3. MNEs and Entry Modes Flashcards
?? is geographically uneven, highly complex and a dynamic web of production networks, economic spaces and places connected together through treads of flows.
Global economy
How does a firm become international (Entry Modes):
Welche Arten können hierbei zunächst unterschieden werden?
Trading from home (Import; Export)
–> International Trade Economics
Foreign Direct Investment (FDI)
–> International Management and Business
How does a firm become international (Entry Mode):
Foreign Direct Investments können unterschieden werden in? (2)
Equity
Non-Equity
How does a firm become international (Entry Mode):
Foreign Direct Investments
Nenne zwei Entry Modes bei Non-Equity!
Licensing
Franchising
How does a firm become international (Entry Mode):
Foreign Direct Investments
Welche Equity Investment-Formen können unterschieden werden? (2)
Brownfield Investment
-> already existing facilities abroad
Greenfield Investment
-> from scratch
How does a firm become international (Entry Mode):
Foreign Direct Investments - Equity
Nenne eine Variante für ein Brownfield investments!
Merger & Aquisition (M&A)
How does a firm become international (Entry Mode):
Foreign Direct Investments - Equity
Nenne zwei Varianten des Greenfield Investments!
Greenfield investment by the firm
Joint Venture (JV)
The firm becomes international if…
Folie 3+4+5!
…
International Investments können unterschieden werden in?
International portfolio investment
-> Loans, Equity Investment
-> Stocks and Bonds
Foreign Direct Investment (FDI)
-> Stocks, Flows
-> Business Unit and/or operation in Foreign Country
The board decided to acquire a strategic foreign firm for its value chain. A portion of the board will sit on the acquired firm’s board.
FDI oder International Portfolio Investment?
FDI
The CEO is investing in a diversified portfolio of companies through formal financial channels. Each investment is relatively small, and the goal is to diversify the company’s profits.
FDI oder International Portfolio Investment?
International Portfolio Investment
What do you mean by ownership?
= more than ??% of the firm’s share
10
-> defined by the International Monetary Fund (IMF)
Control is not ownership
True/False?
True
There are 3 types of control: ?? (3)
- Ownership (i.e. greenfield or brownfield FDI)
- Managerial (i.e. International human resource)
- Contractual (i.e. offshoring and outsourcing)
FDI Terminology
FDI
-> Stocks = ??
-> Flows = ??
Stocks = Total of money at the end of the period
Flows = Total of money in and out in a period
FDIs Terminology
Stocks = Total of money at the end of the period
Flows = Total of money in and out in a period
Host country perspective
-> Inward stock
-> Inward flows
Home country perspective
-> outward stock
-> outward flows
…
Only ?? FDIs create new facilities in the host country, therefore the local effect is higher. (new jobs, more taxes etc.)
Greenfield
International Investments Trends 2022
In 2022 developing economies account for ?? % of global FDI.
70
International Investments Trends 2022
Project activities in developing regions continues to grow.
…
International Investments Trends 2022
The 378 $ billion FDI value that developed economies received was mainly driven by which region?
North America (US, Kanada)
International Investments Trends 2022
There is a rising trend for greenfield projects in Africa. (+39%)
…
International Investments Trends 2022
-> Folie 11
…
International Investments Trends 2022
-> Folie 12
…
International Investments Trends 2022
SDG investment is moving, but too slowly in some sectors.
Folie 12
International Investments Trends 2022
Which sectors see rising investments?
Infrastructure (+6)
GVC-intensive industries (+5%)
Semiconductors (+26%)
Announced greenfield projects, international project finance deals and cross-border M&As, Q1 2021-Q1 2023
Greenfield projects stayed steady while international project finance deals and M&As declined
-> Folie 13
…
FDI inflows, top 20 host economies, 2021 and 2022
Name the first 5 countries in 2022!
- US
- China
- Singapore
- Hong Kong
- Brazil
-> Rest and 2021 auf Folie 14
FDI outflows, top 20 home economies, 2021 and 2022
Name the first 5 countries in 2022!
- US
- Japan
- China
- Germany
- UK
Top five recipients by number of projects
Greenfield investment announcements
International project finance deals
-> Folie 14
…
Top five recipients by number of projects
Greenfield investment announcements
Why have there been so many greenfield investment announcements in the UK?
Folge des Brexits, englische Firmen gehen zurück nach England, um auf dem Markt vertreten zu bleiben
Different strategies for FDIs
Australian building materials supplier Boral bought out the interests of its France partner, cement-maker Lafarge SA, in their Asian plasterboard manufacturing joint venture which had had some consequences for Boral’s production organization
1 more examples Folie 15!
Detailed example on Folie 16+17!
…
FDI that is based on a firm developing a new line of business may be riskier than one seeking a straightforward expansion of existing commercial territory, but the ?? are also higher.
potential rewards
MNEs can use several and different Mode of Entry, depending on what? (2)
scope and goal
Folie 18!
…
The injection of capital fosters both capacity formation and the ?? embodied in it
technology
International production
Example: The (part of) production made in an own-facility located abroad (take the HQ as home country)
…
Selected indicators of FDI and international production, 2022 and selected years
FOLIE 19
The international production is the sum of the production of all subsidiaries abroad. (value of foreign production activities for which TNCs are responsible)
…
Name the 4 main indicators that can account to the internationalization of a firm and that can be used to examine different companies in terms of their degree of internationalization!
Sales of foreign affiliates
Value added (product) of foreign affiliates
Total assets of foreign affiliates
Employment by foreign affiliates
(Verkäufe ausländischer Tochtergesellschaften
Wertschöpfung (Produkt) der ausländischen Tochtergesellschaften
Gesamtvermögen der ausländischen Tochtergesellschaften
Beschäftigte durch ausländische Tochtergesellschaften)
Internationalization statistics of the 100 largest non-financial MNEs, worldwide and from developing economies
-> Folie 20!!
…
Trade
?(1)? = goods made in the home country and sell it abroad
?(2)? = trade takes place between parts of the same company located in different countries (HOME <–> HOST <–> Host)
(1) Exports
(2) Intra-firm trade
Swiss-Swedish MNE ABB uses its Ludvika site to make many of the electrical modules (like current transformers or voltage transformers) that it sells to customers and/or fits into more complex products that ABB manufactures elsewhere.
This is a form of ?? where each unit is producing part of the final product and the finished goods is assembled in different moment.
Vertical Internationalization
Other Modalities:
?? = Contracts between a firm in the home country and host country enterprises/institutions
contractual forms
Other Modalities:
Certain degree of externalization of activities (i.e. R&D, production, marketing, IT etc.) to partner external to the firm
-> it’s the ?? form of network
first
Other Modalities
Equity involvement is not mandatory if…?
…there is a substantial investment (it’s called ‘ownership control’)
Equity involvement is not mandatory. Non-equity agreements are the norm.
True/False?
True
Bargain power can change according to?
the actors involved
?? = The act of transferring some of a company’s recurring interval activities and decision rights to outside providers, as set in a contract.
Outsourcing
(Deutsch: Die vertraglich festgelegte Übertragung eines Teils der wiederkehrenden Intervallaktivitäten und Entscheidungsrechte eines Unternehmens auf externe Anbieter.)
Outsourcing is part of what kind of decision?
make or buy decision
A firm can outsource in home or abroad.
True/False?
True
A firm can outsource in home or abroad.
If abroad, it is called ?(1)? or ?(2)?.
(1) “international outsourcing”
(2) “international subcontracting”
Outsourcing
Remember: a firm is not an island (!)
Rules and norms apply in different way, in different countries.
It can cause some problems
…
International Production can occur through? (2)
Outsourcing
Offshoring
International Production
Outsourcing can happen in which ways? (2)
Outsourcing of an entire function of the firm
Outsourcing through an Collaborative Partnership
Offshoring can happen through? (2)
a branch
a subsidiary
What is most of the time the requirement for outsourcing an entire function of the firm? (quasi)
That the firm is big enough to control the supplier(s).
Offshoring
A branch has more autonomy than a subsidiary because it has different departments like R&D, operations, marketing and so on (Hab da auch andere Meinungen schon zu gelesen, kommt vermutlich darauf an was genau am Ende gemeint ist)
…
?? = contractual agreements to collaborate on specific projects or on a variety of them often for long or indeterminate periods
Collaborative partnership (see p.220-221 Dicken)
(Deutsch: = vertragliche Vereinbarungen über die Zusammenarbeit an bestimmten oder verschiedenen Projekten, oft für lange oder unbestimmte Zeit)
Link zu Uber&Spotify example
-> https://www.bbc.com/news/technology-30080974
…
Name three examples (companies) that use franchising!
McDonald
Starbucks
Carrefour
?(1)? is a contractual entry mode in which one company (the ?(2)?) supplies another (the ?(3)?) with intangible property and other assistance over an extended period.
(1) Franchising
(2) franchiser
(3) franchisee
https://www.researchgate.net/figure/Luxotticas-portfolio-of-brand-licenses-of-eyewear-products7_fig2_273764681
-> sehr lange Studie zum Thema licensing (lesen falls Zeit)
…
?(1)? is a contractual entry mode in which a company that owns intangible property (the ?(2)?) grants another firm (the ?(3)?) the right to use that property for a specified period of time.
(1) Licensing
(2) licensor
(3) licensee
Commonly licensed intangible property includes: ?? (5)
patents
copyrights
special formulas and designs
trademarks
brand names
Licensing, example:
- Luxottica for fashion brand name
- HM with Karl Lagerfeld in 2018
- Hitachi, of Japan, licensed technology to be used in the recycling of plastics from Duales System Deutschland of Germany
…
Trade vs. FDI
Name 3 advantages of Trade only (Import/Export)!
easier to manage, requires less knowledge
engages less capital, thus lower risk
keeps balance sheet smaller and more flexible, thus more responsive to changing economic situation
Trade vs. FDI
Name 3 disadvantages of Trade only (Import/Export)!
Firm develops less overseas experience
The value added generated during the good’s transformation will have to be shared with other companies
Depends on partners; risk of opportunistic behaviour
Trade vs. FDI
Name 3 disadvantages of FDIs!
Harder to manage
Harder to finance
Greater risk of failure
Trade vs. FDI
Name 3 advantages of FDIs!
control/confidentiality
higher profit potential / visibility
Increses knowledge of/comfort with foreign market
Trade vs. FDI
-> Tabellenüberblick (Folie31)
…
Mode of Entry in foreign market
Firm remain domestic from but buys foreign supplier/sells to foreign buyer.
What mode of entry?
Import/Export from home
Mode of Entry in foreign market
Firm gives permission to an agent to manufacture/retail abroad on its behalf
What mode of entry?
Licensing/franchising
Mode of Entry in foreign market
Firm makes equity investment abroad together with partner
What mode of entry?
Joint venture (form of FDI)
Mode of Entry in foreign market
Firm makes standalone equity investment abroad.
What mode of entry?
Wholly owned subsidiary (FDI)
Mode of Entry in foreign market
Order the different entry modes in foreign markets from low to high regarding their Scale of Commitment.
Import/export from home
Joint Venture (form of FDI)
Wholly owned subsidiary (FDI)
Licensing/franchising
- Import/export from home
- Licensing/franchising
- Joint Venture (form of FDI)
- Wholly owned subsidiary (FDI)
(siehe auch Folie32)
See Appendix A Chapter 2 (Ietto-Gillies)
?(1)? = +50% of the firm ownership
?(2)? = <10% of the firm ownership and <50% shareholding power vote
?(3)? = wholly or jointly owned unincorporated enterprise
(1) Subsidiary
(2) Associate
(3) Branch
Branch:
A permanent establishment or office of the ?(1)?
Unicorporated partnership or joint venture
Land, structures and/or immovable equipment and objects directly owned by ?(2)?
mobile equipment for at least ?(3)? year (i.e. ships, aircrafts, oil-drilling)
(1) foreign investor
(2) foreign resident
(3) one
Indirect cross-border flows
Each link is a pipeline for flows of ?(1)? and ?(2)?
(1) people
(2) knowledge
Indirect cross-border flows
What flows have MNEs to manage between and within their firm? (4)
flow of people
flow of knowledge
flow of products
flow of finance
?? = this strategy allows firms to concentrate their capabilities and resources in their respective core businessses, giving up those activities where firms do not have any competitive advantage.
Outsourcing (p. 209-215 Dicken, GS)
There is commercial and industrial outsourcing.
Name 3 characteristics of industrial outsourcing!
Specialty
cost-saving
complementary
Outsourcing as a multi-tired process
-> Folie36
…
Major features of the outsourcing relationship:
Name benefits (3) and costs/risks (1) to principal firm!
benefits
Avoids need to invest in new production capacity
Flexible: easier to change suppliers
Externalizes some risks, while retaining some control
costs/risks:
Possible problems of controlling how suppliers work (including labour issues)
Major features of the outsourcing relationship:
Types of relationship between principal firm and supplier:
Time period may be: ?? (3)
long term
/
short term
/
single batch
Major features of the outsourcing relationship:
Types of relationship between principal firm and supplier:
Principal may provide some or all materials or components
Principal may provide detailed design or specification
Principal may provide finance, e.g. loan capital
Principal may provide machinery and equipment
Principal may provide general and/or technical assistance and advice
Principal is invariably responsible for all marketing arrrangements
…
Major features of the outsourcing relationship:
Name benefits (3) and costs/risks (2) to supplier!
benefits:
Access to markets
Continuity of orders
Access to technical knowledge, possible injection of finance
costs:
Risk of being ‘expendable’ if principal firm changes its priorities
Possible over-dependence on one or a small number of customers
Reorganization and Restructuring (p.223-229, Dicken, GS) -> nachlesen
A firm can change his internationalization strategy after a while (for example when something happens on the global level).
Nenne externe Bedingungen (external condition), die eine Reorganization or Restructuring erforderlich machen können. (5)
declining demand
increased competition in domestic or foreign market
changes in cost or availability of production inputs
militancy and resistance of labour forces
pressure of national governements
Reorganization and Restructuring (p.223-229, Dicken, GS) -> nachlesen
A firm can change his internationalization strategy after a while (for example when something happens on the global level).
Nenne interne Bedingungen (internal condition), die eine Reorganization or Restructuring erforderlich machen können. (2)
Object of failure
production costs too high
Reorganization, restructuring and geographical change
In situ adjustment
Locational shifts
–> FOLIE 39!!
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Folie 40+41 Quiz (!!!)
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