1. International Business (7)
Huang Huiping
Economic School. Whut

2. 7. Entering Foreign Market (chpt.12)
Learning Objective
1. Explore the three basic decisions that a firm contemplating foreign expansion must make: which markets to enter, when to enter those markets, and on what scale.
2. Review the different modes that firms use to enter a foreign market. Understand the advantages and disadvantages of each entry mode.
3. Reviewing FDI theories and policies.
4. Appreciate the relationship between strategy and a firm's choice of entry mode.

3. Opening Case Study: ING Group

4. Opening Case Study: International Expansion at ING Group
which markets :
Why did the ING managers choose America? What issues did managers concern during the market- and-site-screening process?
when to enter
Do you think ING has chosen proper time to entering the American market? Why, or why not? Was ING the first-mover entering this market?
on what scale
By entering the U.S. financial market on a large scale, what were the effects on ING ? Give your comments.
Entry mode
ING chose to enter the U.S. market via acquisitions rather than green-field ventures, What do you think the advantages to ING of doing this? What might the drawbacks be? Does this strategy make sense? Why?

5. Four basic decisions: 7.1 Basic Entry Strategy Which foreign market?
When to enter?
On what scale?
By which entry mode?

6. Which foreign market?
Some important issues concerned managers during the market- and-site-screening process:
(1) The attractiveness of a potential market for an international business depends on the balancing of the benefits, costs, and the risks; (the conclusion in chpt 2)
(2) Value create in foreign markets: check the adaptation of the product and the competition in this market . (the conclusion in chpt 11)
(3) following the steps:
a) Identify basic appeal
b) Assess the national business environment
c) Measure market or site potential
d) Select the market or site,

7. Lack of infrastructure Legal costs Benefits Size of Economy
Corruption
Lack of infrastructure
Legal costs
Benefits
Size of Economy
Likely economic Growth
Overall
Attractiveness
Risks
Political risks: social unrest/anti-business trends
Economic risks: economic mismanagement
Legal risks: failure to safeguard property right

9. When to enter ?
Entry is early : when a firm enters a foreign market before others.
- first-mover advantage :
By brand name;
Experience curve & cost advantage;
Creating switching cost.
- first-mover disadvantage : pioneering cost
Learning costs;
Failure costs;
Promotion and establishing a product offering
Regulations change in a way

10. On What Scale ? On a large scale
Strategic Commitment: A decision that has a long-term impact and is difficult to reverse.
The effects:
First mover advantage: Easier to attract customs and distributors;+
Give other competitors’ entry pause; +
Limit the company’s flexibility －
On a small scale
- gather information;
- lower the risks, lower the benefits

11. 7.3 Entry modes Trade entry mode - exporting & importing
- countertrade
Contractual Entry mode
- licensing
- franchising
- turnkey projects
- management contracts
Investment entry modes
- wholly owned subsidiaries
- joint ventures
- strategic alliance

12. case study: Starbucks’ FDI
Why didn’t Starbuck just simply export the coffee products?
Why did Starbuck initially decide to license its format in Japan? What is licensing? What are the advantages and disadvantages of licensing?
After that ,what made Starbuck set up a joint venture with a local retailer, Sazaby ?
Is FDI expensive and risky? Why or why not?
Was it a green-field investment or an acquisition ?

13. 美国西雅图

14. 日本福冈

15. 泰国曼谷

16. 迪拜

17. 7.3.1 Exporting Advantages To expand sales. To diversify sales
To gain experiences
To avoid the often-substantial costs of establishing manufacturing operation in host countries.
To realize location and experience curve effects
Disadvantages:
Maybe there are lower-cost location for producing the products abroad.
High transportation cost
Trade barriers
Foreign agent problems
Some products are not suitable to be exported.

18. Licensing 许可证
Licensing : Occurs when a licensor grants the right of its intangible property to the licensee for a specified period and receives a royalty fee in return.
许可证协议：许可方将一定期限内的无形资产授权给被许可方,并且获得提成收益。
intangible property : patent, invention, design, formula, copy right, brand name or trademark ….

19. Types of license price Sole license Exclusive license Sub-license
Simple license
Cross license
Licensee’s right

20. Licensing 许可证 Advantages Lower costs and risks
Overcome trade and investment barriers ，enter into new market easily.
When a firm does not want to develop the applications of its own intangible assets.

21. When a firm does not want to develop the applications of its own intangible assets.。。。。。。

22. License： Disadvantages:
Lack of tight control over technology, production, and marketing ,which is required for realizing experience curve and location economies
The core competitiveness is based not so much on its products as on the management, marketing, and manufacturing capabilities, some of them are not amenable to licensing.
Giving away the valuable technology know-how to a potential foreign competitor, may lose know-how
Difficult to coordinate strategic moves across counties.

23. Two ways of lowering risks:
cross-license agreement 交叉许可协议
joint-venture

24. 7.3.3 Franchising特许经营 Franchising:
A specialized form of licensing in which the franchisor sells intangible property to the franchisee and insists on rules to conduct the business.
特许经营：许可证的特殊形式。特许授予者不仅向特许经营人出售无形资产（商标），而且坚持要特许经营人严格遵守规定的方式。
intangible property？ Name, brand, know-how, management skill....

25. 瑞士苏黎世

26. Franchising特许经营 Advantages Lower costs to expand the market quickly
Lower financial risks
Franchisee location advantages
Reduce HRM problem
Q: What are the benefits for franchisee?

27. Disadvantages
Lack of tight control over quality management
Difficult to coordinate strategic moves across counties.
Way of lowering risks:
Set up subsidiary

28. 7.3.4 Management Contract 管理合同
Management Contract ：Practice by which one company supplies another with managerial expertise for a specific period of time. （Airport，hospital。。。。）
Advantages
Can benefit organizations : business opportunities
Can benefit countries: public utilities
Government :develop the skills of local workers and managers
Disadvantages
risks in unstable environment
Create new competitors

29. 7.3.5 Turnkey project 交钥匙工程
Turnkey project: A project in which a firm agrees to set up an operating plant for a foreign client and hand over the “key” when the plant is fully operational.
交钥匙工程:出口加工技术的一种方式.承包商同意为外国客户处理一切细节,包括培训人员，合同完成后，客户拿到一切就绪的工厂钥匙。

33. Turnkey project 交钥匙工程 Advantages
Earn great return from the assets: Know-how required to assemble and technologically complex process
Earn great return in where FDI is limited
Less risk than FDI
Disadvantages:
Lack long-term interest in foreign country
Create a competitor , Loss a firm’s advantages to potential/ actual competitor
Be highly politicalized

34. FDI
Foreign Direct Investment (FDI): Direct Investment in business operations in a foreign country.
Multinational Enterprises (MNE): A firm that owns business operations in more than one country.

35. Joint Venture 合资公司
Joint Venture: A cooperative undertaking between two or more firms.
合资公司：两个或者更多的独立企业共同拥有的企业。

36. Joint Venture 合资公司 Advantages
Benefit from a local partner’s knowledge of the host country
Gain by sharing developing cost and risks
Political considerations
Disadvantages
Giving control of its technology to the local partner
Difficult to coordinate strategic moves across counties.
Unable to realize location and experience curve effects

37. 7.3.6.2 Wholly Owned Subsidiaries 独资子公司
Wholly Owned Subsidiaries: A subsidiary in which the firm owns 100% percent of the stock.
独资子公司：一方拥有100％股权的公司。

38. Wholly Owned Subsidiaries 独资子公司
Advantages
Protect the core competence
Tight control
Coordinate strategic moves across counties.
Realize location and experience curve effects
Disadvantages
High risks and costs
Good Management Capability required

39. 7.4 Selection of Entry Mode
Considerations :
The Pros and Cons for each mode
（see table 12.1）
The company’s advantage’ type
The core competence’s type
The pressures of cost reduction
Competition environment

40. 7.4.1 Pros and cons of each entry mode

41. The evolution of entry mode
experiences
Wholly owned subsidiaries ◎
◎ management
contract
◎ joint venture/
strategic alliance
◎ franchising
Control
◎ turnkey project
◎ licensing
◎ exporting
Risks

42. Three advantages model
7.4.2 The company’s advantage’ type : Eclectic Paradigm(John Dunning)
Three advantages model
- Property-specific advantages: a firm’s own unique assets
Internalizing-specific advantages:
using a firm’s own unique assets to produce products
- location-specific advantages
advantages that arise from using resources endowment or assets that are tied to a particular foreign location and that a firm finds valuable to combine with its own unique assets.

43. Three advantages model
Property advantages
Licensing trade
Property advantages
Goods exporting
Internalizing advantages
Licensing trade
Property advantages
F D I
Internalizing advantages
Licensing trade
Location-specific advantages
Goods exporting

45. 7.4.3 Core competence and entry mode
Wholly Owned Subsidiary
Tech. Know-how
Export
Franchising
Management Know-how
Subsidiary

46. 7.4.4 Pressures for cost reductions and entry mode
Wholly Owned Subsidiary
The greater the pressures for cost reductions
Export
Firm pursuing global or transnational strategy tend to prefer establishing wholly owned subsidiaries

47. 7.4.5 The competition -------Strategic Behavior
Strategic Behavior theory focus on relationship between FDI and rivalry in oligopolistic industries
Oligopoly: is an industry compose of a limited number of large forms .(4 firms, 80% market)
Imitative behavior : a critical competitive feature of this Oligopoly is interdependence of the major players.
Multipoint competition : arises when two or more enterprises encounter each other in different regional markets ,national markets or industry.

48. Green-field investment establish a new operation in a foreign country.
7.5 Establishing a wholly owned subsidiary: Green-field venture or Acquisition?
Green-field investment
establish a new operation in a foreign country.
Acquisition: acquiring or merging an existing firm in a foreign country.

49. Green-field venture Pros
- to build the kind of company that a firm really wants!
- to transfer products, skills, know-how, competency and culture!
Cons
- slower
- risky
Strategies

50. - Preempt the competitors; - Less risky Cons-----Why fail?
Acquisitions
Pros :
- Quicker to execute ;
- Preempt the competitors;
- Less risky
Cons-----Why fail?
Overpay problems
Cultural conflict
Roadblocks in the integrating the operations of acquired and acquiring entities.
Inadequate pre-acquisition screening

51. Assignments Oral presentations
Research task: P408, task 1, one group 4-5 students, 12 minutes presentation, Nov.7
Written homework: due Nov.14
P407(E), Q4,
P408, Closing case study
Read and review chapter 12.

52. For next class: Self-reading P411-419 :
Read“ The 12 most common mistakes and pitfalls awaiting new exporters”, on p451, Another Perspective,
Try to find the solutions to those problems, from your textbook and other sources.
Prepare discussion for the class on Wednesday.