International BusinessInternational Business

((Entry Strategy – Foreign Direct Entry Strategy – Foreign Direct InvestmentInvestment))

Erasmus programmeErasmus programmeIIII

Lecturer Dr Pavlos Dimitratos Lecturer Dr Pavlos Dimitratos pdimitr@aueb.grpdimitr@aueb.gr

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Cultural differencesCultural differences Culture is of paramount importance to Culture is of paramount importance to

internationalizationinternationalization The relationship between culture and The relationship between culture and

country can be ambiguous due to country can be ambiguous due to possible existence of subculturespossible existence of subcultures

Social systems and values differ Social systems and values differ between countries also (e.g. the between countries also (e.g. the individual vs. the group)individual vs. the group)

Social strata, social mobility and class Social strata, social mobility and class consciousness can considerably differ consciousness can considerably differ between countries (e.g. USA vs. India)between countries (e.g. USA vs. India)

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Cultural differences (cont’d)Cultural differences (cont’d) Religion affects ethical standards Religion affects ethical standards

and beliefs towards consumption, and beliefs towards consumption, business and entrepreneurship in business and entrepreneurship in any countryany country E.g. the protestant work ethic E.g. the protestant work ethic

supports the fundamental beliefs of supports the fundamental beliefs of capitalismcapitalism

Islam is mainly concerned with social Islam is mainly concerned with social justice and is critical of those who justice and is critical of those who earn profit through the exploitation earn profit through the exploitation of othersof others

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Cultural differences (cont’d)Cultural differences (cont’d)

Spoken and unspoken language Spoken and unspoken language are also part of cultureare also part of culture E.g. different interpretations of the E.g. different interpretations of the

word ‘liberal’word ‘liberal’ Gestures, symbols and colors around Gestures, symbols and colors around

the worldthe world

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Cultural differences (cont’d)Cultural differences (cont’d) Culture in the workplaceCulture in the workplace Hofstede’s four dimensionsHofstede’s four dimensions

1.1. Power distance: how a society deals Power distance: how a society deals with the fact that people are equal with the fact that people are equal in physical and intellectual in physical and intellectual capabilities (e.g. Denmark vs. India)capabilities (e.g. Denmark vs. India)

2.2. Individualism vs. collectivism: Individualism vs. collectivism: focuses on the relationship between focuses on the relationship between the individual and his/her fellows the individual and his/her fellows (e.g. USA vs. Thailand)(e.g. USA vs. Thailand)

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Cultural differences (cont’d)Cultural differences (cont’d)

Hofstede’s four dimensions (cont’d):Hofstede’s four dimensions (cont’d):3.3. Uncertainty avoidance: the degree Uncertainty avoidance: the degree

to which different cultures socialize to which different cultures socialize their members into accepting their members into accepting ambiguous situations and tolerating ambiguous situations and tolerating uncertainty (e.g. Japan vs. Great uncertainty (e.g. Japan vs. Great Britain)Britain)

4.4. Masculinity vs. feminity: deals with Masculinity vs. feminity: deals with the relationship between gender and the relationship between gender and work roles (e.g. Netherlands vs. work roles (e.g. Netherlands vs. Mexico)Mexico)

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Two main foreign entry modesTwo main foreign entry modes Exports (trade)Exports (trade) Foreign direct investment (FDI)Foreign direct investment (FDI)

FDI occurs when a firm invests FDI occurs when a firm invests directly in value-added activities in directly in value-added activities in a foreign countrya foreign country

Once a firm engages in FDI, it Once a firm engages in FDI, it becomes a multinational (MNE)becomes a multinational (MNE)

Foreign portfolio investment is Foreign portfolio investment is investment in foreign financial investment in foreign financial instruments whereby no significant instruments whereby no significant equity stake in a foreign business equity stake in a foreign business entity takes place entity takes place

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Two main foreign entry modes Two main foreign entry modes (con’d)(con’d)

Licensing (franchising) Licensing (franchising) represents a hybrid between represents a hybrid between exports and FDIexports and FDI

In licensing we have the In licensing we have the exporting of intangiblesexporting of intangibles

FDI can be joint ventures FDI can be joint ventures (strategic alliances) or wholly (strategic alliances) or wholly owned subsidiariesowned subsidiaries

FDI can occur through FDI can occur through mergers/acquisitions or mergers/acquisitions or greenfield investmentsgreenfield investments

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Choice between entry modes…Choice between entry modes… Depends on…Depends on…

Transportation costs (may dictate Transportation costs (may dictate the use of FDI)the use of FDI)

Market imperfectionsMarket imperfections Impediments to exporting (tariffs and Impediments to exporting (tariffs and

other trade barriers)other trade barriers) Impediments to the sale of know-how Impediments to the sale of know-how

stemming from the firm’s stemming from the firm’s technological, marketing or technological, marketing or management know-how. In those management know-how. In those cases, the firm will prefer FDI to cases, the firm will prefer FDI to protect its valuable know-how and/or protect its valuable know-how and/or exert tight control in its foreign exert tight control in its foreign activities and/or because of no activities and/or because of no amenability to licensingamenability to licensing

Most useful theory in explaining choice Most useful theory in explaining choice of entry modesof entry modes

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Choice between entry modes… Choice between entry modes… (cont’d)(cont’d)

Depends on…Depends on… Following competitors Following competitors

(Knickerbocker)(Knickerbocker) The evolution of the international The evolution of the international

product life cycle (Vernon)product life cycle (Vernon) The stage of the firm’s international The stage of the firm’s international

growth (Johanson and Vahlne)growth (Johanson and Vahlne) The higher the experience/knowledge The higher the experience/knowledge

the firm acquires abroad, the more likely the firm acquires abroad, the more likely an FDI mode isan FDI mode is

Location-specific advantages Location-specific advantages (Dunning)(Dunning)

Fit of firm’s resources with foreign Fit of firm’s resources with foreign country’s advantagescountry’s advantages

This viewpoint helps explain the This viewpoint helps explain the direction of FDIdirection of FDI

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ExportingExporting AdvantagesAdvantages

Low costsLow costs May help a firm achieve experience May help a firm achieve experience

curve and location economiescurve and location economies DisadvantagesDisadvantages

Lack of controlLack of control Lack of involvement in the foreign Lack of involvement in the foreign

marketmarket

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Licensing (franchising)Licensing (franchising) AdvantagesAdvantages

No development costs and risks No development costs and risks associated with opening a foreign associated with opening a foreign marketmarket

DisadvantagesDisadvantages Limited control over value-added Limited control over value-added

activities required for realizing activities required for realizing experience curve and location experience curve and location economieseconomies

The firm cannot efficiently The firm cannot efficiently coordinate strategic moves across coordinate strategic moves across countriescountries

Risk associated with licensing Risk associated with licensing know-howknow-how

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Joint venture (strategic Joint venture (strategic alliance)alliance)

AdvantagesAdvantages Benefit from a local partner’s Benefit from a local partner’s

knowledgeknowledge Share the development costs and Share the development costs and

risks of opening a foreign marketrisks of opening a foreign market Politically acceptablePolitically acceptable

DisadvantagesDisadvantages Give control over critical Give control over critical

competencies to foreign partnerscompetencies to foreign partners No tight control compared with No tight control compared with

subsidiaries (lack of global strategic subsidiaries (lack of global strategic coordination)coordination)

May be hard to manage over timeMay be hard to manage over time

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Wholly owned subsidiariesWholly owned subsidiaries AdvantagesAdvantages

Control and protection of valuable Control and protection of valuable core competenciescore competencies

Ability to engage in international Ability to engage in international strategic coordination, and realize strategic coordination, and realize location and experience economieslocation and experience economies

DisadvantagesDisadvantages High costHigh cost Exposure to high riskExposure to high risk

Mini-case discussionMini-case discussion

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FDIFDI Majority of FDI takes place Majority of FDI takes place

through Mergers & Acquisitions through Mergers & Acquisitions rather than Greenfield rather than Greenfield investments - why?investments - why? M&A are quicker to executeM&A are quicker to execute M&A may preempt competitorsM&A may preempt competitors In M&A firms acquire valuable In M&A firms acquire valuable

strategic assetsstrategic assets Internationalized firms believe they Internationalized firms believe they

can increase the efficiency of the can increase the efficiency of the acquired unit and thus may be less acquired unit and thus may be less riskyrisky

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FDI (cont’d)FDI (cont’d)

Yet, M&A may fail becauseYet, M&A may fail because Firms may overpay for the assets of Firms may overpay for the assets of

the acquired firmthe acquired firm There can be a clash of cultures There can be a clash of cultures

between the two firmsbetween the two firms Of difficulties in the management of Of difficulties in the management of

relationshiprelationship Of inadequate pre-acquisition Of inadequate pre-acquisition

screeningscreening

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Other entry decisionsOther entry decisions

Which markets/countries to Which markets/countries to enter (Erasmus programme I)enter (Erasmus programme I)

Timing of entry (first mover vs. Timing of entry (first mover vs. late mover)late mover)

Scale of entry / strategic Scale of entry / strategic commitmentscommitments

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The political economy of FDIThe political economy of FDI FDI has been viewed in a FDI has been viewed in a

continuum ranging from an continuum ranging from an instrument of imperialist instrument of imperialist domination to an instrument for domination to an instrument for allocating production to most allocating production to most efficient locations. efficient locations.

Somewhere in the middle lies the Somewhere in the middle lies the view of the ‘pragmatic nationalism’ view of the ‘pragmatic nationalism’ whereby FDI is viewed as having whereby FDI is viewed as having both benefits and costs (e.g. France both benefits and costs (e.g. France in the 1980s)in the 1980s)

Mini-case discussionMini-case discussion

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Benefits of FDI to the host Benefits of FDI to the host countrycountry

Resource transfer effects Resource transfer effects (capital, technology, (capital, technology, management)management)

Employment effects (direct and Employment effects (direct and indirect)indirect)

Balance of payments effects Balance of payments effects (initial investment, substitution (initial investment, substitution of imports, exports to other of imports, exports to other countries)countries)

Effect on competition and Effect on competition and economic growtheconomic growth

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Costs of FDI to the host Costs of FDI to the host countrycountry

Adverse effects on competition Adverse effects on competition (could monopolize the market)(could monopolize the market)

Adverse effects on balance of Adverse effects on balance of payments (repatriation of payments (repatriation of earnings, imports from earnings, imports from home/abroad)home/abroad)

Threat to national sovereignty Threat to national sovereignty and autonomyand autonomy

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Benefits of FDI to the home Benefits of FDI to the home countrycountry

Effects on balance of payments Effects on balance of payments (repatriation of earnings, (repatriation of earnings, exports from home)exports from home)

Employment effects (demand for Employment effects (demand for home-country goods)home-country goods)

Learning of valuable skills from Learning of valuable skills from foreign market exposureforeign market exposure

Economic diplomacyEconomic diplomacy

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Costs of FDI to the home Costs of FDI to the home countrycountry

Effects on balance of paymentsEffects on balance of payments

Employment effectsEmployment effects

Home/ host countries can encourage Home/ host countries can encourage or discourage FDI through a variety of or discourage FDI through a variety of policiespolicies

The WTO (World Trade Organization) The WTO (World Trade Organization) has also become involved in has also become involved in regulations governing FDIregulations governing FDI

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ReadingsReadings Hill, chapters 3, 6, 7 & 14Hill, chapters 3, 6, 7 & 14

Recommended:Recommended: Johanson J., and Vahlne J.-E. (1977), “The Johanson J., and Vahlne J.-E. (1977), “The

internationalization process of the firm: A model internationalization process of the firm: A model of knowledge development and increasing of knowledge development and increasing foreign market commitments”, foreign market commitments”, Journal of Journal of International Business StudiesInternational Business Studies, 8(1), 23-32., 8(1), 23-32.

Root F.R. (1987), Root F.R. (1987), Entry Strategies for Entry Strategies for International MarketsInternational Markets, Lexington, MA: Lexington , Lexington, MA: Lexington Books.Books.

Young S., Hamill J., Wheeler C., and Davies J.R. Young S., Hamill J., Wheeler C., and Davies J.R. (1989), (1989), International Market Entry and International Market Entry and DevelopmentDevelopment, Englewood Cliffs, NJ: Prentice-, Englewood Cliffs, NJ: Prentice-Hall.Hall.