PowerPoints week 3 Flashcards
Why do MNEs Invest Abroad?
“Traditional” investment motives:
- Market seeking
- Efficiency seeking
- (Natural) Resource seeking
“Modern” investment motive(s): - Strategic asset seeking - Catch-up - Diversification - R&D springboard
A Changing Global Business Context
Which trends are observed by Dunning?
Dunning observes which two reinforcing factors?
- Emergence of intellectual capital as the key wealth creating asset in most industrialized nations
- Increasing integration of economic activity
- Increasing emphasis on ‘alliance’ capitalism both intra- and inter-firm to achieve value creation goals
Dunning observes two reinforcing factors:
- Technological change
- Renaissance of the market economy
Entry Mode Choice
Main factors to consider are..
- Home-Host country distances
- FDI motivation
- Host-country characteristics - political, regulations
- Firm strategy
Why is entry mode choice critical? Important implications in terms of.. 1. resource commitment 2. exploration vs exploitation strategies 3. risk and uncertainty 4. learning and knowledge transfer
Export
Attractive vs. not attractive
Attractive:
- relatively low costs
- firms may exploit economies of scale
not attractive:
- inability to leverage location advantages
- high transportation costs
- high tariff barriers
- foreign agents fail to act in the exporter’s best interest.
Two types of Export
Export = Part of Nonequity modes
Indirect:
Company A -> Company B (export agent) -> Company C
Direct:
Company A -> Company C
Contractual Agreements
3 forms:
Part of Nonequity modes
- Licensing
- Alliances
- R&D contracts
- non-equity agreements between 2 or more foreign partners to collaborate on a specific R&D project
Licensing
A form of ‘Contractual Agreements’ of ‘Non-Equity’ ‘Entry Mode Choice’
Licensing = An arrangement where a licensor grants the rights to intangible property to another entity (i.e. the licensee) for a specified time period, and in return receives royalty fee.
e.g. patents, inventions, formulas, copyrights, trademarks
When attractive?
- Few development costs and risks of doing business abroad
- Capitalize on market opportunities and non-core capabilities
- Avoid tariffs and transportation costs
When not attractive?
- High potential for loss of know-how -> licensor future competitor
- potential conflict with licensee
Franchising
A form of Contractual Agreements of ‘Non-Equity’ ‘Entry Mode Choice’
Franchising = A specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business
= mainly used by service firms
Advantages:
Similar to licensing, but you have more control than the licensing
- Few development costs and risks of doing business abroad
- Capitalize on market opportunities and non-core capabilities
- Avoid tariffs and transportation costs
Disadvantages:
- Similar to licensing, but it required more management involvement (e.g. monitoring, mentoring)
- Bad reputation in one of the franchising location could influence the image of whole brand
When not attractive?
- High potential for loss of know-how -> licensor future competitor
- potential conflict with licensee
Strategic Alliances
A form of ‘Contractual Agreements’ of ‘Non-Equity’ ‘Entry Mode Choice’
Strategic Alliances = Agreements between two or more companies from different countries to collaborate in various business aspects
Advantages:
- Shared investment and risks
- Reduce costs
- Exploitation of complementary skills and assets
- Establishing technological standards
Disadvantages:
- Skills transfers
- Knowledge spillovers
- Opportunistic behaviours
short-term & low level commitment
= contractual agreement (non equity)
long-term & high-level of commitment
= international joint venture
(equity)
Joint Ventures (JV)
Part of Equity Modes of Entry Mode Choice
Joint Ventures (JV) = The establishment of a firm that is jointly owned by >2 independent firms
Why is it attractive?
- Benefit from a local partner’s knowledge of the host country’s competitive conditions, culture, language, political & business systems
- The costs and risks are shared with a partner
- Synergies between partners
- Avoiding the expropriation risk by local governments
Why is it not attractive?
- The firm risks giving control of its technology to the partner
- Conflict between partners due to cultural differences
- Shared ownership > conflicts for control if goals/objectives differ/change over time
Wholly Owned Subsidiaries
Part of Equity Modes of Entry Mode Choice
Wholly Owned Subsidiaries = The parent company will hold all of the subsidiary’s common stock.
Why are they attractive?
- Reduce the risk of losing control over core competencies
- Allow for the tight control over operations in different countries (coordination)
- Replication or redeployment of firms business models and resources
- No integration costs with local partners
Why are they not attractive?
- Firms bear the full costs and risks of setting up overseas operations
- Legitimacy problems
- No bridge with host country
Greenfield Investments
Part of Wholly Owned Subsidiary in Equity Modes of Entry Mode Choice
Greenfield Investments = The establishment of a wholly-owned subsidiary from the ground up
Why are they attractive?
- Exploitation of firm’s advantages
- Replication of firm’ organization and business model
- No integration issues/risks
Why are they not attractive?
- High risk of failure
- Slow to establish
- Considerable knowledge of the host country is needed
- No share of costs or risks with partners
- Possibility to suffer from legitimacy issues
Acquisitions
Part of Wholly Owned Subsidiary in Equity Modes of Entry Mode Choice
Acquisitions = Purchasing an already existing business in the foreign country
Why are they attractive?
- Quick to execute
- Often less risky than greenfield investments
- Possibility to leverage existing assets and resources - Possibility to leverage local market knowledge
- Synergies with the target company
Why are they not attractive?
- High risk of failure
- Lack of strategic fit
- Cultural clashes and post-acquisitions issues
- Overestimation of target assets
What Influences the Choice of Entry Mode?
Three main views:
- Gradual involvement in internationalization
- Depending on the transaction costs
- Depending on location-specific factors
- Gradual involvement in internationalization
Entry mode choice:
- trade-off between
- x resources committed & risk
- x control over activities & profit potential - Depending on the transaction costs (TCE)
- Who will perform the activities in the foreign country? Inside the firm vs. third-party provider?
- Firms internalize those activities that they can perform at a lower cost, but it will subcontract those activities externally if other providers have a cost advantage - Depending on location-specific factors
- Different locations give rise to different types and levels of risk as well as provide different types of inputs
What Influences the Choice of Entry Mode?
Important to understand that market entry selection is a multilevel phenomenon
Firm-level effects
-Specific motivation of the firm
Industry-level effects
- Entering firm and incumbents
- Entering firm and other entering firms
- Competitors (both domestic and foreign)
