INTERNATIONAL BUSINESS STRATEGIES

Andrey G. Medvedev,

Professor

September 22, 2009CEMS MIM Programme

© Andrey Medvedev

7. INTERNATIONAL ENTRY MODES:INVESTMENT MODES

1. MARKET AND INDUSTRY ENTRY

2. ACQUISITIONS OF FOREIGN COMPANIES

3. GREEN-FIELD PROJECTS

4. JOINT VENTURES

5. ENTRY-MIX

6. STEP-BY-STEP INTERNATIONALISATION VS. NETWORKING

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SELECTING AN ENTRY MODE

Responsibilities of International ManagerResponsibilities of International Manager:

Evaluate opportunities and risksopportunities and risksof entering foreign economy

Define a degree of local responsivenesslocal responsiveness Analyse advantages and disadvantagesAnalyse advantages and disadvantages

of alternative foreign direct investment options Select an appropriate entry optionentry option Search for strategic partnersstrategic partners and target companiestarget companies

abroad

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FOREIGN ENTRY: A MODEL FOR ANALYSIS

CompetenceCompetences, values, s, values,

overall overall strategy & strategy &

ODOD

entry mode; entry mode; entry-mix; entry-mix; entry entry stagesstages

PEST-factors PEST-factors of of

opportunities opportunities and threatsand threats

Implementation

Goals of internationalisation

Development (real option)

Industry (SBA) Industry (SBA) / product / product

nature (multi-nature (multi-domestic vs. domestic vs.

global)global)

Current performance

Reasons to internationalise

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FOREIGN DIRECT INVESTMENT

FOREIGN DIRECT INVESTMENT FOREIGN DIRECT INVESTMENT IS USUALLY NEEDED– THE AMOUNT INVESTED BY A HOME COUNTRY PARENT COMPANY

IN A FOREIGN ENTERPRISE TO HAVE EFFECTIVE CONTROLEFFECTIVE CONTROL

– GENERALLY INVOLVES THE LONG-TERM COMMITMENTLONG-TERM COMMITMENTOF LARGE AMOUNTS OF FUNDS TO PROJECTSWHICH WILL PAY OFF OVER AN EXTENDED PERIOD

BEING CLOSER TO THE MARKETCLOSER TO THE MARKET ACHIEVING HIGHER MARKET SHAREHIGHER MARKET SHARE GETTING ACCESS TO (CHEAPER) RESOURCES AND SKILLSRESOURCES AND SKILLS REALISING LOCATION ECONOMYLOCATION ECONOMY

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HOW? FDI ENTRY MODES – INDUSTRY ENTRY

ACQUISITIONSACQUISITIONS

GREEN-FIELD ESTABLISHMENTSGREEN-FIELD ESTABLISHMENTS

JOINT VENTURESJOINT VENTURES– MINORITY SHARE (ALLIANCE)

– 50/50

– MAJORITY SHARE

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STEPS OF ACQUISITION

SEARCHINGSEARCHING FOR A TARGET COMPANY

APPRAISALAPPRAISAL OF A TARGET COMPANY

TAKING ACCOUNT OF ACQUISITION TERMSACQUISITION TERMS– INVESTMENT TENDERS

MAKING POST-ACQUISITIONPOST-ACQUISITION DECISIONS

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STRATEGIC CONTEXT OF ACQUISITIONS

COMPANY’S GLOBAL DIVERSITY COULD BE REACHED THROUGH DIFFERENT TYPES OF ACQUISITIONS

CROSS-BORDERCROSS-BORDER ACQUISITION OF A “FOREIGN TARGETFOREIGN TARGET”– A FOREIGN COMPANY

WITH OPERATIONS ONLY IN ITS HOME COUNTRYONLY IN ITS HOME COUNTRY(LOCAL ACQUISITIONLOCAL ACQUISITION)

– A MAJOR FOREIGN COMPANYFOREIGN COMPANYWITH EXTENSIVE INTERNATIONAL OPERATIONSINTERNATIONAL OPERATIONS(GLOBAL ACQUISITION – 1GLOBAL ACQUISITION – 1)

ACQUISITION OF A “DOMESTIC TARGETDOMESTIC TARGET”– COMPANY WHICH OPERATES IN MANY COUNTRIES

(GLOBAL ACQUISITION – 2GLOBAL ACQUISITION – 2)

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SUBSIDIARIES IN RUSSIA:STADA In the beginning of 2005, Stada Arzneimittel AGStada Arzneimittel AG, Germany's third-

largest generic-drug maker, acquired 99 percent of shares in Nizhpharm OAONizhpharm OAO located in Nizhny Novgorod, Russia, for €80 million.

“Stada considers Russia an important growth market,”' the German company said in the statement. In 2006, STADA Group salesin Russia increased by 55 percent to EUR 87.5 million. The ongoing very positive business development of Nizhpharm mainly focuseson branded products contributed the major part of this increase.

In August 2007, Nizhpharm acquired all ofclosely held Makiz-Pharma Makiz-Pharma shares for €135 millionto get low-cost production and expandin the growing Russian market. Makiz-Pharmais one of a few domestic pharmaceuticals producersthat was planned and build accordingto the Russian and international GMP standards.

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GREEN-FIELD INVESTMENT:VOLKSWAGEN The foundation stone was laid in Kaluga on October 30, 2006

for VolkswagenVolkswagen's new factory, the largest foreign projectin the Russian automobile industry.

Volkswagen has reserved 800 hectares of land in Kaluga Region:400 hectares for the factory itself, in which the company will invest 400 million euros, and 400 hectares for its partners in the automobile parts industry. The Kaluga technoparkKaluga technopark will be the largest projectin the history of the post-Soviet automobile manufacturing industry.

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UPM-KYMMENE

UPM-KymmeneUPM-Kymmene is a global forest products groupwith core businesses in printing papers, speciality papers,label materials and wood products.

UPM has 64 wood production units in 14 countriesand 21 paper mills in 8 countries (Finland, Germany,France, the UK, Austria, the US, Canada and China).They employ about 28,000 people.The UPM’s sales in 2006 were about EUR 10 billion,of which three quarters came from Europe.

In the end of 2007, UPM agreed to forma 50-50 joint venture with Russian SvezaSvezato invest more than 1 billion euros in Russia.

The venture will produce about 800,000 tons of pulp, 300,000 cubic meters of wood and 450,000 cubic meters of building panels per year.

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THE ROLE OF A PARTNER

LOCAL PARTNER COULD SERVE AS A MARKETING SATELLITEMARKETING SATELLITE(TRADE AND SERVICE COMPANIES, CONSULTING AGENCIES)– THEY KNOW LOCAL CONDITIONS BETTER

– THEY MAY CONCENTRATE ON SALES, MARKETING AND SERVICES

LOCAL PARTNERS MAY HELP A FOREIGN FIRMLEARN AND UNDERSTANDLEARN AND UNDERSTAND LOCAL CONDITIONS BETTER

MANY JOINT VENTURESJOINT VENTURES IN RUSSIA WERE TURNEDINTO FULLY-OWNED SUBSIDIARIES AFTER FOREIGN PARTNERS HAD ACCUMULATED ENOUGH LOCAL EXPERIENCE

JOINT VENTURE MAY SERVE TEMPORARYAS A “TESTTEST” MODE

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ENTRY MIX – GENERAL MOTORS

1993 EXPORTINGEXPORTING

2001 JOINT VENTUREJOINT VENTURE (WITH AVTOVAZ)

2004-2008 CO-OPERATIONCO-OPERATION(WITH ASSEMBLER IN ST. PETERSBURG)

2008 GREEN-FIELDGREEN-FIELD(ST. PETERSBURG)

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ENTRY MIX – FRANCHISINGPLUS INVESTMENT: OBI

German OBIOBI (do-it-yourself retailer) has franchisingfranchising agreements with two stores in Moscow Regionand one in Leningrad Region near St. Petersburg.

49 percent of investmentinvestment were made by OBI,51 percent by franchisee, DIY Project RussiaDIY Project Russia.

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ENTRY STAGES – WRIGLEYFOLLOWING WINDOW OF OPPORTUNITIES 1991 INDIRECTINDIRECT EXPORTINGEXPORTING

LEARNING LOCAL CONDITIONS

DEVELOPING DISTRIBUTION 1995 REPRESENTATIONREPRESENTATION WRIGLEY’S RUSSIA 1999 GREEN-FIELDGREEN-FIELD (ST. PETERSBURG) 2004 RECONSTRUCTIONRECONSTRUCTION

OF ST. PETERSBURG PLANT

2008 DIVERSIFICATIONDIVERSIFICATION THROUGH ACQUISITIONACQUISITION (ODINTSOVO CONFECTIONERY PLANT

IN MOSCOW REGION) 2008 WRIGLEY HAS BEEN ACQUIRED BY MARS

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ENTRY STAGES – TIKKURILAFOLLOWING WINDOW OF OPPORTUNITIES 1993 JOINT VENTURE JOINT VENTURE (LENBYTCHIM), BUY-OUT

(FINNCOLOR)

LEARNING LOCAL CONDITIONS

DEVELOPING DISTRIBUTION 1999 GREEN-FIELDGREEN-FIELD (KRASKI TIKKURILA)

2006 ACQUISITIONACQUISITION (TEKS)PLANT IN BELGOROD REGIONWAREHOUSE IN CHELYABINSK REGION

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ENTRY STAGES – KRAFT FOODSVERTICAL INTEGRATION 1993 EXPORTINGEXPORTING

1999 GREEN-FIELDGREEN-FIELD (INSTANT COFFEEPACKAGING PLANTNEAR ST. PETERSBURG)

2006-2008 VERTICALLY INTEGRATED GREEN-FIELDVERTICALLY INTEGRATED GREEN-FIELD(INSTANT COFFEE MANUFACTURING)

2007 ACQUISITIONACQUISITION FROM DANONE(BOLSHEVIK PLANT IN MOSCOW)

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«SCANDINAVIAN» MODELOF FOREIGN EXPANSION

ENTRY IS VIEWED AS A GRADUAL PROCESSGRADUAL PROCESSTHAT CAN BE SUBDIVIDED

– EXPORTING

– LICENSING

– CONTRACT MANUFACTURING

– JOINT PROJECTS

– DIRECT INVESTMENT

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STEP-BY-STEP INTERNATIONALISATION

ADVANTAGESADVANTAGES

DISADVANTAGESDISADVANTAGES