Advantages:

• Least costly (No FDI cost)
• Lower cost: Achieve economies of scale by producing huge quantities in one facility, & achieve experience curve
• Useful for SMEs for reaching a global market place
• More widely used with e-business
• Low risk: Importer bears all risks
• Lack of trust of payment can be overcome by a letter of credit

Disadvantages:

• Long geographical distance can result in high transport cost
• Host gov. regulations/tariffs that blocks or restrict imported goods
• Exchange rates: Home currencies strong will make exports more expensive
• No adaptation: May not suit local taste, result in limited revenue growth
• Do not take advantage of lower cost locations abroad to manufacture products
• Agents in foreign countries not closely controlled & may not act in the exporter's best interests

Advantages

• Way of earning economic returns from the know-how required to assemble and run a technologically complex process.
• Less risky than FDI

Disadvantages

• Contractor has no long-term interest in the foreign country so market growth may be small.
• Selling of 'know-how' is also selling to competitive advantage to a competitor, who may grow to compete globally one day
• Project risks: E.g. Construction will take longer due to differences in soil conditions

Advantages

• No cost/risk for entering foreign market
• Avoid barriers to entry, yet still entering markets and earning revenue by royalty fees
• Capitalise on market opportunities without developing additional marketing, admin & operational capabilities itself.
  
  

E.g. Xerox signed an agreement with Fuji Photo in order to enter the Japanese market, creating Fuji Xerox. Xerox then licensed its xerographic know-how to Fuji Photo in exchange for a royalty fee of 5 percent of net sales revenue, earned from photocopier sales. The agreement was for 10 years and has been extended several times.

Disadvantages

• Lack of control over technology, proprietary or intangible assets could be lost.
  (Can be overcome by exchanging
  for a license to use the other firm’s know-how, or by forming a joint-venture)
  
  

E.g. US biotechnology firm Amgen licenses Japanese sales of its product Nuprogene to Japanese firm, Kirin. In exchange Kirin licenses Amgen to sell some of Kirin’s products in the USA.

• Dissemination risk by licensee
• Licensee may disregard terms and conditions by licensor (e.g. overproducing) and continue selling without paying royalty fees once they learn how to produce the goods.

Disadvantages

• Geographic and administrative distance from the franchisee may make it difficult to detect poor quality.
• Poor quality at one branch can hurt the brand globally.
• Inhibit the company’s ability to take profits out of one country to support competitive attacks in another.
  
  

E.g. of Franchisee disrupting the agreement and become a competitor:
The Minor Group operated Tricon franchised Pizza Hut brand for 20 years in Thailand. When the agreement was terminated, the Minor started “The Pizza Company” as its own brand in 2001.

• Establishing a company that is jointly owned by two or more otherwise independent companies.
• Typically 50/50 owned by the partners
  
  

E.g. Tata Starbucks – owned 50/50 proportions. Tata is an Indian company.

E.g. US multinational General Electric has in recent years used joint ventures to enter foreign markets like Spain and South Korea where its units lacked a strong presence.

Advantages

• Share the costs and risks of opening a foreign market
• Often satisfy local political considerations for market entry.
• Benefit from a local partner’s knowledge of local conditions, culture, language, political systems, legal know-how and business systems.

Disadvantages

• Conflict in Culture between partners affect decision making and goals
• Company risks giving control of its technology to its partner.

Advantages:

• Greater ability to create an organisational culture and ways of operating, which is difficult to transfer to acquired companies.

Disadvantages:

• Takes a longer time to establish
  
  • May be pre-empted by a rival company who used acquisition to gain a quicker foothold in the market
  • Riskier than acquiring company

Advantages

• quicker to execute than Greenfield ventures
• enable companies to pre-empt their competitors in the foreign market
• Less risk than greenfield (Acquired company already has a known revenue and profit stream, intangible assets - e.g. managers’ local knowledge of markets and existing customer relationships.)
  

Disadvantages
Known to fail due to:

• Acquiring company overpays for the acquired company.
• Inadequate pre-acquisition screening of compatibility.
• Clash of cultures between the two companies.
• Attempts to realize synergies running into roadblocks and take much longer
  and are more expensive to realize than forecast.
  (E.g. incompatible technologies and human resource policies)

Examples:
Pearl river piano company acquisition of Ritmuller, a German premium high-end piano company, Lenovo’s acquisition of IBM’s Notebook business.

Advantages

• Acquire local knowledge and adapt the product fully to foreign market.
• Reduce risk of losing control over core competencies
• 100% of the profits earned
• Protect key technologies and intellectual property.
• Bypass tariffs barrier by producing in host country
• Create an integrated global strategy with tight control over operations in different countries with fully optimised global production system

Disadvantage

• 100% of costs and risks.
• Vulnerable to change in policies and economic conditions in host country.

1. Formal Institutions
   
   

Indian government dictates the maximum ceiling of foreign firms' equity position in the retail sector to be 51%. Foreign entrants are forced to set up alliances such as JVs with local firms.

(E.g. Wal-Mart formed a 50/50 JV with Bharti—Bharti Wal-Mart Private Limited.)

Examples:
China: Only JVs are permitted in automobile industry
Russia: Only JVs are permitted in the oil industry
USA: Only 25% foreign equity allowed in US airlines

2. Informal Institutions
   
   

Get to know more about the country first
(E.g. In the late 1980s, McDonald's set up a JV with the Moscow Municipality Government that helped it enter Russia)

Advantages

• Facilitates entry into foreign market
• Stepping stone to full acquisition (parties work together to smooth the path to acquisition)
• Share fixed cost and risks to developing new products/ processes
• Bring together complementary skills and assets that both could not develop on their own
• Set standards for the industry through alliance

Disadvantages

• Failure rate for SAs is very high.
  (E.g. Historically, 2/3 SAs companies run into serious financial & managerial problems within 2 years of formation - 1/3 of these were considered failures) ---> SAs need to be carefully entered into and managed.)
• Entails some elements of trusts which may be easily abused
• Give the competitor you ally with a low-cost route to technologies and market.
  (E.g. US companies in the semiconductors industries were criticised for the their SA with Japanese companies which allowed them to gain valuable US project engineering and production process skills, thus lowering US companies' competitive advantage)

Example: Airline industry - Airline form strategic alliance to connect to all major travel destinations. They also share frequent flyer programmes, resources (e.g. passengers lounge)
E.g. Star alliance, One world, SkyTeam

Principles for Successful SA:

1. Partner selection:

• Both must have shared vision. complemetary capabilities, not exploit alliance.
  
  

(E.g. Pepsi Co & Starbucks worked together to create popular coffee-flavoured drink, Frappacino. This help to move Starbucks to the bottled industry, while PepsiCo gained an innovative product with a well-branded partner. Both parties fulfilled strategic and operational goals.)

2. Alliace Structure:

• Have contractual agreements to guard against partner opportunism, and allow for swapping of skills and technology with equal gains.
  
  

(E.g. Danone and Wahaha failure.)

3. Management Capability:
-Build strong interpersonal relationship between the two management (relational capital)

• Require learning from the alliance partner
  Partners see each other as an opportunity to learn from potential competitor on how to do biz better, and not just cost/risk-sharing devices.
• Progress to a more partnering, trust-base relationship
  
  

(E.g. Hewlett-Packard (HP) alliance with The Walt Disney Co)

Notes: SA can be competitive advantage if managed well
(E.g. CFM International, a JV set up between GE and Snecma to produce jet engines in France has successfully operated for 30 years. Rival had a hard time imitating such successful relationship.)