Lecture 4

Question 1

Name the type of entry modes (with examples)

Answer 1

Non-equity (exporting, licensing, franchising, alliance)
Equity (greenfield, acquisition, joint venture, alliance)

Question 2

What are important questions to ask in entry mode choice?

Answer 2

What are FSAs that I want to make use of?
Under what conditions can these be transferred to and put to work in the new host country?
What are the location advantages that I want to tap into?
To what extent do I need to recombine resources to be successful in the new host country?
To what extent do I need resources held by local actors? Can these be accessed via the market? Through collaboration? Through acquisition?
Are there particular liabilities (or advantages) of foreignness I need to reckon with?

Question 3

Explain the entry modes: foreign distributors

Answer 3

Over time often following pattern:
- Stage 1: initial success
- Stage 2: flattening, sometimes declining
- Stage 3: MNE starts questioning local partner and may: take control of distribution channel, build self owned distribution channel
- Result: local partner and MNE will not invest in each other
Disadvantageous effects may be:
- Conflicts between company and local distributor
- Underinvestment in market development
- Strategic market decisions ceded to distributors
Characteristics of success cases:
- MNEs should keep independent, local distribution partners in the long term, even after establishing their own local network for primary clients
- Key is to balance competing objectives

Question 4

What is licensing?

Answer 4

A business arrangement in which one company gives another company permission to manufacture its products or use its technology for a specified payment (explicit, patent-protected FSAs)

Question 5

What is franchising?

Answer 5

Arrangement where the franchiser grants the franchisee the right to use its trademark or tradename, as well as certain business systems and processes, to produce and market a good or service according to certain specification (trademarks/trade names/business formula)

Question 6

Explain alliances and name advantages and disadvantages of alliances?

Answer 6

Alliances are typically contractual and control in contractual alliances depends on quality of foresight
Advantage: share risks and costs (e.g. R&D), learn from partners complementary resources, and quicker development of capabilities to deliver products and services
Disadvantages: learn as much as possible from this partner while giving away as few of your own FSAs as possible

Question 7

Explain a joint venture

Answer 7

Firm A from country 1 and firm B from country 2 join forces and jointly establish a new firm C in a foreign country, either country 1, 2, or a third country
JVs are based on contracts + equity ownership
Control in JVs is based on contract clauses _ residual ownership rights

Question 8

Explain the paper of Hamel et al. (Collaborate with tour competitors and win) on alliances

Answer 8

Many alliances between Western and Asian MNEs are outsourcing arrangements
In these cases the Asian firms tended to profit more:
- Intrinsic willingness to learn from alliance partner
- View alliances as an opportunity to develop new FSAs, rather than to reduce investment and risks
- Define clear learning objectives and focus efforts on acquiring new knowledge
- Own contribution to alliances often involves complex, tacit process knowledge that is not easily imitated or transferable
It is possible for both MNEs to benefit
Limitations: Hamel et al. insufficiently reflect on the impact of culture on alliance dynamics

Question 9

Explain Prashant Kale and Jaideep Anand’s view on entry modes (Alliances in emerging economies (India))

Answer 9

Foreign MNEs usually won the “learning race” against its partner, thereby eliminating resource complementarity
The learning asymmetry between the MNE and its local partner creates an inherent instability in the JV –> growing incentive to transform the JV into a wholly owned subsidiary

Question 10

Explain Joint Ventures in China

Answer 10

Sometimes China requires foreign companies to form JVs with local firms in order to do business there (e.g. auto industry)
It also sometimes requires that a certain percentage of a product’s value be manufactured locally (e.g. wind turbines and solar panels)
The technology companies Apple and Amazon set up ventures with local partners to handle data in China to comply with internal security laws
Business groups that represent them say Chinese companies use those corporate ties to pressure foreign partners into giving up secrets. They also say Chinese officials have pressured foreign companies to give them access to sensitive technology as part of a review process to make sure those products are safe for Chinese consumers

Question 11

What makes M&A’s difficult?

Answer 11

Pre- and post-integration obstacles
Purchase price premiums

Question 12

Why do managers still do M&A?

Answer 12

Cognitive biases why managers like M&A:
- Topline obsession
- Stock price exploitation
- Grooved thinking
- Herd behavior
- Personal commitments
- Trust in interested parties

Question 13

What logic leads to many international mergers?

Answer 13

Eat-or-be-eaten logic: the number of companies in several industries (automobile, paper & board, oil refining, aluminium) have decreased in the last decades

Question 14

When is alliance preferred over M&A?

Answer 14

When each firm only needs a subset of the FSAs of the partner

Question 15

What are preferences of companies linked to when it comes to M&A/alliances?

Answer 15

The MNE type and (cultural) distance

Question 16

Name advantages and disadvantages of Greenfield investment

Answer 16

Advantages: can exert higher level of control over subsidiary, allows for incremental investment
Disadvantage: cannot build on expertise local partner (vis-a-vis alliances, acquisition and brownfield)

Question 17

Name advantages and disadvantages of Brownfield investment

Answer 17

Advantages: the acquired firm can have resources that are valuable to the MNE, can help overcome weak local institutions
Disadvantages: conflicts over restructuring, somewhat less control than with greenfield

Question 18

What are foreign entry mode theories?

Answer 18

Transaction cost theory (static)
Institutional theory (static)
The eclectic paradigm (static)
Internationalization process theory (dynamic)
Resource-based view (strategic, more dynamic)
MNE types and entry mode choice
Lean internationalization

Question 19

What two key assumption does Transaction Cost Theory/Approach have?

Answer 19

Actors operate and choose within a bounded rationality
Potential for actors to behave opportunistically as well as risk neutrally (bounded reliability)

Question 20

Between what two types of uncertainty is made a distinction in Transaction Cost Approach?

Answer 20

Environmental uncertainty (e.g. political risk)
Behavioral uncertainty (behaviors of partner firms, suppliers, distributors, etc.)
The type of risk that dominates (in the decision-makers mind) determines the entry mode

Question 21

Explain Transaction Cost Approach/Theory

Answer 21

TCA generally considers whether firms enter countries via market-based modes (e.g. contracting with a partner) or internalization (doing it yourself e.g. wholly owned subsidiaries - generally involves more control)
- Transaction costs
- Firms perceiving high transaction costs (high finding, negotiation and monitoring costs for partners) in a market tend to use wholly owned modes
- Transaction costs increase when: it can be difficult to estimate contingencies in an agreement with a partner; there may be information asymmetry between partners; monitoring and enforcement might be difficult due to distance, communication problems and lack of measurable outcomes

Question 22

Explain asset specificity in Transaction Cost Approach/Theory

Answer 22

• The level of firm-specific technology (asset specificity) may also influence mode choice, since firms with greater technology may incur higher transaction costs in safeguarding their technology from misappropriation
• Asset specificity refers to assets that lose value in alternative use
• Firms making high asset specific investments tend to use wholly owned mode as asset specificity tends to create contracting hazards because of the impact of opportunism, when a partner can take advantage of another firm’s dependency

Question 23

Explain Institutional Theory

Answer 23

IT investigates how firms enter and later operate in foreign markets, in an institutional context

Question 24

Explain isomorphism (Institutional Theory)

Answer 24

Companies try to look more like other companies to gain legitimacy in an environment - tension between external isomorphism and internal isomorphism

Question 25

Explain the choice between a JV and WOS in Institutional Theory (Yiu and Makino (2002))

Answer 25

Foreign firms choose for JV if there are strong regulative and normative pressures in the host country
Foreign firms tend to choose the entry mode that is most frequently used by their competitive counterparts in the same host country
Foreign firms tend to choose the entry mode that they have chosen in preceding foreign market entries

Question 26

Explain the eclectic paradigm

Answer 26

The eclectic paradigm (OLI) distinguished between three types of advantages: ownership advantages (FSAs), location advantages, and internalization advantages (doing it yourself)
It is used to explain the choice between ownership and non-ownership modes
If all three advantages are present –> ownership-based entry form (WOS, acquisition, brownfield, greenfield, JV)
Otherwise –> market-based entry form (export, licensing/franchising, contractual alliance)

Question 27

Explain Internalization Process Theory

Answer 27

Over time firms, learn which allows them to:
- Increase commitment (investments)
- Opt for higher control modes (equity-based)
- Enter markets at a larger “distance”

Over time, market commitment and market knowledge grows
1. No regular export activities
2. Export via independent representatives
3. Sales subsidiaries
4. Foreign production and manufacturing
6. Embedded subsidiary

Question 28

Explain resource-based view

Answer 28

RBV emphasizes the importance of resources/competencies (FSAs)
- How can the resources be made of value in a foreign market?
- How can the resources be protected?

Companies can learn:
- Recombination skills
- Internationalization experience
- Country-specific experience

Question 29

Explain MNE types and what entry mode(s) they use

Answer 29

Centralized exporter: foreign distributors, licensing/franchising
International projector: licensing/franchising, greenfield
International coordinator: Alliances and JVs, acquisitions, brownfield, greenfield
Multi-centred MNE: acquisitions, brownfield, greenfield

Question 30

Explain lean internationalization

Answer 30

Effects of digitalization on internationalization:
- Enhances communication capabilities, enabling better coordination across geographically dispersed activities
- Equips firms with greater flexibility to organize their boundaries through outsourcing and offshoring
- Attenuates cross-border information asymmetries
- Reduces resource commitments
- Reduces dependence on location-specific FSAs
- Allows firms to adopt local identities in foreign markets
- Allows for faster learning through direct customer feedback

Question 31

Explain SMEs and Liability of Smallness (Hollander et al. (2017))

Answer 31

SMEs suffer from limited financial financial and personnel resources and the respective capabilities to employ these resources making them highly vulnerable to costly failures in foreign markets
SMEs often lack foreign market knowledge as they are less internationally diversified and possess fewer international engagements compared to their larger counterparts
Third, SMEs are particularly sensitive to external challenges arising in the host country market

Question 32

Based on Hollander et al (2017), explain equity and non-equity entry modes for SMEs

Answer 32

Equity modes:
- Allow firms a greater closeness to foreign markets and customers
- Require significant managerial and financial resources in order to set up such foreign operations

Non-equity modes:
- Require lower amounts of resources and provide greater flexibility
- Lack foreign market closeness

Final thoughts:
Neither mode of entry is more beneficial in all situations. instead, the non-significant effect emphasizes the need to contextualize the entry mode choice and foreign venture performance relationship
Resources and capabilities help SMEs to pursue entry mode strategies with greater efficiency
Resource and capabilities need to be studied in combination
The research lacks focus on e.g. cultural and institutional distance

Question 33

Explain a RBV on entry mode choice of SMEs

Answer 33

The RBV considers a firm’s valuable, rare, hard to imitate or substitute resources and capabilities as foundation of sustainable competitive advantages and, in turn, superior firm performance
- International experience: experiential knowledge on how to organize and manage the firm in international environments
- Product adaptation: firms’ ability to adapt the physical characters as well as the attributes of products in order to better meet the needs of foreign customers
–> Both enable SMEs to mitigate their liabilities of smallness and, in turn, to pursue their foreign market entry mode strategy with greater efficiency (leading to an improved foreign venture performance)