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FOREIGN MARKET ENTRY MODES (BENEFITS TO INTERNATIONALISATION (FDI resolves…
FOREIGN MARKET ENTRY MODES
WHY DO FIRMS GO ABROAD?
Proactive Motivations
Profit advantage
Unique products
Technological advantage
Exclusive information
Tax benefit
Economies of scale
Reactive Motivations
Competitive pressures
Overproduction
Declining domestic sales
Saturated domestic markets
Excess capacity
Proximity to customers
When to Enter?
FIRST-MOVER ADVANTAGES
Benefits that accrue to firms that enter the market first that later entrants don't enjoy
Proprietary, tech leadership - Yahoo in Japan
Preemption of scarce resources
Establishing entry barriers for late entrants
Avoidance of clash with dominant firms at home - Sony & Honda entered USA before Japanese rivals
Relationships with key stakeholders such as customers & governments
LATE-MOVER ADVANTAGES
Benefits from entering market alter than early entrants don't enjoy
Opportunity to free ride on first-mover investments
Resolution of technological & market uncertainty
First-mover's difficulty to adapt to market changes
HOW DO FOREIGN FIRMS CRACK NEW MARKETS?
INSTITUTION BASED VIEW
Firms need to undertake actions deemed
LEGITIMATE & APPROPRIATE
by the various
formal/informal institutions governing market entries
Differences in
formal ins
may lead to regulatory risks due to
differences in political, economic & legal systems
May be numerous
trade & investment barriers
on national or regional basis
Existence of multiple currencies - and currency risks - formal barrier
Informally
- numerous
differences in culture, norms and values
create
source of liability of foreigness
RESOURCE BASED VIEW
Deploy overwhelming resources & capabilities
to
offset liability of foreignness
, and
possess competitive advantage
Acquiring & integrating a foreign firm requires enormous organisational cpabiltiies
WHERE TO ENTER?
2 considerations
Strategic goals
Cultural & institutional distances
Location Specific Advantages & Strategic Goals
Benefits from features specific to a place
Certain locations simply possess geographical features difficult to match
Dubai great stopping point between EU & Asia
Agglomeration
- clustering of economic activites
Advantages stem from:
Knowledge spillovers among closely located firms
Industry demand creating a skilled labour force who can work for different firm w/o relocating
Industry demand facilitating a pool of specialized suppliers and buyers to also locate in region
Different locations offer different benefits
Firm must match strategic objectives with potential locations
Natural resource seeking
Market seeking - abundance of strong market demand & custoemrs
Efficiency seeking - economies of scale & abundance of low cost factors
Innovation seeking - innovative individuals; firms & universities; Silicon Valley
Location specific advantages can
GROW, CHANGE
and/or
DECLINE
- prompting relocation
Important for policy makers to maintain institutional attractivenss
CULTURAL/INSTITUTIONAL DISTANCE & ENTRY
Consideration of cultural & institutional distances
CULTURAL DISTANCE
- difference betweeen 2 cultures along identifiable dimensions like
Individualism
INSTITUTIONAL DISTANCE
- extent of
simialrity or dissimialtrity
bewteen the
regulatory, normative & cognitive institutions
STAGE MODEL
Firms enter culturally similar countries during fist stage of internationalisation
Gain more confidence to enter culturally distance countries alter
HOW TO ENTER?
EQUITY
FDI modes including
Joint Ventures & Wholly Owned Subsidiaries
JV or Strategic Alliance
WOS - Greenfield Investment or Acquisditions
WHOLLY OWNED SUBSIDIARY
Subsidiary owned in foreign country that's entirely owned by parent MNC
Greenfield operations
- building new operations
Advantages
MNE has complete equity & management control - eliminates difficulties with JVs
Undivided control leads to better protection of IP
Allows for centrally coordinated global actions
DISADVANTAGES
Expensive & risky
(politically too) - conspicuous foreigness
Add new capacity to an industry -
more crowding
Slow entry speed
Acquisition
Adds no new capacity and faster entry speed
Post-acquisition problems can arise
JOINT VENTURES
New corporate entity jointly created & owned by two or more parent companies
Strategic Alliance
3 Advantages:
MNE
shares costs, risk and profits
with local partners
limiting risk exposure
MNE gains access to knowledge about host country
;
local firm benefits from MNE technology, capital
& management
More
politically acceptable
in host countries
3 Disadvantages
Partners with different backgrounds & objectives
conflicts arise
Effective equity & operational control difficult to achieve
with negotiation
Doesn't have tight control
from nature of JV over foreign subsidiary
needed for global coordiantion
NON-EQUITY
Entry through
Exports and Contractual Agreements
Smaller commitment to overseas market
EXPORTING
DIRECT EXPORTS
An extension of domestic demand
Most basic entry mode -
capitalizes on economies of scale in home country
- provides
better distributions control
INDIRECT EXPORTING
Exporting through domestically based export subsidaries
Relatively worry free
ADVANTAGES
Manufacturing home based - less risky- enjoy domestic efficiency
Opportunity to learn before investing overseas
Reduces risk of overseas operations
DISADVANTAGES
Mercy of overseas agents -
loss of control
Susceptible to
trade barriers
Logistical difficulties
High transportation costs
can make exporting uneconomical
CONTRACTUAL AGREEMENTS
LICENSING or FRANCHISING
Licensor/franchisor sells rights to IP (patents) & know how to licensee/franchisee for royalty fee
Licensor/franchisor
does not bear full cost and risk
associated with foreign expansion
Doesn't have tight control over production & marketing
Capital not tied up in foreign operations
Local manufacturer can secure government contacts
Allows firm to participate where there are barriers to investment
Licensee may not fully exploit the market
Licensee can
become potential competitor
- has the know-how now
Risk of worldwide reputation
if goes wrong
Franchisee greater incentive with direct stake in business
TURNKEY PROJECTS
Client pays contractors to design and construct new facilities and train personnel
Allows firms to earn returns from process technology in countries where FDI is restricted
Drawbacks:
Foreign clients may be competitors - selling them technology through TK projects boosts their competitiveness
Does n't allow for long term presence after key handed over
R&D contracts
Outsourcing agreements in R&D between firms
Firms tap into best locations for innovation at relatively low costs
Drawbacks:
Contracts difficult to negotiate and enforce with uncertainty and multidimensional nature of R&D
Contracts cultivate compeitors
Scale of entry
Large scale entry
- strategic commitment - assures local customers and suppliers
here for long haul
- deter competitor entry
Small scale entry
-
less costly
- focuses on organisational
learning by doing
- whilst limiting downside risk
Lack of strong commitment
- difficulties in building market share and capturing first mover advantages
BENEFITS TO INTERNATIONALISATION
Reduces cross-border transaction costs
Replaces external market relationship with single organisation spanning both countries
FDI resolves international market transaction difficulties through internationalization - replacing external market with in-house links
e.g. BP undertake upstream vertical FDI by owning oil production assets (abroad) in addition to their oil refinery (domestic)
MNE reduces cross-border transaction costs & increases efficiencies
BENEFITS OF FDI
Host Country:
Capital Inflow
Technolgoy spillovers
Advanced Management know-how
Job creation
Home Country:
Earnings
- repratirated profits
Exports
- increased exportation
Learning from abroad
COSTS TO FDI
Host Country:
Loss of sovereignty - investment/market decisions made by foreigners
Competition
Capital outflow - profits sent back to home country (net outflow)
Home Country:
Capital Outflow
Job loss - curtailing domestic production
Management Implications
Carefully
assess whether FDI is justified
in light of other foreign entry modes
Be
aware of institutional constraints and enablers governing FDI,
and enhace legfitmaicy in host country
Institution based view
: understand rules of the game - formal & informal - governing competition - failure is costly
Resource
- develop overwhelming capabilities to offset liability of foreigness - Hyundai in China offer advanced tech not offered elsewhere
Match entries with strategic goals