International Business Entry Modes I Business College School

International Business: Entry Modes (I) Business College School of Management

Key Learning Objective • This session will help you to understand the concepts of: 1) Internationalisation of business organisations 2) Key international business theories 3) Complexities of choices and approaches in internationalisation

Aims of the Session: • To understand different forms of internationalisation and market entry. • To consider the benefits and problems of firm internationalisation from different perspectives.

Key Questions • How do organisations internationalise? • How does international business manage its internal and external operations when it comes to entry modes foreign market?

Recap • We looked at the concept of ‘internationalisation’ of firms and rationale behind their decision-making process. • Advantages and Risks of internationalisation

Modes of Entry • Organisations contemplating foreign expansion must consider the following: –Which foreign market(s) to enter –Timing of entry –What form of entry to use –What scale of entry to establish –Which mode of entry to adopt

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 – Value of learning – Cost of delay – Preemption of competitors – Constraints of internal resources • Scale of entry – Small scale: Establish a foothold to • Mode learn – Some modes have more flexibility – Large scale: Acquire first mover embedded advantage – Some modes reduce resource requirements

Which Foreign Markets • The choice must be based on an assessment of a country’s degree of alignment with firm strategy and likely contribution to revenue and profit • The attractiveness of a country depends upon balancing the various associated benefits, costs, and risks • These relate to: customer identification, production capabilities, or financial opportunities • Benefits may relate to: market expansion, production flexibility, investment opportunity, etc. • Risks may be competitive, political, financial, etc.

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Timing the Entry • ‘First-mover advantages’ that may be derived from entering a market early: – Preempting rivals and capturing demand – Establishing a strong brand name – Building sales volume – Creating ‘switching costs’ for customers and clients • ‘First-mover disadvantages’ may derive from: – Pioneering costs that early entrant incurs – Unanticipated political, legal, regulatory etc. risks – Additional costs of entry that may not be recouped before competition increases and profit margins decline

Scale of Entry • Large scale entry: – Involves ‘strategic commitment’ - a decision with long-term impact that is difficult to reverse – May lead rivals to rethink market entry – May prompt competitive response from existing players • Small scale entry: – Requires limited financial and other resource commitment – Provides time to learn about market – Reduces exposure to risk

Activity 1: International Market Choice • Considering concept of Timing/Scale/Speed, please return to the case of eretail market in China and discuss potential success or failure of Walmart eretail in China. Why China? What else that Walmart should consider in this situation? http: //www. youtube. com/watch? v=VThkcx. Eqa 7 I

Choice of Market Entry Modes? Markets? Art? Science?

Entry Strategies Manufacturing at Home Exporting Manufacturing Abroad Contractual Licensing/Franchising/ Direct or Indirect RMIT University Turnkey/MGT Contract School of Management Investment Entry Overseas assembly/mixing/ Investment Greenfield/Joint Venture Merger/Acquisition 14

Complementarity of Resources (Source: Peng, 2011) MNC’s Resources Local Firm’s Resources • Innovative capabilities • Imitating capabilities • Advanced technology and know-how • Older technology and know-how • Industry-specific marketing expertise • Country-specific marketing expertise • Organisation structure and systems • Country specific organization skills

Going it Alone: Export HOME COUNTRY HOST COUNTRY Revenues Customers MNC Export of Goods

Key Export Tasks • Transportation • Financing - Negotiation -Quotes - Coordination between modes and shippers - Point of transfer (FOB) • Export licenses and permissions - Credit: Risk assessment/letters of credit • Customs clearing - Exchange rate risk • Warehousing • Repatriation/ countertrade RMIT University School of Management 17

Potential Problems for Export • Price escalation • Dumping regulations • Finding local distribution - Screening - Negotiation • After sales support • Imitation by importer/failure to learn local market RMIT University School of Management 18

Going it Alone: Export…producing product and shipping them to the receiving countries. Disadvantages • Potential costs of trade barriers – Transportation cost – Tariffs and quotas Advantages • Low initial investment • Reach customers quickly • Complete control over production • Benefit of learning for future expansion • 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

Import-Export can be influenced by Political Economy Factors? • Look at this story “Iran’s Hospitals Feel Pain of Sanctions” (http: //www. youtube. com/watch? v=t 5 s 4 HI_oggw) RMIT University School of Management 20

Licensing Agreement HOME COUNTRY HOST COUNTRY Licensing of Technology MNC Local Firm Fees and Royalties

Licensing Agreement: granting a foreign entity the right to produce and sell the firm’s product in return for a royalty fee on every unit sold. Advantages Disadvantages • Low initial investment • Lack of control over operations • Avoids trade barriers • Potential for utilizing location economies • Access to local knowledge • Easier to respond to customer needs • 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

Franchising: Similar but different from licensing Advantages Disadvantages RMIT University • Minimum expenses on overseas operations • International Market Knowledge • Control & Quality • Potential relationship management • Brand Management • Selection of partners • Trust (or mistrust) • Cultural problems in management and communication • Creativity • Misunderstanding in legal and socio-economic issues in the host countries. School of Management 23

Licensing: Lesson Learnt for International Management • Thailand’s Local Cola Rivals Giant Brand: What do you learn from this story? (http: //www. youtube. com/watch? v=r. CVcogw. HK 8 M) RMIT University School of Management 24

Activity 2: Licensing Case Discussion • You and your team are the assistant to the CEO of a small textile firm that manufactures quality, premium-priced, stylish clothing (Italian Brand). The Italian CEO has decided to see what the opportunities are for exporting, franschising, or licensing and has asked you and your team for advice as to the steps the company should take. What advice would you give the CEO?

Merger and Acquisition HOME COUNTRY MNE HOST COUNTRY Investment Profit Local Firm

Mergers & Acquisitions Defined Mergers • two firms are combined on a relatively co-equal basis Acquisitions • one firm buys another firm • the words are often used interchangeably even though they mean something very different • merger sounds more amicable, less threatening

Do Mergers and Acquisitions Create Value? The Logic Related M&A Activity • value creation would be expected due to synergies between divisions • economies of scale • economies of scope • transferring competencies • sharing infrastructure, etc.

Acquisition: The purchase of one business or company by another company or other business entity. Advantages Disadvantages • Access to target’s local knowledge • Uncertainty about target’s value • Control over foreign operations • Difficulty in “absorbing” acquired assets • Control over own technology • 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

Activity 3: Merger and Acquisition • Please watch this clip on international merger and acquisition http: //www. youtube. com/watch? v=EKAr. EQ_8 x. FM • Then, list factors affecting the success of international merger and acquisitions.

Potential Issues: Management of Entry Modes Issues Culture A Culture B Planning Retain business flexibility Maintain congruency between the venture and the state plan Contracts Detailed, enforceable Brief and adaptable Negotiations Sequential, issue by issue Holistic Staffing Maximize productivity; fewest people per given output Maximum number of ‘the community’ Technology Match organisation with technical sophistication Always look for the most advanced technology Profits Long-term Short-term but frequently Process High Quality High quantity Control Reduce political/economic controls on decision making Accept technology and capital but preclude foreign authority infringement on sovereignty and ideology RMIT University School of Management 31