Foreign Market Entry Foreign Market Entry StrategiesStrategies

Foreign Market Entry Foreign Market Entry StrategiesStrategies

Ruth V. AguileraRuth V. Aguilera

World Market

Principal Motives for Int’l Principal Motives for Int’l ExpansionExpansion

Locations Economies

Economies of Scale

Economies of Scope

To seek lower production factor costs

To expand sales and production volume

To exploit proprietary assets

Forms of FDIForms of FDI OwnershipOwnership

Wholly owned Wholly owned operationsoperations

Green-field Green-field investmentinvestment

Full acquisitionFull acquisition Partially owned Partially owned

operationsoperations Partial acquisitionPartial acquisition Joint ventureJoint venture

Relatedness Relatedness Horizontal FDIHorizontal FDI Vertical FDIVertical FDI Unrelated Unrelated

diversificationdiversification

Host CountryHome Country

Forms of FDI: OwnershipForms of FDI: Ownership

MNE

New Entity

Local Firm

Joint Venture

Full Acquisition (i.e., 100%)

Green Field100% Owned

Partial Acquisition (e.g., 50%)

Ownership = s%

Ownership = (1 - s)%

Entry Decision Making Under Uncertainty: Entry Decision Making Under Uncertainty: Trade-off Between Flexibility and Trade-off Between Flexibility and

CommitmentCommitment Timing: When is a Timing: When is a

good time to enter?good time to enter? Potential gain from Potential gain from

waitingwaiting Cost of delayCost of delay

Scale of entryScale of entry Small scale: Small scale:

Establish a foothold Establish a foothold to learnto learn

Large scale: Acquire Large scale: Acquire first mover first mover advantageadvantage

Speed of expansion: Speed of expansion: How fast to grow?How fast to grow? Value of learning Value of learning Preemption of Preemption of

competitorscompetitors Constraints of internal Constraints of internal

resourcesresources ModeMode

Some modes have more Some modes have more flexibility embeddedflexibility embedded

Some modes reduce Some modes reduce resource requirementsresource requirements

Choice of Market Entry Choice of Market Entry ModeMode

Marketing and Sales

ProductionR&D

Company Infrastructure

Organization, Coordination & HRM

Value Chain of an MNEValue 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.

Marketing and Sales

ProductionR&D

Company Infrastructure

Organization, Coordination & HRM

Typical Value Chain of a Local Typical Value Chain of a Local FirmFirm

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

Complementarity of Complementarity of ResourcesResources

Complementarity of Complementarity of ResourcesResources

Local Firm’s Resources

Imitating capabilities Older technology and

know-how Country-specific

marketing expertise Country specific

organization skills

MNE’s Resources

Innovative capabilities Advanced technology

and know-how Industry-specific

marketing expertise Organization structure

and systems

Going it Alone: ExportGoing it Alone: ExportGoing it Alone: ExportGoing it Alone: ExportHOME COUNTRY HOST COUNTRY

Export of Goods

MNE

Revenues

Customers

Going it Alone: ExportGoing it Alone: ExportAdvantagesAdvantages

Low initial investmentLow initial investment Reach customers Reach customers

quicklyquickly Complete control over Complete control over

productionproduction Benefit of learning for Benefit of learning for

future expansionfuture expansion

DisadvantagesDisadvantages Potential costs of Potential costs of

trade barrierstrade barriers Transportation costTransportation cost Tariffs and quotasTariffs and quotas

Foregoes potential Foregoes potential location economieslocation economies

Difficult to respond to Difficult to respond to customer needs wellcustomer needs well

When Is Export Appropriate?When Is Export Appropriate? Low trade barriersLow trade barriers Home location has cost advantageHome location has cost advantage Customization not crucialCustomization not crucial

Licensing AgreementLicensing AgreementLicensing AgreementLicensing Agreement

Local Firm

Licensing of TechnologyHOME COUNTRY HOST COUNTRY

MNE

Fees and Royalties

Licensing AgreementLicensing AgreementAdvantagesAdvantages

Low initial investment Low initial investment Avoids trade barriersAvoids trade barriers Potential for utilizing Potential for utilizing

location economieslocation economies Access to local Access to local

knowledgeknowledge Easier to respond to Easier to respond to

customer needscustomer needs

DisadvantagesDisadvantages Lack of control over Lack of control over

operationsoperations Difficulty in transferring Difficulty in transferring

tacit knowledgetacit knowledge Negotiation of a transfer Negotiation of a transfer

priceprice Monitoring transfer outcomeMonitoring transfer outcome

Potential for creating a Potential for creating a competitorcompetitor

When Is Licensing Appropriate?When Is Licensing Appropriate? Well codified knowledgeWell codified knowledge Strong property rights regimeStrong property rights regime Location advantageLocation advantage

Foreign AcquisitionForeign AcquisitionForeign AcquisitionForeign Acquisition

Local FirmInvestment

HOME COUNTRY HOST COUNTRY

MNE

Profit

Foreign AcquisitionForeign AcquisitionAdvantagesAdvantages

Access to target’s Access to target’s local knowledgelocal knowledge

Control over foreign Control over foreign operationsoperations

Control over own Control over own technologytechnology

DisadvantagesDisadvantages Uncertainty about Uncertainty about

target’s valuetarget’s value Difficulty in “absorbing” Difficulty in “absorbing”

acquired assets acquired assets Infeasible if local market Infeasible if local market

for corporate control is for corporate control is underdeveloped underdeveloped

When Is Acquisition Appropriate?When Is Acquisition Appropriate? Developed market for corporate controlDeveloped market for corporate control Acquirer has high “absorptive” capacityAcquirer has high “absorptive” capacity High synergyHigh synergy

Going it Alone: “Green Field” Going it Alone: “Green Field” EntryEntry

Going it Alone: “Green Field” Going it Alone: “Green Field” EntryEntry

New Subsidiary Company

Investment

HOME COUNTRY HOST COUNTRY

MNEProfit

Going it Alone: “Green Field” Going it Alone: “Green Field” EntryEntry

AdvantagesAdvantages Normally feasibleNormally feasible Avoids risk of Avoids risk of

overpaymentoverpayment Avoids problem of Avoids problem of

integration integration Still retains full Still retains full

controlcontrol

DisadvantagesDisadvantages Slower startupSlower startup Requires knowledge Requires knowledge

of foreign of foreign managementmanagement

High risk and high High risk and high commitmentcommitment

When Is “Green Field” Entry Appropriate?When Is “Green Field” Entry Appropriate? Lack of proper acquisition targetLack of proper acquisition target In-house local expertiseIn-house local expertise Embedded competitive advantageEmbedded competitive advantage

Management ContractManagement ContractManagement ContractManagement Contract

Management Fees

Local Firm

Technological Inputs

HOME COUNTRY HOST COUNTRY

Profit

MNE

Wholly-Owned Subsidiary

Managerial Service

Management ContractManagement ContractAdvantagesAdvantages

Access to local Access to local management skillsmanagement skills

Avoids buying Avoids buying unwanted assetsunwanted assets

Retains strategic Retains strategic controlcontrol

DisadvantagesDisadvantages Potential incentive Potential incentive

problemproblem Potential adverse Potential adverse

selection problem selection problem How do you know the How do you know the

competencies of the competencies of the manager?manager?

When Is a Management Contract Appropriate?When Is a Management Contract Appropriate? Manager has a reputation to protectManager has a reputation to protect

HotelsHotels Consulting companiesConsulting companies

Performance-based contract provides no Performance-based contract provides no perverse incentivesperverse incentives

Joint VentureJoint VentureJoint VentureJoint Venture

Joint Venture Company

Inputs

MNE Local Firm

HOME COUNTRY HOST COUNTRY

Inputs

Share of Profit

Share of Profit

Joint VentureJoint VentureAdvantagesAdvantages

Access to partner’s local Access to partner’s local knowledgeknowledge

Reduction of concern Reduction of concern about overpaymentabout overpayment

Both parties have some Both parties have some performance incentivesperformance incentives

Significant control over Significant control over operationoperation

DisadvantagesDisadvantages Potential loss of Potential loss of

proprietary knowledgeproprietary knowledge Potential conflicts Potential conflicts

between partnersbetween partners Neither partner has full Neither partner has full

performance incentiveperformance incentive Neither partner has full Neither partner has full

controlcontrol

When Is a Joint Venture Appropriate?When Is a Joint Venture Appropriate? Both partners contribute hard-to-measure inputsBoth partners contribute hard-to-measure inputs Large expected mutual gains in the long-runLarge expected mutual gains in the long-run Trade secrets can be walled offTrade secrets can be walled off

Common Market Entry Common Market Entry ModesModes

Common Market Entry Common Market Entry ModesModes

Joint Venture Company

Licensing

Acquisition

Joint Venturing

Local Firm

New Subsidiary Company

“Green Field” Entry

HOME COUNTRY HOST COUNTRY

ExportMNE

Kumar & Subramaniam (1997)

A Contingency Framework for the Mode of Entry

Decision RiskRisk Return Return ControlControl

Modes of entry

Exporting Contractual Agreeme

nt

Joint Venture

Acquisition Greenfield Investm

ent

Risk Low Low Moderate High High

Return Low Low Moderate High High

Control Moderate Low Moderate High High

Integration Negligible Negligible Low Moderate High

Decision Strategies:Decision Strategies:

Rational Analytic StrategyRational Analytic Strategy

Cybernetic StrategyCybernetic Strategy SerendipitySerendipity

DiscoversDiscovers

The Australian ChallengeThe Australian Challenge What’s Freixenet What’s Freixenet corecore competency? competency? Evaluate Freixenet’s market entry Evaluate Freixenet’s market entry

modesmodes Freixenet in AustraliaFreixenet 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 Is it a global theme (standarization/adaptaion?(standarization/adaptaion?

GloGloccalization (Akio Morita)alization (Akio Morita)

Good luck!Good luck!

Future ReadingFuture Reading- Anderson, Erin and Hubert Gatignon. 1986. Modes of Foreign - Anderson, Erin and Hubert Gatignon. 1986. Modes of Foreign Entry: A Transaction Cost Analysis.  Journal of International Entry: A Transaction Cost Analysis.  Journal of International Business Studies, 17: 1-26.Business Studies, 17: 1-26.- Kogut, B. and H. Singh. 1988. The effect of national culture - Kogut, B. and H. Singh. 1988. The effect of national culture on the choice of entry mode. Journal of International Business on the choice of entry mode. Journal of International Business Studies, 19: 411-432.Studies, 19: 411-432.- Hennart, J.-F. and Y.-R. Park. 1993. Greenfield vs. acquisition: - Hennart, J.-F. and Y.-R. Park. 1993. Greenfield vs. acquisition: The strategy of Japanese investors in the United States. The strategy of Japanese investors in the United States. Management Science, 39(9): 1054-1070.Management Science, 39(9): 1054-1070.- Hennart, J. F., and Reddy, S. 1997. The Choice Between - Hennart, J. F., and Reddy, S. 1997. The Choice Between Mergers/Acquisitions and Joint Ventures: The Case of Japanese Mergers/Acquisitions and Joint Ventures: The Case of Japanese Investors in the United States. Strategic Management Journal Investors in the United States. Strategic Management Journal 18: 1-12.18: 1-12.- Barkema, H. G. and Vermeulen, F. 1998. International - Barkema, H. G. and Vermeulen, F. 1998. International Expansion Through Start-up or Acquisition: A Learning Expansion Through Start-up or Acquisition: A Learning Perspective. Academy of Management Journal 41: 7-26.Perspective. Academy of Management Journal 41: 7-26.- Brouthers, K. D. and Brouthers, L. E. 2000. Acquisition or - Brouthers, K. D. and Brouthers, L. E. 2000. Acquisition or Greenfield Start-up? Institutional, Cultural and Transaction Greenfield Start-up? Institutional, Cultural and Transaction Cost Influences. Strategic Management Journal 21: 89-97. Cost Influences. Strategic Management Journal 21: 89-97.