W07: Entering foreign markets

Question 1

Rational optimization approach

Answer 1

Going after the market with most appealing characteristics

Question 2

Uppsala Model

Answer 2

Foreign markets are selected primarily according to their proximity in terms of psychic distance.

Psychic distance makes it difficult to understand foreign environments.

One can alleviate psychic distance by bridges

According to the Uppsala model, companies start investing in one or a few neighboring countries rather than in a variety of countries simultaneously

Suggests firm’s international expansion is a gradual process dependent on knowledge and commitment

Question 3

Determinants of the entry mode choice

Answer 3

> Goals and objectives of the firm (market share, profitability)
Desired degree of control regarding the decision, operations, and assets
Resources and capabilities
Risk
Conditions in the target country
Competition
Partners availability and capabilities
Who does value-adding activities - partner or firm
long-term strategic importance
Characteristics of product or service

Past experience
> path dependency
> learning from experiences

Question 4

Multinational competitive advantage

Answer 4

> Seeking new markets

> Develop worldwide competitive advantage

Question 5

Entry modes (Who should perform the activities?)

Answer 5

> Exporting
> Licensing/ Franchising
> Wholly owned subsidiary
> M&A
> Strategic Alliances & JV

Question 6

Exporting

Answer 6

Producing products or services in one country and selling/distributing them to customers in other countries

Advantages
> no need to establish foreign operations
> Easy to control

Disadvantages
> Transportation costs
> Less responsive to local demands
> no local knowledge gain

Question 7

Licensing / Franchising

Answer 7

Licensing:
Owner of intellectual property grants other firms the right to use property for specified period of time in exchange for compensation

Franchising:
The firm provides another with right to use the entire business system in exchange for compensation

Advantages:
> Low risk & low cost
> Fast

Disadvantages:
> Little control
> lower profit
> create potential competitors

Question 8

Wholly owned subsidiary

Answer 8

Firms sets up presence alone and from scratch

Advantages:
> High level of control
> High profit potential
> internal transfer of competencies/ knowledge

Disadvantages:
> High risk and capital investments
> Lack of local knowledge
> Market access may be difficult

Question 9

M&A

Answer 9

Mergers:
Assets of the acquired company are combined to establish a new legal entity

Acquisitions:
Assets of the acquired company are absorbed by the acquirer and the target company disappears as a legal entity

Advantages
> allows rapid expansion
> establishes market share

Disadvantages
> can be expensive
> information asymmetry
> cultural differences

Question 10

Strategic alliances (non-equity, equity)
Advantages, Disadvantages
+ JV

Answer 10

Joint-Venture:
Cooperating firms invest in new firm and share profits

Non-equity strategic alliance:
Cooperation between firm managed through contracts without equity holdings or new firm created

Equity strategic alliances
Cooperative contracts are supplemented by equity investments by one partner in the other (sometimes reciprocal)

Advantages
> Share risks and resource requirement
> Opportunity to learn from partner
> Often favored by host governments

Disadvantages
> Transfer of compentencies
> Coordination problems

Question 11

Four C’s of strategic alliances

Answer 11

> Complementarity: Partners offer complementary resources
Congruent Goals: Partner have common goals for venture
Compatibiliy: Firms are compatible in culture and organization
Change: How will the other three Cs change over time?

Question 12

Reasons for failure of strategic alliances

Answer 12

• Incompatibility
• Incongruent goals
• Opportunistic behavior (e.g. after making alliance-specific investments, becoming too dependent on the partner)
• Inability to adapt to changing conditions
• Culture clash
• Partner not making promised resources available
• Inadequate management of the alliance, unclear division of responsibilities, etc.