Location Choices & Entry Modes Flashcards
Tendency in selecting locations in internationalization process
Companies tend to expand to close markets, not only geographically but also in the sense of perceived distance
Role of learning by doing in location choices
Knowledge and experience about foreign markets influences further location choices. Since knowledge building takes time, companies especially SMEs move step by step to more distant markets (which are both potentially more risky and rewarding)
Which factors affect a country’s long run potential
- Size (demographic trend)
- Purchasing power
- Estimated economic growth rate
- Balancing benefits costs and risks
- Sustainability of its product offering in that country
Which are the aims of first mover advantages?
- Anticipate rivals capturing demand by establishing a strong brand name
- Build economies of scale (cost advantage)
- Create switching costs in the value network
IN GENERAL: ENTRY BARRIERS
First mover disadvantages
- Pioneering costs: adaptation, learning and failure costs
- Costs of promoting and establishing value offering
- Changes in regulation which disadvantage early entrants
Scale of entry
- Large scale (significant resources and rapidly): has important influence on the market and for the brand, more likely to get first mover advantages
- Small scale
Which are the entry modes (6)?
- Export
- Licensing
- Franchising
- Joint Ventures
- Turnkey projects
- Entirely owned subsidiaries
Export advantages and disadvantages
A
- avoids costs of establishing operations abroad
- achieve experience
D
- often lower costs of manufacturing abroad
- high transport costs and tariffs
- coordination problems with local agents
License advantages and disadvantages
A
- no costs and risks related to opening a foreign market
- risk hedging
- allows participation in markets prohibiting regulations
- used by firms with intangible properties with business application in sectors where the company does not want to operate directly
D
- no tight control over manufacturing
- knowledge spillovers
Cross-licensing agreement
Contract where two companies license valuable know-how, holding each other hostage and reducing associated risks
An alternative to cross-licensing to edge risk from licensing
Joint venture: both licensor and licensee take important equity stakes, ensuring the mutual interest in the company’s success
Example of joint venture to reduce risks associated with licensing
Fuji and Xerox in the photocopier sector
Franchising advantages and disadvantages
A
- no costs and risks related to opening a foreign market
D
- quality control issues (ex. Four Season Hotel)
Master franchisee
Subsidiary in form of joint venture between franchisor and franchisee
Example of master franchisee
McDonald’s
joint venture advantages and disadvantages
Most typically 50/50, but can happen larger percentages for tighter control
A
- benefit from local partner’s knowledge and experience in their home market
- costs and risks sharing
- sometimes only possible entry mode (ex. Chinese JV between GM and SAIC)
D
- knowledge spillovers to partner
- no tight control over subsidiaries to realize economies of knowledge
- risk of dissolution of JV: if goals of participants change over time
What is a turnkey project?
Foreign clients require a plant which is delivered by the contractor. Way of exporting process knowledge diffused in chemical, petrol refining and pharmaceutical industries
turnkey projects advantages and disadvantages
A
- profiting from know-how as an asset
D
- knowledge spillovers from contractor to clients
Modalities of entirely owned subsidiary
- Greenfield investment (set up a new operation)
- Brownfield investment (acquire an established firm)
Entirely owned subsidiary advantages and disadvantages
A
- tight control over technological knowledge
- allows global strategic coordination (profits - comp. attacks)
D
- learning risks (greenfield)
- cultures coordination (brownfield)
