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Foreign Market Entry Foreign Market Entry StrategiesStrategies
Foreign Market Entry Foreign Market Entry StrategiesStrategies
Ruth V. AguileraRuth V. Aguilera
World Market
Principal Motives for Int’l Principal Motives for Int’l ExpansionExpansion
Locations Economies
Economies of Scale
Economies of Scope
To seek lower production factor costs
To expand sales and production volume
To exploit proprietary assets
Forms of FDIForms of FDI OwnershipOwnership
Wholly owned Wholly owned operationsoperations
Green-field Green-field investmentinvestment
Full acquisitionFull acquisition Partially owned Partially owned
operationsoperations Partial acquisitionPartial acquisition Joint ventureJoint venture
Relatedness Relatedness Horizontal FDIHorizontal FDI Vertical FDIVertical FDI Unrelated Unrelated
diversificationdiversification
Host CountryHome Country
Forms of FDI: OwnershipForms of FDI: Ownership
MNE
New Entity
Local Firm
Joint Venture
Full Acquisition (i.e., 100%)
Green Field100% Owned
Partial Acquisition (e.g., 50%)
Ownership = s%
Ownership = (1 - s)%
Entry Decision Making Under Uncertainty: Entry Decision Making Under Uncertainty: Trade-off Between Flexibility and Trade-off Between Flexibility and
CommitmentCommitment Timing: When is a Timing: When is a
good time to enter?good time to enter? Potential gain from Potential gain from
waitingwaiting Cost of delayCost of delay
Scale of entryScale of entry Small scale: Small scale:
Establish a foothold Establish a foothold to learnto learn
Large scale: Acquire Large scale: Acquire first mover first mover advantageadvantage
Speed of expansion: Speed of expansion: How fast to grow?How fast to grow? Value of learning Value of learning Preemption of Preemption of
competitorscompetitors Constraints of internal Constraints of internal
resourcesresources ModeMode
Some modes have more Some modes have more flexibility embeddedflexibility embedded
Some modes reduce Some modes reduce resource requirementsresource requirements
Choice of Market Entry Choice of Market Entry ModeMode
Marketing and Sales
ProductionR&D
Company Infrastructure
Organization, Coordination & HRM
Value Chain of an MNEValue Chain of an MNE
Innovative
Capabilities
Advanced Technology & Know-
How
Industry-Specific
Marketing Expertise
What additional resources may the MNE need to enter a foreign market?
Local expertise: marketing, government relations, etc.
Marketing and Sales
ProductionR&D
Company Infrastructure
Organization, Coordination & HRM
Typical Value Chain of a Local Typical Value Chain of a Local FirmFirm
Imitative
Capabilities
Older Technology and Know-
How
Country-Specific
Marketing Expertise
What may the MNE desire from a local firm? Complementary resources Not necessarily strength in every area
Complementarity of Complementarity of ResourcesResources
Complementarity of Complementarity of ResourcesResources
Local Firm’s Resources
Imitating capabilities Older technology and
know-how Country-specific
marketing expertise Country specific
organization skills
MNE’s Resources
Innovative capabilities Advanced technology
and know-how Industry-specific
marketing expertise Organization structure
and systems
Going it Alone: ExportGoing it Alone: ExportGoing it Alone: ExportGoing it Alone: ExportHOME COUNTRY HOST COUNTRY
Export of Goods
MNE
Revenues
Customers
Going it Alone: ExportGoing it Alone: ExportAdvantagesAdvantages
Low initial investmentLow initial investment Reach customers Reach customers
quicklyquickly Complete control over Complete control over
productionproduction Benefit of learning for Benefit of learning for
future expansionfuture expansion
DisadvantagesDisadvantages Potential costs of Potential costs of
trade barrierstrade barriers Transportation costTransportation cost Tariffs and quotasTariffs and quotas
Foregoes potential Foregoes potential location economieslocation economies
Difficult to respond to Difficult to respond to customer needs wellcustomer needs well
When Is Export Appropriate?When Is Export Appropriate? Low trade barriersLow trade barriers Home location has cost advantageHome location has cost advantage Customization not crucialCustomization not crucial
Licensing AgreementLicensing AgreementLicensing AgreementLicensing Agreement
Local Firm
Licensing of TechnologyHOME COUNTRY HOST COUNTRY
MNE
Fees and Royalties
Licensing AgreementLicensing AgreementAdvantagesAdvantages
Low initial investment Low initial investment Avoids trade barriersAvoids trade barriers Potential for utilizing Potential for utilizing
location economieslocation economies Access to local Access to local
knowledgeknowledge Easier to respond to Easier to respond to
customer needscustomer needs
DisadvantagesDisadvantages Lack of control over Lack of control over
operationsoperations Difficulty in transferring Difficulty in transferring
tacit knowledgetacit knowledge Negotiation of a transfer Negotiation of a transfer
priceprice Monitoring transfer outcomeMonitoring transfer outcome
Potential for creating a Potential for creating a competitorcompetitor
When Is Licensing Appropriate?When Is Licensing Appropriate? Well codified knowledgeWell codified knowledge Strong property rights regimeStrong property rights regime Location advantageLocation advantage
Foreign AcquisitionForeign AcquisitionForeign AcquisitionForeign Acquisition
Local FirmInvestment
HOME COUNTRY HOST COUNTRY
MNE
Profit
Foreign AcquisitionForeign AcquisitionAdvantagesAdvantages
Access to target’s Access to target’s local knowledgelocal knowledge
Control over foreign Control over foreign operationsoperations
Control over own Control over own technologytechnology
DisadvantagesDisadvantages Uncertainty about Uncertainty about
target’s valuetarget’s value Difficulty in “absorbing” Difficulty in “absorbing”
acquired assets acquired assets Infeasible if local market Infeasible if local market
for corporate control is for corporate control is underdeveloped underdeveloped
When Is Acquisition Appropriate?When Is Acquisition Appropriate? Developed market for corporate controlDeveloped market for corporate control Acquirer has high “absorptive” capacityAcquirer has high “absorptive” capacity High synergyHigh synergy
Going it Alone: “Green Field” Going it Alone: “Green Field” EntryEntry
Going it Alone: “Green Field” Going it Alone: “Green Field” EntryEntry
New Subsidiary Company
Investment
HOME COUNTRY HOST COUNTRY
MNEProfit
Going it Alone: “Green Field” Going it Alone: “Green Field” EntryEntry
AdvantagesAdvantages Normally feasibleNormally feasible Avoids risk of Avoids risk of
overpaymentoverpayment Avoids problem of Avoids problem of
integration integration Still retains full Still retains full
controlcontrol
DisadvantagesDisadvantages Slower startupSlower startup Requires knowledge Requires knowledge
of foreign of foreign managementmanagement
High risk and high High risk and high commitmentcommitment
When Is “Green Field” Entry Appropriate?When Is “Green Field” Entry Appropriate? Lack of proper acquisition targetLack of proper acquisition target In-house local expertiseIn-house local expertise Embedded competitive advantageEmbedded competitive advantage
Management ContractManagement ContractManagement ContractManagement Contract
Management Fees
Local Firm
Technological Inputs
HOME COUNTRY HOST COUNTRY
Profit
MNE
Wholly-Owned Subsidiary
Managerial Service
Management ContractManagement ContractAdvantagesAdvantages
Access to local Access to local management skillsmanagement skills
Avoids buying Avoids buying unwanted assetsunwanted assets
Retains strategic Retains strategic controlcontrol
DisadvantagesDisadvantages Potential incentive Potential incentive
problemproblem Potential adverse Potential adverse
selection problem selection problem How do you know the How do you know the
competencies of the competencies of the manager?manager?
When Is a Management Contract Appropriate?When Is a Management Contract Appropriate? Manager has a reputation to protectManager has a reputation to protect
HotelsHotels Consulting companiesConsulting companies
Performance-based contract provides no Performance-based contract provides no perverse incentivesperverse incentives
Joint VentureJoint VentureJoint VentureJoint Venture
Joint Venture Company
Inputs
MNE Local Firm
HOME COUNTRY HOST COUNTRY
Inputs
Share of Profit
Share of Profit
Joint VentureJoint VentureAdvantagesAdvantages
Access to partner’s local Access to partner’s local knowledgeknowledge
Reduction of concern Reduction of concern about overpaymentabout overpayment
Both parties have some Both parties have some performance incentivesperformance incentives
Significant control over Significant control over operationoperation
DisadvantagesDisadvantages Potential loss of Potential loss of
proprietary knowledgeproprietary knowledge Potential conflicts Potential conflicts
between partnersbetween partners Neither partner has full Neither partner has full
performance incentiveperformance incentive Neither partner has full Neither partner has full
controlcontrol
When Is a Joint Venture Appropriate?When Is a Joint Venture Appropriate? Both partners contribute hard-to-measure inputsBoth partners contribute hard-to-measure inputs Large expected mutual gains in the long-runLarge expected mutual gains in the long-run Trade secrets can be walled offTrade secrets can be walled off
Common Market Entry Common Market Entry ModesModes
Common Market Entry Common Market Entry ModesModes
Joint Venture Company
Licensing
Acquisition
Joint Venturing
Local Firm
New Subsidiary Company
“Green Field” Entry
HOME COUNTRY HOST COUNTRY
ExportMNE
Kumar & Subramaniam (1997)
A Contingency Framework for the Mode of Entry
Decision RiskRisk Return Return ControlControl
Modes of entry
Exporting Contractual Agreeme
nt
Joint Venture
Acquisition Greenfield Investm
ent
Risk Low Low Moderate High High
Return Low Low Moderate High High
Control Moderate Low Moderate High High
Integration Negligible Negligible Low Moderate High
Decision Strategies:Decision Strategies:
Rational Analytic StrategyRational Analytic Strategy
Cybernetic StrategyCybernetic Strategy SerendipitySerendipity
DiscoversDiscovers
The Australian ChallengeThe Australian Challenge What’s Freixenet What’s Freixenet corecore competency? competency? Evaluate Freixenet’s market entry Evaluate Freixenet’s market entry
modesmodes Freixenet in AustraliaFreixenet in Australia
What lessons can we draw?What lessons can we draw? Where next?Where next? Adds: what is the theme?Adds: what is the theme?
Is it a global theme Is it a global theme (standarization/adaptaion?(standarization/adaptaion?
GloGloccalization (Akio Morita)alization (Akio Morita)
Good luck!Good luck!
Future ReadingFuture Reading- Anderson, Erin and Hubert Gatignon. 1986. Modes of Foreign - Anderson, Erin and Hubert Gatignon. 1986. Modes of Foreign Entry: A Transaction Cost Analysis. Journal of International Entry: A Transaction Cost Analysis. Journal of International Business Studies, 17: 1-26.Business Studies, 17: 1-26.- Kogut, B. and H. Singh. 1988. The effect of national culture - Kogut, B. and H. Singh. 1988. The effect of national culture on the choice of entry mode. Journal of International Business on the choice of entry mode. Journal of International Business Studies, 19: 411-432.Studies, 19: 411-432.- Hennart, J.-F. and Y.-R. Park. 1993. Greenfield vs. acquisition: - Hennart, J.-F. and Y.-R. Park. 1993. Greenfield vs. acquisition: The strategy of Japanese investors in the United States. The strategy of Japanese investors in the United States. Management Science, 39(9): 1054-1070.Management Science, 39(9): 1054-1070.- Hennart, J. F., and Reddy, S. 1997. The Choice Between - Hennart, J. F., and Reddy, S. 1997. The Choice Between Mergers/Acquisitions and Joint Ventures: The Case of Japanese Mergers/Acquisitions and Joint Ventures: The Case of Japanese Investors in the United States. Strategic Management Journal Investors in the United States. Strategic Management Journal 18: 1-12.18: 1-12.- Barkema, H. G. and Vermeulen, F. 1998. International - Barkema, H. G. and Vermeulen, F. 1998. International Expansion Through Start-up or Acquisition: A Learning Expansion Through Start-up or Acquisition: A Learning Perspective. Academy of Management Journal 41: 7-26.Perspective. Academy of Management Journal 41: 7-26.- Brouthers, K. D. and Brouthers, L. E. 2000. Acquisition or - Brouthers, K. D. and Brouthers, L. E. 2000. Acquisition or Greenfield Start-up? Institutional, Cultural and Transaction Greenfield Start-up? Institutional, Cultural and Transaction Cost Influences. Strategic Management Journal 21: 89-97. Cost Influences. Strategic Management Journal 21: 89-97.