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Foreign Market Entry Strategies Ruth V. Aguilera.

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Presentation on theme: "Foreign Market Entry Strategies Ruth V. Aguilera."— Presentation transcript:

1 Foreign Market Entry Strategies Ruth V. Aguilera

2 World Market Principal Motives for Intl Expansion Locations Economies Economies of Scale Economies of Scope To seek lower production factor costs To expand sales and production volume To exploit proprietary assets

3 Forms of FDI Ownership Ownership Wholly owned operations Wholly owned operations Green-field investment Green-field investment Full acquisition Full acquisition Partially owned operations Partially owned operations Partial acquisition Partial acquisition Joint venture Joint venture Relatedness Relatedness Horizontal FDI Vertical FDI Unrelated diversification

4 Host CountryHome Country Forms of FDI: Ownership MNE New Entity Local Firm Joint Venture Full Acquisition (i.e., 100%) Green Field 100% Owned Partial Acquisition (e.g., 50%) Ownership = s% Ownership = (1 - s)%

5 The Form of FDI: Acquisitions versus Green-Fields The majority of investments is in the form of mergers and acquisitions: The majority of investments is in the form of mergers and acquisitions: Represents about 77% of all flows in developed countries. Represents about 77% of all flows in developed countries. Represent about 33% of all flows in developing countries. Represent about 33% of all flows in developing countries. Fewer target firms. Fewer target firms. Why the preference for mergers and acquisitions? Why the preference for mergers and acquisitions? Quicker to execute. Foreign firms have valuable strategic assets. Believe they can increase the efficiency of the acquired firm.

6 Entry Decision Making Under Uncertainty: Trade-off Between Flexibility and Commitment Timing: When is a good time to enter? Timing: When is a good time to enter? Potential gain from waiting Potential gain from waiting Cost of delay Cost of delay Scale of entry Scale of entry Small scale: Establish a foothold to learn Small scale: Establish a foothold to learn Large scale: Acquire first mover advantage Large scale: Acquire first mover advantage Speed of expansion: How fast to grow? Speed of expansion: How fast to grow? Value of learning Preemption of competitors Constraints of internal resources Mode Mode Some modes have more flexibility embedded Some modes reduce resource requirements

7 Choice of Market Entry Mode

8 Marketing and Sales ProductionR&D Company Infrastructure Organization, Coordination & HRM Value Chain of an MNE Innovative Capabilities Advanced Technology & Know- How Industry- Specific Marketing Expertise What additional resources may the MNE need to enter a foreign market? Local expertise: marketing, government relations, etc.

9 Marketing and Sales ProductionR&D Company Infrastructure Organization, Coordination & HRM Typical Value Chain of a Local Firm Imitative Capabilities Older Technology and Know- How Country- Specific Marketing Expertise What may the MNE desire from a local firm? Complementary resources Not necessarily strength in every area

10 Complementarity of Resources Local Firms Resources Imitating capabilities Older technology and know-how Country-specific marketing expertise Country specific organization skills MNEs Resources Innovative capabilities Advanced technology and know-how Industry-specific marketing expertise Organization structure and systems

11 Going it Alone: Export HOME COUNTRYHOST COUNTRY Export of Goods MNE Revenues Customers

12 Going it Alone: Export Advantages Low initial investment Low initial investment Reach customers quickly Reach customers quickly Complete control over production Complete control over production Benefit of learning for future expansion Benefit of learning for future expansionDisadvantages Potential costs of trade barriers Potential costs of trade barriers Transportation cost Tariffs and quotas Foregoes potential location economies Foregoes potential location economies Difficult to respond to customer needs well Difficult to respond to customer needs well When Is Export Appropriate? Low trade barriers Low trade barriers Home location has cost advantage Home location has cost advantage Customization not crucial Customization not crucial

13 Licensing Agreement Local Firm Licensing of Technology HOME COUNTRYHOST COUNTRY MNE Fees and Royalties

14 Licensing Agreement Advantages Low initial investment Low initial investment Avoids trade barriers Avoids trade barriers Potential for utilizing location economies Potential for utilizing location economies Access to local knowledge Access to local knowledge Easier to respond to customer needs Easier to respond to customer needs Disadvantages Lack of control over operations Lack of control over operations Difficulty in transferring tacit knowledge Difficulty in transferring tacit knowledge Negotiation of a transfer price Monitoring transfer outcome Potential for creating a competitor Potential for creating a competitor When Is Licensing Appropriate? Well codified knowledge Well codified knowledge Strong property rights regime Strong property rights regime Location advantage Location advantage

15 Foreign Acquisition Local Firm Investment HOME COUNTRYHOST COUNTRY MNE Profit

16 Foreign Acquisition Advantages Access to targets local knowledge Access to targets local knowledge Control over foreign operations Control over foreign operations Control over own technology Control over own technologyDisadvantages Uncertainty about targets value Uncertainty about targets value Difficulty in absorbing acquired assets Difficulty in absorbing acquired assets Infeasible if local market for corporate control is underdeveloped Infeasible if local market for corporate control is underdeveloped When Is Acquisition Appropriate? Developed market for corporate control Developed market for corporate control Acquirer has high absorptive capacity Acquirer has high absorptive capacity High synergy High synergy

17 Going it Alone: Green Field Entry New Subsidiary Company Investment HOME COUNTRYHOST COUNTRY MNE Profit

18 Going it Alone: Green Field Entry Advantages Normally feasible Normally feasible Avoids risk of overpayment Avoids risk of overpayment Avoids problem of integration Avoids problem of integration Still retains full control Still retains full controlDisadvantages Slower startup Slower startup Requires knowledge of foreign management Requires knowledge of foreign management High risk and high commitment High risk and high commitment When Is Green Field Entry Appropriate? Lack of proper acquisition target Lack of proper acquisition target In-house local expertise In-house local expertise Embedded competitive advantage Embedded competitive advantage

19 Management Contract Management Fees Local Firm Technological Inputs HOME COUNTRYHOST COUNTRY Profit MNE Wholly-Owned Subsidiary Managerial Service

20 Management Contract Advantages Access to local management skills Access to local management skills Avoids buying unwanted assets Avoids buying unwanted assets Retains strategic control Retains strategic control Disadvantages Potential incentive problem Potential incentive problem Potential adverse selection problem Potential adverse selection problem How do you know the competencies of the manager? When Is a Management Contract Appropriate? Manager has a reputation to protect Manager has a reputation to protect Hotels Hotels Consulting companies Consulting companies Performance-based contract provides no perverse incentives Performance-based contract provides no perverse incentives

21 Joint Venture Joint Venture Company Inputs MNELocal Firm HOME COUNTRYHOST COUNTRY Inputs Share of Profit

22 Joint Venture Advantages Access to partners local knowledge Access to partners local knowledge Reduction of concern about overpayment Reduction of concern about overpayment Both parties have some performance incentives Both parties have some performance incentives Significant control over operation Significant control over operationDisadvantages Potential loss of proprietary knowledge Potential loss of proprietary knowledge Potential conflicts between partners Potential conflicts between partners Neither partner has full performance incentive Neither partner has full performance incentive Neither partner has full control Neither partner has full control When Is a Joint Venture Appropriate? Both partners contribute hard-to-measure inputs Both partners contribute hard-to-measure inputs Large expected mutual gains in the long-run Large expected mutual gains in the long-run Trade secrets can be walled off Trade secrets can be walled off

23 Common Market Entry Modes Joint Venture Company Licensing Acquisition Joint Venturing Local Firm New Subsidiary Company Green Field Entry HOME COUNTRYHOST COUNTRY Export MNE

24 Intl Sourcing HOME COUNTRYHOST COUNTRY MNELocal Firm Design, spec and/or technology OEM goods Payment Applicable to manufacturing of mature products (e.g., shoes) Access to location economies Competition among OEM producers lowers costs.

25 Compensation Trade HOME COUNTRYHOST COUNTRY MNELocal Firm Equipment and technology Output Common reason: Local firms lack money to buy equipment Economic benefits Enhanced incentives for MNE to make sure that equipment works MNEs skills in marketing the products in its home country

26 Kumar & Subramaniam (1997) A Contingency Framework for the Mode of Entry Decision Risk Risk Return Return Control Control

27 Modes of entry ExportingContractual Agreeme nt Joint Venture AcquisitionGreenfield Investm ent RiskLow ModerateHigh ReturnLow ModerateHigh ControlModerateLowModerateHigh IntegrationNegligible LowModerateHigh

28 Decision Strategies: Rational Analytic Strategy Rational Analytic Strategy Cybernetic Strategy Cybernetic Strategy Serendipity Serendipity

29 Discovers

30 The Australian Challenge Whats Freixenet core competency? Whats Freixenet core competency? Evaluate Freixenets market entry modes Evaluate Freixenets market entry modes Freixenet in Australia Freixenet in Australia What lessons can we draw? What lessons can we draw? Where next? Where next? Adds: what is the theme? Adds: what is the theme? Is it a global theme (standarization/adaptaion? Is it a global theme (standarization/adaptaion? Glocalization (Akio Morita) Glocalization (Akio Morita)

31 Good luck!

32 Future Reading - Anderson, Erin and Hubert Gatignon Modes of Foreign Entry: A Transaction Cost Analysis. Journal of International Business Studies, 17: Kogut, B. and H. Singh The effect of national culture on the choice of entry mode. Journal of International Business Studies, 19: Hennart, J.-F. and Y.-R. Park Greenfield vs. acquisition: The strategy of Japanese investors in the United States. Management Science, 39(9): Hennart, J. F., and Reddy, S The Choice Between Mergers/Acquisitions and Joint Ventures: The Case of Japanese Investors in the United States. Strategic Management Journal 18: Barkema, H. G. and Vermeulen, F International Expansion Through Start-up or Acquisition: A Learning Perspective. Academy of Management Journal 41: Brouthers, K. D. and Brouthers, L. E Acquisition or Greenfield Start-up? Institutional, Cultural and Transaction Cost Influences. Strategic Management Journal 21:


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