An entry strategy in which an organization in one country makes certain resources available to companies in another in order to participate in the production and sale of its products abroad.
The next stage in pursuing international markets is licensing and franchising which are similar approaches. With licensing a corporation (the licensor) in one country makes certain resources available to companies in another country (the licensee). These sources include technology, managerial skills, and /or parent and trademark rights. They enable licensing to produce and market a product similar to what the licensor has been producing. This arrangement gives the licensor an opportunity to participate in the production and sale of products outside its home country at a relatively low cost. Hasbro has used licensing agreements with companies in several Latin American countries and Japan. Hasbro builds brand identity and consumer awareness by contracting with toy companies in other countries to manufacture products locally. Heineken which has been called the world’s first truly global brand of beer, usually begins by exporting to help boost familiarity with its product if the market looks enticing enough. Heineken then licenses its brands to a local brewer.
Franchising is a special form of licensing that occurs when the franchise buys a complete package of materials and services including equipment , products, product ingredients, trademark and trade name rights, managerial advice, and standardized operating system. Whereas with licensing, a licensee generally keeps its own company name and operating systems, a franchise takes the name and systems of the franchisor. For example, Auheuser Busch licenses the right to brew and distribute Budweiser beer to several breweries including Labatt in Canada and Kirin in Japan but these breweries retain their own company names, identities and autonomy. On the other hand, a Burger King franchise anywhere in the World is a burger King and managers use standard procedures designed by the franchisor. The fast food chains are some of the best known franchisors. KFC burger, King Wendy’s and McDonald’s outlets are found in almost every large city in the world. The story is often told of the Japanese child visiting Los Angeles who excitedly pointed out to his parents, they have McDonald’s in America,
Licensing and franchising offer a business firm relatively easy access to international markets at low cost but they limit its participation in and control over the development of those markets.
A higher level of involvement in international trade is direct investment in manufacturing facilities in a foreign country. Direct investing means that the company’s involved in managing the productive assets, which distinguishes it from other entry strategies that permit less managerial control.
Currently, the most popular type of direct investment is to engage in strategic alliances and partnerships. In a joint venture a company shares costs and risks with another firm typically in the host country, to develop new products, build a manufacturing facility, or set up a sales and distribution network. A partnership is often the fastest , cheapest and least risky way to get into the global game. Entrepreneurial companies such as Molex, a manufacturer of connectors and Nypro a maker of industrial components have used partnerships to gain overseas access to several countries. Auburn farms, a Sacramento, California, manufacturer of all natural snack foods formed a joint venture to produce the nutritional supplement Inneov, which is designed to improve the health of skin. Internet companies have also used joint ventures as a way to expand. AOL created a joint venture with Venezuela’s Cisneros group to smooth its entry in to Latin America.
The other choice is to have a wholly owned foreign affiliate over which the company has complete control. Direct acquisition of an affiliate may provide cost savings over exporting by shortening distribution channels and reducing storage and transportation costs . Local managers also have heightened awareness of economic, cultural and political conditions. For example, General Electric purchased Hungarian bulbmaker Tungsram in 1990, and the quality was so good that GE eventually shifted all European light bulb production there.
Source: New Era Management