Lecture 8 - Foreign Entry Strategies Flashcards
Define Entry Strategy and its challenge
= A plan that specifies the objectives of an entry and how to achieve them - why, where, when and how
Challenge:
= Matching needs and resources of the MNE with the opportunities and the constraints of the specific local environment
Mention the 4 strategic goals of establishing a subsidiary abroad
1) Natural resource seeking FDI
2) Market seeking FDI
3) Efficiency enhancing FDI
4) Capability enhancing FDI
Mention 4 First mover advantages
1) Pre-empt rivals by accessing scares resources
2) Lock in relationships with key local partners
3) Use proprietary technology to establish technological leadership
4) Set up entry barriers to create switching costs for costumers
Mention 3 Late Mover advantages
1) Can free ride on first-mover investments - solely focus on why their product is best and not why it is needed at all
2) Face lower technological and market uncertainties
3) More flexible to market changes
How can first movers keep their leading position?
1) By continuously commit resources
2) By actively learning about the local environment
Define Non-equity and equity modes
Non-equity:
- Relatively smaller commitments to overseas markets (exports, licensing, subcontracting)
Equity:
-Larger, harder to reverse commitments
-Preferred when transferring intangible assets
(greenfield investments, JV, acquisitions)
*FDI: when MNEs enters foreign markets via equity modes
Mention the 4 types of equity modes/FDI entry modes
and 3 questions to ask when choosing
1) Wholly-owned greenfield
2) Newly created joint venture
3) Full acquisition
4) Partial acquisition
Questions:
1) Should we develop and deploy our own resources or buy local ones
2) Should we buy specific resources one by one or should we buy an entire local business that has all the resources?
3) Do we want full or partial control
Mention 3 advantages and 2 disadvantages of Wholly-owned subsidiaries WOS (greenfield + full acquisition)
Advantages:
1) Enable global strategic coordination via tight control across countries
2) Reduce the risk of losing control over core competencies
3) Provide 100% of the profits generated in the foreign markets
Disadvantages:
1) Most costly entry modes in terms of capital
2) Parent bears full cost and risk of setting up overseas operations
Mention 3 advantages and 3 disadvantages of WOS Greenfield Investment
*+ when is it preferred?
Advantages:
1) Parent can built the kind of subsidiary it wants
2) Full control and protection of intangibles
3) Operations can be scaled up if required
Disadvantages:
1) Adds to the competition
2) Slower to establish
3) High investment risk
*Preferred mode when firms has competitive advantages grounded in organizational structure and culture
Mention 4 advantages and 3 disadvantages of a Full Acquisition
+* when is it preferred?
Advantages:
1) Access to locally embedded resources such as human capital and net works
2) Fast entry
3) Full control of foreign operations
4) Do not add capacity = competition to the industry
Disadvantages:
1) Politically sensitive
2) High up-front capital
3) Post acquisition integration challenges
*Preferred mode when competencies need to be build fast
Mention 2 advantages and 2 advantages of a Partial Acquisition
*+ when is it preferred?
Advantages:
1) Access operations previous owner is reluctant to give up while limiting capital commitment
2) Ensure previous owner continued commitment
Disadvantages:
1) Restructuring with limited control
2) Post-acquisition integration issues
*Preferred mode when the goal is to gain access to assets that otherwise would not be for sale, while limiting capital commitment
Mention 3 advantages and 3 disadvantages of entry via Joint Ventures
*+ when is it preferred?
Advantages:
1) Shared costs and risks of entering a foreign market
2) Access partner’s knowledge, assets and local connections
3) Politically acceptable
Disadvantages:
1) Divergent goals and interests
2) Limited control over operations
3) Difficult to coordinate globally
*Preferred mode when:
-The new firm depends on resource contributions from more than 1 firm
-High transaction costs prevent market exchange
-Not feasible to integrate one firm into the other
-Useful to operate in unfamiliar context eg. in countries with weak market supporting institutions
Mention 4 ways in which Host Country Institutions can influence the choice of foreign country entry modes
1) Prohibit certain types of operations or transactions
2) Create a need for local knowledge
3) Weak institution increase transactions costs of alternative strategies
4) Inhibit trade favoring entry through FDI
