If your company is interested in delving further into the
international trade arena, licensing, joint ventures and off-shore
operations should be explored. While direct exporting may be a profitable
method of market entry for some businesses, licensing to a foreign company
manufacturing rights to your product or setting up a foreign manufacturing
joint venture may be viable alternatives.
In comparison, setting up off-shore manufacturing operations may be a
more economical way of doing business: Kansas-based Extru-Tech, Inc. is
exploring this possibility:
"Because of the high cost of shipping our products and the customs
duties involved, we are seriously considering setting up a manufacturing
facility in the Far East, our biggest market," says Extru-Tech President
Kenneth E. Matson.
This chapter will discuss the relative advantages and disadvantages of
alternatives to direct exporting, how to find licensing and joint venture
manufacturing partners and how to finance overseas investment.
STRATEGIC ALLIANCES
Licensing
Licensing involves a contractual arrangement whereby a company
licenses the rights to certain technological know-how, design and
intellectual property to a foreign company in return for royalties or other
kinds of payment. This arrangement worked well for a small business
exporter from Virginia:
"We export our 'Peace Frogs' T-shirts directly to Japan, but in Spain
per capita income is lower, competition from domestic producers is
stronger, and tariffs are high, so we licensed a Barcelona-based company
the rights to manufacture our product," says Peace Frogs president Catesby
Jones.
Licensing offers a small business many advantages, such as rapid entry
into foreign markets and virtually no capital requirements to establish
manufacturing operations abroad. Returns are usually realized more quickly
than for manufacturing ventures.
The disadvantages of licensing are that control may be lost over
manufacturing and marketing, and more important, that the licensee may
become a competitor if too much knowledge and know-how is transferred.
Take care to protect trademarks and intellectual property.
One way to help ensure that your intellectual property is protected is
to secure proper patent and trademark registration. In the interim before
your patent is filed, you may ask a potential licensee to sign a
confidentiality and non-disclosure agreement barring the licensee from
manufacturing the product itself, or having it manufactured through third
parties. Make sure such agreements are not in violation of laws in the
host country.
Patents should be filed with the appropriate foreign government within
one year of U.S. filing, in order to obtain patent protection under the
Paris Convention, the international agreement on patents. Patent rules
vary from country to country, so it is important to consult a competent
international patent and trademark attorney.
Licensing to a foreign company the rights to your product will require
a carefully crafted licensing agreement. Consulting an attorney is
critical since rules on licensing also vary from country to country. Be
careful that the agreement does not violate host country antitrust laws.
Under the antitrust laws of many countries, the licensee cannot set the
price at which a product will be re-sold by the licensor.
Foreign Manufacturing Joint Ventures
In contrast to licensing arrangements, foreign manufacturing joint
ventures allow for the U.S. company to have a stake and management role in
the foreign operation. Joint ventures require more of a direct investment
than licensing and require training, management assistance and technology
transfer.
Joint ventures can be equity or non-equity partnerships. Equity joint
ventures are contractual arrangements with equal partners. Non-equity
ventures involve the host country partner in the arrangement with a greater
percentage. In some countries, a joint venture is the only way for a
foreign company to set up operations. Laws often require that a certain
percentage of stock belong to a citizen of the host country.
Foreign manufacturing joint ventures are risky in that geographical
and cultural factors may interfere with the smooth running of operations.
You will have to deal with entirely new management, located in a different
country, whose first language may not be English.
Despite the drawbacks, using a foreign partner can have many benefits:
the partner will have intimate knowledge of the target market and may have
business and political contacts to make market entry easier.
Partner Selection Issues
Finding a suitable partner is critical to the success of any licensing
or manufacturing joint venture arrangement.However, this can be a time
consuming and difficult process without proper assistance. Recognizing
this fact, the United States government has a special program to facilitate
overseas partner selection.
The DOC Matchmaker Trade Delegations are an excellent way to make
joint venture and licensee contacts. Matchmakers provide one-on-one
pre-screened business appointments for U.S. companies in a foreign country.
One U.S. company which was particularly successful as a result of a
Matchmaker was Texas-based Made In USA:
"As a result of a Matchmaker trade mission, I was able to consummate
a Finnish joint venture which resulted in $6 million in sales," says Jan
Schwenk, a principal with Made in USA, a software development company.
Exports now account for 25 percent of the company's business.
A limited number of Matchmaker Trade Delegations are held each year.
For companies unable to take advantage of a Matchmaker, you may consider
the DOC's "Gold Key Service." For U.S. firms planning to visit a country,
US&FCS overseas staff will assist in developing a market strategy, setting
up orientation briefings, making introductions to potential joint venture
partners, providing interpreters for meetings and helping with follow-up
planning. Fees vary from country to country.
The steps that can be involved in foreign partner selection are as
follows:
. Contact your local DOC office. Discuss your target market and
what kind of partner you are seeking. They can tell you whether a
Matchmaker program fitting your needs is scheduled. If not, they will send
your request to the appropriate Foreign Commercial Service representative
abroad.
. A list of potential partners will be forwarded to you. Contact
each one with letter of introduction.
. After responses from potential candidates are obtained, conduct
a financial and business reference check on the most qualified candidates.
If you are unable to do this in-house, use a credit reporting firm.
. Make a trip abroad, either with a Matchmaker Trade Delegation or
individually, to meet with potential licensees or joint venture partners.
. Having made your final selection, begin contract negotiations
with the assistance of legal counsel.
Foreign Investment Opportunities
Many companies find that, as a result of exporting profitably and
licensing or joint venturing the manufacture of their products abroad, it
becomes a more viable method of market entry to set up off-shore production
operations.
Having only exported since 1988, Z-International, a Missouri-based
label manufacturer, opened a plant in Germany in 1990. The plant now
employs 12 people and invoiced over DM 4,000,000 in 1991. Company
president Fritz Zschietzschmann said that Z-International's initial
motivation in setting up the plant was to reach the European market, but
now he says, "The doors to all of Eastern Europe will be open for
business."
Off-shore manufacturing requires greater investment than licensing or
joint venture manufacturing, but also affords the greatest amount of
control over operations.
Additional factors that may induce a company to set up off-shore
production include: high transportation costs, prohibitive tariffs or
duties on imports, lower production costs and foreign government investment
incentives, such as tax holidays.
If you are seriously considering setting up an off-shore manufacturing
plant, you will need to assess whether to acquire an existing facility or
to construct a new one. The key factors in this decision-making process
are the legal and tax ramifications, where to set up operations, and how to
finance the foreign investment. An off-shore operation may offer certain
tax benefits and other inducements for your company to make an investment
in their country.
Legal and Tax Implications
Much of the decision-making surrounding joint venture or off-shore
manufacturing involves legal and tax issues. Some countries actively
encourage and promote foreign investment. Countries receptive to, or in
need of, foreign investment may have relaxed laws on kinds and amounts of
foreign investments allowed and may even offer certain tax benefits.
U.S. and host country attorneys and accountants should be an integral
part of the team you assemble to assess whether and where joint venture or
off-shore manufacturing would be profitable for your company.
Location, Partner Selection and Financial Assistance
Foreign investment requires a substantial commitment of time and money
and a certain amount of risk. Recognizing this fact, the United States
government created a separate, business-oriented agency to support American
investors entering the international marketplace.
Overseas Private Investment Corporation (OPIC)
OPIC is the lead agency assisting U.S. businesses interested in
investment overseas.
OPIC programs are available if the project:
. is a new venture, or expansion of an existing business;
. is located in a developing country where OPIC operates (OPIC
operates in 140 countries);
. will assist in the socio-economic development of the host
country;
. is approved by the host government; and
. is consistent with the economic interests of the United States
and will not have a significant adverse effect on the United States economy
or United States employment.
If your potential overseas investment fits these criteria, OPIC can be
an extremely useful resource. OPIC offers a variety of programs,
including: financing and political risk insurance to help protect your
investment and several pre-investment services.
Pre-investment Assistance
OPIC sponsors investment missions to introduce U.S. businesses to key
foreign private sector leaders, government officials and potential joint
venture partners. Since its inception in 1975, investment missions to 45
countries have been organized.
SBA-guaranteed loans may be available to fund your company's
participation in such missions.
In addition to pre-investment assistance, OPIC provides financing to
assist in the setup of overseas operations and risk insurance to mitigate
some of the problems associated with investment in developing countries.
Financing
Direct loans are available to ventures sponsored by, or significantly
involving, U.S. small businesses or cooperatives. OPIC loans range from
$500,000 to $6 million. Loan guarantees are also made to lending
institutions in the range of $2 million to $25 million, but can be as large
as $50 million.
OPIC has also underwritten a number of geographic venture funds,
including the Africa Growth Fund, the East European Environmental Fund and
the Latin America Growth Fund. If your project fits the criteria necessary
to be eligible for access these funds, you may consider applying to the
specific fund for financing assistance.
Insurance
Private investors may be hesitant to undertake long-term investments
abroad, given the political uncertainties of many developing nations. To
alleviate these concerns, OPIC insures U.S. investments against three major
types of political risks: inconvertibility, expropriation and political
violence, including civil strife.
Foreign Governments
Foreign governments, particularly in developing countries, often
sponsor special agencies to aid and facilitate foreign direct investment.
Some examples include the Mexican Investment Board (MIB), the Portuguese
Trade Commission and the Bahrain Marketing and Promotions Office. These
foreign investment promotion agencies can provide detailed market
information, joint venture leads and make contacts with key officials.
They often maintain offices in the United States.
Some countries may also have special funds or financing arrangements
to spur foreign investment in particular sectors or geographical areas.
Foreign investment promotion agencies can lead you to these sources.
Contact the appropriate foreign embassy in the United States for the name
of the agency which can assist you.
A FINAL WORD ON GOING GLOBAL
In Chapter 3, we discussed methods of market entry with an emphasis on
exporting. In this concluding chapter, we focussed on licensing, joint
venture manufacturing and off-shore production as options to be considered
along with, or in addition to, exporting.
How you decide to enter overseas markets will depend on a variety of
factors unique to your own small business. Going global can be a
challenging experience for a small business, but the rewards can be
substantial. As Roger Teigen, 1991 SBA Oklahoma Exporter of the Year, put
it:
"There is a certain greater adulation in winning when we win in the
export market rather than when we win in the U.S. market . . . it is
exciting, it is exhilarating."
Let this optimism and enthusiasm be your guide as you go global. The
U.S. Small Business Administration, as well as numerous other government
agencies at the state and federal level, support and encourage your entry
into the international arena. There are a multitude of programs and a
worldwide staff to assist you.
Source : foreign-trade.com |
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