International Business: Actions Entry mode (I)

Business College

School of Management

Aims of the Session:

• To understand different forms of internationalisation and market entry.

• To consider the benefits and problems of firm internationalisation from different perspectives.

Key Questions

• How do organisations internationalise?

• What are the advantages and disadvantages of various types of market entry?

Recap

• We examined the key IB theories last week.

• In this week, we will look at foreign market entry modes and the advantages and disadvantages associated with them.

Modes of Entry

•Organisations contemplating foreign expansion must consider the following:

–Which foreign market(s) to enter

–Timing of entry

–What form of entry to use

–What scale of entry to establish

–Which mode of entry to adopt

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

• Timing: When is a good time to enter?

– Potential gain from waiting

– Cost of delay

• Scale of entry

– Small scale: Establish a foothold to learn

– Large scale: Acquire first mover advantage

• Speed of expansion: How fast to grow?

– Value of learning

– Preemption of competitors

– Constraints of internal resources

• Mode

– Some modes have more flexibility embedded

– Some modes reduce resource requirements

Which Foreign Markets

• The choice must be based on an assessment of a country’s degree of alignment with firm strategy and likely contribution to revenue and profit

• The attractiveness of a country depends upon balancing the various associated benefits, costs, and risks

• These relate to: customer identification, production capabilities, or financial opportunities

• Benefits may relate to: market expansion, production flexibility, investment opportunity, etc.

• Risks may be competitive, political, financial, etc.

Timing the Entry

• ‘First-mover advantages’ that may be derived from entering a market early:

–Preempting rivals and capturing demand–Establishing a strong brand name–Building sales volume–Creating ‘switching costs’ for customers and clients

• ‘First-mover disadvantages’ may derive from: –Pioneering costs that early entrant incurs–Unanticipated political, legal, regulatory etc. risks–Additional costs of entry that may not be recouped before

competition increases and profit margins decline

Scale of Entry

• Large scale entry: –Involves ‘strategic commitment’ - a decision with long-term

impact that is difficult to reverse

–May lead rivals to rethink market entry

–May prompt competitive response from existing players

• Small scale entry:

–Requires limited financial and other resource commitment

–Provides time to learn about market

–Reduces exposure to risk

Activity 1: International Market Choice

• Considering concept of Timing/Scale/Speed, please return to the case of e-retail market in China and discuss potential success or failure of Walmart e-retail in China. Why China?

http://www.youtube.com/watch?v=VThkcxEqa7I

Choice of Market Entry Mode

Modes? Markets? Art? Science?

Complementarity of ResourcesComplementarity of Resources

Local Firm’s Resources

• Imitating capabilities

• Older technology and know-how

• Country-specific marketing expertise

• Country specific organization skills

MNC’s Resources

• Innovative capabilities

• Advanced technology and know-how

• Industry-specific marketing expertise

• Organization structure and systems

Going it Alone: ExportGoing it Alone: Export

HOME COUNTRY HOST COUNTRY

Export of Goods

MNC

Revenues

Customers

Going it Alone: Export

Advantages

• Low initial investment

• Reach customers quickly

• Complete control over production

• Benefit of learning for future expansion

Disadvantages

• Potential costs of trade barriers

– Transportation cost

– Tariffs and quotas

• Foregoes potential location economies

• Difficult to respond to customer needs well

When Is Export Appropriate?

• Low trade barriers

• Home location has cost advantage

• Customization not crucial

Licensing AgreementLicensing Agreement

Local Firm

Licensing of TechnologyHOME COUNTRY HOST COUNTRY

MNC

Fees and Royalties

Licensing Agreement

Advantages

• Low initial investment

• Avoids trade barriers

• Potential for utilizing location economies

• Access to local knowledge

• Easier to respond to customer needs

Disadvantages

• Lack of control over operations

• Difficulty in transferring tacit knowledge

– Negotiation of a transfer price

– Monitoring transfer outcome

• Potential for creating a competitor

When Is Licensing Appropriate?

• Well codified knowledge

• Strong property rights regime

• Location advantage

Activity 2: Licensing Case Discussion

• You and your team are the assistant to the CEO of a small textile firm that manufactures quality, premium-priced, stylish clothing (Italian Brand). The Italian CEO has decided to see what the opportunities are for exporting or licensing and has asked you and your team for advice as to the steps the company should take. What advice would you give the CEO?

Foreign AcquisitionForeign Acquisition

Local FirmInvestment

HOME COUNTRY HOST COUNTRY

MNE

Profit

Foreign Acquisition

Advantages

• Access to target’s local knowledge

• Control over foreign operations

• Control over own technology

Disadvantages

• Uncertainty about target’s value

• Difficulty in “absorbing” acquired assets

• Infeasible if local market for corporate control is underdeveloped

When Is Acquisition Appropriate?

• Developed market for corporate control

• Acquirer has high “absorptive” capacity

• High synergy

Activity 3: Merger and Acquisition

• Please watch this clip on international merger and acquisition http://www.youtube.com/watch?v=EKArEQ_8xFM

• Then, list factors affecting the success of international merger and acquisitions.