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International Management > Lecture 3 - Foreign entry strategy > Flashcards

Lecture 3 - Foreign entry strategy Flashcards

1
Q

What is meant by ‘Overcoming the liability of foreignness?’

A

The inherent disadvantage that foreign firms experience in host countries because of their non-native status

  • its not natural for firms such as `Coca-cola to be the leading soft drink in Mexico, the firms must have very rare and powerful firm specific resources and capabilities to drive their success (Resource based view)
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2
Q

What are the two reasons for liability of foreignness?

A
  • Different institutions govern the rules of the game i different countries and foreign firms must learn these quickly in order to survive
  • Although customers supposedly no longer discriminate against lfrogetin firms, reality is they still do where it be formally or informally
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3
Q

What are the two views on how foreign firms crack new markets?

A

1) The institution based view

2) The resource based view

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4
Q

What is the institution based view?

A

This suggest that success and failure of firms are enabled and constrained by institutions.
- Those firms that don’t do their homework and thus remain ignorant of the rules of the game are not likely to emerge as winners

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5
Q

Within the institution based view, what is meant by institutions?

A
  • The rules of the game

- Doing business around the globe requires intimate knowledge about the formal (laws) and informal rules (Values)

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6
Q

What is an institutional framework?

A
  • If you establish a firm in a given country you will work within the institutional framework which is the formal and informal institutions that govern individual and firm behaviour
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7
Q

What is a formal institution?

A

These include laws and regulations
- Some countries such as China have laws that treat all foreign firms the same as there own yet other countries have rules that may discriminate against foreign firms e.g shown in INDIA prior to there change to FDI regulations
and coke example

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8
Q

What is an informal institution?

A

These include cultures, ethics and norms

  • For example in individualist societies such as the UK they have a high level of entrepreneurship as its a social norm
  • On the other hand collectivist societies struggle with entrepreneurship as its country to their norm
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9
Q

What is the resource based view?

A

This view focuses on a firms internal resources and capabilities
- Those who succeed such as Pepsi (See example) have certain valuable and unique firm-specific resources and capabilities that are not shared by their competitors

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10
Q

What is a location specific advantage?

A

the benefits a firm reaps from the features specific to a place

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11
Q

What are location specific advantages?

A

1) Natural geographic advantages e.g Due to Mexicos proximity with the US, numerous automakers are attracted to it to set up production there and as a result 64% of Mexicos vehicle production is exported to the US.
2) Agglomeration - The clustering or economic activities in certain locations. For example Dallas attracts all the major telecom equipment makers and service providers, making it the telecom corridor.

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12
Q

What do agglomeration benefits stem from?

A
  • Knowledge spillovers - when firm is being diffused from one firm to another among closely located firms that attempt to hire individuals from competitors
  • Industry demand which creates a skilled labor force whose member may work for different firms without moving out the region
  • Industry demand that facilities a pool of specialised suppliers and buyers also located in the region
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13
Q

What are the four strategic goals firms must match with potential locations?

A

1) Natural resource seeking firms
2) Market Resource seeking firm
3) Efficiency seeking Firm
4) Innovation seeking firms

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14
Q

What is a natural resource seeking firm?

A

When firms have to go to locations where the resources are found

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15
Q

What is a market seeking firm?

A

This is when firms go to countries that have a strong demand for their products or services e.g China has the biggest car selling market in the world and so all the car makers are ‘elbowing’ to get into the fast growing market

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16
Q

What is an efficacy seeking firm ?

A

These firs single out the most efficient locations featuring a combination of scale of economies and cost factors

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17
Q

What is an innovation seeking firm?

A

These firms target countries and regions renowned for world class innovations such as Dallas telecoms

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18
Q

Wha are the three ideas of where to enter?

A

Location
Cultural Distance
Institutional distance

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19
Q

What is institutional distance?

A

The extent of similarity or dissimilarity been the regulatory, normative and cognitive institutions of two countries

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20
Q

What are the two options of ‘When to enter?’

A

1) First mover advantages

2) Late mover advantages

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21
Q

What is a first mover advantage?

A

‘The benefits that accuse to firms that enter the market first and that later entrants do not enjoy’
e.g Colgate has become the generic term for toothpaste

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22
Q

What are the benefits to first movers?

A
  • They get to cherry pick the best local suppliers and distributors
  • Technology leadership e.g apples iPod, iPhone etc
  • Could build relationships with core stakeholders such as customers and the government
  • May establish entry barriers for late entrants such as high switching costs due to brand loyalty e.g Huggies are often used for all of a mums children
23
Q

What is late mover advantage?

A

Benefits that accrue to firms that enter the market later and that early entrants do not enjoy

24
Q

What are the benefits to late movers?

A
  • Late movers can free ride on first movers pioneering investments
  • Don’t have to deal with the technological and market uncertainties - think Nissan car example
  • Late movers may be able to take advantage of the inflexibility of first mover by leapfrogging them - Bus example
25
Q

What is the scale of entry?

A

the amount of resources committed to entering a foreign market

26
Q

What are the benefits of large scale entities?

A
  • Demonstration of strategic commitment to certain markets which helps assure local customer and suppliers that they are there for the long haul and deters potential entrants
27
Q

What are the disadvantages of large scale entities?

A
  • Means limited flexibility elsewhere and huge loses if the large scale bets turn out to be wrong e.g HSBC lost 11 billion due to financial market meltdown.
28
Q

What are the benefits of small scale entities?

A
  • Less costly, focus on learning by doing while limiting the downside risk
  • these less costs may however result in a lack of commitmnet
29
Q

What is meant by entry modes?

A

Methods used to enter a foreign market

30
Q

What is a non-equity mode?

A

-These tend to reflect relatively smaller commitments to overseas markets

31
Q

What is an Equity mode?

A

-A mode of entry (joint ventures and wholly owned subsidiaries) that indicates a relatively larger, harder-to-reverse commitment

32
Q

What are the two options that follow with Non-equity modes?

A

Exports and contractural agreements

33
Q

What are the two options that follow equity modes?

A

Joint ventures and wholly owned subsidiaries

34
Q

What is a direct export?

A
  • Companies sell directly to a customers without using another organisation to make arrangements for them
  • Works with small exports but not optimal with a large number of foreign buyers
35
Q

What are indirect exports?

A
  • This is selling to an intermediary who then sells your product either directly to consumers or imports to wholesalers
  • This enjoys the economies of scale similar to direct exports and is also relatively worry free
36
Q

What are the drawbacks of indirect exports?

A
  • Intermediaries have been known to take advantage and re- package the products under there own brand name
  • Indirect exports don’t provide much info on how companies products do abroad
37
Q

What are examples of contractual agreements?

A
  • Licensing/franchising
  • Turnkey projects
  • Co- marketing
  • R&D Contracts
38
Q

What is a turkey project?

A

Clients pay contractors to design and construct new facilities and train personnel

39
Q

What is a R&D contract?

A

e.g. Firm A agrees to perform certain R&D work for firm B. Firms then tap into the best locations for certain innovations and have relatively low costs

40
Q

What is co-marketing?

A
  • Refers to effort among a number of joint firms to jointly market their products and services
  • E.g toy makers and movie studios often collaborate in co marketing campaigns with fast food chains
41
Q

What is a join venture (Equity mode)?

A
  • A corporate child, a new entity jointly created and owned by two or more parent companies
42
Q

What are the advantages of join ventures?

A
  • They share costs, risks and profits with a local partner
  • MNE gains access to knowledge about the host country and the local firm in turn benefits from the MNEs technology, capital and management
  • JVs may be politically more acceptable in host countries
43
Q

What are the disadvantages of JVS?

A
  • Often involve partners from different backgrounds with different goals so conflicts are natural
  • Effective equity and operational control may be difficult to achieve as everything has to be negotiated and in som cases fought over.
44
Q

What is a wholly owed subsidiary?

A
  • This is defined as a subsidiary located in a foreign country that is entirely owned by the parent multinational
45
Q

What are the two ways of setting up WOS?

A

1) Establish greenfield operations

2) Acquisition

46
Q

What is meant by establishing greenfield operations?

A

Establish greenfield operations - building new factories and offices from scratch e.g Microsoft did this in Beijing
- Adv include MNE has complete equity and management control, this control also leads to better protection of proprietary technology

  • However is expensive to do and so is risky
47
Q

What is meant by an acquisition?

A

-When one company purchases most or all of another company’s shares to gain control of that company.

  • Benefit from benefits of greenfield operations plus:
    added speed of entry and adding no new capacity
48
Q

What is meant by Liability vs asset of foreignness?

A
  • This argues that under certain circumstances being foreign can be an asset e.g German cars are regarded as higher quality than American cars
  • This is known as the country of origin effect which refers to the positive or negative perceptions of a firm and products from a certain country
49
Q

What is meant by the global vs regional geographic diversification?

A
  • Despite the widely held belief that MNEs are expanding globally, Rugman notes that very few are actually expanding globally with only 1 in 8 actually found to be
  • Must be careful when using the term ‘global’ as the majority of the larges MNEs aren’t
50
Q

What is meant by OLI?

A

The OLI framework is based on the experience of MNES headquarters in developed countries that typically posses high knowledge and technological caliber
- While they are searching lucrative locations and internalise transactions (LI) they typically don’t own technology or management capabilities so are missing the O

51
Q

What is meant by LLL?

A

This is the Linkage, Leverage and Learning framework advocated by John Mathews

Linkage - MNES ability to identify and bridge gaps

Leverage - ability to take advantage of their unique resources and capabilities

Learning - MNES go abroad to learn about the area

52
Q

How does a MNE enter a foreign market?

A

Via equity modes

  • Joint Ventures
  • Wholly owned subsidiaries
53
Q

When considering ‘where to enter’ what is involved?

A
  • Location specific advantages and there strategic goals

- Cultural and Institutional distance

54
Q

What is meant by cultural distance?

A

Cultural distance can reflect differences in (i) language (ii) family structure , (iii) religions , (iv) wealth and life

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