Week 3: KC Flashcards
When to opt for a Joint Venture?
= Equity (FDI) mode of entry
- Legal requirement:
- Government of host country stimulates that MNE needs to partner up with a local firm in a Joint Venture to be able to enter the country - Partners help to make sense of foreign environments:
- JV partners are familiar with local customs and MNE’s can draw on their experiences and quickly expand their operations in the foreign country - Risk reduction:
- Especially in equity JV’s. Both partners may put up with initial investment which reduces the amount the MNE has to provide. Besides, JV partners both have an incentive to make it a success. - Different industries, same goals:
JV’s can help MNEs to diversify in an environment in which they do not have a lot of experience yet. They draw on their partner’s expertise and both bring complementary resources to the JV.
When to opt for a Wholly Owned Subsidiary? - In comparison to JV
= = Equity (FDI) mode of entry
Risk of knowledge dissipation:
Protection of intellectual property. This is to avoid JV partners to take advantage of your knowledge and then, for example, bring a new product on the market produced a lower cost. The government could force MNE to share proprietary knowledge or licenses
Most important
Transaction costs of JV can be too high
Low (psychic) distance: JV’s are not beneficial
Network of integrated subsidiaries rather than autonomous (and locally responsive) subsidiaries
Relatively small investments: MNEs typically choose wholly owned subsidiaries
How to choose the right foreign market entry?
Greenfield (setting up your own subsidiary from scratch) vs. Acquisition
4 options for entering host-country locations:
Greenfield (internal)
- Wholly Owned Subsidiary - high equity control
- International Joint Venture - low equity control
Acquisition (external)
- Full Acquisition - high equity control
- Partial Acquisition - low equity control
Wholly owned subsidiary
o When the firm has unique knowledge that can be easily transferred and exploited in a host-country (copy-paste strategy).
o When the firm has cumulated extensive local experience in terms of culture and the local business environment.
o When the foreign operation is part of the Global MNE strategy (according to Bartlett & Ghoshal model).
o When firm overcomes acquisition restrictions in the host-country
When to opt for a Wholly Owned Subsidiary?
Risk of knowledge dissipation:
Protection of intellectual property. This is to avoid JV partners to take advantage of your knowledge and then, for example, bring a new product on the market produced a lower cost. The government could force MNE to share proprietary knowledge or licenses
Most important
Transaction costs of JV can be too high
Low (psychic) distance: JV’s are not beneficial
Network of integrated subsidiaries rather than autonomous (and locally responsive) subsidiaries
Relatively small investments: MNEs typically choose wholly owned subsidiaries
International Joint Venture (Kogut, 1991)
International Joint Venture (Kogut, 1991)
– owned by at least one or more firms, when the firm cannot cope with the risks on their own
o Firm’s knowledge needs to be complemented with country or industry specific inputs. The quickest and cheapest way to do this is to exchange knowledge with a partner.
▪ High competition on global scale and growth of industries
▪ High CAGE distance
▪ High country risk
o Ownership/Acquisition restrictions
When to opt for a Joint Venture?
1.Legal requirement:
Government of host country stimulates that MNE needs to partner up with a local firm in a Joint Venture to be able to enter the country
- Partners help to make sense of foreign environments:
JV partners are familiar with local customs and MNE’s can draw on their experiences and quickly expand their operations in the
foreign country - Risk reduction:
Especially in equity JV’s. Both partners may put up with initial investment which reduces the amount the MNE has to provide. Besides, JV partners both have an incentive to make it a success. - Different industries, same goals:
JV’s can help MNEs to diversify in an environment in which they do not have a lot of experience yet. They draw on their partner’s expertise and both bring complementary resources to the JV.
Full acquisition
Full acquisition – most popular entry mode choices
o Expensive but enables firm to quickly expand its knowledge base knowledge seeking
o Preferred in context of growing foreign markets with a low level of competition.
o When CAGE distance is limited
o When country risk is low
Partial acquisition
Partial acquisition – shared ownership between two or more partners
o Knowledge exchange necessary due to lack of local experience
o When there is a multi-domestic MNE strategy (model of Bartlett & Ghoshal)
o When there are ownership restrictions
Why to choose export?
= Non-Equity Entry mode
- Light tangible assets and low initial investments
- Enable company to quickly enter a foreign market - Flexible
- Allows companies to pursue gradual internationalization process by moving from one country to the next one or by gradually scaling the involvement within a country. - Geographical concentration of core activities
- Enables the firm to leverage economies of scale
When to choose indirect export?
Firm needs a local partner to distribute its product or services
- When there are specific host country regulations
▪ For instance, in food and beverage industries
- When company requires location-specific tangible or intangible assets ▪ Distribution channels and facilities ▪ Informal networks ▪ Domestic brands ▪ Domestic market knowledge
Most active adopters of export strategies. =
Export strategies are adopted across different industries and typologies of firms.
Most active adopters of export strategies.
= Emerging market firms and family firms (small and medium enterprises), which remain close to their intrinsic characteristics,
Factors that drive typologies of firms to internationalize via export =
Factors that drive typologies of firms to internationalize via export:
- Lack of experience,
- lack of resources
- limited of managerial capabilities
The ‘strategy tripod’ perspective (Gao, 2010)
The ‘strategy tripod’ perspective (Gao, 2010)
= Predicts export behaviors by jointly factoring in the 1. Resource, 2. Institution, 3. and Industry- based view. = push factors for export behaviors
- Resource-based View
• Cost leadership competencies
• Differentiation competencies
- Considered to be push factors favoring export behaviors - Institution-based View
• Free market mechanism development favored
• Intermediate institutions development favored
- Considered to be push factors favoring export behaviors - Industry-based View
• Firms operating in industries that are more oriented towards export
• Firms operating in industries that are more instable
- Considered to be push factors favoring export behaviors
Contractual Agreements =
Contractual Agreements =
the establishment of partnerships between two or more entities. Entities are individuals or organizations
Intellectual Property (IP) licensing =
Intellectual Property (IP) licensing =
- most important typology of contractual agreements
- This is a contractual deal that enables to exploit IP in exchange for the payment of fees/royalties.
- This is used for commercialization of research, for instance.
- Normally involved companies, universities, research institutions
Assets that are normally exchanged via IP licensing are:
- patents,
- copyrights,
- know-how,
- trade secrets,
- trademarks,
- industrial designs.
Why do companies want to acquire IP through licensing? + example
- Defensive purposes
- if a company wants to avoid competition from copying their business products or services - Offensive purposes
- when company aims to increase it market share in a specific market or wants to generate revenues from the IP
• Most common example:
- Quick entry in foreign market or diversification strategy
in both cases, the company needs to acquire knowledge in the quickest and least risky way
