International Business (9th, Wild) - Notes for Chapter (13).doc

16 Ch 13: Selecting and Managing Entry Modes 3 Ch 13: Selecting and Managing Entry Modes Chapter 13 Selecting and Managing Entry Modes Learning Objectives: 13.1 Describe how companies use exporting, importing, and countertrade. 13.2 Explain the various methods of export/import financing. 13.3 Describe the different types of contractual entry modes. 13.4 Describe the various kinds of investment entry modes. 13.5 Outline key strategic factors in selecting an entry mode. Chapter Outline: Introduction Exporting, Importing, and Countertrade Why Companies Export Developing an Export Strategy: A Four-Step Model Step 1: Identify a Potential Market Step 2: Match Needs to Abilities Step 3: Initiate Meetings Step 4: Commit Resources Degree of Export Involvement Direct Exporting Sales Representatives Distributors Indirect Exporting Agents Export Management Companies Export Trading Companies Avoiding Export and Import Blunders Countertrade Types of Countertrade Export/Import Financing Advance Payment Documentary Collection Letter of Credit Open Account Contractual Entry Modes Licensing Advantages of Licensing Disadvantages of Licensing Franchising Advantages of Franchising Disadvantages of Franchising Management Contracts Advantages of Management Contracts Disadvantages of Management Contracts Turnkey Projects Advantages of Turnkey Projects Disadvantages of Turnkey Projects Investment Entry Modes Wholly Owned Subsidiaries Advantages of Wholly Owned Subsidiaries Disadvantages of Wholly Owned Subsidiaries Joint Ventures Joint Venture Configurations Forward Integration Joint Venture Backward Integration Joint Venture Buyback Joint Venture Multistage Joint Venture Advantages of Joint Ventures Disadvantages of Joint Ventures Strategic Alliances Advantages of Strategic Alliances Disadvantages of Strategic Alliances Strategic Factors in Selecting an Entry Mode Selecting Partners for Cooperation Cultural Environment Political and Legal Environments Market Size Production and Shipping Costs International Experience A Final Word A comprehensive set of specially designed PowerPoint slides is available for use with Chapter 13. These slides and the lecture outline below form a completely integrated package that simplifies the teaching of this chapter’s material. Lecture Outline I. INTRODUCTION An entry mode is the institutional arrangement by which a firm gets its products, technologies, human skills, or other resources into a market. Companies seek entry to new marketplaces for manufacturing or selling products. Entry mode selection depends on market experience, level of control desired, and market size. II. EXPORTING, IMPORTING, AND COUNTERTRADE The most common method of buying and selling goods internationally is exporting and importing. Companies use countertrade when exporting and importing products when using currencies is not an option. A. Why Companies Export 1. Expand total sales when the domestic market is saturated. 2. Diversify sales to level off cash flow, making it easier to coordinate payments to creditors with receipts from customers. 3. Owners and managers with little or no knowledge of how to conduct business in other cultures, use exporting as a low-cost, low-risk way of gaining valuable international experience. B. Developing an Export Strategy: A Four-Step Model A logical approach to exporting is to research and analyze international opportunities and develop a coherent export strategy. A firm with such a strategy pursues export markets rather than waiting for orders to arrive. 1. Step 1: Identify a potential market (See Chapter 12) a. To identify clearly whether demand exists in a target market, market research should be performed and results interpreted. b. Novice exporters should focus on one or a few markets that are culturally understood. c. A new exporter should seek advice on regulations, exporting in general and to a target market in particular. 2. Step 2: Match needs to abilities a. Assess a company’s ability to satisfy market needs. 3. Step 3: Initiate meetings a. Early meetings with potential distributors, buyers, and others. Initial contact should focus on building trust and cooperation. b. Later meetings can estimate potential success of an agreement. c. In the most advanced stage, negotiations take place and details of agreements are finalized. 4. Step 4: Commit resources a. After all the meetings and negotiations, it is time to put the company’s human, financial, and physical resources to work. b. The objectives of the export program must be clearly stated and should extend out at least 3 to 5 years. c. As companies expand activities, they discover the need for an export department or division. See Chapter 11 for a detailed discussion of organizational design issues to consider at this stage. C. Degree of Export Involvement Some companies use intermediaries to get their products in a market abroad. Other companies perform all of their export activities themselves, with an infrastructure that bridges the gap between the two markets. 1. Direct exporting Company sells directly to buyers in a target market. Need not sell directly to end-users; can rely on local representatives or distributors. a. Sales representatives represent their own company’s products, not those of other companies. Promote products by attending trade fairs and making personal visits to local retailers and wholesalers. Do not take title to the merchandise. b. Distributors take ownership of merchandise when it enters their country, accept risks associated with local sales, and sell to retailers, wholesalers, or end users through their own channels of distribution. This reduces an exporter’s risk and its control. 2. Indirect exporting Company sells to intermediaries who resell to buyers in a target market. The choice of intermediary depends on the ratio of international sales to total sales, available resources, and the growth rate of the target market. a. Agents Individuals or organizations that represent one or more indirect exporters in a target market. Compensated with commissions on sales. Represent several indirect exporters and might focus their promotional efforts on the products of the company paying the highest commission. b. Export management companies EMC exports on behalf of indirect exporters, operating contractually, either as an agent or as a distributor. Provides services on a retainer basis: gather market information, formulate promotional strategies, perform promotional duties, research customer credit, arrange shipping, and coordinate export documents. Advantage: deep understanding of the cultural, political, legal, and economic conditions of target market. Disadvantage: breadth and depth of an EMC’s service hinders exporter’s international skills development. After the EMC contract expires, a company can go at it alone in exporting its products. c. Export trading companies ETC provides services in addition to those directly related to clients’ exporting activities: import, export, and countertrade services, distribution channels, storage facilities, trade and investment projects, and manufacturing. Concept met limited success in the United States; remain small and are dwarfed by Asian counterparts. Governments, financial institutions, and companies have closer working relationships in Asia. The U.S. regulatory environment is wary of such arrangements, and the lines between companies and industries are clearly drawn. D. Avoiding Export and Import Blunders 1. Companies new to exporting often make errors; many fail to conduct adequate market research and obtain adequate export advice. 2. Companies can hire a freight forwarder—a specialist in such export-related activities as customs clearing, tariff schedules, and shipping and insurance fees. Can pack shipments for export and take responsibility for getting a shipment from the port of export to the port of import. E. Countertrade Selling goods or services that are paid for, in whole or part, with other goods or services. Developing and emerging markets often rely on countertrade to import goods due to lack of hard currency. Formerly communist countries in Eastern and Central Europe use countertrade as well as nations in Africa, Asia, and the Middle East. Requires an extensive network of international contacts, but smaller companies can take advantage of its benefits. 1. Types of countertrade a. Barter: Exchange of goods or services directly for other goods or services without the use of money. b. Counterpurchase: Sale of goods or services to a country by a company that promises to make a future purchase of a country’s product. c. Offset: Agreement that a company will offset a hard-currency sale to a nation by making a hard-currency purchase of an unspecified product from that nation in the future. d. Switch trading: One company sells to another its obligation to make a purchase in a given country. e. Buyback: Export of industrial equipment in return for products produced by that equipment. 2. Countertrade can provide access to markets otherwise off-limits because of a lack of hard currency. Typically involves commodity and agricultural products such as oil, wheat, or corn—products whose prices on world markets fluctuate. 3. Problems arise when the price of a product declines between the barter time and the selling time; fluctuating prices generate the same type of risk as in currency markets. Managers might hedge this risk on commodity futures markets as they hedge against currency fluctuations in currency markets (See Chapter 9). III. EXPORT/IMPORT FINANCING International trade poses risks for both exporters and importers. Exporters risk not receiving payment after delivery, whereas importers fear that delivery might not occur once payment is made. (See Figure 13.2) Export and import financing methods: A. Advance Payment 1. Importer pays for merchandise before it is shipped. Used when two parties are unfamiliar with each other, the transaction is small, or the buyer has a poor credit rating. 2. Prior payment eliminates the risk of nonpayment, but creates the complementary risk of non-shipment—importers might pay for goods but not receive them. B. Documentary Collection 1. Bank acts as an intermediary without accepting financial risk. Used in ongoing business relationships between two parties. The documentary collection process can be broken into three main stages and nine smaller steps (see Figure 13.3). 2. A draft (bill of exchange) is a document ordering an importer to pay an exporter a specified sum of money at a specified time. A bill of lading is a contract between an exporter and a shipper that specifies merchandise destination and shipping costs. 3. After receiving the appropriate documents from the exporter, the exporter’s bank sends the documents to the importer’s bank. 4. Documentary collection reduces the risk of non-shipment because the packing list details the contents of the shipment, and the bill of lading is proof that the merchandise was shipped. The risk of nonpayment is increased because the importer does not pay until he receives the necessary documents. C. Letter of Credit (See Figure 13.4) 1. Importer’s bank issues a document stating that the bank will pay the exporter when the exporter fulfills the terms of the document. 2. Used when an importer’s credit rating is questionable, when the exporter needs it to obtain financing, or when a market’s regulations require it. 3. Banks issue letters of credit after an importer has deposited a sum equal to the value of the imported merchandise. The bank pays the exporter, but the deposit protects the bank if the importer fails to pay for the merchandise. 4. Several types of letters of credit: An irrevocable letter of credit allows the bank issuing the letter to modify its terms only after obtaining the approval of both exporter and importer. A revocable letter of credit can be modified by the issuing bank without obtaining approval from either the exporter or the importer. A confirmed letter of credit is guaranteed by both the exporter’s bank in the country of export and the importer’s bank in the country of import. 5. Letter of credit reduces the risk of non- shipment because of proof of shipment before payment. 6. Although risk of nonpayment is increased, this is more secure because the importer’s bank accepts nonpayment risk when it pays the exporter’s bank. D. Open Account 1. Exporter ships merchandise and later bills the importer. 2. Used for sales between two subsidiaries within an international company and when the parties are familiar with each other. 3. Reduces risk of non-shipment for importer but increases the risk of nonpayment for exporter. IV. CONTRACTUAL ENTRY MODES Some products simply cannot be traded in open markets because they are intangible. Companies can use a variety of contracts to market highly specialized assets and skills in international markets. A. Licensing 1. Contractual entry mode in which a company owning intangible property (the licensor) grants another firm (the licensee) the right to use that property for a specified period of time. 2. Licensors receive royalty payments based on a percentage of revenue generated by the property. Commonly licensed intangible property includes patents, copyrights, special formulas and designs, trademarks, and brand names. 3. Licensing often involves granting companies the right to use process technologies inherent to production. 4. Cross-licensing occurs when companies employ licensing agreements to swap intangible property (e.g., Fujitsu and Texas Instruments use cross-licensing to use each other’s technology, saving R&D costs). 5. Advantages of Licensing a. Finance international expansion. b. Less risky method of international expansion. c. Can reduce likelihood of product appearing on black market. d. Licensees can upgrade existing production technologies. 6. Disadvantages of Licensing a. Can restrict a licensor’s future activities. b. Might reduce the global consistency of the quality and marketing of a product. c. Might amount to “lending” strategically important property to future competitors. B. Franchising 1. Contractual entry mode in which one company (the franchiser) supplies another (the franchisee) with intangible property and assistance over an extended period of time. Franchisers typically receive compensation as flat fees, royalty payments, or both. 2. The brand name or trademark of a company is normally the single most important item desired by the franchisee. 3. Franchising differs from licensing in three ways: a. Gives greater control over sale of a product in a target market. b. Although licensing is fairly common in manufacturing industries, franchising is primarily used in the service sector. c. Although licensing normally involves a one-time transfer of property, franchising requires ongoing assistance from the franchiser. 4. Companies based in the United States dominate the world of international franchising. Franchising is growing in the EU with the single currency and a unified set of franchise laws. In Eastern Europe, expansion suffers from a lack of capital, high interest rates and taxes, bureaucracy, restrictive laws, and corruption. 5. Advantages of Franchising a. Low-cost, low-risk mode of entry into new markets. b. Allows for rapid geographic expansion. c. Uses cultural knowledge and know-how of local managers. 6. Disadvantages of Franchising a. Cumbersome to manage many franchisees in several nations. b. Franchisees can experience a loss of organizational flexibility in franchising agreements. C. Management Contracts 1. One company supplies another with managerial expertise for a specific period of time. The supplier of expertise is compensated with either a lump-sum payment or a fee based on sales. 2. Used to transfer two types of knowledge: (1) specialized knowledge of technical managers and (2) business-management skills. 3. Advantages of Management Contracts a. Exploit an international opportunity but risk few physical assets. b. Nation can award contract to operate and upgrade public utilities when a nation is short of investment financing. c. Help nations develop skills of local workers and managers. 4. Disadvantages of Management Contracts a. Places the lives of managers in danger in developing or emerging nations undergoing political or social turmoil. b. Suppliers of expertise may nurture a formidable new competitor in the local market. D. Turnkey Projects 1. Designing, constructing, and testing a production facility for a client. They are often large-scale and often involve government agencies. 2. Transfer special process technologies or production-facility designs to a client (e.g., power plants, telecommunications, petrochemical facilities). 3. Advantages of Turnkey Projects a. Firm specializes in core competency to exploit opportunities. b. Governments can obtain designs for infrastructure from the world’s leading companies. 4. Disadvantages of Turnkey Projects a. Company may be awarded a project for political reasons rather than for technological know-how. b. Can create future competitors. V. INVESTMENT ENTRY MODES Investment entry modes entail the direct investment in plant and equipment in a country coupled with ongoing involvement in the local operation. A. Wholly Owned Subsidiaries 1. Facility entirely owned and controlled by a single parent company. Can establish by purchasing an existing company or by forming a new company from the ground up. 2. Whether an international subsidiary is purchased or newly created depends on its operations; for high-tech products, a company may build new facilities because state-of-the-art operations are hard to locate. 3. Major drawback of “greenfield” is the time it takes to construct new facilities, hire and train employees, and launch production. 4. Advantages of a Wholly Owned Subsidiary a. Managers have complete control over day-to-day operations in the target market and over access to valuable technologies, processes, and other intangible properties within the subsidiary. b. Firm can coordinate activities of its national subsidiaries. 5. Disadvantages of a Wholly Owned Subsidiary a. Expensive, so difficult for small- and medium-size firms. b. Requires substantial resources so risk exposure is high. B. Joint Ventures Separate company is created and jointly owned by two or more independent entities to achieve an objective. 1. Joint venture configurations (See Figure 13.5) a. Forward integration joint venture Parties invest together in downstream business activities. b. Backward integration joint venture Parties invest together in upstream business activities. c. Buyback joint venture Input provided by, and output absorbed by, each partner. d. Multistage joint venture One partner integrates downstream, and the other, upstream. 2. Advantages of Joint Ventures a. Can reduce risk. A joint venture exposes fewer of a partner’s assets to risk than would a wholly owned subsidiary—each partner risks only its own contribution. b. Penetrate international markets that are otherwise off-limits. c. Access another company’s international distribution network. d. Defensiveness: local government or government-controlled company gives authorities a direct stake in venture’s success. 3. Disadvantages of Joint Ventures a. Can result in conflict between partners. b. Loss of control over a joint venture’s operations can also result when the local government is a partner in the joint venture. C. Strategic Alliances 1. Two or more entities cooperate (but do not form a separate company) to achieve the strategic goals of each. 2. Like joint ventures, can be formed for short or long periods, depending on the goals of the participants. 3. Can be established between a company and its suppliers, its buyers, and even competitors; sometimes each partner purchases the other’s stock. 4. Advantages of Strategic Alliances a. Share the cost of an international investment project. b. Tap into competitors’ specific strengths. c. Similar reasons as for entering into joint ventures. 5. Disadvantages of Strategic Alliances a. Can create a future local or even global competitor. b. Conflict can arise and eventually undermine cooperation. VI. STRATEGIC FACTORS IN SELECTING AN ENTRY MODE Because entering a new market requires an investment of time and money, and because of the strategic implications of the entry mode, selection must be done carefully. A. Selecting Partners for Cooperation 1. Each partner must be firmly committed to the stated goals of the cooperative arrangement. Detailing duties and contributions of each party through prior negotiations helps ensure continued cooperation. 2. Although the importance of locating a trustworthy partner seems obvious, cooperation should be approached with caution. 3. Each party’s managers must be comfortable working with people of other cultures and traveling to (perhaps even living in) other cultures. 4. A suitable partner must have something valuable to offer. Managers must evaluate the benefits of a potential international cooperative arrangement as they would any other investment opportunity. B. Cultural Environment (See Chapter 2) 1. Culture can differ greatly, and managers can feel less confident in their ability to manage operations in the host country. 2. Company may avoid investment entry modes in favor of exporting or a contractual mode; cultural similarity encourages manager confidence and thus the likelihood of investment. 3. Importance of cultural differences diminishes when managers are knowledgeable about the culture of the target market. C. Political and Legal Environment 1. Political instability in a target market increases the risk exposure of assets. Significant political differences and instability cause companies to avoid large investments in favor of entry modes that shelter assets. 2. Target market’s legal system influences the choice of entry mode: certain import regulations such as high tariffs or low quota limits can encourage investment. 3. Company producing locally avoids tariffs that increase product cost; it does not have to worry about making it into the market below quota. 4. Governments may enact laws that ban certain types of investment. D. Market Size 1. Size of a potential market influences choice of entry mode. Rising incomes encourage investment entry because a firm can prepare for growing demand and better understand the target market. 2. Growing demand in China is attracting investment in joint ventures, strategic alliances, and wholly owned subsidiaries. Investors believing a market will remain small may prefer exporting or contractual entry. E. Production and Shipping Costs 1. By helping to control total costs, low-cost production and shipping can give a company an advantage. 2. Setting up production in a market is desirable when the total cost of production is lower than at home. Low-cost local production might encourage contractual entry through licensing or franchising. 3. Companies producing products with high shipping costs prefer local production; exporting is feasible when products have low shipping costs. F. International Experience 1. As companies gain international experience, they select entry modes that require deeper involvement. This also means that they must accept greater risk in return for greater control over operations and strategy. 2. They initially explore the advantages of licensing, franchising, management contracts, and turnkey projects. 3. Once they become comfortable in a market, joint ventures, strategic alliances, and wholly owned subsidiaries become viable options. 4. Advances in technology and transportation allow small companies to undertake entry modes requiring more commitment to the local market. VII. A FINAL WORD This chapter explains important factors in selecting entry modes and key aspects in their management. It details the circumstances in which each entry mode is most appropriate and the advantages and disadvantages that each provides. The choice of which entry mode(s) to use in entering international markets should match a company’s international strategy. Some companies want entry modes that give them tight control over activities abroad because they are pursuing a global strategy. Another company might not require an entry mode with central control because it is pursuing a multinational strategy. The entry mode must also be chosen to align well with an organization’s structure. Quick Study Questions Quick Study 1 1. Q: What are the four steps, in order, involved in creating an export strategy? A: Companies should not simply respond to international requests for their products, but develop a detailed export strategy. First, they should identify a potential market. In order to identify clearly whether demand exists in a particular target market, market research should be performed and results interpreted. Second, they should match the needs of the market to their abilities to satisfy the needs of the market. Third, they should initiate meetings. Early meetings with potential distributors, buyers, and others are a must. Initial contact should focus on building trust and a cooperative climate among all parties. Beyond building trust, successive meetings are designed to estimate the potential success of any agreement if interest is shown on both sides. Fourth, they must be willing to commit the resources needed to get the job done. After all the meetings, negotiations, and contract signings, it is time to put the company’s human, financial, and physical resources to work. 2. Q: When a company sells its products to intermediaries who then resell to buyers in a target market it is call what? A: Indirect exporting occurs when a company sells its products to intermediaries who then resell to buyers in a target market. Indirect exporters can use several different types of intermediaries including agents, export management companies, and export trading companies. 3. Q: What is the name of a specific type of countertrade? A: Countertrade is the practice of selling goods or services that are paid for, in whole or part, with other goods or services. Countertrade can provide access to markets that are otherwise off-limits because of a lack of hard currency. 1. Barter is the exchange of goods or services directly for other goods or services without the use of money. 2. Counterpurchase is the sale of goods and services to a country by a company that promises to make a future purchase of a specific product from that country. 3. Offset is an agreement that a company will offset a hard-currency sale to a nation by making a hard-currency purchase of an unspecified product from that nation in the future. 4. Switch trading is countertrade whereby one company sells to another its obligation to make a purchase in a given country. 5. Buyback is the export of industrial equipment in return for products produced by that equipment. Quick Study 2 1. Q: Export/import financing that presents the most risk for exporters is called what? A: Open account is export and import financing in which an exporter ships merchandise and later bills the importer for its value. Open account reduces the risk of non-shipment that the importer faces under the advance payment method. However, it increases the risk of nonpayment for exporters. 2. Q: Export/import financing in which a bank acts as an intermediary without financial risk is called what? A: Documentary collection is export and import financing in which a bank acts as an intermediary without accepting financial risk. This method is common when there is an ongoing business relationship between two parties. 3. Q: Export/import financing in which the importer’s bank issues a document stating that the exporter will get paid when it fulfills the terms of the document is called what? A: A letter of credit is export/import financing in which the importer’s bank issues a document stating that the bank will pay the exporter when the exporter fulfills the terms of the document. Quick Study 3 1. Q: What is the name of a specific type of contractual entry mode? A: A company can use a variety of contractual modes, such as, licensing, franchising, management contracts, and turnkey projects to market highly specialized assets and skills in markets beyond its national borders. 2. Q: What is it called when companies use agreements to exchange intangible property? A: Licensing is a contractual entry mode in which a company owning intangible property (the licensor) grants another firm (the licensee) the right to use that property for a specified period of time. 3. Q: A disadvantage of both management contracts and turnkey projects is what? A: A disadvantage of both management contracts and turnkey projects is that a future competitor may be created. Quick Study 4 1. Q: What is the name of a specific type of investment entry mode? A: There are three common forms of investment entry modes: wholly owned subsidiary, joint ventures, and strategic alliances 2. Q: A wholly owned subsidiary is a facility owned and controlled by what? A: A wholly owned subsidiary is a facility entirely owned and controlled by a single parent company. 3. Q: What is the name of a specific type of joint venture? A: A joint venture is a separate company that is created and jointly owned by two or more independent entities to achieve a common business objective. In the forward integration joint venture, the parties choose to invest together in downstream business activities. In the backward integration joint venture, the parties choose to invest together in upstream business activities. In the buyback joint venture, its input is provided by and output is absorbed by each of its partners. In the multistage joint venture, one partner integrates into downstream activities and one partner integrates into upstream activities. 4. Q: A strategic alliance is similar to a joint venture except for that it doesn’t involve what? A: A strategic alliance is similar to a joint venture except for that it doesn’t involve the formation of a separate firm. Quick Study 5 Q: When selecting a partner for cooperation it is important to remember what? A: Every partner must be firmly committed to the goals of the venture or agreement. Trust is also important, so that often firms naturally prefer to partner with firms that they have had a favorable experience in the past, Finally, in an international arrangement, each party’s managers must also be comfortable working with people of other cultures and with traveling to (even perhaps living in) other cultures, and a suitable partner must have something valuable to offer the company. Q: What factors may discourage an investment entry mode? A: The factors to be considered are the cultural environment, the political and legal environment, market size, production and shipping costs, and the firms level of international experience. Q: What factors may encourage an investment entry mode? A: Just as the factors listed to discourage investment, in turn they could also serve to encourage investment entry modes. Ethical Challenge You are chief operating officer of a U.S.-based telecommunications firm considering a joint venture inside China with a Chinese firm. The consultant you hired to help you through the negotiations has just informed you that ethical concerns can arise when international companies consider a cooperative form of market entry (such as a joint venture) with a local partner in any market. This is especially true when each partner contributes personnel to the venture because cultural perspectives cause people to see ethical dilemmas differently. This is of special concern to you because the venture had planned to employ people from both China and the United States. In light of this recent information, you are reassessing your entry mode options. 13-5 Do you think your two companies can establish a set of ethical principles before commencing operations that will guide a potential joint venture? A: Many firms are confronted with a dilemma similar to this one when they sign joint venture agreements with firms from developing countries that have cultures with a different set of ethical standards. A firm could suggest a policy of rewards, such as profit sharing, and punishments, such as fines, be implemented to encourage more openness and honesty in the process. Further, up-front and frank discussions of potentially damaging ethical issues can help avoid potentially disastrous results based in ethical dilemmas 13-6 What ethical issues might arise in conjunction with other entry modes discussed in this chapter? A: There are many differences between the U.S. and Chinese cultures that can add to the complexity of a joint venture agreement. Perceptions of trustworthiness, honesty, candor, and commitment are just a few of the countless ethical issues that can arise in any international entry mode. Cultural traditions and rituals tend to play an influential role in the mode of entry process and make an impact through such issues as relationship building, saving face, and communication styles. 13-7 Is there a company that succeeded under circumstances that are similar to those that your firm faces? A: There are many differences between the U.S. and Chinese cultures that can add to the complexity of a joint venture agreement. The differences in saving face, low versus high context culture, and individualism between U.S. and Chinese workers should be considered when developing any cooperative policies. These differences can lead to ethical misconceptions due to different behavioral expectations. Further, up-front and frank discussions of potentially damaging ethical issues can help avoid potentially disastrous results based in ethical dilemmas. Better late than never if the formation has already taken place. Teaming Up Negotiation Project. This project is designed to introduce you to the complexity of negotiations and to help develop your negotiating skills. Background: A Western European automobile manufacturer is considering entering markets in Southeast Asia. The company wants to construct an assembly plant outside Ho Chi Min City, Vietnam, to assemble its lower-priced cars. Major components would come from manufacturing plants in Brazil, Poland, and China. The cars would then be sold in emerging markets throughout Southeast Asia and the Indian subcontinent. Managers are hoping to strike a $100 million joint venture deal with Vietnam’s government. The company would supply technology and management for the venture, and the government would contribute a minority share of financing to the venture. The company considers the government’s main contributions to be providing tax breaks (and other financial incentives) and a stable business environment in which to operate. Financial capital is flowing into Vietnam at a fair pace. The currency is strong, and inflation remains low. As with other nations in the region, investors are generally wary of the nation’s stability. The new auto assembly plant would boost the local economy, reduce unemployment, and increase local wages. But some local politicians fear the company might be interested only in exploiting the country’s relatively low-cost labor. Activity: Break into an equal number of negotiating teams of three or four persons. Half the teams are to represent the company and the other half the government. As a group, meet for 15 minutes to develop the team’s opening position and negotiating strategy. Meet with a team from the other side and undertake 20 minutes of negotiations. After the negotiating session, spend 15 minutes comparing the progress of your negotiations with that of the other pairs of teams. A: This exercise can teach students to evaluate investment projects not only from the standpoint of companies, but also from the perspective of governments. If taken very seriously, the students will also be able to judge their abilities as international negotiators. Practicing International Management Case Telecom Ventures Unite the World 13-10 Q: What strengths did AT&T bring to its joint venture with Unisource? A: AT&T offered a globally recognized brand name and a presence in practically every major market worldwide except Latin America. AT&T also had significant experience in developing international relationships as well as the firm’s association with WorldPartners. 13-11 Q: Can you think of any potential complications that could arise in the AT&T–Unisource joint venture? A: Perhaps the greatest potential danger is the potential for complications caused by the fact that there are so many partners involved in the venture. Not only can there be conflicts over the direction and goals of the venture, but also partners exiting and entering can cause a loss of strategic focus and intent. Just as things begin going well, one partner may leave or another one may join with different motivations. 13-12 Q: Assess the formation of Global One, Unisource, and other partnerships in this case. Which strategic factors might have influenced the entry mode choices that these firms made? A: Students should be sure to cover at least the main points listed near the end of the chapter. They should also be encouraged to present other factors that they consider potentially important. Specifically, cultural, legal, regulatory, and technological competencies in each scenario should be assessed and evaluated. -