Lecture 6: Entry Modes & FDI Motives

Question 1

The choice of entry modes depends on three different types of factors

Answer 1

Firm-specific
Industry-specific
Country-specific

Question 2

Modes of entry can be classified into

Answer 2

Equity and non-equity based

Question 3

Equity-based can be split into

Answer 3

Wholly owned subsidiaries and equity joint ventures

Question 4

Non-equity based can be split into

Answer 4

Contractual agreements and export

Question 5

Two types of export

Answer 5

Indirect (company A > Company B > Company C)

Direct (company A > Company C)

Question 6

Types of contractual agreements

Answer 6

Licensing
franchising
r&d contracts
alliances

Question 7

licensing

Answer 7

an arrangement where a licensor grants the rights to intangible property to another entity for a specified time period, and in turn receives royalty fee.

Question 8

3x + and 2x - of licensing

Answer 8

+ few development costs and risks
+ capitalise on market opportunities and non-core capabilities
+ avoid tariffs and transportation costs
- high potential for loss of know-how (licensor might be a future competitor)
- potential conflicts with the licensee

Question 9

franchising

Answer 9

a special form of licencing in which the franchisor not only sells intangible property to the franchisee, but also insists that franchisee agrees to abide by struct rules as to how it does business

Question 10

1x + and 2x - franchising

Answer 10

+ more control than licensing

• more management needed than licensing
• Bad reputation in a franchising location could influence the whole brand image

Question 11

r&d contracts

Answer 11

non-equity agreements between two or more companies from different countries to collaborate on a specific R&D project

Question 12

alliances

Answer 12

agreements between two or more companies from different countries to collaborate in various business aspects

Question 13

positive of alliances

Answer 13

shared investment and risks, reduce costs, exploitation of complementary skills and assets, establishing technological standards

Question 14

negative of alliances

Answer 14

skills transfers, knowledge spillovers, opportunistic behaviours

Question 15

joint venture

Answer 15

the establishment of a firm that is jointly owned by >2 independent firms.

Question 16

positive of joint-venture

Answer 16

benefit from a local partner’s knowledge, costs and risks are shared with a partner, synergies between partners, avoiding the expropriation

Question 17

negative of joint-venture

Answer 17

the firm risks giving control of its technology to the partner, conflict between partners due to cultural differences, shared ownership

Question 18

Wholly owned subsidiary

Answer 18

The parent company will hold all of the subsidiary’s common stock

Question 19

Positive of WOS

Answer 19

Reduce the risk of losing control over core competencies, allow for the tight control over operations in different countries, replication or redeployment of firm’s business models and resources, no integration costs with local partners

Question 20

negative of WOS

Answer 20

firms bear the full costs and risks of setting up overseas operations, legitimacy problems, no bridge with host country

Question 21

Greenfield

Answer 21

a parent company builds its operations in a foreign country from the ground up

Question 22

positive greenfield

Answer 22

high level of control, creation of jobs

Question 23

negative greenfield

Answer 23

high risk investment, high market entry costs, high fixed costs

Question 24

Acquisition

Answer 24

purchasing an already existing business in the foreign country

Question 25

Positive acquisition

Answer 25

Quick, less risky than greenfield, leverage existing assets, and knowledge, synergies with the target company

Question 26

Negative acquisition

Answer 26

high risk of failure, lack of strategic fit, cultural clashes and post-acquisition issues, overestimation of target assets

Question 27

There are three schools of thought (Pan and Tse) that influence the choice of entry mode

Answer 27

Gradual involvement in internationalization, depending on transaction costs, and depending on location-specific factors

Question 28

A large number of theories have been used to explain the entry mode decision

Answer 28

1. TCA = Three TCA factors are hypothesized to influence decisions (asset specificity, uncertainty, and frequency).
2. Resource-based view = Firms develop unique resources that they can exploit in foreign markets or use foreign markets as a source for acquiring or developing new resource-based advantages. one of the earliest resources is experience, earning that over time firms gain experience in foreign markets and move from simple exporting operations to complex organizational structures.
3. Institutional theory = Suggests that a country’s institutional environment affects firm boundary choices because the environment reflects the rules of the game by which firms participate in a given market.
4. Eclectic framework (OLI) - all three advantages affect the entry mode chosen.

Question 29

strategy tripod

Answer 29

1. RBV = a firm can gain competitive advantage through deploying its VRIN resources. These firm’s realized competencies are defined with: cost-leadership competencies and differentiation competencies.
2. institution-based view = firm’s export behaviors may be stimulated or deterred by the institutional environment (free market mechanism development and intermediate institutions development)
3. industry-based view - the key principle of competitive strategy formulation is a firm’s relationship to its environment, represented by the industry in which it competes. in other words, external factors determine the firm’s strategy, which in turn affects its performance.