Foreign Market Entry Strategies

1. Foreign Market Entry Strategies Ruth V. Aguilera

2. World Market Locations Economies Economies of Scale Economies of Scope Principal Motives for Int’l Expansion To seek lower production factor costs To expand sales and production volume To exploit proprietary assets

3. Ownership Wholly owned operations Green-field investment Full acquisition Partially owned operations Partial acquisition Joint venture Relatedness Horizontal FDI Vertical FDI Unrelated diversification Forms of FDI

4. Home Country Host Country Forms of FDI: Ownership Green Field100% Owned New Entity Full Acquisition (i.e., 100%) MNE Local Firm Partial Acquisition (e.g., 50%) Ownership = (1 - s)% Ownership = s% Joint Venture

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

6. Choice of Market Entry Mode

7. Company Infrastructure Marketing and Sales R&D Production Advanced Technology & Know-How Industry-Specific Marketing Expertise Innovative Capabilities Organization, Coordination & HRM Value Chain of an MNE • What additional resources may the MNE need to enter a foreign market? • Local expertise: marketing, government relations, etc.

8. Company Infrastructure Marketing and Sales R&D Production Older Technology and Know-How Country-Specific Marketing Expertise Imitative Capabilities Organization, Coordination & HRM Typical Value Chain of a Local Firm What may the MNE desire from a local firm? • Complementary resources • Not necessarily strength in every area

9. Local Firm’s Resources Imitating capabilities Older technology and know-how Country-specific marketing expertise Country specific organization skills MNE’s Resources Innovative capabilities Advanced technology and know-how Industry-specific marketing expertise Organization structure and systems Complementarity of Resources

10. HOME COUNTRY HOST COUNTRY Going it Alone: Export Revenues MNE Customers Export of Goods

11. 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 Going it Alone: Export When Is Export Appropriate? • Low trade barriers • Home location has cost advantage • Customization not crucial

12. Licensing of Technology Fees and Royalties Licensing Agreement HOME COUNTRY HOST COUNTRY MNE Local Firm

13. 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 Licensing Agreement When Is Licensing Appropriate? • Well codified knowledge • Strong property rights regime • Location advantage

14. Investment Profit Foreign Acquisition HOME COUNTRY HOST COUNTRY MNE Local Firm

15. 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 Foreign Acquisition When Is Acquisition Appropriate? • Developed market for corporate control • Acquirer has high “absorptive” capacity • High synergy

16. Profit Investment Going it Alone: “Green Field” Entry HOME COUNTRY HOST COUNTRY MNE New Subsidiary Company

17. 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

18. Management Fees Profit Technological Inputs Management Contract HOME COUNTRY HOST COUNTRY MNE Local Firm Managerial Service Wholly-Owned Subsidiary

19. 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

20. Inputs Share of Profit Joint Venture HOME COUNTRY HOST COUNTRY MNE Local Firm Share of Profit Inputs Joint Venture Company

21. 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

22. 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

23. Kumar & Subramaniam (1997)A Contingency Framework for the Mode of Entry Decision • Risk • Return • Control

25. Decision Strategies: • Rational Analytic Strategy • Cybernetic Strategy • Serendipity

26. Discovers

27. The Australian Challenge • What’s Freixenet core competency? • Evaluate Freixenet’s market entry modes • Freixenet in Australia • What lessons can we draw? • Where next? • Adds: what is the theme? • Is it a global theme (standarization/adaptaion? • Glocalization (Akio Morita)

28. Good luck!

29. 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.