Chapter 3

Organizational
Participants That
Make International
Business Happen

Educator Resource PPT to accompany:

International Business: The New Realities
2nd Edition
By Cavusgil, Knight, Riesenberger,
Rammal and Rose

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Learning Objectives

1. Identify the three types of participants in international

business
2. Explain the foreign-market-entry strategies of focal
firms
3. Analyze the distribution channel intermediaries in
international business
4. Describe the facilitators in international business

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Born-Global Firms

• Geo Search is a Japanese company that develops

high-technology equipment to help engineers survey
ground surfaces for cavities and build safe roads,
airports and underground utility lines.
• At the request of the UN, Geo Search designed the
world’s first landmine detector (Mine Eye).
• Firm had immediate international market due to
millions of mines in countries such as Afghanistan,
Cambodia and Libya; it works with NGOs
worldwide.

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Born-Global Firms (cont’d)

• Geo Search is one of an increasing number of small

and medium-sized enterprises (SMEs) active in
international business.
• SMEs make up the majority of all firms in a typical country,
accounting for more than 50 per cent of national economic
activity.
• Compared to large multinational enterprises (MNEs), a
typical SME has far fewer financial and human resources.
• Globalisation and technological advances have made
venturing abroad much less expensive, creating a
commercial environment in which many more small firms do
international business than ever before.

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Born-Global Firms (cont’d)

• Companies that internationalise at or near their

founding (born-global firms) have been springing up
all over the world over the past two decades.
• Early and rapid internationalisation develops a borderless
corporate culture.
• Agility and flexibility of born-global firms help serve foreign
and domestic customers well.

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Born-Global Firms (cont’d)

• Reasons for internationalising early:

• To specialise in a product category for which home
market demand is small.
• To respond to major demand from abroad.
• Existing strong international orientation.
• Today, born globals and other SME exporters make
up a sizable proportion of internally active firms.

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Three Types of Participants in International
Business

1. Focal firm: Initiator of an international business

transaction that conceives, designs and produces
the offerings intended for consumption by customers
worldwide (e.g., MNEs and SMEs).
2. Distribution channel intermediary: A specialist firm
that provides a variety of logistics and marketing
services for focal firms as part of the international
supply chain, both in the home country and abroad.

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Three Types of Participants in International
Business (cont’d)

3. Facilitator: A firm or an individual with special

expertise in legal advice, banking, customs
clearance or related support services that assists
focal firms to perform international business
transactions.
• Freight Forwarder: A specialised logistics service
provider that arranges international shipping on
behalf of exporting firms, much like a travel agent
for cargo.

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Participants Organised by Value-Chain Activity

• Value chain is the complete business system of the

focal firm; it comprises all activities the focal firm
performs.
• In IB, individual value-adding activities can be
configured in multiple countries.
• In exporting firms, much of the value chain is
concentrated within the home country.
• Multinational enterprises strive to rationalise their
value chain by locating each activity in a country with
the most favourable combination of cost, quality,
logistical considerations and other criteria.
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 Slide 10
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An Illustration of an International Value Chain: Dell

• Dell makes a variety of products, each with its own

value chain.
• On a typical day, Dell processes orders for 120 000
computers, which are sold and distributed to
customers around the world.
• Non-US sales account for roughly half of Dell’s total
sales (about US$61 billion in 2011).
• As growth in US sales flattens over time, the
proportion of non-US sales will grow.

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 Slide 12
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Focal Firms in International Business

• Multinational enterprise (MNE): A large company

with substantial resources that performs various
business activities through a network of subsidiaries
and affiliates located in multiple countries.
• MNEs are best known for their direct investment
activities, operate in multiple countries, and derive a
substantial portion of their total sales and profits from
cross-border operations.
• In developing countries and centrally planned
economies, some focal firms are partly or wholly
owned by the government.
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 Slide 14
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Focal Firms in International Business (cont’d)

• Small and medium-sized enterprises: A company

with fewer than 15 employees in Australia is
considered to be small, and a company with fewer
than 200 employees is recognised as a medium
enterprise. This number varies across countries.
• SMEs are typically small manufacturers or service
providers and now comprise a large number of firms
active in international business.
• SMEs can be more flexible than the large
multinationals, and quicker to respond to global
business opportunities.
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Focal Firms in International Business (cont’d)
• Born global/early internationalising firms: Young,
entrepreneurial companies that initiate international
business activity very early in their evolution, moving
rapidly into foreign markets.
• Achieve considerable foreign sales early in their
evolution.
• Account for a substantial proportion of national
exports.
• Early, efficient international operations facilitated by
avid use of the internet and modern
communications technologies.
Slide 16
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Foreign-Market-Entry Strategies of Focal Firms

• One way to analyse focal firms in international

business is in terms of the entry strategies that they
typically use to expand abroad.
• Larger MNEs tend to expand abroad through foreign
direct investment (FDI), while smaller firms, including
born globals, tend to be exporters.
• Both MNEs and SMEs rely on contractual relationships
such as franchising and licensing.

Slide 17
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Copyright © 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781486011049/Cavusgil/International Business 2/e
Foreign-Market-Entry Strategies of Focal Firms (cont’d)

• Licensor: A firm that enters into a contractual agreement with a

foreign partner that allows the latter the right to use certain
intellectual property for a specified period of time in exchange
for royalties or other compensation.
• Franchisor: A firm that grants another the right to use an entire
business system in exchange for fees, royalties or other forms
of compensation.
• Turnkey contractors: Focal firms or a consortium of firms that
plan, finance, organise, manage and implement all phases of a
project and then hand it over to a foreign customer after training
local personnel.

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Foreign-Market-Entry Strategies of Focal Firms (cont’d)

• Licensing and franchising are examples of contractual

relationships.
• Licensing allows companies to internationalise rapidly while
remaining in their home market.
• Franchisors remain in the home market and permit foreign
partners to carry on local activities.
• The franchisor assists the franchisee in setting up its operation,
and then maintains ongoing control over aspects of the
franchisee business; the franchisee benefits by gaining access
to a proven business plan and substantial expertise.

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Foreign-Market-Entry Strategies of Focal Firms (cont’d)

• In a typical turnkey contract the contractor plans, finances,

organises, manages and implements all phases of a
construction project.
• The contractors provide hardware and know-how to build a
factory, power plant, railway or some other integrated system
that is capable of producing the products or services that the
project sponsor requires.
• Projects are typically awarded on the basis of open bidding, in
which many potential contractors participate.
• An increasingly popular type of turnkey contract in the
developing economies is the build-operate-transfer venture
(BOT).

Slide 21
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Foreign-Market-Entry Strategies of Focal Firms (cont’d)

• Build-operate-transfer (BOT): Contractors acquire

ownership in facility for period of time until it is turned
over to the client; contractors provide ongoing service
in form of advice, training and assistance in regulatory
requirements and government approvals.
• International collaborative ventures: Cross-border
business alliances where partnering firms pool
resources and share costs and risks of new ventures;
a middle ground between FDI-based foreign market
entry and home-country-focused operations (i.e.,
exporting).

Slide 22
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Copyright © 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781486011049/Cavusgil/International Business 2/e
Foreign-Market-Entry Strategies of Focal Firms (cont’d)

• Joint venture partner: A focal firm that creates and

jointly owns a new legal entity through equity
investment or pooling of assets.

• Project-based, non-equity venture partners: Focal

firms that collaborate through a project, with a
relatively narrow scope and a well-defined timetable,
without creating a new legal entity.

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Distribution Channel Intermediaries in
International Business

• Most intermediaries are based in the exporter’s target

market.
• Provide market research, appoint local agents,
arrange local transportatio, and other services.
• Many intermediaries finance sales and extend credit,
facilitating prompt payment to the exporter.
• Intermediaries based in the foreign market can
function like the exporter’s local partner, handling all
needed local business functions.

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Intermediaries Based in the Foreign Market

Foreign distributor: A foreign-market-based

intermediary that works under contract for an exporter,
and takes title to and distributes the exporter’s products
in a national market or territory, often performing
marketing functions such as sales, promotion and after-
sales service.
Agent: An intermediary (often an individual or a small
firm) that handles orders to buy and sell commodities,
products and services in international business
transactions for a commission.

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Intermediaries Based in the Foreign Market (cont’d)

Manufacturer’s representative: An intermediary

contracted by the exporter to represent and sell its
merchandise or services in a designated country or
territory.
• Retailers: Represents the last link between
distributors and end users in consumer markets.

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Intermediaries Based in the Home Country

• Select group of intermediaries are domestically

based.
• Wholesaler importers: Bring in products or
commodities from foreign countries for the purpose
of selling them in the home market, re-exporting
them or for use in the manufacture of finished
products.
• Manufacturers import a range of raw materials, parts
and components used in the production of higher
value-added products.

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Intermediaries Based in the Home Country (cont’d)

Trading company: An intermediary that engages in

the import and export of a variety of commodities,
products and services.
• Large trading companies are typically high-volume,
low-margin resellers, compensated by adding profit
margins to what they sell.
• Trading companies are very common in commodities
and agricultural goods such as grain.

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 Slide 30
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Intermediaries Based in the Home Country (cont’d)

Export management company (EMC): An

intermediary that acts as an export agent on behalf of
a (usually inexperienced) client company.
• In return for a commission, an EMC finds export
customers on behalf of the client firm, negotiates terms
of sale and arranges for international shipping.
• Manufacturer runs the risk of losing control over how
its products are marketed abroad, with possible
negative consequences for its international image, due
to the indirect nature of the export sale.

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Online Intermediaries

• Disintermediation: Bypassing traditional

intermediaries; made possible by the internet.
• Reintermediation: Occurs when a new firm injects
itself between a buyer and a seller.
• The internet and IT provide enormous opportunities to
transform, manage and communicate within value
chains.

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Facilitators in International Business

• Make it possible for international business transactions

to occur efficiently, smoothly and in a timely manner.
• Examples include logistics service providers (e.g.,
DHL, FedEx), banks, international trade lawyers,
freight forwarders, customs brokers, consultants,
advertising agencies, market researchers, insurance
companies, tax accountants.
• Logistics service provider: Transportation
specialist that arranges for physical distribution
and storage of products on behalf of focal firms.

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Global Trend: Online Retailers Surge Ahead

• During the recent recession, online sales were one of

the few bright spots in retailing, surging by 25 per
cent or more for many firms.
• Websites of conventional retailers are growing fast.
• Launching an internet-based sales operation is
complex and challenging, even in international
markets.
• One approach is to market products via social
networking sites (e.g., Facebook); large global
audience of social networkers growing rapidly.

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Facilitators in International Business (cont’d)

• Common carriers: Companies that own the ships,

trucks and aircraft used to transport goods globally.
• Consolidator: Type of shipping company that
combines cargo of more than one exporter into
international shipping containers.
• Most exporters use services of freight forwarders to
arrange international shipments.
• Governments typically charge tariffs and taxes and
have complex rules for importing products.
• Customs brokers: Specialist enterprises that
arrange product clearance through customs.

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Facilitators in International Business (cont’d)

• Various players in financial operations of international

business (e.g., commercial banks).
• Banks often reluctant to extend credit to SMEs;
smaller firms in Australia can turn to government
agency Export Finance and Insurance Corporation
(EFIC).
• EFIC provides assistance with securing finance
and insurance to help gain access to foreign
markets through exports.
• Governments may provide funding through
development banks and agencies.

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Facilitators in International Business (cont’d)

• International trade lawyers help navigate

international legal environments.
• Insurance companies provide coverage against
commercial and political risks.
• Consultants advise internationalising firms on various
aspects of doing business abroad.
• Tax accountants advise companies on minimising tax
obligations.
• Market research firms are key resources for
identifying and targeting foreign buyers.

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Closing Case — Alibaba.com

• Alibaba Group founded by Jack Ma in 1999 in China,

consisting of internet-based businesses that facilitate
e-commerce; today, its platform reaches more than
61M registered users in more than 240 countries.
• Alibaba.com is the preferred platform for B2B
transactions in China.
• Faced controversy regarding sale of shark fins over
its platform; no longer permits sale and has
committed itself to environmental protection.
• Due to environmental philanthropy, Ma has been
recognised by Time and Forbes; Alibaba.com’s
success is strongly linked to Ma’s recognition.
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 End of chapter

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