Participants in

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Chapter 3 Participants in International
Business International Business Strategy,
Management, and the New Realities by Cavusgil,
Knight and Riesenberger
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Three Types of Participants in IB

• The focal firm initiator of IB transaction,
  including MNEs and SMEs
• Distribution channel intermediary specialist
  firm providing logistics and marketing services
  in the international supply chain
• Facilitator a firm providing special expertise
  in legal advice, banking, customs clearance,
  market research, and similar areas

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Example from the Textbook Dell Computers

• Dell makes various products, each with its own
  value chain. The total supply chain for a
  notebook computer, including multiple tiers of
  suppliers, involves about 400 companies,
  primarily in Asia, but also in Europe and the
  Americas.
• On a typical day, Dell processes orders for
  150,000 computers, which are distributed to
  customers around the world, with non-U.S. sales
  accounting for 40.
• Shipping is handled via air transport, e.g. from
  the Dell Malaysia factory to the U.S. Dell
  charters a China Airlines 747 that flies to
  Nashville, Tennessee six days a week, with each
  jet carries 25,000 Dell notebooks that weigh a
  total of 110,000 kilograms, or 242,500 pounds.
• One of the hallmarks of Dells value chain is
  collaboration. CEO Michael Dell and his team
  constantly work with their suppliers to improve
  Dells value chain.

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The MNE as a Focal Firm

• A Multinational Enterprise (MNE) is a large
  organization with a network of production plants,
  regional headquarters, and country subsidiaries
  in numerous countries.
• Examples include Nestlé, Sony, Unilever, Nokia,
  Ford, Citibank, ABB, and Shell Oil.
• Some MNEs in countries like China and Russia may
  be state owned.

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The SME as a Focal Firm

• A Small and Medium-Sized Enterprise (SME) is a
  relatively small player in its respective
  industry (in the U.S., those with 500 employees
  or less).
• SMEs can be more flexible and quicker to respond
  to international opportunities.
• As limited resources often prevent them from
  engaging in FDI, SMEs internationalize via
  exporting, joint ventures, and contractual
  arrangements

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The Born Global as a Focal Firm

• A relatively new breed of the SME that undertakes
  early and substantial internationalization.
• Primarily a niche player
• Displays high degree of entrepreneurial
  orientation, proactiveness, and customer service.
• Now make up the fastest growing segment of
  exporters in most countries.

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Evolution of a Born Global Exporterand
Challenges It Overcomes
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Common Characteristics of Born Global Firms

• Early, rapid, and substantial internationalization
  
• Fewer financial and other resources than
  traditional MNEs
• Often formed by strong entrepreneurs
• Often technically superior in a given product
  category
• Internationalize via exporting
• Heavy use of information and communications
  technologies

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Foreign Market Entry Strategies of Focal Firms

• Cross-border business transactions can be grouped
  into three categories
• Trade buying and selling of products (mainly
  exporting and importing)
• Contractual exchange of services or intangibles
  (mainly licensing and franchising)
• Equity ownership in foreign operations
  establishing foreign presence through direct
  investment (FDI)

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Examples of Contractual Strategies

• Licensor Focal firm grants the right to the
  foreign
• partner to use certain intellectual property in
• exchange for royalties.
• Anheuser-Busch signed a licensing agreement with
  Japanese beer brewer Kirin in which Kirin
  produces and distributes Budweiser in Japan.
• Mega Bloks (Canadian toymaker) signed an
  agreement with Disney that gives the SME the
  right to manufacture toys that feature Disney
  characters like Winnie the Pooh, Power Rangers.

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Examples of Contractual Strategies (contd)

• Franchisor Focal firm grants the right to the
  foreign partner to use an entire business system
  in exchange for fees and royalties.
• For firms like Subway or KFC, its an efficient
  way to internationalize,
• In China, Subway is the third-largest U.S.
  fast-food chain.

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Examples of Contractual Strategies (contd)

• Turnkey Contractor Provide engineering, design,
  and architectural services in the construction of
  airports, hospitals, oil refineries, and other
  types of infrastructure. E.g., European Channel
  Tunnel, Three Gorges Dam in China, Delhi Metro
  Rail Ltd.
• Build-own-transfer venture- an increasingly
  popular type of turnkey contract in the
  developing economies where contractors acquire an
  ownership in the facility for a period of time
  until it is turned over to the client.

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International Collaborative Venture (ICV)

• Arrangement in which partners pool their
  resources and share the cost and risks of the new
  venture.
• Through an ICV, a focal firm can exploit
  partners complementary technologies and
  expertise, avoid trade barriers, connect with
  customers abroad, and configure value chains more
  effectively.
• A middle ground strategy between exporting and FDI

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Two Types of International Collaborative Ventures

• Joint Venture One firm creates and jointly owns
  a new legal entity together with another firm.
  Advantages share costs and risks gain access to
  needed resources gain economies of scale pursue
  long-term strategic goals.
• Project-Based Collaborative Venture Firm
  collaborates with foreign partners on a project
  with a relatively narrow scope and a well-defined
  timetable, without creating a new legal entity.
  Often used to share the cost and risks of
  knowledge-intensive RD projects.

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Example from the Textbook Project-Based
Collaboration

• Cisco Systems has expanded much of its
• operations through strategic alliances with key
• foreign players.
• With Japans Fujitsu to jointly develop routers
  and switches that enable clients to build
  Internet protocol networks for advanced
  telecommunications.
• In Italy, Cisco teamed with the telecom company
  Italtel to jointly develop network solutions for
  the convergence of voice, data, and video to meet
  growing global demands.

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Distribution Channel Intermediary

• Specialize in physical distribution and marketing
  service connect the focal firm with the end user
  in the foreign market.
• Assist the focal firm by providing logistics
  services such as warehousing and customer
  support.
• Especially critical to exporters
• Based either in the home country or the foreign
  market.

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Intermediaries Based in the Foreign Market

• Distributor Takes title to the exporters goods
  and performs marketing functions such as sales,
  promotion, and after sales service.
• Serves as an extension of the firm in the foreign
  market, performing many downstream marketing
  functions

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Agent and Manufacturers Representative

• Agent (also known as a broker) Does not take
  title to the goods. Works on a commission basis.
• Manufacturers Representative Works under
  contract to the exporter to represent and sell
  its goods. Acts as a contracted salesperson in a
  designated territory.

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Retailer

• Stores that mainly serve regular consumers.
• Some, large firms sell directly to retailers,
  bypassing distributors (wholesalers)
• Retailers provide direct access to retail
  customers
• Examples Carrefour, IKEA, Royal Ahold, Seibu,
  Toys R Us, Wal-Mart, and Zara.

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Top Retailers based on Percent of Sales Outside
of Home Country
Retailer Base Percent of Sales in Foreign Countries
IKEA Sweden 99.90
Delhaize "Le Lion" Belgium 83.00
Royal Ahold Netherlands 76.40
OttoVersand Gmbh Co Germany 52.00
Pinault-Printemps-Red France 48.10
Tengelmann Warenhande Germany 47.90
IGA USA 44.90
Kingfisher plc UK 41.00
MetroAG Germany 40.00
Carrefour Group France 37.70
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Trading Company

• Based in the home country, a trading company is
  an intermediary that engages in imports and
  exports of a variety of products.
• Large trading companies such as Cargill are
  high-volume, low-margin resellers.
• Many trading companies deal primarily in
  commodities such as grains, minerals, coal, and
  metals.

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The Japanese Sogo Shosha

• Large trading companies in Japan are known as the
  sogo shosha. Each has an extensive network of
  foreign offices and buyers including
  governments.
• Examples include Mitsubishi, Mitsui, Marubeni,
  and Sumitomo
• The sogo shosha historically handled about half
  of Japanese external trade.

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The Role of Trading Companies in IB

• Trading companies work with remarkably low
  margins they tend to be high-volume, low-margin
  resellers.
• Five of the 10 largest trading companies are
  based in Japan. Trading companies have
  historically played a very important role in
  Japans external trade.
• Being an island economy and lacking most raw
  materials needed for industrialization, Japan had
  to import them.
• Trading companies are also more common in South
  Korea, India, and Europe.

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Export Management Company (EMC)

• Acts as an export agent on behalf of the focal
  firm. Based in home country.
• An EMC finds export customers, negotiates terms
  of sale, and arranges for international shipping,
  typically for smaller exporters.
• Most specialize in specific industries and
  geographic areas.

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Online Intermediaries

• Examples include Amazon, Dell, eBay, and Alibaba
  English-language portal based in China that
  specializes in business-to-business exchanges.
• Traditional retailers such as Wal-Mart and Tesco
  have also set up online presence.
• One negative aspect is the ease with which
  unscrupulous marketers prey on unsuspecting
  customers with fake products (e.g., fake
  pharmaceuticals).

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Facilitators in IB

• Facilitators assist the focal firm with
  specialized services required in cross-border
  transactions.
• Facilitators include Banks, international trade
  lawyers, freight forwarders, customs brokers,
  consultants, ad agencies, and market researchers.

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Examples of Other Facilitators

• International trade lawyers
• International business consultants
• Tax accountants
• Market research firms