The document discusses various foreign market entry strategies for multinational enterprises (MNEs). It outlines the main motives for international expansion including seeking lower production costs, expanding sales and production volumes, and exploiting proprietary assets. The key forms of foreign direct investment covered are wholly owned operations, partial acquisitions, joint ventures, greenfield investments, and contractual agreements like licensing. The advantages and disadvantages of different entry modes like exports, acquisitions, joint ventures, and greenfield entries are also summarized. Finally, the document discusses factors that influence the choice of entry strategy including risk, return, control, and the need to leverage complementary resources between the MNE and local firms.

1. StudsPlanet
Leading Education consultant in India
www.StudsPlanet.com

2. Foreign Market Entry Strategies
Ruth V. Aguilera

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

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

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

6. Entry Decision Making Under Uncertainty:
Trade-off Between Flexibility and Commitment
 Timing: When is a  Speed of expansion: How
good time to enter? fast to grow?
 Potential gain from  Value of learning
waiting  Preemption of competitors
 Cost of delay  Constraints of internal
 Scale of entry resources
 Small scale: Establish  Mode
a foothold to learn  Some modes have more
 Large scale: Acquire flexibility embedded
first mover advantage  Some modes reduce
resource requirements

7. Choice of Market Entry Mode

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

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

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

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

12. Going it Alone: Export
Advantages Disadvantages
 Low initial investment  Potential costs of trade
 Reach customers quickly barriers
Transportation cost
Complete control over


Tariffs and quotas
production

 Benefit of learning for
 Foregoes potential
future expansion location economies
 Difficult to respond to
customer needs well
When Is Export Appropriate?
 Low trade barriers
 Home location has cost advantage
 Customization not crucial

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

14. Licensing Agreement
Advantages Disadvantages
 Low initial investment  Lack of control over
 Avoids trade barriers operations
 Potential for utilizing  Difficulty in transferring tacit
location economies knowledge
Negotiation of a transfer price
Access to local


Monitoring transfer outcome
knowledge

 Easier to respond to
 Potential for creating a
customer needs competitor
When Is Licensing Appropriate?
 Well codified knowledge
 Strong property rights regime
 Location advantage

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

16. Foreign Acquisition
Advantages Disadvantages
 Access to target’s local  Uncertainty about target’s
knowledge value
 Control over foreign  Difficulty in “absorbing”
operations acquired assets
 Control over own  Infeasible if local market for
technology corporate control is
underdeveloped
When Is Acquisition Appropriate?
 Developed market for corporate control
 Acquirer has high “absorptive” capacity
 High synergy

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

18. Going it Alone: “Green Field” Entry
Advantages Disadvantages
 Normally feasible  Slower startup
 Avoids risk of  Requires knowledge of
overpayment foreign management
 Avoids problem of  High risk and high
integration commitment
 Still retains full control
When Is “Green Field” Entry Appropriate?
 Lack of proper acquisition target
 In-house local expertise
 Embedded competitive advantage

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

20. Management Contract
Advantages Disadvantages
 Access to local  Potential incentive
management skills problem
 Avoids buying unwanted  Potential adverse
assets selection problem
 Retains strategic control  How do you know the
competencies of the
manager?
When Is a Management Contract Appropriate?
 Manager has a reputation to protect
 Hotels
 Consulting companies
 Performance-based contract provides no perverse
incentives

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

22. Joint Venture
Advantages Disadvantages
 Access to partner’s local  Potential loss of
knowledge proprietary knowledge
 Reduction of concern about  Potential conflicts between
overpayment partners
 Both parties have some  Neither partner has full
performance incentives performance incentive
 Significant control over  Neither partner has full
operation 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

23. 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

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

25. Modes of entry
Exporting Contractual Joint Acquisition Greenfield
Agreeme Venture Investm
nt 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

26. Decision Strategies:
 Rational Analytic Strategy
 Cybernetic Strategy
 Serendipity

27. Discovers

28. 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)

29. Good luck!

30. 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.