Cfbe0entry Modes 2

8/12/2019 Cfbe0entry Modes 2

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Amity School of Business

Management Contract

Management Fees

Local Firm

Technological Inputs

HOME COUNTRY HOST COUNTRY

Profit

MNE

Wholly-Owned

Subsidiary

Managerial

Service


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Management contract is when one company supplies another with

managerial expertise for a specific period of time.

The supplier of expertise is compensated with either a lump-sum

payment or a fee based on sales.

Management contracts are used to transfer specialized knowledge of

technical managers and business management skills.


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Management ContractCompany supplies another with managerial

expertise for a specific period of timeAdvantages

+ Few assets risked+ Additional income to the

foreign company+ Develops local workforce

Disadvantages

Create competitor


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Turnkey Project

Advantages + Firms specialize in competency+ Nations obtain infrastructure

Politicized process

Create competitorDisadvantages

Company designs, constructs, and tests

a production facility for a client


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Amity School of BusinessWholly Owned Subsidiary

Facility entirely owned and controlled by

a single parent company

Advantages+ Day-to-day control+ Coordinate subsidiaries

Disadvantages Expensive High risk


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Wholly owned subsidiaries are entirely owned and controlled by a

single parent company.

A wholly owned subsidiary gives a company total control over day-

to-day local operations and valuable technologies, processes, and

other intangibles. It also lets a firm coordinate activities of all itsvarious national subsidiaries.

Yet, it can be an expensive entry mode and involve high risk

exposure for a firms assets.

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Amity School of BusinessJoint Venture

Joint Venture

Company

Inputs

MNE Local Firm

HOME COUNTRY HOST COUNTRY

Inputs

Share of Profit

Share of

Profit


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A joint venture is a separate company that is created and jointly

owned by two or more independent entities to achieve a common

objective.

A joint venture can reduce risk by sharing the investment with other

parties, help penetrate international markets that are otherwise off-

limits, and provide access to another partys distribution channels.

Yet, conflict can develop between partners if objectives change, if

one partys goals are reached early, or if trust and cooperation break

down. Also, parties may lose all control over the ventures

operations if the local government participates in the venture.

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Joint Venture

When Is a Joint Venture Appropriate? Both partners contribute hard-to-measure inputs

Large expected mutual gains in the long-run


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Amity School of BusinessJoint Venture

Company created and jointly owned by two or more

entities to achieve a common objective

Advantages Reduce risk level

Penetrate markets

Access channelsLarger funds

Larger projects with more

ideas

Disadvantages Partner conflict

Lose control

Slow decision making


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Strategic Alliance

DisadvantagesPartner conflict

Create competitor

AdvantagesShare project cost

Tap competitors strengthsGain channel access

Entities cooperate (but do not form a separate

company) to achieve strategic goals of each


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Strategic alliance is when two or more entities cooperate (but do

not form a separate company) to achieve the strategic goals of

each.

Alliances may be formed for short or long periods, and can beformed between a company and its suppliers, buyers, and

competitors.

A strategic alliance can allow firms to share the cost of an

international investment project, tap competitors specific

strengths, and access distribution channels.

Yet, conflict among partners may undermine cooperation, and an

alliance may create a future competitor in a target market or even

globally.


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Selecting Partners

Commitment

Trustworthiness

Cultural knowledge

Valuable contribution


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First, each partner must be firmly committed to the stated goals of thecooperative arrangement. Detailing duties and contributions of each

party through prior negotiations helps ensure continued cooperation.

Second, although the importance of locating a trustworthy partner

seems obvious, cooperation should nevertheless be approached withcaution.

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Points to be considered when selecting

partners for cooperation.


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Third, each partys managers should be at ease working with people

of other cultures and be comfortable traveling to, and perhaps living

in, other cultures.

And fourth, managers should apply the same stringent evaluation

criteria to a potential international cooperative arrangement as they

would to any other investment opportunity.


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.

Cultural differences can reduce managers confidence in

their ability to control operations in the host country. A lack

of cultural familiarity can cause a firm to avoid investment

entry and pursue exporting or contractual entry.

Political instability in a host country increases the risk

exposure of assets. Political uncertainty can cause companies

to avoid investment entry in favor of other modes. But a target

markets laws can encourage investment if, for example, itimposes high tariffs or low quota limits on imports.

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Market size is often a determining factor in entry mode choice.Rising incomes can encourage investment to help a firm

better understand the target market and prepare for growing demand.

For example, companies are undertaking enormous investments

in China, but making far more modest investments or pursuing

exporting and contractual entry in smaller markets.

Low-cost production and shipping can give a company

an advantage by helping it control total costs. If producing in

a host country lowers a firms total production costs, it

can encourage investment, licensing, or franchising.

As international experience grows, a firm may select

entry modes that require deeper involvement, but which

also involve greater exposure to risk.


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International modes of entry and valueat risk

Managers of an international business choose the mode of entry

based on a trade-off between risk versus control in the particular

supplier or customer country

Joint ventures, not only share knowledge, but also share

investment costs and value at risk

Spot or contract sales can substantially reduce value at risk

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International modes of entry and value at risk

M&A

Growth

Alliances/

JointVentures

Licenses

Contract

Spot

Increase in

control,

Increase in

commitment

and risk

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Choice of entry mode jointly determinesdegree of control and extent of risk

Degree of commitment depends on

contractual duration and vertical

integration

With less knowledge of other countrys

market, choose lower degree of

commitment

As knowledge increases over time, canincrease degree of commitment to get

closer to desired entry mode.

Contractual transactions may give

optimal mix of control and commitment

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Cfbe0entry Modes 2

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