Chapter 8: International Strategy 253
8-4a Exporting
For many firms, exporting is the initial mode of entry used.^66 Exporting is an entry mode
through which the firm sends products it produces in its domestic market to interna-
tional markets. Exporting is a popular entry mode choice for small businesses to initiate
an international strategy.^67
The number of small U.S. firms using an international strategy is increasing, with
some predicting that up to 50 percent of small U.S. firms will be involved in international
trade by 2018, most of them through export.^68 By exporting, firms avoid the expense of
establishing operations in host countries (e.g., in countries outside their home country)
in which they have chosen to compete. However, firms must establish some means of
marketing and distributing their products when exporting. Usually, contracts are formed
with host-country firms to handle these activities. Potentially high transportation costs
to export products to international markets and the expense of tariffs placed on the
firm’s products as a result of host countries’ policies are examples of exporting costs. The
loss of some control when the firm contracts with local companies in host countries for
marketing and distribution purposes can be expensive, making it harder for the export-
ing firm to earn profits.^69 Evidence suggests that, in general, using an international cost
leadership strategy when exporting to developed countries has the most positive effect on
firm performance, while using an international differentiation strategy with larger scale
when exporting to emerging economies leads to the greatest amount of success. In either
case, younger firms with a strong management team and market orientation capabilities
are more successful.^70
Firms export mostly to countries that are closest to their facilities because usually
transportation costs are lower and there is greater similarity between geographic neigh-
bors. For example, the United States’ NAFTA partners, Mexico and Canada, account for
more than half of the goods exported from the state of Texas. The Internet has also made
exporting easier. Firms of any size can use the Internet to access critical information
about foreign markets, examine a target market, research the competition, and find lists
of potential customers.^71 Governments also use the Internet to support the efforts of those
applying for export and import licenses, facilitating international trade among countries
while doing so.
8-4b Licensing
Licensing is an entry mode in which an agreement is formed that allows a foreign com-
pany to purchase the right to manufacture and sell a firm’s products within a host coun-
try’s market or a set of host countries’ markets.^72 The licensor is normally paid a royalty
on each unit produced and sold. The licensee takes the risks and makes the monetary
investments in facilities for manufacturing, marketing, and distributing products. As a
result, licensing is possibly the least costly form of international diversification. As with
exporting, licensing is an attractive entry mode option for smaller firms, and potentially
for newer firms as well.^73
China, a country accounting for almost one-third of all cigarettes smoked world-
wide, is obviously a huge market for this product. U.S. cigarette firms want to have a
strong presence in China but have had trouble entering this market, largely because of
successful lobbying by state-owned tobacco firms against such entry. Because of these
conditions, cigarette manufacturer Philip Morris International (PMI) had an incentive
to form a deal with these state-owned firms. Accordingly, PMI and the China National
Tobacco Corporation (CNTC) completed a licensing agreement at the end of 2005. This
agreement provides CNTC access to the most famous brand in the world, Marlboro.^74
Because it is a licensing agreement rather than a foreign direct investment by PMI, China
maintains control of distribution. The Marlboro brand was launched at two Chinese