MODES OF ENTRY INTO INTERNATIONAL MARKETS:Forms of countertrade, Specialized entry modes

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International Marketing MKT630

Lesson # 25

MODES OF ENTRY INTO INTERNATIONAL MARKETS

Countertrade, Specialized Modes and Direct Investment

Countertrade:

· The sale of a good, service, know-how or system in one direction is conditional upon the sale of a

good or service as part or full payment in the reverse direction.

· More than 20% of world trade is financed through countertrade transactions.

world debt crisis

circumvention of exchange controls

bilateralism

entry into new markets

major growth opportunities in emerging markets lacking hard currency and cash-strapped

countries

Forms of countertrade:

· Barter

simplest form of countertrade, in which each party simultaneously swaps its products or services

for the products or services of other party

· Compensation Deal

semi-barter or simple compensation - importer makes part payment in cash and balance in goods

or services

· Counterpurchase (Parallel Barter)

two separate contracts specifying products to be exchanged

one contract for payment of exported goods

second for exporter's counter-purchase obligation with penalty for non-fulfillment

· Advance Purchase

exporter buys goods in advance from countertrading country before making exports to that

country

· Buy-Back Agreement

also called compensation agreement

one party exports production equipment, machinery, technology, or turnkey plant to another party

- the exporter buys-back part of the output as compensation

· Offset Agreement

used often in military-related or technology purchases (air crafts)

exporting firm permits certain portion of purchase to be produced or assembled in the importing

country - called Direct Offset.

may take the form of co-production, licensing, subcontracting, or joint venture

Indirect Offsets do not relate to the purchase equipment - that is some other equipment is

produced or assembled in the importing country

· Clearing Accounts

a refined form of barter done at government level on log-term basis covering broad range of

International Marketing MKT630

products

clearing accounts established to track credits and debits of trades

balance in accounts over the long run

· Switch Trading

three or more parties required to complete countertrade transactions

one party not willing to accept all the goods or clearing credits received in the transaction

professional switch trader or a bank steps in and provides a secondary market for the goods or

credits using own network of firms and personal contacts

Specialized entry modes:

Management Contracts

is an agreement where one firm provides managerial assistance, technical expertise or specialized

services to a second firm for some agreed period in return for a flat fee or a percentage of sales.

(such as hotels)

Turnkey Projects

is a contract under which a firm agrees to fully design, construct and equip a facility and then turn

the project over to the purchaser when it is ready for operation. (such as the motorway)

Turnkey projects:

· Turnkey Plus projects

may include feasibility study or management of the completed facility in the operational phase -

project operators may also be required to assist the client organization in securing sources of

finance or to be involved in equity participation in the completed facility.

· Turnkey failures

minimum investment required in the project by the turnkey supplies

commission gap due to contractor's emphasis on hardware and equipment rather than skills

transfer.

indigenization of operation of the facility done too soon.

Types of foreign direct investment:

An investment in foreign country that also brings at least 10% ownership rights (voting control) is

termed as a direct investment. Direct investment not only brings in capital, it also brings into a country

latest technologies and management expertise. Forms of direct investments are in the following;

Subsidiary establishment

the greenfield strategy

· starting a new operations from scratch

acquisition strategy

· buy an existing firm conducting business in the host country

Joint venture

when two or more firms agree to work together and create a jointly owned but separate firm to

International Marketing MKT630

promote their mutual interests

Managing a joint venture:

A joint venture is usually managed in one of the three ways:

The parent firms may jointly share management with each firm appointing key personnel who

report back to the executives of the parent.

One parent may assume primary responsibility.

An independent team of managers may be hired to run the joint venture.

A non-joint venture strategic alliance may be formed merely to allow the partners to overcome a

particular hurdle that each faces in the short run.

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