investment, solely owned subsidiary and wholly owned subsidiary. A large investment in a new country can be done sole venture with new establishment or sole venture acquisition and also joint venture according to Root (1994:6). The sole venture mode is a high investment that also brings high risks and possibility to high returns (Agarwal & Ramaswami 1992:3). In sole venture mode, a firm tries to develop a foreign market by directly investing in that market (Agarwal & Ramaswami 1992:11).

Foreign Direct Investment (FDI): – The Organization for Economic Co-operation and Development (OECD) define foreign direct investment (FDI) as “a category of investment that reflects the objective of establishing a lasting interest by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investor” (oecd:7). This entry modes offers a high degree of control over the international business in the host country (Chung & Enderwick 2001:444; Bradley 2005:269). This is high financial commitment mode, but also a transfer of technology, skills, management, manufacturing and marketing, production processes and other recourses according to Bradley (2005:270). Bradley (2005:270) also explains for having unique asset or competitive advantage is often important when a firm want to replicate their good business in another country .

In Chung & Enderwick (2001:444) article it is said that FDI often generate a greater profit return then those generated by exporting. However, FDI modes are also associated with greater risks and imply higher management complexity. Since this is high risk options the companies want to go in to large market to compensate the risk involvement. In Bradley (2005:270) claims that the major determinants for FDI is

? Size of host country market

? Proximity of host country

? Previous FDI experience

? Perceived need to mimic competitors actions.

Foreign direct investments (FDIs) can be classified by the form of investment, meaning, whether it is an acquisition, merger, Greenfield investment, or a Brownfield investment (Cavusgil et al. 2012, 444).

Greenfield investment -A firm may also start from scratch and conduct a direct investment to establish a new production, marketing, or administrative facility abroad. This is called a Greenfield in-vestment. A firm may prefer to buy an empty plot of land and build new facilities in-stead of acquiring another company, because there are no adequate acquisitions targets, there is no financial capability within the firm, or production logistics is a key industry success factor. Also, the fact that when a firm decides to build up a new plant or other facility abroad, they can build and shape it as they prefer as well as integrate the latest technology and equipment into it.

Brownfield investment- Brownfield investment refers to the situation where a firm buys or leases an old facility such as a factory which has been used, to launch a new production activity. As a good example of a Brownfield investment is the purchase of Stora Enso’s paper mill building by Google for use as a data centre, in 2009 (Helsingin Sanomat).

Sole Venture Acquisition

Sole venture; acquisition is when a company buys an established business in a foreign market and it has become more popular according to Root (1994:142). The reason for acquire a foreign company can be a mix of the following reasons; geographical changes, the acquirement of specific asset like management, technology, product diversification, sourcing of raw material or other products for sale outside the host country, or financial diversification (Root 1994:142). The specific advantages can be a faster start in the new market due to establish firm, new product line and a short payback period due to immediate income for the investors. The disadvantages on the other hand are transfers of ownership and control and hard to evaluate the prospects, but several of the advantages can turn in to disadvantages if it is not handle right.

International Joint venture

“An enterprise, corporation or partnership, formed by two or more companies, individuals, or organizations, at least one of which is an operating entity which wishes to broaden its activities, for the purpose of conducting a new, profit-motivated business of permanent duration. In general the ownership is shared by the participants with more or less equal equity distribution and without absolute dominance by one party” (Young and Bradford, 1977:11).In Bradley’s (2005:248) book International Marketing Strategy he states that international joint venture is often motivated by the desire of at least one partner want to expand in to a difficult market. Furthermore he also argues that various forms of joint venture are common, for example the spider’s web. That usually means establishing a joint venture with a large competitor. One of the other ways of joint venture is according to Bradley (2005:249) split strategy. It means that for a limited time firms cooperate and then separate after the completion of the project. Joint venture is associated with provide access to resource and market, technology transfer, reduce political risk and help to improve the firms competitive position se figure 1 (Bradley 2005:249).