Chapter 12 Flashcards
Foreign subsidiary:
An operation abroad set up by foreign direct investment
Entry strategy:
A plan that specifies the objectives of an entry and how ti achieve them
Natural resource-seeking FDI:
Investor’s’ quest to pursue natural resources in certain locations
Market-seeking FDI:
Investors’ quest to go after countries that offer string demand for their
products and services
=> They expand internationally to capture new customers and build market presence before competitors do => prioritise early entry
Efficiency-enhancing FDI:
Investors’ quest to single out the most efficient locations for each
value chain activity
Capability-enhancing FDI:
Investors’ quest for new ideas and technologies to upgrade their own
technological and managerial capabilities
Location-specific advantages:
Advantages that can be exploited by those present at a location
Global cities:
Cities that are globally connected, culturally diverse, and provide high-level services like finance, law, and consulting — acting as key hubs in the world economy
Non-equity modes:
A mode of entry that does not involve owning equity in a local firm
Equity modes:
A mode of entry (JV that involves taking full or partial) equity ownership in a local
firm
Wholly owned subsidiary (WOS):
A subsidiary located in a foreign country that is entirely owned
by the parent multinational
Greenfield investment:
Building factories and offices from scratch
Four common objectives for MNEs establishing foreign subsidiaries abroad
1) Natural resource-seeking FDI
2) Market-seeking FDI
3) Efficiency-enhancing FDI
4) Capability-enhancing FDI
Wholly owned Greenfield
Degree of equity control: HIGH
Resource growth: INTERNAL (organic)
- Design operations to fit the parent
- Complete equity and operational control
- Better protection of know-how
- Option to scale operation to needs
Full acquisition
Degree of equity control: HIGH
Resource growth: EXTERNAL (acquisitive)
- Complete equity and operational control
- Better protection of know-how
- Don’t add new capacity
- Faster entry speed
Newly created joint venture
Degree of equity control: LOW
Resource growth: INTERNAL (organic)
- Sharing costs, risks and profits
- Access to partners’ knowledge and assets
- Politically acceptable
Partial acquisition
Degree of equity control: LOW
Resource growth: EXTERNAL (acquisitive)
=> Acquisition of an equity stake in another firm
- Access to operation that the previous owner is reluctant to give up
- Previous owners’ continued commitment
Entry mode depends on:
1) How do we access complementary local resources?
2) How much control will we attain?
Acquisition:
The transfer of the control of operations and management from one firm (target) to
another (acquirer), the former becoming a unit of the latter
When constraint in the institutional environment in the host economy is higher transaction costs due to lack of financial intermediates, then a sensible entry strategy is to…
… avoid full or partial acquisitions of local firms
In countries with weak financial systems or high institutional barriers, it’s risky and costly to acquire local firms.
A sensible strategy would be to minimize exposure, often by choosing joint ventures, partnerships, or even exports instead of acquisitions.
Strategic alliance:
Collaboration between independent firms using equity modes, non-equity
contractual agreements or both
Scale of entry:
The amount of resources committees to foreign market entry
Platform investment:
An investment that provides a small foothold in a market or location
Multiple acquisitions:
A strategy based on acquiring and integrating multiple businesses
Staged acquisitions:
Acquisitions were ownership transfer takes place over stages
When institutional environments are weak, it becomes costly and risky to engage in complex transactions such as acquisitions
Due to (the risk of):
- Information assymetry
- Poor contract enforcement
- Non existence of intermediaries
Brownfield acquisitions:
Acquisition where subsequent investment overlays the acquired
organization
Buys an existing firm or facility, often in another country.
Then invests to upgrade, modernize, or integrate it into its own operations.
So rather than starting from scratch (as in a Greenfield investment), the company builds on what’s already there.
