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Foreign Market Entry Strategies
Ruth V. Aguilera
Principal Motives for Int’l Expansion
World Market
Locations
Economies

To seek lower
production factor costs

Economies
o...
Forms of FDI


Ownership


Wholly owned
operations
Green-field
investment
 Full acquisition




Partially owned
opera...
Forms of FDI: Ownership
Home Country

Green Field
100% Owned

Host Country
New Entity

Full Acquisition
(i.e., 100%)

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

Timing: When is a
good time to en...
Choice of Market Entry Mode
Value Chain of an MNE
Company Infrastructure
R&D
Innovative
Capabilities





Production

Marketing
and Sales

Advanced
...
Typical Value Chain of a Local Firm
Company Infrastructure
R&D
Imitative
Capabilities

Production

Marketing
and Sales

Ol...
Complementarity of
Resources
MNE’s Resources







Innovative capabilities
Advanced technology
and know-how
Industry-...
Going it Alone: Export
HOME COUNTRY

HOST COUNTRY
Revenues

Customers

MNE

Export of Goods
Going it Alone: Export










Advantages
Low initial investment
Reach customers quickly
Complete control over
pr...
Licensing Agreement
HOME COUNTRY
HOST COUNTRY
Licensing of Technology

MNE

Local Firm
Fees and Royalties
Licensing Agreement








Advantages
Low initial investment
Avoids trade barriers
Potential for utilizing
location ...
Foreign Acquisition
HOME COUNTRY

HOST COUNTRY

Investment

MNE

Local Firm
Profit
Foreign Acquisition
Advantages
Access to target’s local
knowledge
Control over foreign
operations
Control over own
technol...
Going it Alone: “Green Field” Entry
HOME COUNTRY

MNE

Investment

HOST COUNTRY

Profit

New Subsidiary
Company
Going it Alone: “Green Field” Entry







Advantages
Normally feasible
Avoids risk of
overpayment
Avoids problem of
i...
Management Contract
HOME COUNTRY
HOST COUNTRY
Management Fees

MNE

Local Firm
Profit

Technological Inputs

Managerial
Se...
Management Contract












Disadvantages
Potential incentive
problem
Potential adverse
selection problem


How...
Joint Venture
HOME COUNTRY

HOST COUNTRY

MNE

Local Firm
Share of
Profit
Joint Venture
Company

Inputs
Inputs
Share of Pr...
Joint Venture













Advantages
Access to partner’s local
knowledge
Reduction of concern about
overpayment
Bo...
Common Market Entry Modes
HOME COUNTRY

Licensing

HOST COUNTRY

Acquisition

MNE

Local Firm
Export
Joint Venturing

“Gre...
Kumar & Subramaniam
(1997)
A Contingency Framework for
the Mode of Entry Decision




Risk
Return
Control
Modes of entry
Exporting Contractual
Agreeme
nt

Joint
Venture

Acquisition

Greenfield
Investm
ent

Risk

Low

Low

Moder...
Decision Strategies:


Rational Analytic Strategy



Cybernetic Strategy


Serendipity
Discovers
The Australian Challenge




What’s Freixenet core competency?
Evaluate Freixenet’s market entry modes
Freixenet in Aus...
Good luck!
Future Reading
- Anderson, Erin and Hubert Gatignon. 1986. Modes of Foreign Entry:
A Transaction Cost Analysis.  Journal o...
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  1. 1. Foreign Market Entry Strategies Ruth V. Aguilera
  2. 2. Principal Motives for Int’l Expansion World Market Locations Economies To seek lower production factor costs Economies of Scale To expand sales and production volume Economies of Scope To exploit proprietary assets
  3. 3. Forms of FDI  Ownership  Wholly owned operations Green-field investment  Full acquisition   Partially owned operations Partial acquisition  Joint venture   Relatedness    Horizontal FDI Vertical FDI Unrelated diversification
  4. 4. Forms of FDI: Ownership Home Country Green Field 100% Owned Host Country New Entity Full Acquisition (i.e., 100%) MNE Local Firm Partial Acquisition (e.g., 50%) Ownership = s% Ownership = (1 - s)% Joint Venture
  5. 5. 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
  6. 6. Choice of Market Entry Mode
  7. 7. Value Chain of an MNE Company Infrastructure R&D Innovative Capabilities   Production Marketing and Sales Advanced Technology & KnowHow IndustrySpecific Marketing Expertise Organization, Coordination & HRM What additional resources may the MNE need to enter a foreign market? Local expertise: marketing, government relations, etc.
  8. 8. Typical Value Chain of a Local Firm Company Infrastructure R&D Imitative Capabilities Production Marketing and Sales Older Technology and KnowHow CountrySpecific Marketing Expertise Organization, Coordination & HRM What may the MNE desire from a local firm?  Complementary resources  Not necessarily strength in every area
  9. 9. Complementarity of Resources MNE’s Resources     Innovative capabilities Advanced technology and know-how Industry-specific marketing expertise Organization structure and systems Local Firm’s Resources     Imitating capabilities Older technology and know-how Country-specific marketing expertise Country specific organization skills
  10. 10. Going it Alone: Export HOME COUNTRY HOST COUNTRY Revenues Customers MNE Export of Goods
  11. 11. 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
  12. 12. Licensing Agreement HOME COUNTRY HOST COUNTRY Licensing of Technology MNE Local Firm Fees and Royalties
  13. 13. 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
  14. 14. Foreign Acquisition HOME COUNTRY HOST COUNTRY Investment MNE Local Firm Profit
  15. 15. 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
  16. 16. Going it Alone: “Green Field” Entry HOME COUNTRY MNE Investment HOST COUNTRY Profit New Subsidiary Company
  17. 17. Going it Alone: “Green Field” Entry     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 When Is “Green Field” Entry Appropriate? Lack of proper acquisition target In-house local expertise Embedded competitive advantage
  18. 18. Management Contract HOME COUNTRY HOST COUNTRY Management Fees MNE Local Firm Profit Technological Inputs Managerial Service Wholly-Owned Subsidiary
  19. 19. Management Contract       Disadvantages Potential incentive problem Potential adverse selection problem  How do you know the competencies of the manager? When Is a Management Contract Appropriate? Manager has a reputation to protect    Advantages Access to local management skills Avoids buying unwanted assets Retains strategic control Hotels Consulting companies Performance-based contract provides no perverse incentives
  20. 20. Joint Venture HOME COUNTRY HOST COUNTRY MNE Local Firm Share of Profit Joint Venture Company Inputs Inputs Share of Profit
  21. 21. Joint Venture        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 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. 22. Common Market Entry Modes HOME COUNTRY Licensing HOST COUNTRY Acquisition MNE Local Firm Export Joint Venturing “Green Field” Entry Joint Venture Company New Subsidiary Company
  23. 23. Kumar & Subramaniam (1997) A Contingency Framework for the Mode of Entry Decision    Risk Return Control
  24. 24. Modes of entry Exporting Contractual Agreeme nt Joint Venture Acquisition Greenfield Investm ent Risk Low Low Moderate High High Return Low Low Moderate High High Control Moderate Low Moderate High High Integration Negligible Negligible Low Moderate High
  25. 25. Decision Strategies:  Rational Analytic Strategy  Cybernetic Strategy  Serendipity
  26. 26. Discovers
  27. 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. 28. Good luck!
  29. 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.

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