Foreign Market Entry Strategies

Ruth V. Aguilera

Principal Motives for Intl Expansion

World Market
Locations Economies Economies of Scale Economies of Scope
To seek lower production factor costs

To expand sales and production volume

To exploit proprietary assets

Forms of FDI

Ownership

Relatedness

Wholly owned operations

Green-field investment Full acquisition

Horizontal FDI Vertical FDI Unrelated diversification

Partially owned operations

Partial acquisition Joint venture

Forms of FDI: Ownership

Home Country
Green Field 100% Owned

Host Country
New Entity

Full Acquisition (i.e., 100%)

MNE
Partial Acquisition (e.g., 50%) Ownership = s%

Local Firm
Ownership = (1 - s)%

Joint Venture

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

Timing: When is a good time to enter?

Speed of expansion: How fast to grow?

Potential gain from waiting Cost of delay Small scale: Establish a foothold to learn Large scale: Acquire first mover advantage

Scale of entry

Value of learning Preemption of competitors Constraints of internal resources

Mode
Some modes have more flexibility embedded Some modes reduce resource requirements

Choice of Market Entry Mode

Value Chain of an MNE

Company Infrastructure R&D Production Advanced Technology & KnowHow Marketing and Sales IndustrySpecific Marketing Expertise

Innovative Capabilities

Organization, Coordination & HRM What additional resources may the MNE need to enter a foreign market? Local expertise: marketing, government relations, etc.

Typical Value Chain of a Local Firm

Company Infrastructure R&D Production Older Technology and KnowHow Marketing and Sales CountrySpecific Marketing Expertise

Imitative Capabilities

Organization, Coordination & HRM What may the MNE desire from a local firm? Complementary resources Not necessarily strength in every area

Complementarity of Resources
MNEs Resources

Local Firms Resources

Innovative capabilities Advanced technology and know-how Industry-specific marketing expertise Organization structure and systems

Imitating capabilities Older technology and know-how Country-specific marketing expertise Country specific organization skills

Going it Alone: Export

HOME COUNTRY Revenues HOST COUNTRY

MNE

Customers

Export of Goods

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

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 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

Foreign Acquisition
HOME COUNTRY HOST COUNTRY

Investment

MNE
Profit

Local Firm

Foreign Acquisition

Advantages Access to targets local knowledge Control over foreign operations Control over own technology

Disadvantages Uncertainty about targets 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

Going it Alone: Green Field Entry

HOME COUNTRY HOST COUNTRY

MNE
Profit

Investment

New Subsidiary Company

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

Management Contract
HOME COUNTRY HOST COUNTRY Management Fees

MNE
Profit

Local Firm
Managerial Service

Technological Inputs

Wholly-Owned Subsidiary

Management Contract

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?

When Is a Management Contract Appropriate? Manager has a reputation to protect

Performance-based contract provides no perverse incentives

Hotels Consulting companies

Joint Venture
HOME COUNTRY HOST COUNTRY

MNE
Inputs

Local Firm
Inputs

Share of Profit Joint Venture Company

Share of Profit

Joint Venture

Advantages Access to partners 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

Common Market Entry Modes

HOME COUNTRY HOST COUNTRY

Licensing
Acquisition

MNE
Export Joint Venturing Green Field Entry

Local Firm
Joint Venture Company New Subsidiary Company

Kumar & Subramaniam (1997) A Contingency Framework for the Mode of Entry Decision

Risk Return Control

Modes of entry
Exporting Contractual Agreeme nt Risk Return Control Integration Low Low Moderate Negligible Low Low Low Negligible Joint Venture Moderate Moderate Moderate Low Acquisition Greenfield Investm ent High High High High

High High High Moderate

Decision Strategies:

Rational Analytic Strategy

Cybernetic Strategy

Serendipity

Discovers

The Australian Challenge

Whats Freixenet core competency? Evaluate Freixenets 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)

Good luck!

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.