8/12/2019 Cfbe0entry Modes 2
1/23
8/12/2019 Cfbe0entry Modes 2
2/23
Amity School of Business
Management Contract
Management Fees
Local Firm
Technological Inputs
HOME COUNTRY HOST COUNTRY
Profit
MNE
Wholly-Owned
Subsidiary
Managerial
Service
8/12/2019 Cfbe0entry Modes 2
3/23
Amity School of Business
3
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.
8/12/2019 Cfbe0entry Modes 2
4/23
8/12/2019 Cfbe0entry Modes 2
5/23
Amity School of Business
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
8/12/2019 Cfbe0entry Modes 2
6/23
8/12/2019 Cfbe0entry Modes 2
7/23
Amity School of Business
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
8/12/2019 Cfbe0entry Modes 2
8/23
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
8/12/2019 Cfbe0entry Modes 2
9/23
Amity School of Business
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.
9
8/12/2019 Cfbe0entry Modes 2
10/23
Amity School of BusinessJoint Venture
Joint Venture
Company
Inputs
MNE Local Firm
HOME COUNTRY HOST COUNTRY
Inputs
Share of Profit
Share of
Profit
8/12/2019 Cfbe0entry Modes 2
11/23
Amity School of Business
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.
11
8/12/2019 Cfbe0entry Modes 2
12/23
Amity School of Business
Joint Venture
When Is a Joint Venture Appropriate? Both partners contribute hard-to-measure inputs
Large expected mutual gains in the long-run
8/12/2019 Cfbe0entry Modes 2
13/23
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
8/12/2019 Cfbe0entry Modes 2
14/23
Amity School of Business
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
8/12/2019 Cfbe0entry Modes 2
15/23
Amity School of Business
15
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.
8/12/2019 Cfbe0entry Modes 2
16/23
Amity School of Business
Selecting Partners
Commitment
Trustworthiness
Cultural knowledge
Valuable contribution
8/12/2019 Cfbe0entry Modes 2
17/23
Amity School of Business
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.
17
Points to be considered when selecting
partners for cooperation.
8/12/2019 Cfbe0entry Modes 2
18/23
Amity School of Business
18
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.
8/12/2019 Cfbe0entry Modes 2
19/23
8/12/2019 Cfbe0entry Modes 2
20/23
Amity School of Business
.
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.
20
8/12/2019 Cfbe0entry Modes 2
21/23
Amity School of Business
21
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.
8/12/2019 Cfbe0entry Modes 2
22/23
Amity School of Business
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
22
8/12/2019 Cfbe0entry Modes 2
23/23
Amity School of Business
International modes of entry and value at risk
M&A
Growth
Alliances/
JointVentures
Licenses
Contract
Spot
Increase in
control,
Increase in
commitment
and risk
23
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