Terms and Conditions of Purchase or Sale/Modes of Entry-Relationships

Modes of Entry – Relationships

The modes of entry used by an exporter will depend on the product or service being sold as well as the country targeted for entry. Each mode of entry has its advantages and disadvantages based on the relative risk of a buyer and target country. These advantages and disadvantages will obviously affect the costs of the venture/transaction and ultimately the profitability of the international business. The experience of a seller as well as the company support in terms of personnel and finances will also help to determine the best mode of entry. Remember that the mode of entry is just that, the entry. Once the relationship has been established and experience and critical mass gained, it can be changed. It may cost to make a change, but long term profitability should be increased.

Agent

An agent will represent the manufacturer in the target market and be responsible for making contacts with potential buyers, conducting sales presentations and demonstrations and negotiating transactions. An agent normally does not take possession of merchandise since it is usually shipped directly to a buyer. An agent is paid a commission for the sale. The rate of the commission depends on industry standards as well as the value of the product, the value of the transaction and the market restrictions. An agent may be based in the country of export or import. Before signing an agent agreement with an individual based overseas, it is imperative that an international manager be aware of the local laws governing agent contracts and the labor laws that may apply.

Advantages to the seller

low cost
quicker entry
lower time commitment
can be a domestic sale
US laws pertain

Disadvantages to the seller

low return
reduced control
no market experience
increased market costs due to middleperson

Distributor

A distributor is normally located within the target market and is responsible for purchasing, stocking, and reselling merchandise. In many cases, a distributor is focused on a specific industry, trade, or channel of distribution and may provide sales, marketing and logistics services as well.. The level of service will depend on the price of the products and profit margin for both parties. The responsibilities of each party should be clearly spelled out in the contract.

Advantages to the seller

market entry control
higher return
development of relationships
experience in export marketing

Disadvantage to the seller

increased costs
increased time for market entry
reduced knowledge base for international expansion
fewer market targets
increased time commitment from company resources

The differences found between agents and distributors are as follows:

Agent

exclusive or non
small company
fewer resources
may be domestic sale
commission- based
do not take ownership of product
no responsibility of market relationships
agent protection laws do not favor exporter

Distributor

exclusive or non
usually larger than agent
in-market relationships
usually takes ownership of products
more market responsibility

Licensing

A licensing agreement will provide an overseas manufacture the right to produce products in a certain manner and use the name or logo of the product. A seller must provide specific and detailed instructions for manufacturing and will either require that all products be sold back to a seller or available for sale by the licensee. If the licensee is allowed to sell the products, an upfront fee as well as a percentage of sales is normally paid to the licensor.

Advantages to the licensor

decreased capital needs
increased return on research investment
decreased risk to local government issues
access to market faster – market test
extends life cycle of technology

Disadvantage to the licensor

less control – no marketing exposure
can steal technology after contract up
create own competitor
brand, quality and image must be protected
contract – negotiations must be thorough and complete

Franchising

Franchising provides the right to conduct business in a certain manner to a franchisee. This form of business, which is normally found in the service sector, has become increasingly popular in developing countries since successful business models can be bought and quickly established. The franchisor is normally paid an upfront fee as well as a percentage of sales and often required marketing support fees.

Advantages to the franchisor

duplicate time
reduced market investment
increased income
duplicate business model
build International Brand
entry to controlled markets

Disadvantage to the franchisor

loss of control
need to adapt to local market demands
loss of proprietary information
must be a business model that can be duplicated

Joint Venture

A joint venture allows a foreign company to establish an overseas presence by partnering with local or international companies. Each partner may contribute different resources to a venture, so their risk and reward will be based on the level of investment. In some countries, a local partner is required; in others one may not be required.

Advantages to the partners

reduced investment
access to controlled markets
in market contacts
in market knowledge
in market presence

Disadvantage to the partners

reduced control
reduced ROI
chance to lose market with a buy out
creates local competitor

Direct Foreign Investment (DFI)

A direct foreign investment is established when an overseas presence is created by a foreign company. It is a single venture that does not include local or foreign partners. The joint venture may be structured in the form of an overseas corporation or subsidiary of the parent company. This type of venture can be accomplished only if the foreign investment, property and labor laws of the overseas country allow for it.

Advantages to the seller

market control
local presence
increased return on investment (ROI)
developing relationships
in market knowledge

Disadvantage to the seller

increased investment of time
increased investment of financial resources
increased risk of buy out
increased investment of personnel resources

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