Foreign Market Entry

Strategies
Ruth V. Aguilera
 Principal Motives for Intl
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
 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
Forms of FDI: Ownership

Home Host Country

Green Field
Country 100%
Owned New
Entity
Full Acquisition
(i.e., 100%)

MNE Local Firm

Partial Acquisition
(e.g., 50%) Ownership = (1 - s)
%
Ownership = s%
Joint Venture
Entry Decision Making Under Uncertainty:
Trade-off Between Flexibility and
Commitment
Timing: When is a Speed of expansion:
good time to enter? How fast to grow?
Potential gain from Value of learning
waiting Preemption of
Cost of delay competitors
Scale of entry Constraints of internal
resources
Small scale:
Establish a foothold Mode
to learn Some modes have more
Large scale: Acquire flexibility embedded
first mover Some modes reduce
advantage resource requirements
Choice of Market Entry
Mode
 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.
Typical Value Chain of a Local
CompanyFirm
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
 Complementarity of
Resources
MNEs Resources Local Firms
Innovative capabilities
Resources
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
Going it Alone: Export
HOME COUNTRY HOST COUNTRY

Revenues

MNE Customers

Export of Goods
 Going it Alone: Export
Advantages Disadvantages
Low initial investment Potential costs of
Reach customers trade barriers
quickly Transportation cost
Tariffs and quotas
Complete control over
production Foregoes potential
Benefit of learning for location economies
future expansion 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 Disadvantages
Low initial investment Lack of control over
Avoids trade barriers operations
Potential for utilizing
Difficulty in transferring
location economies tacit knowledge
Negotiation of a transfer price
Access to local Monitoring transfer outcome
knowledge Potential for creating a
Easier to respond to competitor
customer needs
When Is Licensing Appropriate?
Well codified knowledge
Strong property rights regime
Location advantage
 Foreign Acquisition
HOME COUNTRY HOST COUNTRY

Investment
MNE Local Firm

Profit
 Foreign Acquisition
Advantages Disadvantages
Access to targets Uncertainty about
local knowledge targets value
Control over foreign Difficulty in absorbing
operations acquired assets
Control over own Infeasible if local market
technology 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
Advantages
Entry
Disadvantages
Normally feasible Slower startup
Avoids risk of Requires knowledge
overpayment of foreign
Avoids problem of management
integration High risk and high
Still retains full control
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 Local Firm

Managerial
Profit Service

Technological Inputs
Wholly-Owned
Subsidiary
 Management Contract
Advantages Disadvantages
Access to local Potential incentive
management skills problem
Avoids buying Potential adverse
unwanted assets selection problem
Retains strategic How do you know the
control 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
 Joint Venture
HOME COUNTRY HOST COUNTRY

MNE Local Firm

Share of
Inputs
Profit
Inputs Joint Venture
Company
Share of Profit
 Joint Venture
Advantages Disadvantages
Access to partners local Potential loss of
knowledge proprietary knowledge
Reduction of concern Potential conflicts
about overpayment between 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
 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
 Kumar & Subramaniam
(1997)
A Contingency Framework
for the Mode of Entry
Decision
Risk
Return
Control
 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

 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.