Week 3: Entry Modes

Question 1

Entry Mode Choice

Why is it crucial?

Important implications in terms of =

Answer 1

Important implications in terms of:

• Resource commitment
• Exploration vs. Exploitation strategies
• Risk and uncertainty
• Learning and knowledge transfer

Question 2

Entry Mode Choice

Which are the main factors to consider?

Answer 2

Which are the main factors to consider?

• Home-host country distances
• FDI motivation
• Host-country characteristics, i.e. political and economic risks, regulations
• Firm strategy

Question 3

EXPORT

Answer 3

When is it attractive?
- it is relatively low cost
- firms may exploit economies of scale

When is it not attractive?
- you cannot leverage location advantages
- High transportation costs
- High tariff barriers
- if foreign agents fail to act in the exporter’s best interest

Question 4

Contractual Agreements

Licensing =

Answer 4

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

When is it attractive?
- Few development costs and risks of doing business abroad
- Capitalize on market opportunities and non-core capabilities
- Avoid tariffs and transportation costs

When is it not attractive?
- High potential for loss of know-how -> licensor future competitor
- Potential conflicts with licensee

Question 5

Contractual Agreements

Franchising =

Answer 5

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

Advantages:
- Similar to licensing
- but more control than the licensing

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

Question 6

Contractual Agreements

Strategic Alliances =

Answer 6

Strategic Alliances
= Agreements between 2 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

Question 7

Joint Ventures (JV) =

Answer 7

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

Question 8

Wholly Owned Subsidiaries =

Answer 8

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 q No integration costs with local partners

Why are they not attractive?
- Firms bear the full costs and risks of setting up overseas operations q Legitimacy problems
- No bridge with host country

Question 9

Wholly Owned Subsidiaries

Greenfield Investments
=

Answer 9

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

Question 10

Wholly Owned Subsidiaries

Acquisitions =

Answer 10

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

Question 11

What Influences the Choice of Entry Mode?

Three main views (Pan & Tse):

Answer 11

1. GRADUAL INVOLVEMENT IN INTERNATIONALIZATION
   - entry mode: trade off between:
   1) resources committed & risk
   2) control over activities & profit potential
2. DEPENDING ON TRANSACTION COSTS (TCE)
   - What is internalized?
   * 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
3. DEPENDING ON LOCATION SPECIFIC-FACTORS
   - Different locations give rise to different types and levels of risk as well as provide different types of inputs