BUSM1227: International Business: Entry Modes (II)

Business College

School of Management

RMIT University School of Management 2

Key Learning Objectives

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

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.

RMIT University School of Management 3

Key Questions

• How do organisations internationalise?

• How does international business manage its internal and external operations when it comes to entry modes for foreign market?

RMIT University School of Management 4

Entry Strategies

RMIT University School of Management 5

Strategic Alliances

• “When two or more companies from different countries agree to ENGAGE jointly in business activities.”

• “A strategic alliance is a relationship between two or more entities that agree to share resources to achieve a mutually beneficial objective. For example, a company manufactures and distributes a product in the United States and desires to sell it in other countries. Another company wants to expand its product line with the type of product the first company creates, and has a worldwide distribution channel. The two companies establish an alliance to expand the distribution of the first company’s product.”

• Examples: joint R&D, joint manufacturing, joint sales, joint service

RMIT University School of Management 6

Rationale for International Strategic Alliances

• Penetrating new foreign markets

• Sharing market/marketing costs

• Sharing research and development costs and risks

• Launching a counterattack against competitors

• Pooling global resources

• Learning from partners

RMIT University School of Management 7

Success Factor for Strategic Alliances

RMIT University School of Management 8

Activity 1:Case Study: South African Airways and Etihad

• Please read the case of strategic alliance between Etihad and South African Airways in early 2015. Then, discuss the following questions:

(http://www.businesstoday.co.ke/news/news/1418640757/etihad-south-african-airways-strike-double-daily-flights-deal)

1)What are the key benefits for Etihad and South African airways?

2)What do you see as potential pitfalls?

RMIT University School of Management 9

Etihad Airways President and CEO James Hogan (L) with SAA acting chief executive Nico Bezuidenhout during the signing of the partnership

Management Contract

• A management contract is an arrangement under which operational control of an enterprise is vested by contract in a separate enterprise that performs the necessary managerial functions in return for a fee.

• Management contracts involve not just selling a method of doing things (as with franchising or licensing) but involve actually doing them. A management contract can involve a wide range of functions, such as technical operation of a production facility, management of personnel, accounting, marketing services and training.

RMIT University School of Management 10

School of Civil, Environmental and Chemical Engineering 11

Why Management Contract?

Advantages

•Low Risk (financial/management)

•Potential Government Support

•Can be used as a national strategy for skill development

This story can help you to understand rationales behind MC•http://www.bloomberg.com/news/articles/2011-07-15/spain-approves-sale-of-aena-management-contracts-for-airports

RMIT University School of Management 12

Disadvantages

• Potential incentive problem

• Potential adverse selection problem

– How do you know the competencies of the manager?

Turnkey Projects

• It is a contract under which a firm agrees to fully design, construct and equip a manufacturing/ business/ service facility and turn the project over to the purchaser when it is ready for operation for a remuneration.

Why/Why Not Turnkey?

+ Permit firms to specialize in their core competencies

+ Allow governments to obtain designs for infrastructure projects from the world’s leading companies

+ Technology Transfer

- Company may be awarded project for political reasons

- Can create future competitors

- No long term interests.

RMIT University School of Management 13

Turnkey Projects

• What are the key benefits and challenges of turn key project? Learn from the story of “Sunda Strait Bridge Project” from Indonesia

Link: http://www.thejakartapost.com/news/2011/07/17/financing-sunda-strait-bridge.html

RMIT University School of Management 14

Joint Venture

•A joint venture (JV) is a business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets.

RMIT University School of Management 15

Joint Venture

ADVANTAGES

•Access to partner’s local knowledge

•Reduction of concern about overpayment

•Both parties have some performance incentives

•Significant control over operation

PITFALLS

•Potential loss of proprietary knowledge

•Potential conflicts between partners

•Neither partner has full performance incentive

•Neither partner has full control

RMIT University School of Management 16

Activity 2 International Joint Venture Case Study

• Please read this IJV case study and answer the following questions:

• http://cws.cengage.co.uk/doole5/students/case_studies/chap_07.pdf

• 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 17

Greenfield Investment

• A form of foreign direct investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up. In addition to building new facilities, most parent companies also create new long-term jobs in the foreign country by hiring new employees.

• Compared to a greenfield investment, a cross-border acquisition is clearly much quicker and can also be a cost effective way to obtain technology and/or brand names

• Cross-border acquisitions are however, not without pitfalls, as firms often pay too high a price or utilize expensive financing to complete a transaction

RMIT University School of Management 18

Greenfield Investment

• Please read this information from the Bulgarian Board of Investment and discuss if Bulgaria should be considered a place for greenfield investment? Why?

Link: http://bulgarico.com/wp-content/uploads/2011/02/Bulgaria-The-Right-EU-Location.pdf

RMIT University School of Management 19

Determinants of Entry Mode Strategies

• Country-specific knowledge

• Firm size: size can be related to commitment and resources

• Firm experiences

• Cultural distance

• Political/economic factors

• Tacit knowledge and know-how

• Industry growth

• Competitors

RMIT University School of Management 20

Discussion

• What factors should be consider when it comes to choice of entry mode? Why?

• What are the cultural and political-economy links with entry mode? Please explain.

• What are the roles of technology in the choice of entry strategies?

RMIT University School of Management 21