Lecture 4 Flashcards
Name the type of entry modes (with examples)
Non-equity (exporting, licensing, franchising, alliance)
Equity (greenfield, acquisition, joint venture, alliance)
What are important questions to ask in entry mode choice?
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?
Explain the entry modes: foreign distributors
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
What is licensing?
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)
What is franchising?
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)
Explain alliances and name advantages and disadvantages of alliances?
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
Explain a joint venture
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
Explain the paper of Hamel et al. (Collaborate with tour competitors and win) on alliances
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
Explain Prashant Kale and Jaideep Anand’s view on entry modes (Alliances in emerging economies (India))
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
Explain Joint Ventures in China
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
What makes M&A’s difficult?
Pre- and post-integration obstacles
Purchase price premiums
Why do managers still do M&A?
Cognitive biases why managers like M&A:
- Topline obsession
- Stock price exploitation
- Grooved thinking
- Herd behavior
- Personal commitments
- Trust in interested parties
What logic leads to many international mergers?
Eat-or-be-eaten logic: the number of companies in several industries (automobile, paper & board, oil refining, aluminium) have decreased in the last decades
When is alliance preferred over M&A?
When each firm only needs a subset of the FSAs of the partner
What are preferences of companies linked to when it comes to M&A/alliances?
The MNE type and (cultural) distance
Name advantages and disadvantages of Greenfield investment
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)
Name advantages and disadvantages of Brownfield investment
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
What are foreign entry mode theories?
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
What two key assumption does Transaction Cost Theory/Approach have?
Actors operate and choose within a bounded rationality
Potential for actors to behave opportunistically as well as risk neutrally (bounded reliability)
Between what two types of uncertainty is made a distinction in Transaction Cost Approach?
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
Explain Transaction Cost Approach/Theory
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
Explain asset specificity in Transaction Cost Approach/Theory
- 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
Explain Institutional Theory
IT investigates how firms enter and later operate in foreign markets, in an institutional context
Explain isomorphism (Institutional Theory)
Companies try to look more like other companies to gain legitimacy in an environment - tension between external isomorphism and internal isomorphism
