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SGMT 2200 > Chapter 10 Foreign Market Entry& 12 Alliances and Acquisitions Terms > Flashcards

Chapter 10 Foreign Market Entry& 12 Alliances and Acquisitions Terms Flashcards

1
Q

Overall Liability of Foreignness comes from 3 groups

A
  1. Liability of Non-Native Status
  2. Liability of Newness
  3. Liability of emergingness
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2
Q

Institutional void:

A

Institutional conditions of a country lacking market-supporting infrastructure

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3
Q

Debate 1: Liability versus Asset of Foreignness

A

Country-of-origin effect: The positive or negative perception of firms and products from a certain country

A contrasting view to liability of foreignness argues that under certain circumstances, being foreign can be an asset (comparative advantage)

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4
Q

Country-of-origin effect:

A

The positive or negative perception of firms and products from a certain country

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5
Q

Institutions, Resources, and Foreign Market Entries

A

IBV:
1. Regulatory Risks
2. Trade and investment barriers
3. Differences in cultures, norms, and values

RBV
1. Value
2. Rarity
3. Imitability
4.Organization

Foreign Market Entries: (IBV & RBV combine into this to shape entry)
1. Where
2. When
3. How

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6
Q

Core Decisions in Foreign Market Entries

A

Where/Why: location advantages & strategic motivations; distance
When: First-mover vs. late-mover
How: entry / establishment modes

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7
Q

Location-specific advantage:

A

The benefits a firm reaps from the features specific to a place

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8
Q

Matching Strategic Goals with Locations

A

Table 10.1

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9
Q

Strategic Goals: Natural resource seeking

A

Location-Specific Advantages: Possession of natural resources and related transport and communication infrastructure

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10
Q

Strategic Goals: Market seeking

A

Abundance of strong market demand and customers willing to pay

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11
Q

Strategic Goals: Efficiency seeking

A

Economies of scale and abundance of low-cost factors

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12
Q

Strategic Goals: Innovation seeking

A

Abundance of innovative individuals, firms, and universities

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13
Q

Factors for Choosing Foreign Entry Locations

A

Strategic goals
–> Location-specific advantages
Cultural and institutional distances

C. cultural
A. administrative
G. geographical
E. economic

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14
Q

Ghemewat’s CAGE Framework for Assessing Country Differences: Distance between two countries increases with:

A
  1. Cultural Distance: Different languages, ethnicities, religions, social norms, Lack of connective ethnic or social networks
  2. Administrative and Political Distance: Absence of shared political or monetary association, Political hostility, Weak legal and financial institutions
  3. Geographical Distance: Lack of common border, water-way access, adequate transportation or communication links, Physical remoteness
  4. Economic Differences: Different consumer incomes
    Different costs and quality of natural, financial, and human resources, Different information or, knowledge
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15
Q

Ghemewat’s CAGE Framework for Assessing Country Differences: Industries most affected by source of distance

A
  1. Cultural Distance: Industries with high linguistic content
    (TV, publishing) and cultural content (food, wine, music)
  2. Administrative and Political Distance: Industries viewed by government as strategically. important (e.g., energy, defense, telecoms)
  3. Geographical Distance: Products with low value-to-weight (cement), are fragile or perishable (glass, milk), or dependent upon communications (financial services)
  4. Economic Differences: Products whose demand is sensitive to consumer income levels (luxury goods), Labor-intensive products (clothing)
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16
Q

First-mover advantage:

A

Benefits that accrue to firms that enter the market first and that late entrants do not enjoy

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17
Q

Examples of First-mover advantage:

A
  1. Proprietary, technological leadership
  2. Pre-emption of scarce resources
  3. Establishment of entry barriers for late entrants
  4. Avoidance of clash with dominant firms at home
  5. Relationships with key stakeholders such as governments
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18
Q

Late-mover advantage:

A

Benefits that accrue to firms that enter the market later and that early entrants do not enjoy

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19
Q

Examples of Late-mover advantage:

A
  1. Opportunity to free ride on first mover investments
  2. Resolution of technological and market uncertainty
  3. First mover’s difficulty to adapt to market changes
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20
Q

Scale of entry:

A

The amount of resources committed to entering a foreign market

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21
Q

Benefits of Large-Scale Entry

A

A demonstration of strategic commitment to certain markets, which helps assure local customers and suppliers and deters potential entrants

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22
Q

Drawbacks of Large-Scale Entry

A

Limited Strategic flexibility elsewhere

Huge losses if these large-scale “bets” turn out to be wrong

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23
Q

Benefits of Small-Scale Entry

A

Less Costly

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24
Q

Drawbacks of Small-Scale Entry

A

Lack of strong commitment, which may lead to difficulties in building market share and in capturing first-mover advantages

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25
Q

Entry mode:

A

A form of operation that a firm employs to enter foreign markets

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26
Q

Nonequity mode:

A

A mode of entry (exports and contractual agreements) that reflects relatively smaller commitments to overseas markets

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27
Q

Equity mode:

A

A mode of entry (joint ventures and wholly owned subsidiaries) that indicates relatively larger commitments to overseas markets

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28
Q

Types of Contractual Agreements

A
  1. Turnkey project:
  2. Build-operate-transfer (BOT) agreement:
  3. Research-and-development (R&D) contract:
  4. Co-marketing:
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29
Q

Turnkey project:

A

A project in which clients pay contractors to design and construct new facilities and train personnel

30
Q

Build-operate-transfer (BOT) agreement:

A

A nonequity entry mode used to build a longer-term presence by first constructing and then operating a facility for a period of time before transferring operations to a domestic agency or firm

31
Q

Wholly owned subsidiary (WOS)

A

A subsidiary located in a foreign country that is entirely owned by the parent multinational

31
Q

Research-and-development (R&D) contract:

A

An outsourcing agreement in R&D between firms

32
Q

Means to set up a WOS (establishment mode)

A

Greenfield operations: Building new factories and offices from scratch

Acquisitions: Acquiring the control of another firm’s operations and management from one firm (target). The target becomes the subsidiary.

32
Q

Co-marketing

A

Efforts among a number of firms to jointly market their products and services

33
Q

Equity Modes

A

Joint venture (JV): A new corporate entity jointly created and owned by two or more parent companies

Wholly owned subsidiary (WOS)
–> A subsidiary located in a foreign country that is entirely owned by the parent multinational

Means to set up a WOS (establishment mode)
–> Greenfield operations: Building new factories and offices from scratch
–> : Acquiring the control of another firm’s operations and management from one firm (target). The target becomes the subsidiary.

33
Q

Joint venture (JV):

A

A new corporate entity jointly created and owned by two or more parent companies

34
Q

Motives for Acquisitions: Synergistic motives (IB Issues & RB Issues)

A

IB: Respond to formal institutional constraints and transitions

RB:
–> Leverage superior managerial capabilities
–> Enhance market power and scale economies
–> Access to complementary resources

35
Q

Hubris:

A

Overconfidence in one’s capabilities

35
Q

Motives for Acquisitions: Hubristic motives (IB Issues & RB Issues)

A

IB: Herd behavior—following norms and chasing fads of M&As

RB: Managers’ overconfidence in their capabilities

35
Q

Motives for Acquisitions: Managerial motives (IB Issues & RB Issues)

A

IB: Self-interested actions such as empire-building guided by informal norms and cognitions

36
Q

Strategic investment:

A

One firm investing in another as a strategic investor

36
Q

Equity-based alliance:

A

Alliance based on ownership or financial interest between the firms

–> Strategic investment: One firm investing in another as a strategic investor
–> Cross-shareholding: Both firms investing in each other to become cross-shareholders

36
Q

Contractual (nonequity-based) alliance:

A

Alliance between firms that is based on contracts and does not involve the sharing of ownership

–> Includes co-marketing, research and development (R&D) contracts, turnkey projects, strategic suppliers, strategic distributors, and licensing/franchising

36
Q

Managerial motive

A

Managers’ desire for power, prestige, and money, which may lead to decisions that do not benefit the firm overall in the long run

36
Q

Cross-shareholding:

A

Both firms investing in each other to become cross-shareholders

37
Q

Strategic alliance:

A

A voluntary agreement of cooperation between firms

38
Q

Market Transactions (Contractual (nonequity-based) alliances) towards Acquisitions (Equity-based alliances)

A
  1. co-marketing
  2. R&D contracts
  3. turnkey projects
  4. strategic suppliers
  5. strategic distributors
  6. licensing/franchising
  7. Strategic investment
  8. Cross-shareholding:
  9. Joint Ventures
39
Q
  1. Nonequity modes: Exports- Direct Exports (Advantages and Disadvantages)
A

Advantages:
-> Economies of scale in production concentrated in home country
-> Better control over distribution

Disadvantages:
->High transportation costs for bulky products
->Marketing distance from customers
-> Trade barriers and protectionism

40
Q
  1. Nonequity modes: Exports - Indirect Exports (Advantages and Disadvantages)
A

Advantages:
-> Focus on production
-> Avoid export processes

Disadvantages:
->Less control over distribution
-> Inability to learn how to compete overseas

41
Q
  1. Nonequity modes: Contractual Agreements - Licensing/Franchising (Advantages and Disadvantages)
A

Advantages:
->Low development costs
->Low risk in overseas expansion

Disadvantages:
->Little control over technology and marketing
->May create competitors
->Inability to engage in global coordination

42
Q
  1. Nonequity modes: Contractual Agreements - Turnkey projects (Advantages and Disadvantages)
A

Advantages:
->Ability to earn returns from process technology in countries where FDI is restricted

Disadvantages:
->May create efficient competitors
->Lack of long-term presence

43
Q
  1. Nonequity modes: Contractual Agreements - R&D contracts (Advantages and Disadvantages)
A

Advantages:
->Ability to tap into the best locations for certain innovations at low costs

Disadvantages:
->Difficult to negotiate and enforce contracts
->May nurture innovative competitors
->May lose core innovation capabilities

44
Q
  1. Nonequity modes: Contractual Agreements - Co-marketing (Advantages and Disadvantages)
A

Advantages:
->Ability to reach more customers

Disadvantages:
->Limited coordination

45
Q
  1. Equity modes: Partially owned subsidiaries (Joint Venture) (Advantages and Disadvantages)
A

Advantages:
->Sharing costs, risks, and profits
->Access to partners’ assets
->Politically acceptable

Disadvantages:
–> Divergent goals and interest of partners
–> LImited equity and operational control
–> Difficult to coordinate globally

46
Q
  1. Equity modes: Wholly owned subsidiaries- Greenfield operations - (Advantages and Disadvantages)
A

Advantages:
->Complete equity and operational control
->Protection of know-how
->Ability to coordinate globally

Disadvantages:
->Potential political problems and risks
->High development costs
->Add new capacity to industry
-> Slow entry speed (relative to acquisitions)

47
Q
  1. Equity modes: Wholly owned subsidiaries- Acquisitions - (Advantages and Disadvantages)
A

Advantages:
->Same as Greenfield (above)
->Do not add new capacity
->Fast entry speed

Disadvantages:
->Same as Greenfield (above), except adding new capacity and slow speed
->Post-acquisition integration problems

48
Q

Equity-Based versus Non-Equity-Based Alliances

A

Driving Forces

49
Q

Driving Force: Nature of shared resources and capabilities (degree of tacitness)

A

Equity-Based Alliances: = High

Nonequity-Based Alliances: = Low

50
Q

Driving Force: Importance of direct organizational monitoring and control

A

Equity-Based Alliances: = High

Nonequity-Based Alliances: = Low

51
Q

Driving Force: Potential as real options

A

Equity-Based Alliances: = High (for possible upgrading to M&As)

Nonequity-Based Alliances: = High (for possible upgrading to equity-based relationships)

52
Q

Driving Force: Influence of formal institutions

A

Equity-Based Alliances: = High (when required or encouraged by
regulations)

Nonequity-Based Alliances: = High (when required or encouraged by regulations)

53
Q

Learning by doing:

A

A way of learning, not by reading books but by engaging in hands-on activities

54
Q

IBV and RBV combine to form _ __and ___

A

Alliances and Acquisitions

55
Q

IBV:

A

Formal Institutions (Antitrust and entry mode concerns)

Informal Institutions (normative and cognitive pillars)

56
Q

RBV:

A

Value
Rarity
Imitability
Organization

57
Q

FORMAL INSTITUTIONS

A

Antitrust authorities are more likely to approve alliances than they are acquisitions.

Many countries ban acquisitions to establish wholly owned subsidiaries (W O S), thereby leaving some sort of alliances with local firms to be the only entry choice for foreign direct investment (F D I).

58
Q

INFORMAL INSTITUTIONS

A

Due diligence: Investigation prior to signing contracts

59
Q

Relational (collaborative) capability:

A

Ability to manage interfirm relationships

–> Alliances without trust and understanding between partners have a hard time imitating each other’s resources and capabilities.

> Some successful alliance relationships are organized in a way that makes it difficult to replicate.
-> Firms in unsuccessful alliances find it challenging, if not impossible, to effectively organize and manage their interfirm relationships.

60
Q

Acquisition premium:

A

The difference between the acquisition price and the market value of target firms

->For acquisitions to add value, one or all of the firms involved must have rare and unique skills that enhance the overall strategy.
-> Firms that excel in integration possess hard-to-imitate capabilities that are advantages in acquisitions.

61
Q

Strategic fit:

A

The effective matching of complementary strategic capabilities

62
Q

Organizational fit:

A

The similarity in cultures, systems, and structures

63
Q

Implications for Action - MGMT Savy

A
  1. Understand the rules of the game - both formal and informal - governing competition in foreign markets
  2. Develop overwhelming resources and capabilities to offset the liability of foreignness.
  3. Match efforts in market entry and geographic diversification with strategic goals.

SGMT 2200 (10 decks)

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