Ch.10 Entry Modes Flashcards
What are the four distances in the CAGE framework?
- Cultural
- Economic
- Geographic
- Administrative/Political
Describe cultural distance.
- Languages
- Values and power distance relationships
- Ethics
- Trust within a company’s ranks and within external stakeholders
Describe administrative/political distance?
- Familiarity with political and legal systems decreases administrative burdens and reduces likelihood of mistakes/liability
- Access to some markets may depend on administrative membership (ex. free trade groups, sanctions)
- Increase distance raises complexity in human resources, financial reporting, regulatory environment, etc
Describe geographic distance.
- Distance
- Time Zones
- Travel time
- Affects transportation, communication, and coordination costs
- Natural resources are present only in some locations
- Talent is clustered in some locations
- Transportation costs are not uniform even within a country
- Communication and coordination costs rise with global operations
Describe economic distance.
- Economic development level
- Consumption level
- Relative size of economy
- There are measured using GDP, GDP per capita, GDP growth, Human Development Index
- Purchasing power
- Wage levels
- Market size
- Market attractiveness
What are the two inherent disadvantages a multinational firm might face?
- Liability of foreignness
- Domestic firms have lower distance and superior knowledge of the local market
Do empirical studies show a link between gradual international expansion and increased profitability?
No, they do not
Name some advantages of MNC’s?
- Superior technical know-how
- Ability to leverage existing reputation, brand image, goodwill
- Larger size leads to scale and slope economies
- Managerial expertise and experience
- Ability to locate activities elsewhere
- Information advantages
- Risk diversification across countries
Describe scale & scope economies.
- Increased bargaining power
- Scale helps cover high fixed costs in capital intensive industries
- Lower input costs due to scale and scope
- Logistics, promotion, and distribution scale economies
- Lower financing costs and lower credit risk
Name some potential disadvantages of MNC’s?
- Foreign exchange risk
- Host country regulations
- Different legal systems
- Political risks (Ex. Nationalization, War)
- Operational difficulties (Ex. Adaption to local business practices)
- Cultural differences
- Coordination costs
Name the ways in which small/medium firms learn about internationalization.
- Joining a domestic trade association
- Joining a regional trade association
- Affiliation with multinational firm as part of international supply chain, also called indirect exporting because the large company exports the smaller company’s products, smaller company learns about
Name all entry modes and whether they are equity or non-equity.
- Exporting (non-equity)
- Licensing (non-equity)
- Franchising (non-equity)
- Management contract (non-equity)
- Turnkey operation (non-equity)
- Strategic alliances (non-equity, but sometimes lead to acquisition)
- Equity alliance (Equity)
- Joint ventures (Equity)
- Wholly-owned subsidiaries (Equity)
- Note all equity are also Foreign Direct Investment
True or false, the more control you have, the more commitment you have made?
True
Name the six reasons why exporting might not be feasible.
- When production abroad is cheaper than at home
- When transportation costs to move goods or services internationally are too expensive
- When companies lack domestic capacity
- When products and services need to be altered substantially to gain sufficient consumer demand abroad
- When governments inhibit the import of foreign products
- When buyers prefer products originating from a particular country
What are the two non-collaborative foreign equity arrangements?
- Acquisition of existing facilities
- Greenfield Investment-Building New Facilities
