internationalization strategies of emerging market

Internationalization Strategies of Emerging Market Multinationals

Focused on the Case of Kidzania: Analysis of Appropriate Market

Entry Modes for Kidzania in Germany.

A thesis submitted to the Bucerius Master of Law and Business Program in partial fulfillment of

the requirements for the award of the Master of Law and Business (“MLB”) Degree.

Eder Lam July 21, 2017

12,315 words (excluding footnotes)

Supervisor 1: Prof. Dr. Natalia Ribberink

Supervisor 2: Prof. Dr. Stephan Wagner

Internationalization Strategies for MNEs 2

Table of Contents

Abbreviations………………………………………………………………..…………….……4

1. Introduction............................................................................................................................5

1.1. Research problem.…………………………………………………………….…....5

1.2. Way of investigation…………………………………………….…………………5

1.3. Course of investigation………………………………………….………………....5

2. Overview of internationalization for MNEs.......................................................................6

2.1 EMMs – Concept of Emerging Market Multinationals………….…………………6

2.2 MNEs – Concept of Multinational Enterprises…...…….....……………………….6

2.2.1 Theories and paradigms of MNE´s activities………….………………….7

2.2.2 World leading MNEs………………………………….…………………..8

2.2.3 Example of Mexican MNEs…………………………….………………...9

2.3 Internationalization drivers - Company´s motivations for going abroad….………10

2.3.1 Proactive and reactive motivations……………………………….……...10

2.4 Classification of market entry modes………………………………………..…….11

2.4.1 The hierarchical model of market entry modes……………………..…...11

2.4.2 Foreign direct investments…………………………………………..…...13

2.4.2.1 FDI perceptions…………………………………………….….13

2.4.2.2 Selecting FDI locations………………………………………..14

2.4.3 Equity modes. Joint ventures versus wholly owned subsidiaries……….15

2.4.3.1 International collaborative ventures…………………………..17

2.4.4 Nonequity modes. Contractual agreements versus exports……………..18

2.4.5 The five forces that shape industry competition………………………...24


3. Case study: Kidzania Company Profile and Market Analysis............................................33

3.1. History and company overview…..............................................................................33

3.2. Company business model….......................................................................................34

3.3 The expansion………………………………………………………………………..35

3.4 The franchise around the world…..............................................................................35

3.5 Competition in the industry………………………………………………………….36

3.6 A successful story of Kidzania in Japan………………………………………….....37

3.7 Germany in the scope?...............................................................................................37

3.8 Partner and alliances………………………………………………………………....37

4. Analysis and recommendation for market entry mode for Kidzania in Germany..........38

4.1. Recommended market entry mode ...........................................................................38

4.2 Different forms of franchise in Germany……………………………………………40

4.3 Advantages of franchising in Germany……………………………………………...41

4.4 How to establish a franchise system in Germany……………………………………44

4.5 Legal Perspective of the regulatory framework for franchising in the EU………….45

4.6 Franchisor/franchisees relationship in the EU…………………………………........46

4.7 Overview and challenges on the EU Regulation No. 330/2010………………….…46

5. Conclusion ..............................................................................................................................49

5.1 Summary……………………………………………………………………………..50

5.2 Critical acclaim ..........................................................................................................51

References

Tables

Appendix A. Q&As

Appendix B. Excerpts from Regulation 330/2010


Abbreviations

MNE Multinational enterprise

EMM Emerging market multinational

FDI Foreign direct investment

OECD Organization for Economic Cooperation and Development

UNCTAD United Nations Conference on Trade and Development

R&D Research and development

TNI Transnational Index

SO-MNE state-owned multinational enterprise

BOT Build operate transfer agreements

ERP Enterprise resource planning software

GDP Gross domestic product

DFV Deutscher franchise verband

IMCO Internal Market and Consumer Protection Committee


1. Introduction

1.1 Research problems.

(1) What are the motivations for Multinational enterprises (MNEs) from emerging

markets that leads them to internationalization?

(2) What are the different entry market modes for MNEs in Germany, especially in the

case for the company Kidzania?

The aim of this thesis is to give an explanation of the different entry market modes that

MNEs from emerging markets could analyze in order to develop an appropriate strategic

expansion. Additionally, this research will also present the motivations behind the willingness of

the companies to take their businesses abroad. Furthermore, a specific case study on a selected

Mexican multinational enterprise, will serve as an example to recommend its most suitable entry

mode in Germany.

1.2 Way of investigation

The way of investigation on this thesis will be mixed and will cover literature as well as

empirical research. Literature found in economic text books, journal articles as well as class

discussions will be used to describe concepts, models and research studies. In the other hand,

empirical research such as questionnaires will serve as a helpful basis for the development of this

thesis. Additionally, model-based reasoning along with scientific discussions will shape the flow

of the arguments presented from beginning to end.

1.3 Course of investigation

The course of investigation on this thesis is going to be straightforward. In the

introduction, a research question arising from the appropriate entry market mode for MNEs will

be formulated. In the second chapter, the motivations for companies to internationalize and their


desires to expand into foreign markets are going to be explained. In addition to this, a theoretical

framework of internationalization strategies for MNEs will be discussed. Moreover, a case study

of a selected Mexican multinational and its preferred entry market mode will be analyzed. In the

last chapters of this thesis, an entry mode will be recommended along with some implications

and challenges in the legal framework of the proposed entry strategy mode.

2. Overview of internationalization for MNEs

2.1 EMMs – Concept of Emerging Market Multinationals.

Since the beginning of the 1990s, several local firms from emerging economies (e.g.

Mexico) started their internationalization. An emerging economy can be defined as a country that

satisfies two criteria: (1) a rapid pace of economic development and government policies

favoring economic liberalization and (2) the adoption of a free-market system. (Hoskisson, Eden,

Lau, & Wright, 2000) The literature shows that this situation occurred by the desire of the

companies to take advantage of the global business opportunities. As a result of their economic

development, these companies were named emerging market multinationals (EMMs). EMMs

had assorted reasons to adopt an outward strategic orientation. For example, some of the

challenges they encountered, were the increase of their domestic rivals and the aggressive

outward expansion by international companies into their market. (Aybar & Ficci, 2009)

2.2 MNEs – Concept of Multinational Enterprises

Dunning & Lundan (2008) defines “Multinational” or “transnational enterprise” as an

“enterprise that engages in foreign direct investments (FDI) and owns or, in some way, controls

value-added activities in more than one country”. According to the authors, this definition is

widely accepted by several agencies such as: the Organization for Economic Cooperation and

Development (OECD), the United Nations Conference on Trade and Development (UNCTAD),


as well as by national governments and supranational entities. The authors also mention that

business analysts distinguish between two types of MNEs: the ones that (1) undertake foreign-

owned productions and the ones that (2) treat their affiliates as an important part of their globally

coordinated network. The literature also shows that several criteria need to be considered in

order to observe the degree or intensity of a specific MNE. These criteria are the following: (1)

the number and size of foreign affiliates, (2) the number of countries where the enterprise have

value-added activities, or in some way they control it, (3) the proportion of its global assets along

with their revenues, (4) the internationalized degree of its management, (5) the extent of its

research and development activities abroad, (6) the extent of their systematic advantages caused

by their governance and (7) the level amount of responsibility and usage of its assets. (Dunning

& Lundan, 2008)

Each year a transnational index (TNI) report provided by the UNCTAD, in the World

Investment Report, serves as a good indicator of the percentage of production capacity that a

specific enterprise operates abroad. For example, in 2005, Bowater, a Canadian company had

58% of its production capability located abroad with only 5% outside of the United States. Or

Unilever, which has global presence in 150 countries but has 63% of its turnover derived from

outside of Europe. (Dunning & Lundan, 2008). The TNI is calculated by the unweighted average

of three ratios: foreign assets to total assets, foreign sales to total sales and foreign employment

to total employment. (UNCTAD, 2017)

2.2.1 Theories and paradigms of MNEs activities

Back in the mid-1970, the following attempts generated a lot of attention in the literature

regarding its comprehensive explanation of the firm‟s activities in other countries.


(1) Internalization theory, (2) the eclectic paradigm of international production and (3) the

macroeconomic theory of FDI. (1) The internalization theory, establish that ”firms are likely to

engage in FDI whenever they perceive that the net benefits of their common ownership of

domestic and foreign activities, are likely to exceed those offered by external trading

relationships” (Dunning & Lundan, 2008. p.94)

(2) The eclectic paradigm (also known as OLI paradigm) of international production,

concentrates in three factors: (O) Ownership-specific advantages, (L) location-specific factors

and (I) internalisation advantages. This approach explains the advantages of internalization. For

example, when a company wants to sell its technology to foreign producers, the eclectic

approach will support the advantages to internalize the technology instead of selling it.

In the other hand, (3) the macroeconomic theory of FDI, do not evaluate the

microeconomic or behavioral explanations of a particular firm or group of firms, as in the case of

the eclectic paradigm and the internalization theory. Instead, this theory focuses on the activities

that firms can undertake in a particular country. (Dunning, 2013. p.34)

2.2.2 World leading MNEs

According to the World Investment Report of 2017, some of the top non-financial

state-owned MNEs (SO-MNEs) ranked by foreign assets in 2016 were: Volkswagen Group and

Deutsche Telekom AG in Germany, Airbus Group NV and Orange SA in France, among other

industries such as electricity, gas, water, mining, telecommunications from countries such as

Malaysia, Norway and Brazil. (UNCTAD, 2017)


2.2.3 Examples of Mexican MNEs

Founded by Xavier Lopez Ancona, Kidzania accomplished to open its first location in

Mexico City in September of 1999 with an initial investment of US$10 million. (Berenstein,

2008)

Kidzania, is a successful Mexican indoor theme-park focused in educating children by

entertainment (a case study of this company will be discussed in the next chapters). Kidzania

recently opened its 24th

facility in the UK. Currently more than 10 million children around the

globe have visited the distinct locations of Kidzania in countries such as Japan, India, South

Korea, Singapore and some other in which Kidzania has its franchise. (Kidzania, 2017)

In 2008, the turnover of Kidzania was nearly US$80 million. (Prado & Castorena, 2013)

Another good example of one of the first Mexican MNEs that evolved by acquisition

from 1982 to 2007, is CEMEX, the Mexican cement company. This Mexican MNE, was founded

in 1982 as a small and privately-owned company with 6,500 employees and $275 million in

revenues and by 2007, the company went publicly traded with 65,000 employees. Nowadays

CEMEX has its global presence in more than 50 countries with nearly $21.7 billion in annual

revenues. (Lessard & Lucea, 2008)

For the purpose of this thesis it is important to address once again the terms of MNEs and

EMMs. MNEs are “firms that engage in foreign direct investments”. (Dunning, 1981) and

EMMs are the companies that were born in emerging countries such as: Mexico, Brazil, Russia,

India, China or Argentina among others. (Hennart, 2012)


2.3 Internationalization drivers – Company´s motivations for going abroad

Several research studies show that one of the principal motivations for companies

forgoing global is their willingness to succeed abroad. According to some studies (Czinkota,

Ortiz-Buonafina &Ronkainen, 2004), a variety of factors that must be taken into account by the

company's management such as making strong commitments and to be prepared to endure

stagnation and failure. According to literature, the proactive and reactive motivations are the two

divers that are considered by the companies when seeking to expand into foreign markets: These

motivations are classified as: proactive and reactive.

2.3.1 Proactive and reactive motivations

It is important to mention that one of the main motivation that companies have for going

global are the profit gains that the management could obtain. As previously mentioned,

companies choose to go global mainly by two driver motivators; the proactive and the reactive

motivators. A firm decides to internationalize by the following reactive motivations: when at any

given point of the life cycle, the company is facing competitive pressures, overproduction,

declining domestic sales, excess capacity or experiencing a saturated domestic market. In

contrast, a decision for a local company to seek for internationalization could also be driven by

proactive motivations such as: profit advantage, unique products, technological advantage,

exclusive information, managerial urge, tax benefit, and by the economies of scale. In other

words, proactive firms choose to go international because they find a large variety of advantages,

in the contrary reactive firms has a different scenario due to the challenges they face in their

countries. (Czinkota et al., 2004)


2.4 Classification of Market entry modes

After the company is motivated either by reactive or proactive reasons, the following

steps to start their internationalization process is by choosing strategically the appropriate market

entry mode. It is worth mentioning that before giving an appropriate market entry mode for

Kidzania (which is one of the main purposes of this thesis), the following subchapter will go

over some literature related to the different types of entry modes that MNEs can analyze and

consider when making a decision to enter into a foreign market. The following chapter will use

simple case scenarios referring some of the well-known multinational companies around the

world to later analyze and recommend a suitable market entry mode for Kidzania in Germany.

The information provided on the following subchapters, will serve to discuss Kidzania´s reasons

to use their current entry mode finalizing with reviewing the advantages and disadvantages of

that decision. For this next subchapter, the use of literature from text as well as from journal

studies will support with the main concepts of the different market entry modes. After reviewing

and describe the hierarchical model of market entry modes proposed by authors Yigan Pan and

David K, the five forces that shape the industry competition proposed by Michael E. Porter, will

be discuss at the end of this chapter.

3.1 The Hierarchical Model of market entry modes

The hierarchical model of market entry modes proposed by Pan & Tse (2000) on the

Journal of international business studies will serve as a good guide and introductory base to go

through the types of market entry modes. The authors proposed and tested the hierarchical model

of entry market modes out of an empirical investigation from results from over more than 10,000

samples on foreign entry activities into China between the years of 1979 and 1998. After the


results of this empirical research, they conclude that there aare two types of views as regard to

the choice of entry mode selected by firms.

The first entry approach can be considered as equity modes in which the choice of entry

is based on either wholly owned subsidiaries or equity joint ventures. In the other hand, the

second entry approach is best described as non-equity based modes in which the choice of entry

is achieved either through contractual agreements or exports. (Pan, Y., & Tse, D., 2000)

Figure 1. - The Hierarchical Model of Market Entry Modes. Adapted from Pan, Y and D.

Tse (2000) “The Hierarchical Model of Market Entry Modes,” Journal of International

Business Studies 31(4), (p. 535-554)


2.4.2 Foreign Direct Investments (FDI)

This subchapter will go over the theoretical information about the first part on the

hierarchical model shown on figure 1, The foreign direct investments (FDI). The FDI definition

described by the International Monetary Fund‟s Balance of Payments Manual found on the

research study by author Moosa (2002), defines FDI as „‟an investment that is made to acquire a

lasting interest in an enterprise operating in an economy other than that of the investor, the

investor’s purpose being to have an effective voice in the management of the enterprise‟‟

(Moosa, 2002).

This type of investments come into play in the internationalization field whenever a country and

its residents, also referred as, “the source country”, acquires an ownership of assets from another

country, referred, as the “host country” with the solely goal of controlling the production,

distribution or other activities from a specific firm. (Moosa, 2002)

2.4.2.1 FDI perceptions

There are two different perspectives coming from two different players when it comes to

choose the right foreign direct investment. One perception comes from the host country, and the

other perception comes from the investor side. From the investor perception, FDI can be

classified in three categories: (1) horizontal, (2) vertical and (3) conglomerate. A horizontal FDI

can be recognized when a firm wants to expand his business abroad to produce the same or

similar goods in the other country. On the other hand, Vertical FDI can be observed when a

company attempts to exploit raw materials or to be closer to their end-customers through

acquiring distribution outlets in the foreign country. An example of a vertical FDI can be better

explained when US car makers successfully achieved to enter in Japan. In the past, Japanese car

manufactures and Japanese car dealers had a very close business relationship making american


car makers out of the game. In order to overcome that situation, US car manufacturing needed to

establish their own network of dealerships in Japan with the intention to market their

automobiles and get close to their end-customers. Conglomerate FDI is the third category from

the investor perception which constitutes the both the horizontal and the vertical FDI. (Moosa,

2002).

There are three various views regarding the perception from the host countries when it

comes to internationalize its products or services. These three views are the following: (1) Import

substituting FDI, (2) export-increasing FDI and (3) government initiated FDI. (1) The import

substituting FDI category is best described when a host country decides to produce their own

goods instead of importing those goods from abroad. It is also important to mention that this

decision depends on the market of the host country, transportation costs and trade barriers.

Moreover, the second category that comes from the host country perception is the export-

increasing FDI. (2) The export-increasing FDI is driven by the host country´s willingness to

acquire new sources of raw materials and intermediate products by increasing its exports to their

investment countries. The last category, (3) government initiated FDI, is its name mentions, re

FDIs initiated by the government, in which it provides incentives to foreign investors, thus

eliminating a deficit of balance of payments. (Moosa, 2002)

2.4.2.2 Selecting FDI Locations

As authors Cavusgil, Knight and Riesenberger (2009) describe in their research, they

mention that the most typical foreign market entry for large MNEs are by direct investments,

they also emphasized that selecting a foreign direct investment location is essential for investors.

This is the reason why there are several factors to consider when investors of the emerging


market multinationals consider when investing in a foreign market. These factors are described

in the following paragraph.

(1) Markets factors such as: Size and grow of national and regional markets as well as

proximity of key export markets. (2) Human resource factors such as: cost, availability and

productivity of skilled labors, involvement of labor union, availability and quality of managerial

workforce, employment regulations. (3) Infrastructural factors such as: availability and quality of

local manufacturing, efficiency of physical distribution, cost, availability, quality and finance,

quality of marketing and distribution. (4) Profit retention factors such as: types and level of

taxes, Tax-rates for profit registration, complexity of tax system and rate of inflation. (5)

Economic Factors such as: Cost of land and facilities, state of the local economy, stability of

currency extent of regional integration and free trade. (6) Legal and regulatory factors such as:

Regulation on FDI and technology transfer, nature of legal system and laws, intellectual property

protection, extent of tariffs, other trade barriers. Finally, (7) Political and governmental factors

such as: Political stability, openness to foreign investments, extent of bureaucracy and red tape,

transparency and corruption. (Cavusgil et al., 2009)

2.4.3 Equity modes. Joint ventures versus wholly owned subsidiaries

There are three types of foreign direct investment activities: (1) Greenfields versus

mergers and acquisitions, (2) nature of ownership (wholly owned vs joint venture, (3) level of

integration (horizontal vs vertical). According to the authors Cavusgil, Knight and Riesenberger

(2009), "Greenfield investments occurs when a firm invest o build a new manufacturing,

marketing or administrative facility, as opposed to acquire existing facilities". Greenfield

investments is exercised when a company invest and buys new land to construct a new

manufacturing plant. The investors also have the option to merge or acquire with an existing firm


in that area by means of acquisition. An example of Home Depot entering in Mexico by

acquiring the assets and facilities of Home Mart can best describe the nature of this way of

attribution. Furthermore, merging with another company and creating a new one can be regard as

another possible option that investors can consider when doing business abroad. The proffered

FDI for host countries are the greenfield investments by means of creating more new

employment opportunities for their people. In the other case scenario, when a company merge

and acquire another company most of the times labor headcount comes within the acquisition

giving less opportunities to the unemployed group.

Referring to the second type of FDI, investors can decide how much control the want to

own in the company. A partial ownership is given when the investors are pursuing to have a

partial control in an existing firm. In another scenario, if investors want to own and have an

entire control on a firm in the foreign market, then they will pursue a fully owned direct

investment. A good example of this type of investment can be seen when some years ago,

foreign automobile manufactures like Toyota started acquiring manufacturing plants in the

United States with the aim to be closer to their end-customers. (Cavusgil et al., 2009)

Jean Francois Hennart in his research regarding the transaction costs theory of equity

joint ventures, refers to “joint ventures” as “companies who join forces with foreign rivals” also

set up cooperative research, manufacturing or distribution ventures such in the cases of the

American MNEs: AT&T and Olivetti, General Motors and Toyota, United Technologies and

Rolls Royce among others. (Hennart, 1988)

Another example of equity joint venture, can be seen on the case of Tri Star International, a

Chinese company acquiring the majority stake of a company in Illinois which saved jobs in the


company and gave the Chinese firm an easy entrance to the US market. In this case scenario both

companies benefited by using this FDI strategy. (Cavusgil et al., 2000)

The third FDI classification is called the level of integration which is divided into vertical

and horizontal integration. The vertical integration consists when the investing firm seeks to own

the multiple stages of a value chain from top to bottom. An example of this kind of integration

can be seen in Honda´s acquisition of automobile supplier parts and owning the dealerships that

sells its cars. In the other hand, the horizontal stage integration is performed when the investing

firm seeks to only acquire a single stage of the value chain. (Cavusgil et al., 2000)

2.4.3.1 International collaborative ventures

The following part of our FDI study describes the International collaborative ventures

which are classified in (1) equity joint ventures, (2) project base and (3) nonequity ventures.

These types of ventures are usually called international partnerships or international strategic

alliances. In an international deal regarding (1) equity joint ventures, the investing firm sends its

technology along with its “know-hows”, management expertise, training and more other factors

that the firm in the other country do not have. In the other hand, the local firm provides the land,

the language, the people, the culture, the legal knowledge as well as the lower cost production

factors, a notable example of a joint venture can be seen in the Samsung case. Samsung, one of

the well-known electronics manufacturing located in South Korea started its internationalization

by partnering with some other companies that produce assorted products such as NEC and

Sanyo. As a result of partnering with these companies, Samsung was able to acquire product

designs and marketing outlets. (Cavusgil et al., 2009)


The question that this paper is about to analyze is, Should Kidzania use the equity joint

venture strategy to enter into the German market? An extensive discussion can be seen in the

later throughout this study.

Furthermore, (2) Project based nonequity ventures, comes in one single category in which

partners creates a well-defined project but without creating a new legal entity. Some of the

factors that differentiate an equity joint venture and the project based non-equity ventures are

that parent companies do not intend to acquire any ownership in the enterprise.

To summarize the distinctions between equity joint ventures and project-based nonequity

ventures, a several advantages and disadvantages can be seen from these two entry modes. Some

of the advantages of selecting equity joint ventures are that the management can have a higher

control on future decisions, also the transfer of knowledge between the partners is easier, and

both parties set common goals. Along with these advantages on the other hand, a complex

management structure and a higher exposure to political risk re considered as weaknesses

regarding this strategic entry mode.

On the other hand, selecting a project-based nonequity ventures, some strengths and

weaknesses must also be considered. (3) Project-based nonequity ventures are easy to set up, the

management structure is easy to adjust, has a quick response regarding market conditions and a

technology change. In the contrary, because there is no equity commitment involved, only trust,

good communication and good relationship are the main relevant factors, therefore this factors

requests more attention. (Cavusgil et al., 2009)

3.2.2 Nonequity modes-Contractual agreements vs. exports.

Now that equity modes have been described in the previous section of this thesis, it is

time to explain the second part of the hierarchical model which describes the nonequity modes


approaches. Figure 1 shows that non-equity modes can be divided in exports and contractual

agreements. Regarding to the subsection of contractual agreements, licensing/franchising,

Turnkey projects, R&D contracts and co-marketing are the essential parts on this division. The

other division under the nonequity modes are the exports category, which includes direct and

indirect exports. In the following paragraph, all of these terms will be described.

Contractual agreements, are the agreements between the focal firm and the host partner

governed by an explicit contract. The two most common types of contractual agreements are

licensing and franchising. Licensing is the way of contractual agreement in which a firm owning

an intellectual property rights, concedes these rights to another firm for a fixed period of time by

receiving royalties or compensation for those rights. In the other hand, franchising is performed

when a business concedes the entire business system for an exchange of royalties and other

compensations. (Cavusgil et al., 2009)

An example of licensing can be seen in the pharmaceutical area. In which pharmaceutical

companies in their approach of increasing revenues, license drug discovery related technologies

from other pharmaceutical companies to improve their R&D department. These agreements are

followed by initial, royalty and milestone payments. In 2002 licensing agreements between

Hoffmann La-Roche and Kosan BioSciences enter into an agreement for a drug, and it consisted

on 30 M in initial payments, 180 M in milestone payments plus a royalty percentage of sales.

(Ouellette, 2010)

Licensing not only works in the pharmaceutical industry, but also in the manufacturing of

high technologies some of these examples can be also seen when Intel license their

manufacturing process of computer chips to a chip manufacturer in Germany. Most of these

licensing contracts are settled for a period amount of time, typically from 5 to 7 years. In favor of


creating an effective licensing agreement, licensors roles and obligations are to provide a

combination of intellectual property rights along with supporting products such as parts,

components or raw materials to their licensees. In the case of the licensees‟ obligations, in return

they must compensate their licensors through a combination of lump sum payments, “know-

hows”, down payments plus royalty, and some other types of compensations previously stated in

their contract agreement. (Cavusgil et al., 2009)

Some of the advantages of licensing as this entry strategy mode are that licensors do not

need be present in the foreign market or require capital investment. Easy income generator

comes by the selling of their intellectual property rights. In contrast, some disadvantages arising

from licensing are related to the control of the licensed products such as its purpose and its used.

In some instance, the licensees can become a competitor by infringing in their intellectual

property because dispute resolutions are complex and most of the times do not provide positive

results. (Cavusgil et al., 2009)

Authors F. Burton and A. Cross in their International franchising research (1997),

describes the term of “franchising” as a “relationship between an entrant, the franchisor, and a

host-country entity, in which the former transfers, in a controlled manner, a business package

(or format) to the latter” (Burton & Cross, 1997). Meaning also that the franchisor must provide

all the necessary elements needed to be able to replicate the business in the host country. Some

examples of the elements consist of intellectual property rights in the way of trademarks, patents,

copyrights, business “know-hows” along with managerial assistance and geographical

exclusivity. In return, the franchisor must receive from the franchisee some initial fee upfront

plus a continuing franchise fees based on annual turnover percentage (Burton & Cross, 1997)


Franchising offer some advantages to firms choosing this entry mode, some examples of

this advantages are numbered as follows: (1) quick and cost-effective entry into foreign markets,

(2) from the franchisor perspective there is no need to invest substantial capital, (3) the

established brand name can have potential sales abroad, also (4) franchisors can benefit from

franchisees knowledge of the local markets. In contrast, some disadvantages of franchising

appear as the way in the way that control over the franchise can be difficult, legal disputes can

arise with the franchisee, the image of the franchisor in foreign country can be challenging, can

require a strong monitoring of the franchisee and continuing assistance, and franchisees could

learn about the company and can become a competitor in the future. (Burton & Cross, 1997)

Turnkey contracting is another subdivision of these contractual agreements under the

nonequity entry modes hierarchical model. The authors Cavusgil, Knight and Riesenberger

describes turnkey projects as “arrangements where the focal firm or a consortium of firms plans,

finances, organizes, manages, and implements all faces of a project abroad and then hands it

over to a foreign customer after training local personnel” (Cavusgil, et al., 2009) The most

popular turnkey projects are the construction of railroads, metro systems, airports, refineries,

hospitals. Most of the firms working with turnkey projects involve the firms in construction,

engineering, architectures as well as design industries.

Other types of contractual agreements that the authors refer in their findings can take the

form of management contracts, leasing, and build operate transfer agreements (BOT).

Corresponding to BOT agreements, these types of projects are only used to construct major

facilities abroad such as water treatment plants, one characteristics that differs BOT deals with

turnkey projects is that on BOT deals the builder operates the facility for a long period of time

before it transfer that ownership to the sponsor. As a BOT example, the Vietnamese government


order the construction of the first energy plant facility to the German company Siemens Power

Generation, this in order to get the needed infrastructure cost effectively.

Management contracts, it is another special type of contractual agreements but it differs

from licensing and franchising in the way that it is performed. Management contracts are special

arrangements in which the suppliers provide managements know-hows to operate a facility such

as a hotel, airport, hospital but without owning it. One of the disadvantages of this type of entry

is that it can create competition when providing the necessary training and skills to foreign

companies.

Another contractual strategy is by leasing, Leasing provides machinery or equipment to

companies abroad as a way of rent. This type of agreement supports mainly developing

economic countries which lacks of financial resources to obtain the assets. Under this agreement,

the lessor, the party who rents the equipment, receives payment compensation from the lessee. It

is easy to mention a variety of management agreements use case scenarios in the aircraft

industry. For example, a Dubai company leases aircraft to other companies in the market such as:

Air New Zealand, Airtours, Golf Air, and Virgin express. Another company that choose these

approach, is a company based in the Netherlands, ING Lease International Equipment

Management, leasing aircrafts to Varig Airlines in Brazil. (Cavusgil et al., 2009)

Co-Marketing alliances are another type of contractual agreements under the hierarchical

model proposed by the authors Pan, Y. and D. Tse. Professor Louis P. Bucklin from the

University of California and assistant professor Sanjit Sengupta from the University of

Maryland, describe in their research studies “Organizing successful co-marketing alliances” the

meaning of this alliances as “contractual agreements undertaking by firms whose respective

products are complements in the marketplace” (Bucklin & Sengupta, 1993, p. 32). Products


from co-marketing alliances can be seen in the entertainment context, also on high-technology,

hardware and food products. (Venkatesh, Mahajan & Muller, 2000)

Exporting is the most popular entry strategy for small and medium size enterprises

because it allows local companies to enter into foreign markets in a very flexible and low risk

manner. (Cavusgil et al., 2009. p. 387) According to the product cycle hypothesis in a new

international environment proposed by Vernon R. in 1979, firms tend to compare the marginal

cost of producing for export in the home country plus the transportation cost they may inquire

comparing the cost of producing in the foreign subsidiary. (Vernon, 1979)

In his studies, the author also assumes that if the marginal production cost together with the

transportation cost is lower than manufacturing the products in a foreign subsidiary, firms will

tend to export and will avoid an investment in the foreign country. (Vernon, 1966)

Some of the advantages from exporting goods into foreign markets are that the company

can avoid the cost of establishing manufacturing operations. Also selecting this strategy, the

company can benefit for the achievement of experience curve and location economies. In the

contrary, exporters could face some disadvantages such as dealing with low cost location

manufacturers, high transportation costs, tariff barriers and possible lack of control over

marketing reps (Ribberink, 2017)

Indirect exports, is another type of non-equity entry under the exports category. Indirect

exports are defined as “firms exporting through a trade intermediary” (McCann, 2010). These

intermediaries located in the firm‟s home market, take the exporting risk and are also responsible

for finding buyers in the foreign market and shipping the products. In the contrary, direct

exports, is accomplished by working directly with a contract intermediary in the foreign country

that serves as an extension of the exporter and it is responsible for the customer service, pricing


and the supply chain management. There are some considerations that firms must take into

account when selecting between direct or indirect exports. Some of these are: the level of

resources, the strategic importance on the foreign market, the nature of the company products,

and the availability of intermediaries in the market. (Cavusgil et al., 2009, p. 392)

2.4.5 The five forces that shape industry competition

After reviewing which entry market mode is suitable for any type of company, the next

step for the management supervisors are the several factors (or “forces” explained briefly in the

following text) that they need to consider when expanding into foreign markets. When making a

strategic proposal to enter into a new foreign market, it would be beneficial for them to look over

the acclaimed and revolutionary article in the Harvard Business Review “The Five Competitive

Forces that Shapes Strategy” (2008) written by Professor Michael E. Porter. In the following

part of this thesis, literature related to this model will be exposed.


Figure 2. The Five Forces that Shapes Industry Competition. Adapted from Michael E.

Porter “The Five Competitive Forces that Shape Strategy” (p. 27), Harvard Business

Review, January 2008

“Awareness of the five forces can help a company understand the structure of its industry

and stake out a position that is more profitable and less vulnerable to attack.” (Porter, 2008,

p.25) Figure 2, exhibits the five forces model that shapes industry competition proposed by Prof.

Michel E. Porter and by analyzing these 5 forces: (1) threat of new entrants, (2) bargaining

power of buyers, (3) threat of substitutes products and services, (4) bargaining power of

suppliers, and (5) rivalry among existing competitors, the company can have a better picture of

what are the factors or “forces” that influence the profitability of their industry.


The author also mentions that the configuration of these forces differs by industry, for

example, he refers to the commercial aircraft and the movie industries in the way in which

different forces prevail based on the characteristics of these industries. The author also

emphasizes that the strongest force or forces, determines the profitability of the industry and

creates a good base to prepare in the strategy process.

In the following pages, a brief explanation of every force will be described based on the

perspective of an incumbent or a company that is already present in an industry.

Threat of entry. Michael E. Porter shows in his research that “new entrants to an

industry bring new capacity and a desire to gain market share” (Porter, 2008, p. 26) The author

mentions that new entrants put pressure on prices, on the cost, also in the rate of investments in

an industry. Furthermore, there are new entrant firms that in order to gain power in the new

market they leverage their capabilities, such as in the example of companies like Pepsi entering

into the water bottle industry, Microsoft offering internet browsers and Apple entering into the

music distribution business. A high level of threat will push the firms to lower their prices. The

threat of entry depends on the height of entry barriers that are present in the industry. (Porter,

2008) The barriers to entry can be seen as advantages to incumbent firms against new entrants.

Barriers to entry “are factors that need to be overcome by new entrants if they are to compete

successfully” (Johnson, Scholes & Whittington, 2008)

In relation to the barriers to entry, there are 7 major sources that the author (Porter, 2008)

briefly explains in his research. These are: (1) Supply-side economies of scale, (2) Demand side

benefits of scale, (3) Customer switching cost, (4) Capital requirements, (5) Incumbency

advantages independent of size, (6) Unequal access to distribution channels and (7) Restrictive

government policy.


These entry barriers will be briefly discussed in the following part (1) Supply-side

economies of scale. This barrier arises when firms that benefit of a low unit cost due to their

large production of units push the aspiring entrants to come into the market in a larger scale. In

the other hand, (2) Demand-side benefits of scale, arises when buyers are willing to pay for a

company‟s product when more buyers are also interested in paying for those. In other words, the

incumbent can discourage customers to buy products from a new entrant. Another source of

entry barrier is the (3) customer switching cost. A good example of this source can be described

in the Enterprise Resource Planning (ERP) software, in which customers can experience a high

switching cost if they decide to move from one vendor to another, making them stay with their

current company. The following barrier is (4) Capital requirements, this barrier can also deter

new entrants because it needs a large amount of investment in order to cover all the fixed cost of

the new company. Although, the author emphasizes that if the industry is attractive and some

other factors are beneficial for the new entrant in the foreign market, such as: the expected return

of the investment, or the efficiency of capital markets, investors will provide the funds for the

new entrant. The next barrier is the (5) Incumbency advantages independent of size. Companies

may also have advantages that are not available to new entrants such as proprietary technology,

the way of accessing to raw materials, an established brand and a geographic location. (Porter,

2008, p.27) (6) Unequal access to distribution channels. This is another barrier that discourages

new entrants into a new market by the struggling to find the right distribution channel for its

products and services. Finally, (7) a restrictive government policy could either help or block the

new entrants. By imposing safety regulations, patenting rules or licensing requirements.

Nevertheless, not only these factors previously mentioned are the solely players when it comes to

decide for new entrant to enter or stay out of an industry. “Expected retaliation”, the incumbent‟s


reactions about potential entrants, are also considered in the decision making. (Porter, 2008,

p.29)

Power of suppliers. This is the next force that shapes the industry competition and is

centered specifically in the suppliers. A supplier has the power to affect directly the industry by

increasing prices, lowering the quality, or shifting the cost to other participants. A supplier group

is powerful on the following scenarios, for example: when supplier is more concentrated that the

industry in which it sells their products, or when this does not depend on the industry for its

revenues. Another example also can be seen when supplier´s customers face high switching cost

for replacing them, and when the supplier offers products that are differentiated.

Power of buyers. Contrary to the power of suppliers, the power of buyers, also referred

as the “powerful customers”, are the group that force low prices, can also demand for better

quality of products and services (regardless on the increase on the cost of suppliers). Moreover,

according to the research, buyers are powerful when they have negotiation leverage against the

industry participants. Buyers have negotiation leverage in the next case examples: when there are

few buyers in the market, when the industry‟s products are standardized, this can be better

explained when buyers find a similar product in the market, they will tend to put one vendor

against the other. Furthermore, in terms of switching cost, buyers incurred relatively low

switching cost by changing the vendor. Buyers can also have leverage in negotiation when they

find that their vendor is profitable and they could also produce their own products. A clear

example of this can be seen when producers of soft drinks and beer manufacturing started to

produce their own packaging, instead of buying it from the suppliers. Additionally, a group of

buyers is price sensitive when the product cost is a considerable fraction of its cost structure.

When this happens, the buyers will shop aro und and bargain hard under those circumstances.


On the other hand, buyers could be less price-sensitive when they find that the quality of the

products they are looking for is more important than the price itself. The author provides an

example of this approach when makers of major motion pictures purchase high quality cameras

with the latest features and are careless about the price.

Threat of substitutes. - This threat focus on substitutes, substitutes performs the same or

similar functions in an industry‟s product but by a different means. the literature provide some

examples of substitutes products such as: plastic for aluminum, videoconferencing for travel, and

email for express mail. The author also mentions that when the threat of substitutes is high, the

industry profitability suffers. Firms must be aware of substitutes and according to the article;

they need to improve its marketing and product performance. The author also references an

example of phone lines that have been substituted by mobile telephone in emerging economies.

The threat of a substitute is high when the product offers an attractive price performance, such in

the case of Skype and Vonage, internet based phone services against providers of long distance

telephone services. Another example would be with the video rental outlets that have been

substituted by online video rental services such as YouTube and Netflix.

Furthermore, the threat of substitute is also high when the buyer‟s switching cost is low (e.g.

branded drugs versus generic drugs), the study also suggests that strategist must be aware of the

changes in other industries that could affect their own industry and that could turn to be

substitutes.

Rivalry among existing competitors. Finally, the last force that shapes the competition

of an industry is the rivalry among existing competitor. According to the author, a high degree of

rivalry affects directly in the profitability of the industry. This force can take many familiar

forms such as: price discounting, introduction of new products, advertising campaigns, or service


improvements. The degree of rivalry depends in two factors: its intensity with which companies

compete and the basis in which they compete with others. A great intensity of rivalry can be

observed when there are numerous competitors in the industry or when the competitors are

equally in size and power. A slow growth in the industry and high exist barriers also arise the

degree of rivalry. Exit barriers, the opposite side of entry barriers, keep companies from going

out of the market even when they are earning low or negative returns. In figure 3, it is easier to

visualize the degrees of rivalry that most of the times the companies encounter in a specific

industry. (Porter, 2008)

Figure 3. The life-cycle model. Adapted from Gerry Johnson, Kevan Scholes & Richard

Whitting, “Exploring Corporate Strategy” (p. 86), 2008


This life cycle model was presented by authors Gerry Johnson, Kevin Scholes & Richard

Whitting in his text “Exploring Corporate Strategy” published in 2008. On this model, a low

rivalry can be observed on the development and growth of the company with few competitors

and early adopters in the industry. Furthermore, an increasing level of rivalry can be observed in

the shake-out stage of the life cycle. In the maturity stage, the industry has a saturation of users,

making buyers strong. Finally, at the later stage, there are most of the times many exits due to

extreme rivalry. (Ribberink, 2017)

In order to better understand how the five forces are analyzed in real life; a simple case on the

mobile phone industry extracted by the book “Exploring Corporate Strategy” will be explained

in the following paragraph. (Johnson et al., 2008. p.83)

(1) Competitive rivalry. Back in 2004, there was a high level of rivalry between mobile

network providers; with the entrance in the market of 3G technologies; the mobile

service providers had very difficult challenges in order to keep their customers. In the

United Kingdom for example; many of these companies offered either free phones or

free months of line rentals in order to compete with their other rivals. As the market

matured, customers were more attracted by price, coverage and customer service.

(2) Buying power. At that time, buyers had a wide variety of choices, thus, making

harder for them to buy a product as a result of confusing over-complex offers by the

mobile phone providers.

(3) Power of suppliers. Supplier power increased when the sector began to consolidate

through company alliances.


(4) Threat of substitutes. This threat also directly affected the mobile network industry

because at that point personal digital assistants such as voice and text messaging

through the internet were on the rise.

(5) Threat of entry. At that point in time, the threat of entrants was low due to the high

costs of licenses and general investment for the 3G broadband technology.

The use of these forces can give an insight of the industry‟s environment and it is

important for strategist to analyze them in order to develop a enter strategy for their companies.

Strategist need to consider the implications of these forces. The literature provides some

suggestions that strategist needs to follow. Some of the questions they need to consider when

implementing the strategies can be the following: “Are some industries more attractive than

others? What are the underlying forces in the macro-environment that are driving the

competitive forces? Is it likely that the forces will change, and if so, how?” (Johnson et al., 2008.

p.86)


3. – Case study: Kidzania - Company profile and market analysis

3.1 History and company overview

Kidzania is a privately held multinational company from an emerging market country,

Mexico. The description of Kidzania has been extracted from its website and it shows as “an

interactive kids’ city combining inspiration, fun, and learning through realistic role-play for

children 3-14, where kids independently explore an 80,000 square foot kid-sized city with over

100 exciting careers that they can try” (Kidzania, 2017).

Kidzania was founded in 1996 by the entrepreneur Xavier Lopez Ancona along with a

group of Mexican businessmen Esteban Lopez Ancona and Francisco Ares among others. The

founder of the company studied his bachelor degree in Management in Mexico City and his

master degree in Illinois. After working four years as a consultant in Booz Allen in Hamilton‟s

office in Mexico City, he became Vice-president – equity for two years in GE Capital Mexico.

His entrepreneurial personality along with his interest to the entertainment industry allowed him

to come up with the idea of founding a place where he created the family “edutainment” concept.

This concept can be described as a fusion of education and entertainment in which kids play to

be grown-ups in a safe and secure venue. (Lopez, 2017).

The company was originally known as “La ciudad de los niños” by turning later into

what is called today “Kidzania”. Since the opening of its first location in Santa Fe, close to

Mexico City, in 1999, the company attracted close to 800,000 visitors. Nowadays, an average of

10 million children around the world have visited their facilities. The second Kidzania opened its

doors in 2006 in Monterrey city, and its first international expansion occurred on the same year

in Tokyo, Japan. Kidzania in Japan launched the company‟s extension into a global franchising.

Recently its 24th

new location opened in the United Kingdom. According to the company‟s


website, Kidzania has received more than 9 million visitors in 19 countries such as : Mexico with

three facilities, Japan with two, Indonesia, Portugal, Dubai, South Korea, Malaysia, Chile,

Thailand, Kuwait, India, Egypt, Turkey, South Arabia, Brazil, United Kingdom, Philippines,

Russian and Singapore. There are ten more facilities currently under development, such new

facilities will be open in USA, Canada, France, a second facility in Indonesia, a fourth facility in

Mexico, Qatar, South Africa and Abu Dhabi. There are more new territories under negotiation

such as: Australia, China, Costa Rica, The Netherlands, Hong Kong, Iran, Italy and Taiwan.

Some of the missions under the company‟s philosophy are to feature the best

educational entertainment experience in role-playing for kids, also delivering an effective

medium of communication for their industry partners, as well as to achieve sustainable returns

for their investors. It is also worth mentioning that the vision statement of the company is to

empower the kids to make the world a better place. The company values are also essential to

emphasized, some of these values consist of passion, commitment, integrity, entrepreneurship

and efficiency. The company essence is based on fourteen qualities that differentiate them with

other companies around the world. These qualities are identified as: Kid centered, role -play

based, reality-based, interactive, fun, thrilling, educational, skills developer, value-promoter,

safe, detail-oriented, keep current, accessible to all and sustainable. (Kidzania, 2017)

3.2 Company business model

Kidzania has a two-fold business models. First, the company is a family edutainment

center, where kids from 3 to 14 years old role-play. Currently there are around 60 real-world

establishments in which children can role-play from nearly 100 professions such as veterinary,

mechanics, nurse, actors etc. Second, Kidzania serves as a communication media for brands.

These brands sponsor activities in which they bring to life authentic career experiences that kids


can role-play. For example: kids can customized their own Honda car in the manufacturing line,

experience siting in the cockpit of a simulated version of an American airline aircraft, or even

have the real life experience to broadcast a radio show in a simulated studio built up from a local

broadcaster. Kidzania has within their sponsors a lot of well positioned brands around the world

such as: Coca-Cola, Sony, HSBC, Procter & Gamble, Walmart, DHL, McDonald‟s among

others.

The overall success of the company is the commitment and participation from its partners

who shares the same vision to commit to the “edutainment” of the kids. (Prado & Castorena,

2014)

3.3 The Expansion

According to a case studies on Kidzania (Prado & Castorena, 2014), at the

beginning of his expansion into foreign markets, the company wanted to enter first into the USA

market, but after receiving advice, they left the US market in queue until the company was able

to gain more maturity. The founder, Xavier Lopez Ancona, defined Kidzania´s entry strategies in

three stages:

Stage 1. - Mexican business. Based on ownership

Stage 2. - Outside Mexico. Franchising with business partners

Stage 3. - USA. Through association with business partners.

3.4 The Franchise around the world

Kidzania has achieved its international expansion through Franchise. In a recent

questionnaire sent to with the global commercial director of Kidzania, Patricia Velasco, she

kindly shared the following answer when asking about the reasons why Kidzania use franchising

as their preferred entry market mode: “Kidzania gets the “know who and know how” from his


Franchises as they know the market in a cultural and business environment, and help Kidzania

to develop the business knowing the laws, regulations, including the correct industry partners,

restrictions, etc. Additionally, this model allows a quick expansion due to the high investment

needed for opening a facility” (Velasco, 2017) (See Appendix A for the full text)

Kidzania currently has exclusive franchise licenses in 19 countries in which their

facilities are operated by their franchisees. When it comes to find the best suitable candidates to

obtain the franchise license, there are several factors that are crucial for the company. The

candidates: (1) must be committed for the education and the success of children (2) they must be

locally based and must provide the necessary “know who” and “know how” elements for the

success on its markets. (3) they must have a comprehensive brand relationship, sponsorship and

commercial experience, preferred in the areas of hospitality, entertainment and media. (4) they

also must hold a minimum capital requirement of US$20 million with the flexibility of rolling

out multiple facilities in its market. It is important to mention that Kidzania looks the finest

candidates on a country-by-country basis and the licenses are provided per country exclusivity.

(Kidzania, 2017)

Additionally, not only finding the suitable partner is taken into consideration for the

management of Kidzania when it comes to opening a facility in a new country. According to

information provided by the global commercial director of Kidzania, the company also takes

some other factors into account such as: children population, GDP and political stability.

(Velasco, 2017)

3.5 Competition in the industry

Kidzania competitors can be classified under three market niches: (1) Destiny parks, (2)

Regional parks, and (3) Local parks. Under the first category Disneyland and trip to Las Vegas


are considered destiny parks in which people travels by plane and visits once or less a year.

Regional parks are considered as a complete day experience such as Six Flags and Legoland.

Local parks are the niche in which Kidzania fit along with cinemas and theaters. (Prado &

Castorena, 2014)

3.6 A successful story of Kidzania in Japan

According to Mrs. Velasco, the company most successful market is Japan. She mentioned

that the external factors such as: population, GDP along with an educated-oriented society in that

country has been the major drivers for the success of the franchise in that market. As a result, the

facilities of Kidzania in Japan have sold-out tickets for three months in advance. (Velasco, 2017)

3.7 Germany in the scope?

Currently, the company is in talks with a prospect group to open a facility in Germany. In

relation with obstacles or entry barriers, the company claims that it has not encountered any of

them yet and that now it is important for them to define a very good location for the facility.

(Velasco, 2017)

3.8 Partner and alliances

In order to transfer its culture and values across national boundaries, the company adapts

to the country in which it operates. The way in which the company responds to cross culture

challenges is by integrating globally understood concepts with local partnerships. As described

by the company‟s management, the most important goal for the company is to create a win-win

relationship at a local level. (Velasco, 2017)


4.- Analysis and recommendation for entry market mode for Kidzania in Germany

4.1 Recommended market entry mode

In order to give a recommendation of the appropriate entry market mode for Kidzania in

Germany, it is important to follow some steps as well as to consider various factors for this

recommendation. First of all, it will be advantageous to go back and use the theoretical

framework provided on this thesis and look at the hierarchical model of market entry modes

proposed by authors Pan. Y and D. Tse. Also since this thesis has been based on literature as

well as by empirical research in the form of a questionnaire with the company‟s management, a

preferred market entry mode of the company has been revealed in Chapter 3 as part of the

company‟s profile and market analysis. Based on assumptions by reviewing the theoretical

framework on this thesis, it is important to mention that an appropriate market entry mode varies

from company to company. By reviewing the literature, and referring to the theoretical model,

the appropriate entry market mode for Kidzania in Germany is by franchising.

Some of the reasons why the other market entry modes were not recommended for this

company in specific are going to be briefly described in the next section. Greenfield investments,

are used when the company set up and operates their facilities or manufacturing abroad on their

own. (Cavusgil, 2009) this is not the case of Kidzania. For the company, it would be a big

challenge to face the cross border cultural barriers, the laws, regulations, restrictions and finding

industry partners. According to the management, one of the reasons why the choose franchising

as their preferred mode of entry is by the “know-who and know-how” knowledge that the

franchisees provide to the company. Also by doing so, they avoid the high investment need it to

open a facility. For these reasons, the Greenfield investment as entry mode for Kidzania is not

recommended. Different circumstances of the entry modes as exports, turnkey projects and


contractual R&Ds, shows that they are also not suitable for Kidzania to enter in Germany.

Moreover, the two-different kind of exporting would not work for Kidzania because the only

things that Kidzania could export would be their brand and their “know-hows”. By doing this,

the company could face a risk of creating a direct competitor in the foreign market. Very similar

scenario could happen by choosing the management contract strategy. Leasing contracts, are also

not recommended since Kidzania does not rent its products or facilities. Turnkey projects, are

also not suitable because the company may need to open and operate their facility on its own for

several years to later transfer it to a local investor. This could be time consuming for the

company and it could also engage in the same challenges as selecting a Greenfield entry strategy.

The only entry strategy that was close to be recommended besides franchising is by alliances

with partners. Based on research provided on Chapter 3, Kidzania plans to enter into US in

alliance with partnerships. Currently, there is limited information regarding the causes that leads

the management to select this entry mode to enter into US. Different factors could drive this

approach such as the proximity to the Kidzania´s headquarters to US or by the “know-who”

approach. Note that future research must be considered on this matter.

This recommendation comes from several factors that have been described throughout

the entire content of this thesis, starting from the company‟s motivations to go abroad following

with reviewing the advantages and disadvantages of the different market entry modes. All this

data in addition to the profile of the company and its successes stories with their franchise around

the world supports a better solid recommendation.


4.2 Different forms of franchise in Germany

The company can choose from a variety of internationalization strategies possible in

Germany. These approaches will be described on the next paragraph:

(1) Direct foreign franchising. According to DFV, this is the simplest type of

internationalization, one of the main characteristics of this type of approach is that the

franchisee who will be based in Germany is supervised by the headquarters from the

franchisor´s host country. One disadvantages that carries this approach is the

language and cultural barriers. In the other hand, some of the strengths of this

approach is that there are no shared charges, the communication technology makes

management easier, and the franchisee receives the most competent support.

(2) Indirect foreign franchising. This approach is used when the franchisor pursues a

better monitory system and forms an independent subsidiary in the foreign country

which is entitled to conclude contracts with local franchises. This approach is suitable

for larger markets but it involves a high startup cost.

(3) Master franchising. This approach is based on permission from the franchisor to a

“master franchisee” to operates several franchise subsidiaries within the same market.

In this case, Germany. Some of the master franchisee´s roles and responsibilities

includes: start-up, adaptation and roll-out investments. It is also worth mentioning

that the master franchisee is the one who covers the operation cost of its headquarters.

(4) Area development. Under this approach, an area developer is commission to acquire

franchisees for the franchisor but is not allowed to operate their own franchise units

on their own. One of the advantages for this type of approach is that it provides a

strong supervision of franchisees.


(5) Joint ventures. This approach is based in cooperation between the franchisor and a

partner in Germany. Most of the times it involves the formation of a joint subsidiary.

Some of the strengths of this approach include the lower capital requirements, there is

a high acceptance from local partners and risk reduction. In the contrary, some

weaknesses such as possible disagreements from the managements or a damage in the

company´s image can be observed. (Deutsche Franchise Verband, 2015)

4.3 Advantages of franchising in Germany

The following chapter will provide an overview of the positive advantages that Germany

offers to investor that make this country very attractive for them. The following information has

been extracted from the Deutscher Franchise Verband E.V.in the “guide for franchisors entering

into the German market” produced by the members of their international committee, which

explains some of the economic performance and global reputation that Germany has in the

world. Germany is one of the strongest countries in the world that meets the following criteria to

be the most attractive business location for investors. A variety of positive factors are met by this

country such as: a vital and growing economy, large sales market for goods and services, good

labor market (which enables the easy acquisition of required staff), stable political environment

with low levels of corruption, friendly legal system for Start-ups, also a fair and transparent

company taxation. Regarding the positive economic indicator of Germany, it is important to

consider that the GDP per resident in this country is approximately of 41,000 euros which is very

high considering the GDP of other economies in the European Union.

Germany offers a variety of knowledge in logistic solutions and service expertise to new

entrepreneurs when they decide to expand into this country. Franchises in Germany are

supported by federal and governmental institutions such as: the ministries of the German Federal


States, Chambers of Industry and Commerce, Chambers of Trades and Crafts, the KfW banking

group and credit institutions and their associations. (Deutscher Franchiser Verband, 2015)

Another key factor to consider when entering in Germany in conjunction with the

economic factors is the labor market. Germany has an unemployment rate of 7.4% which is

under the average countries within the EU countries making easier for new companies to find

qualified workers for their business. The labor force currently in Germany is around 44 million

individuals. The consumption climate in Germany it is also another positive factor for Kidzania.

in 2011, many of the households were currently earning an average of €3,052 and most of these

earnings were spent on consumptions which makes the country very attractive in terms of high

purchasing power and consumer strength.

The following important characteristics that attracts investors is the prevailing status of

their political system, the guide released by the DFV also mentions that “According to the

corruption perception Index in 2013 produced by Transparency International Germany is

ranked in the number 17 in a list of 177 countries in terms of freedom from corruption”

(Deutscher Franchiser Verband, 2015)

In order to better understand the corruption index for Germany, it is worth mentioning

that the score level depends on how the country is perceived in the level of public sector. In this

case: Corruption. The rank goes from 0 (highly corrupt) to 100 (very clean). According to data

provided by the Trading Economics website, Germany ranked 81 points in December 2016

becoming one of the top 4 countries among the G20 countries, with the highest scores in terms of

clean corruption. (Germany corruption index, 2017)


Table 1 & 2.- Franchising and franchise sectors in Germany. Adapted from Deutscher

Franchise Verband E.V. International Franchising. A Guide for franchisors entering into

the German market. (2015) (p.10)

Due to its great reviews produced on the World Economic Forum in relation to its

ambitious standards on efficient transportation for goods and people, Germany has been an

attractive country in the European Union for international enterprises such as McDonalds,

Burger King, KFC to name a few. On Table 1 it is evident to see the growth in percentage of

franchises located in Germany between the years of 2003 and 2013. In addition to the visible


growth on the economic factors, Table 2 also shows the overall percentage of franchise sectors in

the country, showing that the service sector takes the biggest part of the graph.

Now that the franchise is the suggested market entry mode, several criteria must be taken

by Kidzania (the franchisor) when selecting this type of strategy. Referring to the article

provided by the DFV in 2015, there are some characteristics regarding franchise law that may be

perceived as advantageous for franchisors and franchisees entering in Germany. This country

allows individual contract design due to a lack of a specific franchise law (a different view will

be further discussed in the next subchapter). Another advantage that the DFV emphasized is the

creation of pre-contractual documents e.g. registration of franchise system and franchise

contracts are not necessary in this member state. In the next section, a discussion of the

challenges and a legal framework of franchising in the European Union will be discussed.

4.4 How to establish a franchise system in Germany

The Deutscher Franchise Verband already mentioned in the previous paragraphs,

suggests to franchisors to run a pilot phase before establishing their foreign franchise in

Germany. First of all, it recommends to franchisors to make a preliminary test including a market

analysis, a feasibility study and public relation strategies. It also recommends that the result of

that preliminary test is the market entry strategy suitable for the company. Right after this

preliminary test is performed and an entry strategy is selected, the DFV suggest to start preparing

the pilot operation which includes: selecting suppliers and reviewing the terms and conditions of

delivery as well as calculating the franchise fees. Besides this, the institution recommends

translating the handbook and adapted to meet the DFV guidelines on the next step, the

franchisors must install, monitor and control de pilot operation, also it needs to obtain the require

permits and licenses. During the monitoring, the franchisor must focus on profitability and


balance. As a result of this monitoring, the next step on this process is to create a franchise

contract based on the experiences gathered in the pilot phase. The last step is to establish a

system. In this step, the fee system, the contracts and the handbook must be finalized, it is also

recommended to look for possible state subsidy, develop an advertising strategy and start looking

to recruit franchisees. (Deutscher Franchise Verband, 2015)

4.5 Legal perspective of the regulatory framework for franchising in the EU

According to a recent study about the legal perspective and the regulatory framework for

franchising in the European Union made by the (IMCO) Internal Market and Consumer

Protection Committee, franchising is a uniform commercial activity that has a positive impact in

the (EU) European Union. The study also shows that franchising in the EU “stimulates

economic activity by improving distribution and increasing competition”. (Maciejewski, 2016)

In another research study made by author Mark Abell in 2013, he showed that franchising

substantially contributed to the (GDP) Gross Domestic Product of many EU member states.

However, he clearly remarks that franchising is underdeveloped in the EU in comparison with

the franchises activities in US and Australia. For example, in the United Kingdom in 2009,

franchising contributed with GBP 11.8 billion, in Germany EUR 48 billion and EUR 47.6 billion

in France. The estimated turnover of franchising in the EU that year was of US$300 billion

generated by 9971 franchises. Notwithstanding, the problem arises when an estimated of 835%

of this turnover corresponds to only 25% of the member states. (Abell, 2013)

According to some studies, franchising in the EU has not fulfilled its full potential due to

its dysfunctional regulations. There are two types of franchise regulations, the first type

comprehends the macro-economic issues and the second one focuses on the sales/relationship

regulations. These two regulations are developed in an uncoordinated manner and according to


this study, causing the dysfunctionality of franchise regulation in the EU. (Maciejewski, 2016)

Author M. Abell suggests in his study of “The Law and Regulation of Franchising in the EU”

that the creation of a directive will be a way to re-engineer the regulatory environment for

franchises. (Abell, 2013). A directive is a “legislative act that sets out a goal that all EU

countries must achieve. (European Union, n.d.). The author also argues that currently there are

only franchise-specific disclosures in six member states within the EU, and that the lack of a

uniform approach to pre-contractual disclosure weakens the impact of franchise-specific laws.

(Abell, 2013)

4.6 Franchisors – franchisees relationship in the EU

In 2016, a workshop organized by the European Parliament took place in

Brussels. In this event, comments were presented by the European Parliament to the Retail

Action Plan of the European Commission, in which, topics about challenges and EU rules with

regard to specific problems in the franchising market were discussed. The main purpose of this

meeting as mentioned by Mr. Dennis de Jong An author mentioned on this thesis (Abell, 2013)

also attended the workshop and presented his findings in front of a panel, a discussion about the

relationship between franchisors and franchisees was the main topic of discussion. Franchisors,

franchises as well as practitioners and academics were the participants of this workshop.

(Maciejewski, 2017)

4.7 Overview of the EU regulation No.330/2010

EU regulation 330/2010 can be found in the online database of the EU law. In relation to

the previous subtopic, some practitioners (Abell, 2013) argued that the know-how definition of

regulation 330/2010 is vague and needs to be updated in order to solve the current problems that

are arising in the franchise market in the EU. The following paragraph has been extracted


directly from the Commission Regulation No. 330/2010 in which states the “know how”

definition as follows:

“know-how” means a package of non-patented practical information, resulting from

experience and testing by the supplier, which is secret, substantial and identified: in this

context, „secret‟ means that the know-how is not generally known or easily accessible;

„substantial‟ means that the know-how is significant and useful to the buyer for the use,

sale or resale of the contract goods or services; „identified‟ means that the know-how is

described in a sufficiently comprehensive manner so as to make it possible to verify that

it fulfils the criteria of secrecy and substantiality” (Regulation, 2010)

(See Appendix for excerpt of art. 1 of this Regulation)

For the purposes of understanding what it was discussed in the workshop held in

Belgium, a brief synopsis of the 10 articles included on Regulation No.330/2010 will be shown

in the next part of this text:

Article 1. Definitions. Under this article several definitions are described for the

purposes of the regulation. Definitions of vertical agreement, vertical restraint,

competing undertaking, non-compete obligation, selective distribution system,

intellectual property rights, know-how (explained in the previous paragraph), buyer,

customer and connecting undertakings. (See Appendix B for the definitions of this

article)

Article 2. Exemption. This article declares that Article 101(1) (See Appendix B for

the excerpt of the article) of the Treaty does not apply to vertical agreements.


Article 3. Market share threshold. This article is related to the exemptions provided

on Article 2 and conditions the market share held by suppliers.

Article 4. Restrictions that remove the benefit of the block exemption – hardcore

restrictions. This article also focuses on the exemptions on article 2 but in a more

detail aspect concerning restrictions of the territory, buyers, sales and suppliers.

Article 5. Excluded restrictions. This article shows some of the cases in which the

article 2 is should not apply regarding the obligations that are contained in vertical

agreements.

Article 6. Non-application of this Regulation. This article follows article 1a of

Regulation No. 19/65/EEC in which it states that the Commission will not apply this

regulation in the case of “parallel networks of similar vertical restrains cover more

than 50% of the relevant market”.(Regulation, 2010)

Article 7. Application of the market share threshold. This article provides the rules

for applying the market share thresholds provided in article 3.

Article 8. Application of the turnover threshold. This article explains the calculation

of the total annual turnover between the relevant parties and the connected

undertakings.

Article 9. Transitional period. This article indicates the period in which the article

101(1) should not apply.

Article 10. Period of validity. This articles shows the period in which this regulation

enters into force as well as indicating its expiration date. (Regulation, 2010)


5. – Conclusion

This thesis mentions franchising as the recommended strategic entry market mode for the

company Kidzania entering in Germany. Nevertheless, based on this research, franchises already

established and working in the EU are currently facing some challenges within the regulatory

environment within the EU that according to some academics does not allowed them to achieve

their full potential in the market. As mentioned in the previous chapter, several suggestions by

some academics in relation to issues encounter by franchisors on article 330/2010 were given.

Also, they proposed that in order that franchising can reach its full potential, the regulation

environment needs to be modified in terms of promoting market confidence and law

harmonization throughout each EU member state. (Abell, 2013)

It is also worth mentioning that based on the data provided by Kidzania, the company is

currently in negotiations to open a facility in Germany and no challenges have been encounter

yet besides to finding the perfect location for their new facility. Given this information, it is also

important to consider that the company successfully opened its first facility in the EU (2016) in

the United Kingdom. It would be of great value for them to analyze more deeply the current

regulatory environment of the EU within the scope of franchising in order to avoid and be

prepared for any possible challenges that may encounter in the future.


5.1 Summary

In the introduction, a research problem was proposed in the light of the different entry

modes that multinational companies commonly use. Following this, a course of investigation was

explained from the beginning to give the reader an overview of the concepts that were going to

be explained throughout this thesis. Following to the introduction, the second chapter described

the basic concepts of multinational enterprises and emerging market multinationals extracted

from literature provided by some journals and books. In this same chapter, it was also mention

the world leading MNEs along with examples of successful Mexican multinationals already

established abroad. This chapter also explained the motivations that drives companies to aim for

expansion abroad. After reviewing those motivations. A classification of market entry modes

was shown in the following subchapters. The analysis of the hierarchical model which includes

the different entry modes were also described.

After the analysis of the hierarchical mode, the five forces model described by Michael E.

Porter regarding the industry competition was briefly explained. It was important to provide this

information in order to explain briefly the process that the companies experience once they

decide to internationalize. To accentuate this thesis, a case study regarding a company based in

Mexico was taken as an example of what could be the best entry strategy into the German

market. After doing some research regarding the company´s profile, its successful stories and its

preferred entry mode, on chapter 4, a strategic recommendation was given based on literature

and available data. Within the course of chapter 4, some challenges were found and described

regarding the legal framework of franchising in the EU regulation 330/2010.


5.2 Critical acclaim

This research paper has been written with the support of the reliability of its sources. The

following reliable sources were used for the completion of this thesis: books, journal articles,

case studies from academics, as well as publications released by public and private institutions.

One has not to forget about the fact that the only intention of this thesis was to provide a

recommendation rega rding the appropriate entry market mode for the selected MNE.

Additionally, due to lack of time and resources, a deep market analysis for the selected company

entering in Germany was not observed. Finally, in relation to the challenges that the company

could face when entering into the German market, future research needs to be done on this field.

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(p.34) Routledge

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economies. Academy of management journal, 43(3), 249-267.

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cases. Pearson Education.

Kidzania (2017). Franchises. (online) Retrieved July 09, 2017, from

http://www.Kidzania.com/franchises.html

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Lopez Ancona, Xavier - CV February 2017 (Press Release Kit). Retrieved from

http://www.Kidzania.com/press.html on July 9th 2017

Maciejewski, M. (2016). Legal Perspective of the Regulatory Framework and Challenges for

Franchising in the EU. Retrieved from:

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framework and current challenges. Retrieved from:

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6)595340_EN.pdf

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mcmillan.

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Pan, Y., & Tse, D. (2000). The Hierarchical Model of Market Entry Modes. Journal of

International Business Studies, 31(4), 535-554. Retrieved from

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Kidzania. Emerald Emerging Markets Case Studies.

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Treaty on the Functioning of the European Union to categories of vertical agreements

and concerted practice

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[email protected]

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Tables

Figure 1. - The Hierarchical Model of Market Entry Modes. Adapted from Pan, Y and D. Tse

(2000) “The Hierarchical Model of Market Entry Modes,” Journal of International Business

Studies 31(4), (p. 535-554)

Figure 2. The Five Forces that Shapes Industry Competition. Adapted from Michael E. Porter

“The Five Competitive Forces that Shape Strategy” (p. 27), Harvard Business Review, January

2008

Figure 3. The life-cycle model. Adapted from Gerry Johnson, Kevan Scholes & Richard

Whitting, “Exploring Corporate Strategy” (p. 86), 2008

Table 1 & 2.- Franchising and franchise sectors in Germany. Adapted from Deutscher

Franchise Verband E.V. International Franchising. A Guide for franchisors entering into

the German market. (2015) (p.10)

Appendix A

Q&As from KidZania´s management

Questions answered by the Global Commercial Director of Kidzania - Patricia Velasco

referred to Eder Lam by the CEO and founder of Kidzania- Xavier Lopez Ancona

Date: July 10th

2017

1. Why does KidZania uses franchising to enter into foreign markets?

KidZania has become a global phenomenon with 24 locations in nineteen countries including

Mexico, Japan, Indonesia, Portugal, United Arab Emirates, South Korea, Malaysia, Chile,

Thailand, Kuwait, India, Egypt, Turkey, Saudi Arabia, Brazil, United Kingdom and the

Philippines, and experiencing rapid global growth, with 7 more locations currently under

development around the world including Moscow, Singapore, Busan, Delhi-NCR, Doha,

Johannesburg and Paris.

Each KidZania location offers experiences that are relevant to a region, culture and geography by

way of food, entertainment and professions. At every location, KidZania uses real-world fun and

learning to ready kids for a better world. KidZania gets the “know who and know how” from his

Franchises as they know the market in a cultural and business environment, and help KidZania to

develop the business knowing the laws, regulations, including the correct industry partners,

restrictions, etc.

Additionally, this model allows a quick expansion due to the high investment needed for opening

a facility.

2. Which of the markets where KidZania is present with their franchise could be defined as

the most successful and why?

KidZania Japan could be considered one of the most successful Franchise due to different

reasons; in regards to external factors, it would be the population amount and the GDP.

Secondly, Japan has a very education-oriented society and KidZania has world-class learning

contents; both KidZania facilities in Japan have sold-out tickets for 3 months in advance.

3. Is there any obstacle or restriction to enter into foreign markets as a franchise? How does

kidZania overcomes these challenges?

To open a KidZania in a new country, we consider many factors, and among the most important,

are the following: getting the correct partner, kids population, GDP, and political stability.

4. Has KidZania experienced a failure to enter into any foreign market in the past?

No

5. Is it Germany in the scope as a potential country for kidZania’s expansion? What could be

some of the obstacles regulations, brand, etc.) for its entrance into the german market.

Yes, KidZania is already negotiating with a prospect group and hasn‟t encountered any obstacles

yet; though it is important to define a very good location for the facility.

6. Does KidZania personalized its business model to different foreidng market needs?

Yes. We are actively building alliances with local companies. Since role playing is a universal

idea that draws on our human instincts, we‟re confident that it transfers even across national

boundaries. Culture and values, however, vary from country to country, so the content must be

locally adapted. KidZania responds to such challenges by integrating globally understood

concepts in local partnerships. The important thing is to go forward by building, at a local level,

to create win-win relationships.

Appendix B

Excerpt from Regulation (EC) No. 330/2010 of 20 April 2010 on the application of Article 101

(39 of the Treaty on the Functioning of the European Union to categories of vertical agreements

and concerted practice. Retrieved from URL: http://eur-lex.europa.eu/legal-

content/EN/TXT/?uri=CELEX%3A32010R0330

Article 1

Definitions

1. For the purposes of this Regulation, the following definitions shall apply:

(a) „vertical agreement‟ means an agreement or concerted practice entered into

between two or more undertakings each of which operates, for the purposes of the

agreement or the concerted practice, at a different level of the production or

distribution chain, and relating to the conditions under which the parties may

purchase, sell or resell certain goods or services;

(b) „vertical restraint‟ means a restriction of competition in a vertical agreement

falling within the scope of Article 101(1) of the Treaty;

(c) „competing undertaking‟ means an actual or potential competitor; „actual

competitor‟ means an undertaking that is active on the same relevant market;

„potential competitor‟ means an undertaking that, in the absence of the vertical

agreement, would, on realistic grounds and not just as a mere theoretical

possibility, in case of a small but permanent increase in relative prices be likely to

undertake, within a short period of time, the necessary additional investments or

other necessary switching costs to enter the relevant market;

(d) „non-compete obligation‟ means any direct or indirect obligation causing the

buyer not to manufacture, purchase, sell or resell goods or services which compete

with the contract goods or services, or any direct or indirect obligation on the

buyer to purchase from the supplier or from another undertaking designated by the

supplier more than 80 % of the buyer's total purchases of the contract goods or

services and their substitutes on the relevant market, calculated on the basis of the

value or, where such is standard industry practice, the volume of its purchases in

the preceding calendar year;

(e) „selective distribution system‟ means a distribution system where the supplier

undertakes to sell the contract goods or services, either directly or indirectly, only

to distributors selected on the basis of specified criteria and where these

distributors undertake not to sell such goods or services to unauthorised

distributors within the territory reserved by the supplier to operate that system;

(f) „intellectual property rights‟ includes industrial property rights, know how,

copyright and neighbouring rights;

(g) „know-how‟ means a package of non-patented practical information, resulting

from experience and testing by the supplier, which is secret, substantial and

identified: in this context, „secret‟ means that the know-how is not generally

known or easily accessible; „substantial‟ means that the know-how is significant

and useful to the buyer for the use, sale or resale of the contract goods or services;

„identified‟ means that the know-how is described in a sufficiently comprehensive

manner so as to make it possible to verify that it fulfils the criteria of secrecy and

substantiality;

(h) „buyer‟ includes an undertaking which, under an agreement falling within

Article 101(1) of the Treaty, sells goods or services on behalf of another

undertaking;

(i) „customer of the buyer‟ means an undertaking not party to the agreement which

purchases the contract goods or services from a buyer which is party to the

agreement.

2. For the purposes of this Regulation, the terms „undertaking‟, „supplier‟ and

„buyer‟ shall include their respective connected undertakings.

„Connected undertakings‟ means:

(a) undertakings in which a party to the agreement, directly or indirectly:

(i) has the power to exercise more than half the voting rights, or

(ii) has the power to appoint more than half the members of the supervisory board, board

of management or bodies legally representing the undertaking, or

(iii) has the right to manage the undertaking's affairs;

(b) undertakings which directly or indirectly have, over a party to the agreement, the

rights or powers listed in point (a);

(c) undertakings in which an undertaking referred to in point (b) has, directly or

indirectly, the rights or powers listed in point (a);

(d) undertakings in which a party to the agreement together with one or more of the

undertakings referred to in points (a), (b) or (c), or in which two or more of the

latter undertakings, jointly have the rights or powers listed in point (a);

(e) undertakings in which the rights or the powers listed in point (a) are jointly held

by:

(i) parties to the agreement or their respective connected undertakings referred to in points

(a) to (d), or

(ii) one or more of the parties to the agreement or one or more of their connected

undertakings referred to in points (a) to (d) and one or more third parties.

internationalization strategies of emerging market

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