Exporting and Trading info

SUMMARY ■ The forms of foreign involvement differ in terms of internal as opposed to external handling of activities and in terms of the proportion of resources committed at home rather than abroad. ■ Although the mode employed for foreign operations should be examined in terms of a firm's strategic objectives, the choice often will involve a trade-off among objectives. ■ Among the factors that will influence the choice of operating mode are legal conditions, the firm's experience, competitive factors, political and economic risk, and the nature of the assets to be exploited. ■ Licensing is granting another firm the use of some rights, such as patents, trademarks, or know-how, usually for a fee. It is a means of establishing foreign production that may minimize capital outlays, prevent the free use of assets by other firms, allow the receipt of assets from other firms in return, and allow for income in some markets where exportation or investment are not feasible. ■ Among...

LOOKING TO THE FUTURE As more businesses are becoming international, competition is becoming more global and more interrelated. Thus, what happens competitively in one country is more likely to affect competitive viability in other countries as well. To expand more rapidly to meet this challenge, firms are increasingly turning to alliances with other firms. At one extreme there are international mergers and acquisitions. The alliances discussed in this chapter might be considered half-way houses toward full merger and acquisition. It is safe to say that they will continue to accelerate because firms lack the internal resources to do everything alone as they compete internationally. These alliances will bring both opportunities and potential problems as companies move simultaneously to new-country environments and to contractual arrangements with new companies. Furthermore, the additional operating alternatives may strain the decision-making and control processes.

MANAGING FOREIGN ARRANGEMENTS Contracts with Other Firms Even though a company may find it beneficial to rely on other firms at home or abroad to carry out part or all of its foreign business functions, management is not relieved of the responsibility for these functions. Periodically management must assess whether the functions should be carried out internally. Great care should be taken to ensure that the best firms are involved and that they are performing the jobs of making, selling, or servicing the product adequately. We have already referred to the major reason for getting other companies to perform functions overseas. If an outside firm can perform the same functions (assuming the same quality) at a cheaper rate, a company should give little consideration to taking on the duties itself. If it can do them more cheaply itself, there may still be justification for getting someone else to do the work. Every company has limited resources, which it should use to the best advantag...

SHARED OWNERSHIP When a firm does take an ownership in foreign operations, it may own the entire stock or it may share the ownership. There are various types of ownership sharing, just as there are several reasons for selecting an equity amount. The Argument for 100 Percent Ownership Most businesspeople would prefer to have a 100 percent interest in foreign operations in order to ensure control and to prevent the dilution of profits. As long as there are no other stockholders, corporate management has a greater freedom to enact measures that, although not in the best interest of the particular operations, are in the best interest of the company as a whole. With other stockholders, the parent firm has much less freedom of action, since even minority stockholders may become very vocal to their governments about practices that are not in the best interest of subsidiaries. In fact, most countries have legislation to protect minority stockholders. Freuhauf-France, for example, received ...

IMPROVING ACCESS TO FOREIGN TECHNOLOGY In most of the aforementioned operational forms (licensing, franchising, management contracts, turnkey operations, and other contractual arrangements) an organization in one country may gain access to scientific or managerial technology from an organization in another country. By gaining these assets a firm may be in a much better position to compete domestically and internationally. Because of the competitive implications, it is not surprising that many firms are establishing mechanisms whereby they may increase the likelihood of gaining advantages before their competitors. One of the most commonly used mechanisms is to establish company units to monitor journals and technical conferences. This is not sufficient because very few patent descriptions ever appear in other than the voluminous patent-office publications from each different country; therefore, firms must government increased its ownership share of Aramco, it still needed managemen...

CUSTOM CONTRACTS Companies that at one time would have integrated vertically by making direct investments for the extraction of raw materials in foreign countries now are experiencing increased desire for local ownership of the extractive process. Since the local owners frequently continue to need certain resources the foreign firms hold, contracts may be established whereby raw materials are traded for the assets held by foreign firms. For example, as the Saudi Arabian

TURNKEY OPERATIONS Turnkey projects involve a contract for construction of operating facilities that are transferred for a fee to the owner when the facilities are ready to commence operations. Firms performing turnkey operations are frequently industrial equipment manufacturers that supply some of their own equipment for the project. Most commonly, they are construction firms. In addition, they may be consulting firms or manufacturers that do not find an investment on their own behalf in the country to be feasible. The customer for a turnkey operation is very often a governmental agency that has decreed that a given product must be produced locally and under its auspices. As in the case of the management contract, a firm building a turnkey facility may be developing a future competitor. Yet many firms have chosen to perform design and construction duties, particularly where there are restrictions on foreign ownership. In recent years, most of the large projects have been in oil-exp...

MANAGEMENT CONTRACTS One of the most important assets a firm may have at its disposal is management talent. Despite huge endowments of capital and technology, many governmental enterprises in LDCs encounter difficulties because of inadequately trained management. The transmission of management internationally has depended largely on foreign investments that deploy expatriate managers and specialists to foreign countries. Management contracts offer a means through which a firm may use part of its management personnel to assist a firm in a foreign country in general or specialized management functions for a specified period of time for a fee. Management contracts are established in three types of situations. The first is when a foreign investment has been expropriated by a foreign government and the former owner is invited to continue supervising the operations until local management is trained. In this case the management structure may remain substantially the same, although board m...

FRANCHISING Franchising is essentially a way of doing business in which the franchisor gives an independent franchisee the use of a trademark that is an essential asset for the franchisee's business and in which the franchisor more than nominally assists on a continuing basis in the operation of the business. In many cases the franchisor also provides supplies.20 For instance, Holiday Inn grants to franchisees the goodwill of the Holiday Inn name and the support service to get started, such as appraisal of a proposed motel site. As part of the continued relationship, Holiday Inn offers reservations services and training programs to help ensure the success of the venture. In a sense the franchisor and franchisee act almost like a vertically integrated firm because the parties are interdependent and each produces part of the product or service that ultimately reaches the consumer. Many types of proi iuas Franchising goes back at least as far as the nineteenth century and is most ...

LICENSING patents, inventions, formulas, processes, designs, patterns; copyrights, literary, musical, or artistic compositions; trademarks, trade names, brand names; franchises, licenses, contracts; and methods, programs, procedures, systems, etc. Usually, the licensor is obliged to furnish technical information and assistance and the licensee to exploit the rights effectively and to pay compensation to the licensor. Economic Motives Frequently, a new product or process may affect only part of a firm's total output and only for a limited period of time. The sales volume may not be large enough to warrant the establishment of overseas manufacturing and sales facilities. Furthermore, during the period of acquiring operations there is a risk that competitors will develop improvements that negate the firm's advantages. As discussed earlier, a firm that is already operating abroad may be able to produce and sell at a lower cost and with less start-up time. Risk of operating fa...

SOME VARIABLES AFFECTING CHOICE In terms of resources, the modes of foreign operations differ in terms of both the amount a firm commits to foreign operations and the proportion of the resources that is located at home rather than abroad. Exports may, for example, result in a lower additional resource commitment than direct foreign investment if there is domestic excess capacity. If a firm must increase capacity, then this increase may take place by investing the resources either at home or abroad. The former involves a substantial commitment to foreign operations, although the assets are not in a foreign location. In exporting, in direct investment, and in some of the other forms of foreign operations, a firm may be able to reduce its total resource commitment by making contracts with other companies to conduct activities on its behalf or by sharing ownership in international business endeavors. Before examining these other operational forms it is useful to discuss some of the major...

INTRODUCTION International business may be conducted in a variety of ways. The truly experienced firm with a full global orientation usually makes use of most of the forms available, selecting them according to specific product or foreign operating characteristics. The preceding case illustrates the use of several different methods of exploiting international opportunities. Alfa made joint ventures with foreign firms, engaged in the acquisition and sale of process and product technology through licensing and turnkey contracts, and paid for goodwill (the favor a company has acquired beyond its tangible assets) by gaining the use of trademarks through licensing agreements. This chapter discusses the most common means by which companies commit resources to the foreign sector, methods prompted either by their own desire or by external pressures that force them to accept certain parameters. The chapter also covers the problems of control when one company enters an agreement that makes an...