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| SOURCE : Root, Foreign Market Entry Strategies, p. 82. |
The contractual arrangements ( CA ) mode of entry is in most cases a stepping stone to international production. An MNC may move into that mode voluntarily (to test the waters, so to speak) or for purely defensive reasons (to prevent a competitor from entering the market or to preserve sales that otherwise would be lost because of a government's change in policy). In either case, the MNC is taking a risk in sharing its hard-earned technological or product advantage with a potential competitor.
There are literally hundreds of contractual arrangements through which firms enter and/ or maintain the international market. Because they all involve the transfer of knowledge (process, product, or management know-how) from the MNC to a local company, such agreements are also known as knowledge agreements. Knowledge agreements fall basically into nine categories:
Licensing
Franchising
Management contracts
Construction-turnkey contracts
Contract manufacturing
Technical assistance agreement
Service contracts
Co-production agreements
R&D cooperative agreements
Although the potential risks and benefits associated with each specific type vary, the general principle remains the same: the MNC is giving its proprietary expertise and intangible assets to a local firm in exchange for royalties and other fees. 1 According to the experts in the field, this type of entry mode is most appropriate in cases where a company's opportunities to export or to invest have been restricted or where MNC products have become very mature and have lost their lead over international competition. Or, as one expert put it, companies must become involved in contractual agreements as part of the process of "insiderization" into the huge global market of the OECD countries and especially the Triad, the "golden triangle" of the United States, Europe, and Japan. 2
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