International business actions entry modes ii
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International Business: Actions Entry modes (II). Business College School of Management. Key Learning Objective. This session will help you to understand the concepts of: 1) Internationalisation of business organisations 2) Key international business theories

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International Business: Actions Entry modes (II)

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International business actions entry modes ii

International Business: Actions Entry modes (II)

Business College

School of Management


Key learning objective

Key Learning Objective

  • This session will help you to understand the concepts of:

    1) Internationalisation of business organisations

    2) Key international business theories

    3) Complexities of choices and approaches in internationalisation


Aims of the session

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

Key Questions

  • How do organisations internationalise?

  • How does international business manage its internal operations?

  • How does international business manage its external operations (e.g. relationship with the host country/communities)?


Recap

Recap

  • We looked at the concept of ‘internationalisation’ of firms and rationale behind their decision-making process.

  • Advantages and Risks of internationalisation


Modes of entry

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


Going it alone green field entry

Profit

Investment

Going it Alone: “Green Field” Entry

HOME COUNTRY

HOST COUNTRY

MNE

New Subsidiary Company


Going it alone green field entry1

Advantages

Normally feasible

Avoids risk of overpayment

Avoids problem of integration

Still retains full control

Disadvantages

Slower startup

Requires knowledge of foreign management

High risk and high commitment

Going it Alone: “Green Field” Entry

  • When Is “Green Field” Entry Appropriate?

  • Lack of proper acquisition target

  • In-house local expertise

  • Embedded competitive advantage


International business actions entry modes ii

Between 2007 and 2011, a total of 1,243 foreign direct investment (FDI) projects were recorded in Australia from 933 companies. This represents an average annual growth rate of 15.4 per cent with a total capital investment of US$122 billion. Greenfield investments accounted for 84.8 per cent of projects over this five year period.  (Brisbanemarketing, 2012)


Activity 1 hyundai goes greenfield in czech republic

Activity 1: Hyundai goes greenfield in Czech Republic

  • In 2008, Hyundai invested in the form of greenfield investment in Czech republic (http://www.eurofound.europa.eu/eiro/2006/04/articles/cz0604029i.htm). Please discuss the choice of doing greenfield investment. Why this strategy? What are the benefits and pitfalls for Hyundai?


Management contract

Management Fees

Profit

Technological Inputs

Management Contract

HOME COUNTRY

HOST COUNTRY

MNE

Local Firm

Managerial Service

Wholly-Owned Subsidiary


Contractual entry modes

Contractual entry modes

Management contracts

One company supplies another with managerial expertise for a specific period of time

+ Low risk

+ Receive awards from governments

+ Governments use to develop the skills of local workers

- Managers’ lives in danger when countries are undergoing political or social turmoil

- Can create future competitors

Franchising

Licensing

Management contracts

Turnkey projects


Management contract1

Advantages

Access to local management skills

Avoids buying unwanted assets

Retains strategic control

Disadvantages

Potential incentive problem

Potential adverse selection problem

How do you know the competencies of the manager?

Management Contract

  • When Is a Management Contract Appropriate?

  • Manager has a reputation to protect

    • Hotels

    • Consulting companies

  • Performance-based contract provides no perverse incentives


International business actions entry modes ii

Turnkey projects

One company designs, constructs, and tests a production facility for a client firm

+ Permit firms to specialize in their core competencies

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

- Company may be awarded project for political reasons

Can create future competitors

No long term interests.

Contractual entry modes

Franchising

Licensing

Management contracts

Turnkey projects


Joint venture

Inputs

Share of Profit

Joint Venture

HOME COUNTRY

HOST COUNTRY

MNE

Local Firm

Share of Profit

Inputs

Joint Venture Company


Joint venture1

Advantages

Access to partner’s local knowledge

Reduction of concern about overpayment

Both parties have some performance incentives

Significant control over operation

Disadvantages

Potential loss of proprietary knowledge

Potential conflicts between partners

Neither partner has full performance incentive

Neither partner has full control

Joint Venture

  • When Is a Joint Venture Appropriate?

  • Both partners contribute hard-to-measure inputs

  • Large expected mutual gains in the long-run

  • Trade secrets can be walled off


Air asia tata joint venture

Air Asia – Tata Joint Venture

  • This is the story of IJV between TATA and Air Asia in India:

    Case Study

School of Management


Activity 3 international joint venture case study

Activity 3: International Joint Venture Case Study

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

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

  • What are the factors that MNCs should consider when deciding to use an international joint venture as a market entry strategy?

  • What are the potential benefits and risks in taking this course of action?

School of Management


Common market entry modes

Common Market Entry Modes

HOME COUNTRY

HOST COUNTRY

Licensing

Acquisition

MNE

Local Firm

Export

Joint Venturing

Joint Venture Company

“Green Field” Entry

New Subsidiary Company


Activity 3 is nigeria an attractive place for fdi

Activity 3: Is Nigeria an attractive place for FDI?

  • Please watch this and discuss the question.

http://www.youtube.com/watch?v=I77sUqQx8i4


Future reading

Future Reading

  • Anderson, Erin and Hubert Gatignon. 1986. Modes of Foreign Entry: A Transaction Cost Analysis.  Journal of International Business Studies, 17: 1-26.

  • Kogut, B. and H. Singh. 1988. The effect of national culture on the choice of entry mode. Journal of International Business Studies, 19: 411-432.

    - Hennart, J.-F. and Y.-R. Park. 1993. Greenfield vs. acquisition: The strategy of Japanese investors in the United States. Management Science, 39(9): 1054-1070.

    - Hennart, J. F., and Reddy, S. 1997. The Choice Between Mergers/Acquisitions and Joint Ventures: The Case of Japanese Investors in the United States. Strategic Management Journal 18: 1-12.

    - Barkema, H. G. and Vermeulen, F. 1998. International Expansion Through Start-up or Acquisition: A Learning Perspective. Academy of Management Journal 41: 7-26.

  • - Brouthers, K. D. and Brouthers, L. E. 2000. Acquisition or Greenfield Start-up? Institutional, Cultural and Transaction Cost Influences. Strategic Management Journal 21: 89-97.


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