Entry Modes Flashcards
What are the motives for internationalising?
- Seeking new markets
- Seeking new resources and capabilities
- Exploiting differences (arbitrage)
- Efficiency seeking
- Learning new competencies
- Imitate competitors
Why might an MNC be seeking a new market?
- Large customer base
- Enter a different market
- Follow a customer
- Follow globalised customers
How might an MNC exploit differences (arbitrage)?
Differences in factors of production of different countries e.g Silicon Valley - spill overs and sharing of knowledge, take advantage of different resources
What is an example of an MNC learning new competencies?
Starbucks has established a presence in China through a strategic partnership with Alibaba enabling voice ordering and fast delivery of coffee
What is FDI and what are the FDI entry modes?
When a firm invests in foreign assets with the objective of taking full/partial control over them
- M&As
- Greenfield investments
- Joint ventures
What are examples of non FDI entry modes?
Exporting and contractual entry modes
- Turnkey contracts
- Licensing
- Franchising
What is a turnkey contract?
Contractor handles every detail of the project for the foreign client and hands over the operation to the client at the project end
What is licensing?
A licensor grants the rights to intangible property to the licensee for the specified time period, which enables the licensee to make/sell in the host country, a similar product to that of the licensor. Licensor gets royalty fee.
What is franchising?
Franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agrees to abide by strict rules as to how to do business
What are strategic alliances?
Cooperative agreements between firms.
- Joint ventures: a firm that is jointly owned by two or more independent firms e.g Google and NASA - google earth
- A new entity where two companies shave equal staked in the company
E.g Tesco and Carrefour
E.g Spotify and Uber
What is a wholly-owned entry mode via Greenfield investment?
- Creating an activity in a country from scratch
- Full ownership of the investment
What is a wholly-owned entry mode via mergers or acquisitions?
- Acquisition - one firm takes ownership of existing firms
- Merger - two firms are consolidated as one firm
How do the entry modes relate to resource commitment and control?
Wholly owned subsidiary and Joint venture = high resource and high control (high risk)
Franchising and exporting and licensing low resource and low control (low risk)
What is Dunning’s eclectic paradigm - OLI?
Ownership, location and internationalisation framework - 3 tiered evaluation framework that companies can follow when attempting to determine if it is beneficial to pursue a foreign direct investment
What are the ownership advantages from Dunning’s eclectic paradigm - OLI?advantages from
Branding, copyright, trademark or patent rights and the use of management of internally available skills. Intangible factors that provide competitive advantage.
What are the location advantages from Dunning’s eclectic paradigm - OLI?
Availability and cost of resources when functioning in one location compared to another. Can refer to natural or created resources, generally immobile, require a a partnership or foreign investor in that location to be utilized to full advantage
What are the internationalisation advantages from Dunning’s eclectic paradigm - OLI?
Whether it is better to produce a product in house vs contracting to a 3rd party. Outsourcing is only good when they can do the job at a lower cost. Although, benefits of local knowledge from local producers.
What are the advantages of mergers and acquisitions?
- Geographically diversified
- Faster to merge
- Faster to acquire EOS
- Can make decisions faster once you are in control
What are the disadvantages of Mergers and Acquisitions?
- Price involved buying another company
- Potential diseconomies of scale: hard to communicate across such a vast organisation
- Cultural clash between two companies: difficult to merge
- May be limited synergistic benefits
What are the advantages of Greenfield sites?
- Creates jobs in host country: potential for subsidies and grants
- Full control over price setting and strategy
- No restrictions: ability to innovate
- Focus on the heritage of the product and create a niche in the new market/country
What are the disadvantages of Greenfield sites?
- Very risky - high investment cost, may have little local knowledge
- Subject to trade barriers: local content requirements etc
- High fixed costs
- Merging offers greater local knowledge and connections with contractors
- Vulnerable to political risk: significant commitment
What are the advantages of exporting?
- Local ‘made in Germany’ creates a desire from consumers in a foreign country
- Low commitment level but still able to significantly expand market
- Increased production = increased scope for EOS
What are the disadvantages of exporting?
- Cost of transport
- Barriers of trade like tariffs, export regulations, import quotas
- Can lose focus on home market and existing customers
What are the advantages of licensing?
- Reduce cost of shipping or transport, minimal investment from the perspective of licensor because the costs go onto the licensee
- Licensing is only for a specific period so it is contractual relationship, you can terminate the contract if you are unhappy with the deal
What are the disadvantages of licensing?
- Giving the name of your brand to a third party and there are risks that they could ruin the brand name
- Risk of theft - smaller players do not have full control so the third player could steal the intellectual property and not have much control over it
What are the advantages of joint ventures?
- Risk reduction as you have information on abiding by government as you share the investment
- Shared risk
What are the disadvantages of joint ventures?
- Risk of partner stealing ideas, greater risk than licensing as the sharer can set up own company
- May be cultural clashes as there is shared control
- JV partners do not always see the same future, can divorce unless there is a legal obligation to remain
What are the three factors that affect the choice of international entry mode?
- Strategic variables: extent of national differences, extent of EOS, global concentration
- Environmental variables: country risk, location familiarity, demand conditions, volatility of competition
- Transaction variables: firm-specific know-how, tacit nature of know-how
How do the strategic variables favour low/high control entry modes?
Localisation favours low control - adapting to local market
Standardisation favours high control to get EOS and control of supply chains
Global strategic coordination favours high control to react quickly to the market
Which environmental variables favour low resource commitment entry modes?
- High country risk - can leave if need to
- Greater perceived distance - culturally , more unfamiliarity
- Uncertain demand - adjust resources to demand
- Volatile competition - respond when it is more stable
How do transaction specific variables favour low/high control entry modes?
- High control when revenue is due to MNC’s know how
- Tacit component of know-how = high control
How does Uppsala recommend firms should enter?
- Start with small scale investments in geographically similar countries
- Increase scale as you gain familiarity
- Learn how to manage risk internationally
- Start with low resource entry mode and invest more as you gain more skills
E.G IKEA
How does Born Global/The Rapid Internationalisation Process recommend firms should enter?
- Use entry modes in multiple environments
- Use the internet to internationalise quickly and learn
- Simultaneous expansion to multiple countries
- Uber
How do firms decide on the timing of entry?
Benefit of capturing customer base as a first mover.
Late movers find it harder to establish valuable relationships and EOS but benefit from hindsight.
