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International Business Management > Lecture 4 - Foreign Market Entry Modes > Flashcards

Lecture 4 - Foreign Market Entry Modes Flashcards

1
Q

What are the proactive motivations for firms going abroad?

A
  • profit advantage
  • unique products
  • technological advantage
  • exclusive information (that they can turn into profit)
  • tax benefit
  • economies of scale
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2
Q

What are the reactive motivations for firms going abroad?

A
  • Competitive pressures
  • Overproduction: more than home market requires/needs
  • Declining domestic sales
  • Saturated domestic markets
  • Excess capacity
  • Proximity to customers (subsidiaries of agencies)
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3
Q

Define what a first-mover advantage is

A

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

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4
Q

Define what a late-mover advantage is

A

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

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5
Q

List some examples of first-mover advantages

A

Look at notes

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6
Q

List some examples of late-mover advantages

A

Look at notes

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7
Q

What is the non-equity mode of entering a market?

A

Entering foreign markets through exports and contractual agreements.

  • Reflects relatively smaller commitments to overseas markets
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8
Q

What is the equity mode of entering a market?

A

Entering foreign markets through Joint Ventures and wholly owned subsidiaries (Foreign Direct Investment)

  • Indicates a relatively larger, harder-to-reverse commitment
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9
Q

What are the two main types of non-equity entry modes?

A
  • exporting

- contractual agreements

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10
Q

What are the two main types of equity entry modes?

A
  • joint ventures

- wholly owned subsidiaries

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11
Q

Define what exporting is

A

Firms’ products are manufactured in the domestic market or a third country and then transferred either directly or indirectly to the host market

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12
Q

What is direct exporting?

A

Sells directly to foreign customer

UK Company A to South Africa Company B

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13
Q

What is indirect exporting?

A

UK Company A sells to UK Company B and then B sells to South Africa Company C

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14
Q

What is cooperative exporting?

A

Companies in the UK sell to foreign customer cooperatively

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15
Q

What are some of the advantages of exporting?

A
  • Manufacturing is home based thus, it is less risky than being overseas-based
  • Gives an opportunity to ‘learn’ about overseas markets before investing in bricks and mortar: work out whether there is demand for your goods and services before committing
  • Reduces the risk of operating overseas
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16
Q

What are some of the disadvantages of exporting?

A
  • Being at the ‘mercy’ of overseas agents i.e. loss of control and loss of reputation
  • Susceptible to trade barriers
  • Logistical difficulties: getting products from home to foreign markets (e.g. damaged on route)
  • Not appropriate if other lower cost manufacturing -
    locations exist
  • High transportation costs can make exporting uneconomical
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17
Q

What is licensing?

A

…the method of foreign operation whereby a firm in one country (licensor) agrees to permit/allow a company in another country (licensee) to use the manufacturing, processing, trademark, know-how or some other skill provided by the licensor.

  • The licensor receives a royalty fee from the licensee (see the process in the next slide)
18
Q

Outline the stages of the licensing process

A

1) licensor leases the rights to use intellectual property
2) licensee uses the intellectual property to create products
3) pays a royalty to licensor
4) earns new revenues with low investment

19
Q

What some of the advantages of licensing?

A
  • Good way to start in foreign operations and open the door to low risk manufacturing relationships
  • Allows the firm to participate where there are barriers to investment
  • Capital not tied up in foreign operations
  • Options to buy into partner exist or provision to take royalties in stock: depend on institutions that are present in the foreign country
  • No danger of nationalization/expropriation of assets
  • Local manufacturer can secure government contracts
20
Q

What are some of the disadvantages of licensing?

A
  • Limited form of participation-to length of agreement, specific product, process or trademark
  • Partner/licensee develops or diffuses know-how and so license is short (Pizza Hut in Thailand lost business to The Pizza Company)
  • Licensee may not fully exploit the market leaving space for competitors’ entry (opposite also true)
  • Licensee can potentially become a future competitor
  • Lack of control over licensee operations
  • Requires considerable fact finding, planning, investigation and interpretation
21
Q

What is franchising?

A

Franchising is the practice of using another firm’s successful business model

  • Players: franchisor and franchisee
22
Q

What are some of the advantages of franchising?

A
  • For the franchisor, the franchise is an alternative to building ‘chain stores’ to distribute goods
  • The franchisee is said to have a greater incentive than a direct employee because he/she has a direct stake in the business
  • Limited financial commitment
  • Involves longer term commitment than licensing
23
Q

What are some of the disadvantages of franchising?

A
  • No manufacturing, so no location economies and experience curve
  • Risk of worldwide reputation if something goes wrong
  • Franchisee may end up being a competitor (In Thailand, Pizza Hut lost business to The Pizza Company)
24
Q

What is a joint venture?

A
  • An enterprise in which two or more investors share ownership and control over property rights and operation
  • Any form of association which implies collaboration for more than a transitory period is a joint venture
  • A joint venture may be brought about by a foreign firm showing an interest in a local company
  • A local firm acquiring an interest in an existing foreign firm or
  • By both the foreign and local companies jointly forming a new enterprise
  • Joint ventures are a form of FDI
  • can be two foreign companies forming a joint venture
25
Q

What are some of the advantages of JVs?

A
  • Sharing of risk: better for MNC
  • Local firm understands the national environment: understands both formal and informal institutions
  • Joint financial strength
  • May be the only means of entry in some countries
26
Q

What are some of the disadvantages of JVs?

A
  • Different organizational cultures may be difficult to reconcile (Daimler-Chrysler 1998)
  • Partners may have different views on expected benefits
27
Q

What are the four key reasons for establishing a subsidiary abroad?

A

NATURAL RESOURCE SEEKING
- Quest for natural resources ideally with related transport and communication infrastructure

MARKET SEEKING
- Quest for countries that offer strong demand for a firm’s products and services

EFFICIENCY SEEKING
- Quest to identify the most efficient locations featuring a combination of scale economies and low-cost factors

INNOVATION SEEKING
- Quest for innovative countries /regions with an abundance of innovative individuals and firms/universities

28
Q

What is horizontal FDI?

A

When a firm takes the same activity at the same value-chain stage from its home country and duplicates it in a host country

29
Q

What is vertical FDI?

A

When a firm moves upstream or downstream in different value-chain stages in a host country through FDI

30
Q

Why does FDI take place?

A

OWNERSHIP ADVANTAGES
- Possession and leveraging of certain valuable, rare, hard-to-imitate, organizationally embedded resources

LOCATION ADVANTAGES
- Features unique to a place that provide advantage to a firm

INTERNALIZATION ADVANTAGES
- Replacement of cross-border markets with one firm locating and operating in two or more countries

31
Q

How does FDI result in ownership advantages?

A
  • Direct is the key word in FDI.
  • Direct ownership provides combination of equity ownership rights and management control rights.
  • FDI reduces dissemination risks
  • FDI provides tight control over foreign operations
  • FDI facilitates the transfer of tacit knowledge through “learning by doing”
32
Q

How does FDI provide location advantages?

A
  • Some locations possess geographical features that are difficult to match.
  • Location advantage can arise from agglomeration – the clustering of economic activities in certain locations

Results from:
- Knowledge spillover: the diffusion of knowledge from one firm to others among closely located firms that attempt to hire individuals from competitors

  • Industry demand for skilled workers
  • Industry demand that facilitates a pool of specialized suppliers and buyers in a region
33
Q

Acquiring and neutralizing location advantages

A
  • Location advantage does not entirely overlap with country-level advantages.
  • Refers to advantage that firm obtains when operating in a specific location due to firm-specific resources (however, the firm faces the liability of foreignness).
  • Liability of foreignness refers to the additional costs that firms operating outside their home countries experience above those incurred by local firms.
  • When one firm enters a foreign country through FDI, competitors are likely to increase FDI in order to acquire or neutralize location advantages
34
Q

What are the benefits of internalization?

A
  • Reduces cross-border transaction costs.
  • Replaces external market relationship with single organization spanning both countries: resolves the difficulties of an international market transaction
  • MNC reduces cross-border transaction costs and increases efficiencies by replacing an external market relationship with a single organization spanning both countries
35
Q

Draw the benefits and costs of FDI diagram

A

Look at notes

36
Q

What are the benefits of FDI to home countries?

A

1) Repatriated earnings from FDI profits
2) Increased exports
3) Learning via FDI from operations abroad

37
Q

What are the costs of FDI to home countries?

A

1) Capital outflow
2) Job loss: many MNEs invest abroad while simultaneously curtailing domestic production - that is, they increase employment overseas but lay of domestic employees

38
Q

What are the benefits of FDI to host countries?

A

1) Capital inflow: can help improve a country’s balance of payments
2) Technology spillovers; the domestic diffusion of foreign technical knowledge and processes that benefit domestic firms and industries
3) Advanced management know-how: in many developing countries, it is often difficult for the development of management know-how to reach a world-class level if it is only domestic and not influenced by FDI
4) Creates jobs

39
Q

What are the costs of FDI to host countries?

A

1) Loss of economic sovereignty: because of FDI, decisions to invest, produce, and market products and services in a host country are being made by foreigners
2) Loss of domestic firms: MNEs may drive some domestic firms out of business
3) Capital outflow: MNEs repatriating earnings to home countries, so host countries experience a net outflow in the capital account in their balance of payments

40
Q

What are the managerial attention implications?

A
  • carefully assess whether FDI is justified in light of other foreign entry modes such as outsourcing and licensing
  • pay careful attention to the location advantages in combination with the firm’s strategic goal
  • be aware of the institutional constraints and enablers governing FDI, and enhance legitimacy in host countries
41
Q

What advantages do the following companies get from their internationalisation modes?

1) Renault Nissan and Russian Technologies
2) Star Alliance
3) Ford - non partnership assembly plant

A

1) Renault Nissan and Russian Technologies
- joint venture

2) Star Alliance
- contractual strategic alliance

3) Ford - non partnership assembly plant
- loose strategic alliance

International Business Management (6 decks)

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