Chapter 15 - Entry strategic alliances Flashcards
International firms must consider
- The decision of which foreign markets to enter, when to enter them, and on what scale.
- The choice of entry mode.
- The role of strategic alliances.
Modes for serving foreign markets
- Exporting
- Licensing
- Franchising
- Joint-ventures
- Setting up a new wholly owned subsidiary in a host country
- Acquiring an established enterprise
Strategic alliance
Cooperative agreements between potential or actual competitors.
Done in order to be predatory
Greater market access
Strategic alliances include
– Cross-shareholding deals. – Licensing arrangements. – Formal joint ventures. – Informal cooperative arrangements. → How does this differentiate from a merger and acquisition? Merger: Combine with another company Acquisition: Buy
which foreign market based on
- size
- present and likely future wealth of consumers
- costs and risks
- value and international business can create in foreign market
benefit-cost-risk trade off
is likely to be most favorable in politically stable developed and developing nations that have free market systems, and where there is not a dramatic upsurge in either inflation rates or private-sector debt.
Basic entry decisions:
which foreign market
timing of entry
scale of entry and category of commitment
Timing of entry
First-mover advantages: Preempt rivals and capture demand by establishing a strong brand name and customer satisfaction
- > The cost advantage may enable the early entrant to cut prices below that of later entrants, thereby driving them out of the market
- > Pioneering costs: Costs that an early entrant has to bear that a later entrant can avoid
Scale of entry
Entering a market on a large scale involves the commitment of significant resources and implies rapid entry
-> Large scale entrant is more likely than the small-scale entrant to be able to capture first-mover advantage associated with demand preemption, scale economies and switching costs
Even some large firms prefer: small scale and then build slowly as they become more familiar with the market
-> Small-scale entry allows a firm to learn about a foreign market while limiting the firm’s exposure to that market
Entry modes
- exporting
- Turnkey project
- Licensing
- Franchising
- Joint ventures
- Wholly owned subsidiaries
Exporting pros
Avoids costs of establishing manufacturing operations in the host country
experience curve and location economies
Exporting cons
May not be appropriate if lower cost locations for manufacturing the product can be found abroad
High transport costs
Tariff barriers
Turnkey projects
->contractor agrees to handle every detail of the project for a client, including the training of operating personnel. At completion of the project, the foreign client is handed the “key” to a plant that is ready for full term operation
-> exporting process technology to other countries
Common in chemical, pharmaceutical, petroleum-refining and metal-refining industries
Turnkey pros
Preserve know-how valuable asset
Can earn great economic returns
Strategy is particularly useful when FDI is limited to host-government regulations
less risky than conventional FDI
Turnkey cons
The firm that enters into a turnkey deal will have no long term interest in the foreign country
One way around this is to take a minority equity interest in the operation
May inadvertently create a competitor
Selling a technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors
Licensing agreement
An arrangement whereby a licensor grants the right to intangible property to another entity (the licensee) in exchange for royalty
