1. International Business: Actions Entry modes (II)
Business College
School of Management

2. Key Learning Objective
This session will help you to understand the concepts of:
1) Internationalisation of business organisations
2) Key international business theories
3) Complexities of choices and approaches in internationalisation

3. Aims of the Session:
To understand different forms of internationalisation and market entry.
To consider the benefits and problems of firm internationalisation from different perspectives. 3

4. Key Questions How do organisations internationalise?
How does international business manage its internal operations?
How does international business manage its external operations (e.g. relationship with the host country/communities)?

5. Recap
We looked at the concept of ‘internationalisation’ of firms and rationale behind their decision-making process.
Advantages and Risks of internationalisation

6. Modes of Entry
Organisations contemplating foreign expansion must consider the following:
Which foreign market(s) to enter
Timing of entry
What form of entry to use
What scale of entry to establish
Which mode of entry to adopt

7. Going it Alone: “Green Field” Entry
HOME COUNTRY
HOST COUNTRY
MNE
Profit
Investment
New Subsidiary Company

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

9. Between 2007 and 2011, a total of 1,243 foreign direct investment (FDI) projects were recorded in Australia from 933 companies. This represents an average annual growth rate of 15.4 per cent with a total capital investment of US$122 billion. Greenfield investments accounted for 84.8 per cent of projects over this five year period.  (Brisbanemarketing, 2012)

10. Activity 1: Hyundai goes greenfield in Czech Republic
In 2008, Hyundai invested in the form of greenfield investment in Czech republic ( Please discuss the choice of doing greenfield investment. Why this strategy? What are the benefits and pitfalls for Hyundai?

11. Wholly-Owned Subsidiary
Management Contract
HOME COUNTRY
HOST COUNTRY
Management Fees
MNE
Local Firm
Managerial Service
Profit
Technological Inputs
Wholly-Owned Subsidiary

12. Contractual entry modes
Management contracts
One company supplies another with managerial expertise for a specific period of time
+ Low risk
+ Receive awards from governments
+ Governments use to develop the skills of local workers
- Managers’ lives in danger when countries are undergoing political or social turmoil
- Can create future competitors
Licensing
Franchising
Turnkey projects
Management contracts 12

13. When Is a Management Contract Appropriate?
Advantages
Access to local management skills
Avoids buying unwanted assets
Retains strategic control
Disadvantages
Potential incentive 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
Hotels
Consulting companies
Performance-based contract provides no perverse incentives

14. Contractual entry modes
Turnkey projects
One company designs, constructs, and tests a production facility for a client firm
+ Permit firms to specialize in their core competencies
+ Allow governments to obtain designs for infrastructure projects from the world’s leading companies
- Company may be awarded project for political reasons
Can create future competitors
No long term interests.
Licensing
Franchising
Turnkey projects
Management contracts 14

15. MNE Local Firm Joint Venture HOME COUNTRY HOST COUNTRY Share of Profit
Inputs
Inputs
Joint Venture Company
Share of Profit

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

17. Air Asia – Tata Joint Venture
This is the story of IJV between TATA and Air Asia in India:
Case Study
RMIT University
School of Management

18. Activity 3: International Joint Venture Case Study
Please read this IJV case study and answer the following questions:
What are the factors that MNCs should consider when deciding to use an international joint venture as a market entry strategy?
What are the potential benefits and risks in taking this course of action?
RMIT University
School of Management

19. Common Market Entry Modes
HOME COUNTRY
HOST COUNTRY
Licensing
Acquisition
MNE
Local Firm
Export
Joint Venturing
Joint Venture Company
“Green Field” Entry
New Subsidiary Company

20. Design, spec and/or technology
Int’l Sourcing
HOME COUNTRY
HOST COUNTRY
Design, spec and/or technology
MNE
Local Firm
OEM goods
Payment
Applicable to manufacturing of mature products (e.g., shoes)
Access to location economies
Competition among OEM producers lowers costs.

21. Activity 3: Is Nigeria an attractive place for FDI?
Please watch this and discuss the question.

22. Contractual Agreement Greenfield Investment
Modes of entry
Exporting
Contractual Agreement
Joint
Venture
Acquisition
Greenfield Investment
Risk
Low
Moderate
High
Return
Control
Integration
Negligible

23. Future Reading
Anderson, Erin and Hubert Gatignon Modes of Foreign Entry: A Transaction Cost Analysis.  Journal of International Business Studies, 17: 1-26.
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: 1-12.
- Barkema, H. G. and Vermeulen, F International Expansion Through Start-up or Acquisition: A Learning Perspective. Academy of Management Journal 41: 7-26.
- Brouthers, K. D. and Brouthers, L. E Acquisition or Greenfield Start-up? Institutional, Cultural and Transaction Cost Influences. Strategic Management Journal 21: