How firms expand their international reach (topic 15) Flashcards
Exporting
The sale of goods and services produced by a firm based in one country, to consumers living in another country. Includes: goods, services, IP.
Exporting is the most common form of IB, because…
It imposes minimum business risk; requires relatively low resource commitment; improves marketplace flexibility; reduces dependency on the home market; and stabilises seasonal fluctuations.
Firms export to:
Make a profit, improve productivity, and diversify activities.
Indirect exporting
The exporting process is handled by an ‘intermediary’ in the producer’s home country who arranges: documentation, physical movement of goods, distribution channels.
Direct exporting
The producer actively undertakes exports of its own products. Develops international contracts; undertakes market research; arranges transportation/documentation; establishes pricing policies, etc.
The challenges of exporting
Financial risks (getting paid); managing customers; understanding foreign business practices; market barriers; top management commitment/resources; different regulations in destination countries; trade documentation/paperwork; logistics.
Reasons to import
Input optimisers: to optimise, in terms of price and quantity, the inputs fed into a supply chain (cost pressures).
Opportunistic: filling gaps in local markets, importing products only available by foreign suppliers.
Arbitrageurs: to secure the highest quality product and the lowest possible price - exploits differences in price when the same, or similar, commodities are traded in two or more markets.
Diversification and risk management: developing alternative suppliers.
Importers are also likely to be exporters.
Contractual modes
Include: franchising, licensing, sub-contracting, alliances.
Generally regarded as: lower risk; lower commitment; lower cost (than investment modes).
Licensing
A contract involving a transfer of technology or know-how in return for value.
Motives include: the licensee may be better equipped to produce at a lower cost and start more quickly; PLC motives; may provide route to cross-licensing, which could increase potential market size; insufficient sales volumes to justify setting up own manufacturing/sales facilities; host country constraints may favour licensing.
Pitfalls: loss of control; competitors may be created from ex-licensees; products can be over-licensed which dilutes brand value.
Franchising
Suitable in the service/retail industry; seen as a means to achieve rapid and extensive global penetration via the motivation, financial commitment, and market knowledge of local franchisees. Provides access to local resources and knowledge, especially regarding the need for adaptation and innovation.
Product and trade name franchising
Where dealers use the trade name, trademark, and product line.
Direct franchising
Franchisor controls numerous franchisees in a foreign country.
Indirect franchising
Franchisor controls a ‘master franchisee’ or ‘subfranchisor’ in the foreign country, who then controls individual franchisees.
Disadvantages of franchising
Keeping a standardised franchise format and replicating it in culturally different countries is challenging; host country differences/differences make task standardisation difficult; monitoring issues isn’t easy (particularly with an indirect route).
Alliances
An important operation mode for internationalising firms - distinguished from a JV which usually involves equity cooperation, with a new company formed.
Can assist a firm to penetrate markets through linking with another firm; can help an internationalising firm to overcome challenges relating to language, culture, govt. regulations.
International sub-contracting
Occurs when one firm (the principal) interacts with another firm (the supplier) for a given production cycle. The output is generally incorporated into the principal’s final products.
Advantages: being close to foreign customers; low production costs; lower transportation costs; overcoming tariffs/quotas…without making an FDI commitment.
Suitable for: firms with few resources; offers flexibility; common in the fashion industry; can risk leakage of IP.
Investment modes
FDI modes: firms that engage in them are generally seen as more productive. They involve high costs and commitment - bring risk to small/new international firms.
Equity joint venture (EJV)
When two or more firms create a separate legal entity to carry out a productive economic activity in which each partner takes an active role in decision-making.
Three principal objectives: entering new markets, reducing manufacturing costs, developing and diffusing technology.
Resource-driven EJVs
Partner provides: financing, key raw materials, under-used physical plant facilities, technology, access to distribution networks.
Market-driven EJVs
Partner provides: local market access, knowledge, products that broaden/diversify the company’s product line, preferential treatment (by govt. and customers).
Risk-driven EJVs
Partner provides: greater economies of scale, cost-sharing, expedience.
Challenges/risks of EJVs
Choosing the right partner; lack of control and threat of technology leakage; repatriation of profits; cultural and communication problems; decision making; diminishing returns.
Wholly-owned subsidiary (WOS)
Also known as a hierarchical mode. Firms can either set up a completely new operation (on a greenfield site), or merge with/acquire an existing foreign company (M&A).
Acquisition (M&A)
Rapid entry, access to distribution channels, existing customer base, established brand names, existing staff, etc.
Greenfield investment
Establish operations from the ground up, latest technology, avoid problems with existing practices.
WOS are suitable for:
competitive markets/ones with entry barriers; there are high costs attached to failure (particularly with M&A); the success is dependent on a company’s experience.
WOS are suitable for:
competitive markets/ones with entry barriers; there are high costs attached to failure (particularly with M&A); the success is dependent on a company’s experience.
Firm size and experience
Size is an indicator of the resources available to the firm. Small firms = limited resources, so they choose export modes. As the firm grows, it will increasingly use hierarchical modes.
Experience: following the Uppsala model, when firms are less experienced, they are more likely to choose export modes. Accumulated experience leads to hierarchical modes.
Product
The characteristics of the product/service may affect entry mode. E.g. a highly technical product may use a hierarchical mode because in many foreign areas exporting may not be able to handle such work.
Firms may have an impulse to protect their competitive advantages through the use of a hierarchical mode - ownership advantages such as brands, technologies, resources.
Entry with lower control is acceptable for firms with mature products.
Strategy
A firm’s choice may depend on the perceived level of control required to make an impact.
Short/long-term objectives in entering a market.
A firm may wish to keep up with competitors in a ‘follow the leader’ fashion.
Factors influencing the choice of international expansion method
Experience, trust, psychic distance.
Control, trust, risk
Risk factors in the foreign market entry decision
Environmental, economic, political risk; risk of opportunistic behaviour.
Risks can effect: when, why, how, where, what.
Control factors in the foreign market entry decision
Strategic issues (having a say, profit distribution, investment and divestment decisions)
Intellectual property and other firm-specific assets.
Day-to-day decisions (marketing, production, HRM)
Cost factors in the foreign market entry decision
Operational costs: managerial costs, transport and logistics costs, communication costs, bribery and corruption costs.
Knowledge costs: the political system, the economic system, the local market, the legal system, the cultural environment.
Return factors in the foreign market entry decision
Return on foreign market entry = potential revenue.
Internalise transactions
When firms do things themselves, but at greater risk/control.
Externalise transactions
When firms divest or accept the consequences of lower risk/control modes.
The control/risk trade off is balanced by revenue expectations
Revenue-related factors:
When returns on entry are to be maximised; when markets are large and/or growing; when demand is uncertain; when quick returns on entry are required.
Internal administration costs
Cost of gaining knowledge about the local market, production environment, local suppliers, etc.
Also governance costs of exercising cross-border control.
These costs are higher with hierarchical modes.
Transactions costs
E.g. Writing and enforcing contracts, shipping, agency costs, commissions, risk of dissipation of knowledge.
Lower in hierarchical modes.
Market
In a market with a large potential, a sales subsidiary may be justified; small market - agent/indirect export modes.
Use of investment modes in high potential markets; but still invest in low potential markets if this suits strategic objs (future growth/profits etc).
Govt. policies can restrict market entry choice.
The market entry decision
FDI decision is complex and not always therefore determined by rational analytical means.
Consider: govt. restrictions, production costs, existing market experience.
