Page 200 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 12: Foreign Market Entry and Country Risk Management

Consortia Notes
The consortium and syndicate are similar to the joint venture and could be classified as such
except for two unique characteristics: (1) they typically involve a large number of participants;
(2) they frequently operate in a country or market in which none of the participants is currently
active. Consortia are developed for pooling financial and managerial resources and to lessen
risks. Often, huge construction projects are built under a consortium arrangement in which
major contractors with different specialities form a separate company specifically to negotiate
for and produce one job. One firm usually acts as the lead firm or the newly formed corporation
may exist quite independently of its originators.

Manufacturing

Another means of foreign market development and entry is manufacturing, also called a wholly
owned subsidiary within a foreign country. A company may manufacture locally to capitalise
on low-cost labour, to avoid high import taxes, to reduce the high costs of transportation to
market, to gain access to raw materials, and/or as a means of gaining market entry. Seeking
lower labour costs offshore is no longer an unusual strategy. A hallmark of global companies
today is the establishment of manufacturing operations throughout the world. This is a trend
that will increase as barriers to free trade are eliminated and companies can locate manufacturing
wherever it is most cost effective.
There are three types of manufacturing investment by firms in foreign countries: (1) market
seeking; (2) resource seeking; (3) efficiency seeking. Investments in China, for example, are
often of the first kind, where companies are attracted by the size of the market. Investment in
India, especially by a number of fashion garment producers such as Mexx and Marc O’Polo, are
of the second type, while investments in Malaysia and Singapore by electronics manufacturers
such as Intel and Motorola are of the third type.
Countertrade

Countertrade deals are now on the increase and represent a significant proportion of world
trade. Countertrade ties the export and other foreign sales to an undertaking from the seller to
purchase products from the buyer or a third party in the buyer’s country.
There are several reasons behind the demand for counter-trade, such as promotion of local
exports, saving scarce foreign exchange, balancing trade flows and/or ensuring guaranteed
supplies. The terms and conditions for countertrade are not standardised and may be different
from market to market. Other terms used for counter-trade include counter- purchase, buyback,
compensation and offset, and barter. In the 1960s, Eastern European countries started demanding
countertrade to achieve a balance in foreign trade.

Notes Nowadays, however, it is common practice in developing as well as in developed
markets, and there are a number of companies that specialise in advising on counter trade
and a number of trading houses that act as clearing houses for counter trade products.

Task Assume you are marketing director of a company producing refrigerators. Select
one country in Asia and one in Latin America and develop screening criteria to evaluate
the two markets. On the basis of these criteria make an analysis and select the country you
should enter.

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