Lecture 2b: Modes of Entry and Internalization Flashcards
What is the Pre-WW2 pattern of internalization?
firms involved in multi-stage production processes faced uncertainty on quantity and price of commodity inputs so internalized ownership of value chain:
vertical integration
What is the Post-WW2 pattern of internalization?
firms with brands, marketing skills as intellectual property (IP) faced buyer uncertainty and risk of IP leaks if licensing, hence internalized application of brand and marketing know-how across multiple products leading to international business based on diversification and product/service scope
What is the Post-2000 pattern of internalization?
– firms with network platforms and network effects facing buyer
uncertainty, uncertain revenue streams and risk of IP leaks internalize ownership &
application of network platform across multiple markets: Facebook, Uber
what are the two theories of the internationalization process?
learning/stages model vs. born global
describe the “learning model” or stages theory of internationalization?
Johanson & Vahne, 1977, 1990
- gradual experiential learning or developing capabilities
1. Initially no regular exports
2. Exports via third parties (agents or distributors)
3. Establishment of own foreign sales affiliates (bricks & mortar on sales side)
4. Establishment of foreign production facilities
Describe the born global idea of internationalization
McKinsey & Co., 1993; McDougall, Shane, Oviatt 1994; Madsen & Servais 1997
**why/how do some new ventures leapfrog
traditional stages and quickly become international?
- Entrepreneurial vision
- Mobile knowledge-intensive resources
- Network platform (Facebook, Spotify, SoundCloud)
How do small and medium size firms acquire/learn capabilities for internationalization?
• Learn capabilities through following – Domestic trade association (social capital and domestic cluster in Chile agricultural processing) (Perez-Aleman, 2005) – Regional trade association before going international (Toulan & Guillen 1996) – Affiliation with multinational firm as part of international supply chain (Sobrero & Toulan 2000) • Indirect internationalization (indirect exporting): Sell components to larger local firm which is international, thereby becoming part of international supply chain and learning global quality standards (Toulan & Guillen 1997) • Local firms become the vehicle for multinational corporations trying to market to the “bottom of the pyramid” (Prahalad & Hart 2002)
What are the non-equity entry modes? (7)
- Exporting
- Licensing
- Franchising
- Contract manufacturing (outbound)
- Management contract
- Turnkey operation
- Strategic alliances (sometimes lead to acquisition)
What are the equity entry modes?
• Equity alliance (minority stake in alliance partner)
• Joint ventures
• Mergers (not covered as entry mode in textbook)*
• Wholly-owned subsidiaries (FDI)
– Acquisition vs. Greenfield
What are the decision factors for modes of entry?
• ownership advantages • location advantages • internationalization advantages • other factors 1. need for control 2. resource availability 3. global strategy
Choice among entry modes: If firm has low experience & or low resources, then choose
– Exporting – Leasing – Licensing, management contract, turnkey – Contract manufacturing (downstream) – Strategic alliance
Choice among entry modes: If learning goal
– Strategic alliance
– Equity alliance
– Joint venture
– Management contract (host is the learner), turnkey
– Licensing (opportunity to reverse-engineer)
Choice among entry modes: If firm has distinctive competencies, then
– If technological competency
• Wholly-owned subsidiary is preferred over licensing, strategic alliances and joint ventures
– If management competency
• Franchising, licensing, management contract, joint ventures, equity alliance, wholly-owned subsidiary
Choice among entry modes: If firm needs control (to protect intellectual property [IP], reputation, or integrated
global strategy/coordination) then
Wholly-owned subsidiary
Choice among entry modes:If goal increased market
power and/or scale/scope economies, then perhaps
• Merger
What are the two overarching modes of direct investment in a foreign country?
– Acquisition of existing facilities
– Greenfield investment – building new facilities
Why do firms want control? (three main reasons)
– Internalization
– Appropriability
– Freedom to pursue a homogeneous global strategy rather than country by country strategy
describe internalization as reason why firms want control
- Choose the lower cost option between conducting operations under internal ownership versus contracting to another party
- It may be cheaper to handle operations internally
describe appropriability as a reason why firms want control
• Capacity of firm to retain for itself the added value it creates.
– Higher appropriability if 100% ownership
– Risk of lower appropriability due to intellectual property leaks in alliances, joint ventures and outsourcing activity to another firm. Hence higher risk of having a competitive position undermined
advantages and disadvantages of exporting
Advantages:
- relatively low financial exposure
- permit gradual market entry
- acquire knowledge about local market
- avoid restrictions on foreign investment
Disadvantages:
- vulnerability to tariffs and nontariff barriers
- logistical complexities
- potential conflicts with distributors
advantages and disadvantages of licensing
Advantages:
- low financial risks
- low-cost way to assess market potential
- avoid tariffs, nontariff barriers, restrictions on foreign investment
- licensee provides knowledge of local markets
Disadvantages:
- limits market opportunities and profits
- potential conflicts with licensee
- possibility of creating future competitor
advantages and disadvantages of franchising
advantages:
- low financial risk
- low-cost way to assess market potential
- avoid tariffs, nontariff barriers, restrictions on foreign investment
- maintain more control than with licensing
- franchisee provides knowledge of local market
Disadvantages:
- limits market opportunities and profits
- dependence on franchisee
- may be creating future competitor
advantages and disadvantages of contact manufacturing
Advantages:
- low financial risk
- minimize resources devoted to manufacturing
- focus firm’s resources on other elements of the value chain
Disadvantages:
- reduced control (may affect quality, delivery schedules, etc.)
- reduced learning potential
- potential public relations problems–may need to monitor working conditions,etc
advantages and disadvantages of management contracts
Advantages:
- focus firm’s resources on its area of expertise
- minimal financial exposure
Disadvantages:
- potential returns limited by contract
- may unintentionally transfer proprietary knowledge and techniques to contracted
advantages and disadvantages of turnkey projects
Advantages:
- focus firm’s resources on its area of expertise
- avoid all long-term operational risks
Disadvantages:
- financial risks (cost overruns, etc.)
- construction risks (delays, problems with suppliers, etc.
advantages and disadvantages of foreign direct investment
Advantages:
- high profit potential
- maintain control over operations
- acquire knowledge of local market
- avoid tariffs and nontariff barriers
Disadvantages:
- high financial and managerial investments
- higher exposure to political risk
- vulnerability to restrictions on foreign investment
def. strategic alliance
business arrangement in which two or more firms choose to cooperate for their mutual benefit. Examples
international airline alliances: Oneworld, Star Alliance, Sky Team
def. joint venture
arrangement in which two or more firms set up another entity, a jointly-owned subsidiary firm, for a common
purpose. Maersk-IBM Blockchain JV, , Swatch- Mercedes Smart Car
def. equity alliance
business arrangement in which a cooperating company takes an equity position (almost always a minority position, but usually sufficient to get a board of directors seat) in the company with which it has a collaborative arrangement.
Sometimes used to
solidify a supplier-buyer relationship; less often used to solidify a
strategic alliance as in Nissan – Renault equity alliance, initially
Renault 37% stake in Nissan & Nissan 15% stake in Renault, later
expanded to include Mitsubishi
advantages and disadvantages of joint ventures
• Advantages – Benefit from partner’s knowledge. – Shared costs/risks with partner. – Reduced political risk. • Disadvantages – Risk giving control of technology to partner. – May not realize experience curve or location economies. – Shared ownership & divergent goals can lead to conflict.
def. exporting
the sale of goods or services produced by a company based in one country to customers that reside in a different country
def. licensing agreements
contracts whereby firms allow others to use some assets, such as trademarks, patents, copyrights, or expertise
def. franchising
a contract in which a company assists another on a continuous basis and allows use of its trademark
def. management contract
arrangements in which a company provides personnel to perform management functions for another organization
def. turnkey operations
construction projects performed under contract and transferred to owners when they’re operational
def. wholly-owned FDI
a foreign direct investment that is 100% owned by the company
def. acquisition
acquiring pre-existing assets abroad
def. Greenfield
start-up international investment; ie start from scratch
