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Amity School of Business

MODULE 3 Modes of International Entry

Management Contract

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HOME COUNTRY HOST COUNTRY Management Fees

MNE
Profit

Local Firm
Managerial Service

Technological Inputs

Wholly-Owned Subsidiary

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Management contract is when one company supplies another with managerial expertise for a specific period of time. The supplier of expertise is compensated with either a lump-sum payment or a fee based on sales.

Management contracts are used to transfer specialized knowledge of technical managers and business management skills.

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Management Contract

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

Hotels Consulting companies

Performance-based contract

Company supplies another with expertise for a specific period of time

Management Contract Amity School of Business


managerial Advantages

+ Few assets risked + Additional income to the


foreign company + Develops local workforce

Disadvantages

Create competitor

Turnkey Projects

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Turnkey project is when a company designs, constructs, and tests a production facility for a client. These projects are often large-scale utility projects in host countries. They usually transfer special process technologies or facility designs to a client. Turnkey projects let a firm specialize in its core competency to exploit international opportunities, and allow a nation to obtain the latest infrastructure from the worlds leading companies. Yet, turnkey projects may be awarded for political reasons rather than for technological know-how, and can create future international competitors.
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Turnkey Project

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Company designs, constructs, and tests a production facility for a client

Advantages

+ Firms specialize in competency + Nations obtain infrastructure

Disadvantages

Politicized process Create competitor

Wholly Owned Subsidiary


Facility entirely owned and controlled by a single parent company
Advantages
+ Day-to-day control + Coordinate subsidiaries

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Disadvantages
Expensive High risk

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Wholly owned subsidiaries are entirely owned and controlled by a single parent company. A wholly owned subsidiary gives a company total control over dayto-day local operations and valuable technologies, processes, and other intangibles. It also lets a firm coordinate activities of all its various national subsidiaries. Yet, it can be an expensive entry mode and involve high risk exposure for a firms assets.

Joint Venture
HOME COUNTRY

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HOST COUNTRY

MNE
Inputs

Local Firm
Inputs

Share of Profit Joint Venture Company

Share of Profit

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A joint venture is a separate company that is created and jointly owned by two or more independent entities to achieve a common objective. A joint venture can reduce risk by sharing the investment with other parties, help penetrate international markets that are otherwise offlimits, and provide access to another partys distribution channels. Yet, conflict can develop between partners if objectives change, if one partys goals are reached early, or if trust and cooperation break down. Also, parties may lose all control over the ventures operations if the local government participates in the venture.

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Joint Venture

When Is a Joint Venture Appropriate? Both partners contribute hard-to-measure inputs Large expected mutual gains in the long-run

Joint Venture

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Company created and jointly owned by two or more entities to achieve a common objective

Advantages

Disadvantages

Reduce risk level Penetrate markets Access channels

Partner conflict Lose control Slow decision making

Larger funds

Larger projects with more ideas

Strategic Alliance

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Entities cooperate (but do not form a separate company) to achieve strategic goals of each

Advantages
Share project cost Tap competitors strengths Gain channel access

Disadvantages
Partner conflict Create competitor

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Strategic alliance is when two or more entities cooperate (but do not form a separate company) to achieve the strategic goals of each. Alliances may be formed for short or long periods, and can be formed between a company and its suppliers, buyers, and competitors. A strategic alliance can allow firms to share the cost of an international investment project, tap competitors specific strengths, and access distribution channels. Yet, conflict among partners may undermine cooperation, and an alliance may create a future competitor in a target market or even globally.
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Selecting Partners
Commitment
Trustworthiness Cultural knowledge Valuable contribution

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Points to be considered when selecting partners for cooperation.

First, each partner must be firmly committed to the stated goals of the cooperative arrangement. Detailing duties and contributions of each party through prior negotiations helps ensure continued cooperation. Second, although the importance of locating a trustworthy partner seems obvious, cooperation should nevertheless be approached with caution.

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Third, each partys managers should be at ease working with people of other cultures and be comfortable traveling to, and perhaps living in, other cultures. And fourth, managers should apply the same stringent evaluation criteria to a potential international cooperative arrangement as they would to any other investment opportunity.

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Strategic Factors
Cultural environment

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Political/Legal environments Market size Production and shipping costs International experience

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. Cultural differences can reduce managers confidence in their ability to control operations in the host country. A lack of cultural familiarity can cause a firm to avoid investment entry and pursue exporting or contractual entry. Political exposure to avoid markets imposes instability in a host country increases the risk of assets. Political uncertainty can cause companies investment entry in favor of other modes. But a target laws can encourage investment if, for example, it high tariffs or low quota limits on imports.

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Market size is often a determining factor in entry mode choice. Rising incomes can encourage investment to help a firm better understand the target market and prepare for growing demand. For example, companies are undertaking enormous investments in China, but making far more modest investments or pursuing exporting and contractual entry in smaller markets. Low-cost production and shipping can give a company an advantage by helping it control total costs. If producing in a host country lowers a firms total production costs, it can encourage investment, licensing, or franchising. As international experience grows, a firm may entry modes that require deeper involvement, but also involve greater exposure to select which risk.
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International modes of entry and value at risk


Managers of an international business choose the mode of entry based on a trade-off between risk versus control in the particular supplier or customer country Joint ventures, not only share knowledge, but also share investment costs and value at risk Spot or contract sales can substantially reduce value at risk

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International modes of entry and value at risk


M&A Growth Alliances/ Joint Ventures Licenses Contract Spot
Choice of entry mode jointly determines degree of control and extent of risk Increase in control, Degree of commitment depends on contractual duration and vertical integration

Increase in With less knowledge of other countrys commitment market, choose lower degree of commitment and risk
As knowledge increases over time, can increase degree of commitment to get closer to desired entry mode. Contractual transactions may give optimal mix of control and commitment
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