Global Finance: International Business Expansion Project

RUNNING HEADER: Disney Shanghai
Signature Assignment: International Business Expansion
A Case Study of Disney Company’s Shanghai Expansion
Stacey Troup
Global Finance/MBA-603
December 7, 2019
Professor Dr. Jacqueline Gilliard
Touro University Worldwide

Abstract
Disney took a gamble on operations in Hong Kong and followed with a Shanghai
presence in 2011. Virtually without competition, they found favor and expanded several times
through heavy review of their modes of entry into the international markets all while having
their hands forced into joint ventures in order to maintain the laws of the local (host) country.
Can these entities survive the international trade relation tension that exists in 2019? Will the
U.S. policy against China cost these U.S. businesses their success overseas?
Keywords:
Modes of Entry, theories of mode of entry, Chinese Government Owned
Businesses, Joint Ventures, Legalities of foreign owned subsidies in China.

Disney Shanghai Business Expansion
Disney made the decision to expand into the Asian marketplace with their Shanghai park
which opened in 2011. While a global namesake in the field of children’s entertainment, Disney
took a risk on their expansion into Shanghai following their opening in Tokyo a few years prior.
This decision had to be weighed heavily on several factors including macroeconomic risks that
exist with the global expansion, which method to use for the least risk and greatest reward, what
rewards came with such risks and how they would continue their branding beyond the initial
opening year. These decisions face any business who wish to develop a presence internationally
but Disney took a large gamble which will be reviewed against current threats and rewards as the
world faces immense political strife in terms of international expansion and foreign ownership,
as a whole.
International Modes of Entry
The decision for any company to expand internationally needs to be weighed accordingly
to the risk factors and best practices related to the business’ overall goals. Should the company
wish to have an equity-based investment internationally, they can chose between wholly-owned
subsidiaries and joint ventures with partnerships. Should the company decide that an equity
(ownership) based investment is not within their grasp or best interest, they can take a “non-
equity” based tact such as contractural agreements (licensing, etc.), or just choose to export their
goods (manufacturers) (Handelshøyskole, 2011) (Saylor Academy, N.D.).
Equity-based methods come with the highest risk as they require a business to own things
such as real estate or factories. Two types of equity-based entry methods exist; Joint ventures
and wholly-owned subsidiaries. Joint ventures are investments that are split between two or
more businesses where the risk and ownership is split between the “partners” accordingly to their

ownership percentages (Handelshøyskole, 2011). These types of investments are usually found
in countries where foreign governments have rules against foreign-owned businesses (such as the
case of China) (Stevenson, 2018).
China’s Communist Party controls how businesses can exist within the country. They
prohibit foreign-controlled businesses as they view such businesses as threats to their overall
economy. In order to have a business within China’s borders, joint ventures are the only types of
equity-based businesses that are allowed to exist within the country accordingly (Stevenson,
2018).
Wholly-owned subsidiaries are types of businesses that are entirely owned by one entity.
Common examples of these types of businesses found abroad include investment banks,
manufacturers, etc. A company will often establish a presence in an international location as a
means to obtain greater customer advantage/market presence (Handelshøyskole, 2011).
As far as non-equity methods of entry, contractual agreements and exports exist.
Contractual agreements are things such as licensing agreements and franchises which allow a
business to conduct certain types of business under an agreement to pay fees to the corporate
office which are equal to a percentage of sales as a result of the legal agreements. These types of
business can be owned by someone within a certain country but they will pay their commissions
and payments to their international owners as a result. These types of businesses are more likely
to be welcomed by the Chinese government as most of the profits remain within the country
(Handelshøyskole, 2011) (Stevenson, 2018).
Theories of Mode of Entry
Within the decision to expand a business lays the theories behind the reasoning for a
specific course of action. There are five (5) theories to consider when a decision to expand

exists including; Uppsala Model, Transaction Cost Economics; Resource-Based View,
Institutional Theory, and Cultural Distance Theory. In order to decide which tact to take, a
deeper look at each of these theories should be reviewed for best overall decision-making
abilities (Handelshøyskole, 2011).
The Uppsala Method, of which Disney chose for their Shanghai expansion, gained its
namesake courtesy of the University of Uppsala in Sweden who penned the moniker after
discovering that the approach took a gradual step to success rather than an “all-in” methodology
similar to “putting all your eggs in one basket”. This methodology ensures that small,
attainable steps are taken toward an overall larger goal in order to mitigate risk while gaining
greater knowledge of the macroeconomic conditions of the area in which the business is
established (Handelshøyskole, 2011). Disney chose this methodology to coincide with their joint
venture ownership with Shanghai Shendi Group who own a majority share of the park over the
43% ownership that Disney (corporate) owns. In addition to this ownership, the Shanghai
Shendi Group is controlled by the Chinese Government as part of the country’s ownership laws
(BARBOZA & BARNES, 2011) (Stevenson, 2018) (Tho, 2019).
Resource-Based view methodology is commonly found in businesses utilizing licensing
agreements or wholly-owned subsidiaries methods of entry. The reasoning behind this principle
is based on competitive advantages which measure the value of the asset in question which may
lead to a transference of ownership accordingly (based on the results of the profits). This may
not make sense in context but in reality, we have seen this type of transaction often. Consider
the recent acquisition of Tiffany™ & Co. jewelers by the corporate holding company of Louis
Vuitton (LVMH) in the largest LBO in history (within the luxury business). In a record
transaction, LVMH determined that purchasing the brand for a value approximately $16.2B in

securities and cash were a greater advantage than developing a new brand to compete, given the
history and iconic stature of the Tiffany™ & Co. brand since inception (Togoh, 2019). LVMH is
run from its corporate office in Paris, France and is an international business venture who have
been devouring other designer brands as part of their extensive competitive advantage goals
(Togoh, 2019) (Handelshøyskole, 2011).
Institutional Theory is based on the idea that a firm will open a new location in an
emerging markets location but will try to keep the internal workings the same as they are in the
corporate office, regardless of the cultural customs within the host country of the new location.
This takes great risk and could result in great loss if the differences in cultural norms are vastly
different from each other as companies will not find a welcoming host country government or
employees as a result which could result in a complete failure of business (Handelshøyskole,
2011).
Similar to institutional theory is cultural distance theory. Unlike the institutional theory
whereby the company tries to impose its cultural norms into a new host country, the cultural
distance theory imposes the host country’s cultural norms over the corporate locations basic
norms (Handelshøyskole, 2011).
Transaction Cost Economics Theory is one we see in the every day when we use portals
like Wish or Amazon.com. The premise behind this theory is to reduce the overall cost of goods
for sale by lowering the overall submerged costs within a product. By this, the underlying goal
is to transfer the outside costs such as freight charges, warehousing, labor (for same), rental
space, etc. to the end consumer or middle man (such as the distributor) which are associated with
warehousing and selling goods to a distributor or a retail store. By having places like Wish™
who transfer goods from Chinese manufacturers directly to the retail market, or Amazon™ who

warehouse these items and ship them free of charge to Prime™ members through a yearly
membership fee. These methods are used to not only lower the overall costs to the
manufacturers but also to gain a greater competitive advantage over others in the marketplace by
delivering to the end consumer rather than forcing them into the overcrowded retail marketplaces
(stores) to try to find what they seek, often requiring greater time and resources than the
simplified e-tailers mentioned herein. While the overall view of this theory may not be overly
visible, Amazon™ negotiates the lowest prices for these items to turn them over to their clients
seeking the “economy of convenience” where they can read reviews and seek out what they want
from their own homes, at drastically lower prices than the retail stores who must pay primes on
things like wages, insurance, etc. (Mean That, 2015).
Disney’s Choices
Through review of the methods and theories of entry to market options, we can see that
Disney chose both the Uppsala Model and Joint Venture entry method when opening the
Shanghai park. These decisions were based on both the inability to be a totally foreign-owned
location which went against Chinese rules and regulations while allowing Disney to take “baby
steps” to their grand plan of expanding the park to a glorious international competitor
(Handelshøyskole, 2011) (Stevenson, 2018).
With a minority stake in the park’s profits, they have also outsourced the retail stores
which are typically wholly-owned entities of the U.S. parks owned by Disney. This allows them
to reduce their overall risk while taking a partner that ensures the cultural choices related to the
park’s design and transfer transaction costs to the primary owners (who are also owned by the
Chinese Government) (Handelshøyskole, 2011) (Stevenson, 2018).

However, as a deeper dive into the theories discussed reveals, independent portions of
each of the theories were put into play as the park was not only developed but grew since the
opening. The partners decided to create a park that was more closely based on Chinese
familiarities. Included in this tact was the decision to gear not only the architectural approach
but an overall decision to skew everything toward the cultural bias of the host country vs the
U.S. norms. Prior to opening, several news outlets were concerned with how “Asian” the park
would be when it opened, but once a “peek” was available, it was discovered that they renamed
several streets away from the U.S. names to more Asian markets and that a lot of the buildings
were designed with “Shikumen” style architecture (Makinen, How 'Chinese' will the park be?;
New Shanghai Disney resort adds cultural elements to appeal to mainland visitors., 2015).
Also, the park took a different step when they decided to rent out the licensed shops
which were selling Disney™ character items as well as the food vendors who (at least within the
U.S.) are part of Disney’s corporate holdings but were decided to be leased out to outside
vendors in lieu of corporate structured stores. This tact reduces the overall cost of goods as well
as the risks of shops that may fail if the host country visitors do not like the overall offerings.
Disney and their partner in the park would have the option to turn the shop over to another
vendor should the originally designated shop fail, with Disney taking the least amount of risk and
alleviating themselves of the overall cost of running the shop (wages, insurance, stock, etc.)
(BARBOZA & BARNES, 2011).
While in most countries the Joint Venture tactic may have seemed overzealous and to cut
too deep into the plans the park had for expansion, the country’s laws regarding international
ownership prohibited them owning any part of the park over 50% and they took a risk of a
second park after opening a Hong Kong park with similar structure a few years prior. Industry

and park insiders questioned if the park could sustain a “double dose” of Disney so (relatively)
close together as the first park took a major hit to their financial success once the Shanghai park
opened but Disney Shanghai has found great success over the years which has enabled them to
expand the park several times, adding new and interesting aspects for the visitors (Makinen, Is
there enough Chinese demand for a double dose of Disney in Shanghai and Hong Kong?, 2016)
(10-K, 2018)
Chinese Business Advantages
Through the partnership (forced) with the firms involved in the park who are also part of
the Chinese government, the company (Disney) took a calculated risk by alleviating their overall
risk of a park failure through a leveraged partnership (Joint Venture) with their Chinese investors
who took 53% ownership (and responsibility) in the park’s finances and success. This leveraged
risk ensured that Disney took the least amount of risk while alleviating themselves of
environmental factors such as staffing, environmental, etc.) as the brunt of their risk was shifted
to their partners (transaction theory-based) (Makinen, How 'Chinese' will the park be?; New
Shanghai Disney resort adds cultural elements to appeal to mainland visitors., 2015) (Stevenson,
2018).
Alternatively, these risks are costing the company less overall in up-front fees but will
cost them greater fees in legal structured contracts for the forced joint ventures abroad. As is
commonplace, JV formations are usually with a set term with Chinese partners and the
negotiations of a JV with removal rights for board members and legal representatives as needed
to ensure alignment with the firm’s overall goals (Shaked & Co., N.D.).
Additionally, by shifting the risk of success to the primary investor, Disney ensures their
profitability provided that the decisions for the park do not become more than the JV agreement

can bear. It is apparent that they have found success with their partners as they have been able to
repay the loans provided by their JV agreements as well as renegotiate their terms as the park has
expanded several times, the most recent being a wild animal park slated for opening in 2021.
With each of these expansions comes new financing and negotiations with the partners as well as
the overall determination on how to keep with the spirit of Disney while attracting both local
clientele (of varying liquidity) as well as international clientele as a “destination” similar to the
U.S. alternatives has become.
PESTLE Analysis of Disney
A PESTLE analysis is similar to a SWOT analysis with the exception that the SWOT
identified items are turned into items which could be impacted by overall environmental risks.
PESTLE, which stands for Political, Economic, Social/Sociocultural, Technology, and
Ecology/Environmental all relate to macroeconomic risks that a company faces when
establishing a presence abroad in normal markets, notwithstanding the very particular risks faced
by Disney in this Communist environment run by Chinese government (indifferent for this
review) (Dahr, 2019).
Political risks (P) are based on the international trade issues within the global markets.
When the park first opened, we had positive trade relations with China but economists and
industry insiders warn that the current climate under Trump could result in severe consequences
for the success and profitability of Disney within China as a whole (Disney boss warns China
trade war would be damaging, 2017). The ongoing conflict between the U.S. and Chinese
governments could lead to lower disposable income for trips to the overseas (or even domestic)
parks, difficulty in obtaining entrance to the Singapore park (due to customs) and violence as a

result of international policy problems similar to the uprising we have seen in Hong Kong as of
recent (Dahr, 2019).
Economic (E) risks associated with this expansion included the impact on the GDP which
was mitigated via laws within China limiting the foreign ownership of the park (as outlined
previously). Within this risk, the park and their partners face a high risk of cultural revolt. If the
host country citizens do not welcome the park or some of its expansion efforts, the risk of
immense losses face/plague the park. In addition, the existential risk of competition is also
vastly prevalent (see “Competitive Risk”) (Dahr, 2019). In addition, changing tides in the form
of tariff reform could result in higher costs of goods for the park on a global basis.
Social/Sociocultural (S) are directly related to the risks within the economic risks. These
include the host country’s (China) acceptance of the park, the expansions, the policies and costs
related to attending the park. In addition, the welcoming of the video offering (within the laws
of Chinese government allowance) which will be available to the citizens of China from both the
Disney vault as well as their vast catalog of offerings including those as part of the 21st Century
Fox acquisition (MightyMax, n.d.) (Dahr, 2019) (Makinen, Is there enough Chinese demand for
a double dose of Disney in Shanghai and Hong Kong?, 2016).
Technology (T) relates to the company’s ability to keep up with the trends in both the
entertainment business but also the “wow” factor of their offerings in terms of rides, experiences,
and park amenities. While they found success with the Florida park having Epcot Center™,
which gave a global view of cuisine and culture under one roof, the Shanghai location is steering
clear of this in favor of true “experiences” and rides that immerse the customers with new
technologies allowing them to be part of the immersive environment sought by the company for
their patrons. The ability to keep up with these trends while not drastically impacting costs or

fees to gain entrance to the park will also be seen as they continue their expansions (Dahr, 2019)
(Disney’s Acquisition of 21st Century Fox Will Bring an Unprecedented Collection of Content
and Talent to Consumers Around the World, 2019).
Legal (L) are the risks associated with the development, expansion, and continued
operations of a global presence. The impact on the acquisition/merger with 21st Century Fox will
alleviate regional trademark rights to vast programming while allowing the Hulu platform to
become more prevalent globally, so long as the legalities of broadcast and internet laws within
China are maintained, as the communist regime block out a majority of content which violates
their legal parameters (Dahr, 2019) (Disney’s Acquisition of 21st Century Fox Will Bring an
Unprecedented Collection of Content and Talent to Consumers Around the World, 2019).
Ecology/Environmental (E) is the final stage of the PESTLE analysis. These
environmental facts which impact successful business abroad. As Asia is prone to weather-
related catastrophes such as hurricanes and typhoons (on outlying lands) as well as vast issues
with waste disposal ability and availability and poor air pollution. How the company will
mitigate these risks while showcasing their corporate responsibility to alleviate their carbon
footprint and aide in the efforts of clean up of such issues in their host country remain to be seen
(Dahr, 2019).
Local Impact
As the company partnered with a Chinese-based entity, they were uniquely established to
appeal to the Chinese patrons of the park. They have found great success through their joint
venture as they have removed a bulk of their responsibilities to staff, hire, and handle park
operations locally, leaving this to the local owners to handle within their cultural norms and
expectations.

The company is always innovating in order to provide the “latest and greatest”
attractions, all while maintaining parts of their significant historical culture mingled together
with that of the host country.
While this impact has been immensely unimpacted by foreign threat from competitors, in
recent years both Universal Studios as well as Dreamworks to open parks as early as 2021.
These parks, particularly Universal Studios, will offer a more entertainment-based offering rather
than brand loyalty of Disney’s venture, where rides will be themed around Universal characters
but still be more “thrill” based than character-based, which enable for easy conversion based on
new releases rather than a complete overhaul of a ride when it becomes outdated.
Universal Studios has nearly doubled the budget of Disney’s venture for a new park
which will be the largest park in the world dedicated to entertainment (Ma, 2018). Located in
Beijing, it will establish itself as a location for a more thrill-seeking clientele vs character-based
loyalty and younger generations that Disney is known for (Mitchell, 2019) (Niles, Universal
Officially Signs the Deal with China to Build Universal Studios Beijing, 2015) (Niles, Universal
expands plans for its new theme park in China, 2018).
Dreamworks™ is directly targeting the audience of Disney with a new park in Shanghai
to be opened approximately 2021 that is also geared toward character interaction and up-sale of
licensed products with a minor twist toward the riding entertainment, in line with the same
offering of Disney but with different characters under their license agreements to directly
compete with those under the Disney name (Orden, Areddy, & Kung, 2012).
With all of these ventures heading into the marketplace, China is further strengthening
their economic presence and low GDP while driving a positive economy from both the local
residents as well as those from foreign lands who visit these destination parks to spend money

locally. The parks all have the joint venture structure teamed with Chinese government
companies per the rules and regulations but have different age groups and draws to visitation. In
addition, each of these parks will be able to positively impact their host country environments
through jobs, revenues, incentives, education, and other impacts to assist with job creation and
professional advancement/fulfillment of residents who may otherwise work in factories.
Conclusion
Businesses often believe that the secret to their success lies within their ability to expand
internationally and gain a greater competitive advantage on a global scale. This is only true if all
of the theories behind the modes of entry are examined closely and a PESTLE analysis is
reviewed from a very fine angle.
Different countries have different rules when it comes to foreign-owned businesses and
the percentages allowed for foreign subsidies to be established within their countries and China
has secured their financial success (continued) by limiting the foreign-owned businesses where
they need to be levied with Chinese owned entities in order to keep the jobs, the money, and the
clientele within the country while welcoming foreign visitors but not workers. This ensures that
regardless of who wants to establish a presence within their country, they always reap the
rewards.
China has established themselves as a leader in how to keep control over foreign-owned
businesses but international presences wish to establish there in order to push their own agenda.
Disney found favor with their unique offering but will have serious threats when both Universal
Studios and Dreamworks open their presence there. Perhaps with all of the playing fields being
even in terms of ownership, import, and other rules of international trade, these can all exist
equally but only time will tell.

Can Universal Studios and Dreamworks adapt to the marketplace in the same way or with
the same success as Disney? Will the international reach of their offerings both physical
entertainment as well as digital content be as welcomed in China as the Disney family brand?
Only the people in the area can tell but it is certain that they will be able to all exist with a
positive impact on their host countries through their partnerships.
Perhaps the U.S. could learn a thing or two about how to keep money and jobs locally
from the Chinese government. The rules are a bit antiquated but reform could make this country
a superpower once again if we can establish ourselves as a destination, presence, and privately
owned business entity at least 50% owned by U.S. entities in order to exist as a way to reduce
our overall impact on both the GDP and our employment issues, overall.

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