international business 11

 Introduction •General Motors was an early entrant into China’s automobile market •Entered on a significant scale Basic Entry Decisions •A firm contemplating foreign expansion must make three basic decisions oWhich markets to enter oWhen to enter those markets oOn what scale Which Foreign Markets? •the choice must be based on an assessment of a nation’s long-run profit potential opotential is a function of several factors the attractiveness of a country as a potential market for an internal business depends on balancing the benefits, costs, and risks associated with doing business in that country •the costs and risks associated with doing business in a foreign country are typically lower in the economically advanced and politically stable democratic nations •look at living standards and economic growth •another important factor is the value an international business can create in a foreign market odepends on the suitability of its product offering to that market and the nature of indigenous competition Timing of Entry Early entry is when an international business enters a foreign market before other foreign firms •Late when it enters after other international businesses have already established themselves

•The advantages frequently associated with entering a market early are commonly known as first-mover advantage oAbility to preempt rivals and capture demand by establishing a strong brand name oAbility to build sales volume in that country and ride down the experience curve ahead of rivals, giving the early entrant a cost advantage over later entrants •May enable the early entrant to cut prices below that of later entrants, thereby driving them out of the market oAbility of early entrants to create switching costs that tie customers into their products or services •Make it difficult for later entrants to win business •There can also be disadvantages associated with entering a foreign market before other international businesses oFirst mover disadvantages •May give rise to pioneering costs, which are costs that an early entrant has to bear that a later entrant can avoid ? Arise when the business system in a foreign country is so different from that in a firm’s home market that the enterprise has to devote considerable effort, time, and expense to learning the rules of the game ?

Include the costs of business failure if the firm makes major mistakes ? A late entrant may benefit by observing and learning from the mistakes made by early entrants ? Also include the costs of promoting and establishing a product offering, including the costs of educating customers •Significant when the product being promoted is unfamiliar to local consumers •If regulations change in a way that diminishes the value of an early entrant’s investments ? Serious risk in many developing nations where the rules that govern business practices are still evolving Scale of Entry •Entering a market on a large scale involves the commitment of significant resources oImplies rapid entry Not all firms have the resources necessary to enter on a large scale and even come large firms prefer to enter foreign markets on a small scale and then build slowly as they become more familiar with the market •The consequences of entering on a significant scale—entering rapidly—are associated with the value of the resulting strategic commitments oHas a long-term impact and is difficult to reverse oStrategic commitments, such as rapid large-scale market entry, can have an important influence on the nature of competition in a market •Significant strategic commitments are neither unambiguously good nor bad oThey tend to change the competitive playing field and unleash a number of changes, some of which may be desirable and some of which will not be

•The value of the commitments that flow from rapid large-scale entry into a foreign market must be balanced against the resulting risks and lack of flexibility associated with significant commitments oBut strategic inflexibility can also have value Balanced against the value and risks of the commitments associated with large-scale are the benefits of small-scale entry oAllows a firm to learn about a foreign market while limiting the firm’s exposure to the market oWay to gather info about a foreign market before deciding whether to enter on a significant scale and how best to enter oReduces the risks associated with a subsequent large-scale entry oLack of commitment may make it more difficult for the small-scale entrant to build market share and to capture first mover advantage or early mover advantages Entry Modes •Firms can use six different entry modes to enter foreign markets Exporting •Many manufacturing firms begin their global expansion as exporters and only later switch to another mode for serving a foreign market •Advantages oTwo distinct advantages Avoids the often substantial costs of establishing manufacturing operations in the host country •May help a firm achieve experience curve and location economies •Disadvantages oNumber of drawbacks •Exporting from the firm’s home base may not be appropriate if lower-cost locations for manufacturing the product can be found abroad ? May be preferable to manufacture where the mix of factor conditions is most favorable from a value creation perspective ?

Export to the rest of the world from that location •High transport costs can make exporting uneconomical, particularly for bulk products ? May be better to manufacture bulk products regionally Enables the firm to realize some economies from large-scale production and at the same time to limit its transport costs •Tariff barriers that make exporting uneconomical ?By the host-country government can make it very risky •When a firm delegates its marketing, sales, and services in each country where it does business to another company ? the local agent may not do as good as a job as the firm would if it managed its marketing itself To solve this, firm can set up wholly owned subsidiaries in foreign nations to handle local marketing, sales, and service •the firm can exercise tight control over marketing and sales in the country while reaping the cost advantages of manufacturing the product in a single location, or a few choice locations Turnkey Projects Firms that specialize in the design, construction, and start-up turnkey plants are common in some industries •In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel •At the completion of the contract, the foreign client is handed the “key” to a plant that is ready for full operation •Means of exporting process technology to other countries •Most common in the chemical, pharmaceutical, petroleum-refining, and metal-refining industries oAll of which use complex, expensive production technologies •Advantages oKnow-how required to assemble are run a technologically complex process, such as refining petroleum or steel is a valuable asset oA way of earning great economic returns from that asset oParticularly useful where FDI is limited by host-government regulations oLess risky than conventional FDI •In a country with unstable political and economic environments, a longer-term investment might expose the firm to unacceptable political and/or economic risks •Disadvantages oThree main drawbacks •The firm that enters into a turnkey deal will have no long-term interest in the foreign country ?

Can be a con if that country subsequently proves to be a major market for the output of the process that has been exported •The firm that enters into a turnkey project with a foreign enterprise may inadvertently create a competitor •If a firm’s process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors Licensing •A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified period, and in return, the licensor receives a royalty fee from the licensee oIntangible property includes patens, inventions, formulas, processes, designs, copyrights, and trademarks •Advantages The firm does not have to bear the development costs and risks associated with opening a foreign market •Very attractive for firms lacking the capital to develop operations overseas oCan be attractive when a firm is unwilling to commit substantial financial resources to an unfamiliar or politically volatile foreign market oOften used when a firm wishes to participate in a foreign market but is prohibited from doing so by barriers to investment •Fuji Xerox oWhen a firm possesses some intangible property that might have business applications but its does not want to develop those applications itself •Disadvantages oThree serious drawbacks •Does not give a firm the tight control over manufacturing, marketing, and strategy that is required for realizing experience curve and location economies

•Competing in a global market may require a firm to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in in another ? Licensing limits a firm’s ability to do this the risk associated with licensing technological know-how to foreign companies ? constitutes the basis of many multinational firms’ competitive advantage Franchising •Similar to licensing, although franchising tends to involve longer-term commitments than licensing •Franchising is a specialized form of licensing in which the franchiser not only sells intangible property (normally a trademark) to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business oFranchiser will also often assist the franchisee to run the business on an ongoing basis •Franchising is employed primarily by service firms Advantages •Very similar advantages to those of licensing The firm is relieves of many of the costs and risks of opening a foreign market on its own oThe franchisee typically assumes those costs and risks •Creates a good incentive for the franchisee to build a profitable operation as quickly as possible •Using a franchising strategy, a firm can build a global presence quickly and at a relatively low cost and risk Disadvantages •Less pronounced than in the case of licensing oNo reason to consider the need for coordination of manufacturing to achieve experience curve and location economies •May inhibit the firm’s ability to take profits out of one country to support competitive attacks in another •Quality control Joint Venture Entails establishing a firm that is jointly owned by two or more otherwise independent firms •Establishing a joint venture with a foreign firm has long been a popular mode for entering a new market •Advantages oNumber of advantages •A firm benefits from a local partner’s knowledge of the host country’s competitive conditions, culture, language, political systems, and business systems •When the development costs and/or risks of opening a foreign market are high, a firm might gain by sharing these costs and or risks with a local partner

•In many countries, political considerations make joint ventures the only feasible entry mode ? Research suggests joint ventures with local partners face a low risk of being subject to nationalization or other forms of adverse government interference •Disadvantages oMajor disadvantages with joint ventures A firm that enters into a joint venture risks giving control of its technology to its partner •Does not give a firm the tight control over subsidiaries that it might need to realize experience curve or location economies •Nor does it give a firm the tight control over a foreign subsidiary that it might need for engaging in coordinated global attacks against its rivals •The shared ownership arrangement can lead to conflicts and battles for control between the investing firms if their goals and objectives change or if they take different views as to what the strategy should be Whole Owned Subsidiaries •The firm owns 100% of the stock •Establishing a whole owned subsidiary in a foreign market can be done in two ways othe firm can set up a new operation in that country, often referred to as a greenfield venture othe firm can acquire an established firm in that host nation and use that firm to promote its products •Advantages oSeveral clear advantages When a firms competitive advantage is based on technological competence, a wholly owned subsidiary will often be the preferred entry mode because it reduces the risk of losing control over that competence •Gives a firm tight control over operations in different countries ? Necessary for engaging in global strategic coordination •A wholly owned subsidiary may be required if a firm is trying to realize location and experience curve economies (as firms pursuing global and transnational strategies try to do) •Gives the firm 100 percent share in the profits generated in a foreign market •Disadvantages oMost costly method of serving a foreign market from a capital investment standpoint oFirms must bear the full capital costs and risk of setting up overseas operations Selecting an Entry Mode (SEE TABLE 15. 1 on pg. #499)

Core Competencies and Entry Mode •Technological Know-how oIf a firm’s competitive advantage (its core competence) is based on control over proprietary technological know-how, licensing and joint-venture arrangements should be avoided if possible to minimize the risk of loosing control over that technology oIf a high-tech firm sets up operations in a foreign country to profit from a core competency in technological know-how, it will probably do so through a wholly owned subsidiary oSometimes a licensing or joint-venture arrangement can be structured to reduce the risk of licensees or joint-venture partners expropriating technological know-how •Management Know-How The risk of loosing control over the management skills to franchisees or joint-venture partners is not that grate oThese firms’ valuable asset is their brand name, and brand names are generally well protected by international laws pertaining to trademarks •Many of the issues arising in the case of technological know-how are of less concern here oMany service firms favor a combination of franchising and subsidiaries to control the franchises within particular countries or regions •May be wholly owned or joint ventures but most service firms have found that joint ventures with local partners work best for the controlling subsidiaries ? Politically more acceptable and brings a degree of local knowledge to the subsidiary Pressures for Cost Reductions and Entry Mode The greater pressures for cost reductions are, the more likely a firm will want to pursue come combination of exporting and wholly owned subsidiaries

•By manufacturing in those locations where factor conditions are optimal and then exporting to the rest of the world, a firm may be able to realize substantial location and experience curve economies Greenfield Venture or Acquisition? •A firm can establish a wholly owned subsidiary in a country by building a subsidiary from the ground up, which is a greenfield strategy or by acquiring an enterprise in the target market Pros and Cons of Acquisitions •Pros oQuick to execute •By acquiring an established enterprise, a firm can rapidly build its presence in the target foreign market oFirms make acquisitions to preempt their competitors •The need for preemption is particularly great in markets that are rapidly globalizing, such as telecommunications, where a combination of deregulation ithin nations and liberalization or regulating governing cross-border foreign direct investment has made it much easier for enterprises to enter foreign markets through acquisitions oManagers may believe acquisitions to be less risk than greenfield ventures •When a firm makes an acquisition, it buys a set of assets that are producing a known revenue and profit stream oWhy Do Acquisitions Fail? •Fail for several reasons ?The acquiring firms often overpay for the assets of the acquired firm •the price of the target firm can get bid up if more than one firm is interested in its purchase ? the management of the acquiring firm is often too optimistic about the value that can be created via an acquisition and is thus willing to pay a significant premium over a target firm’s market capitalization •called the “hubris hypothesis” There is a clash between the cultures of the acquiring and acquired firms •After an acquisition, many acquired companies experience high management turnover, possibly because their employees do not like the acquiring company’s way of doing things ? Attempts to realize synergies by integrating the operations of the acquired and acquiring entities often run into roadblocks and take much longer than forecast •Differences in management philosophy and company culture can slow the integration of operations ? Inadequate pre-acquisition screening

•Many firms decide to acquire other firms without thoroughly analyzing the potential benefits and costs •Reducing the Risks of Failure These problems can all be overcome if the firm is careful about its acquisition strategy •Screening of the foreign enterprise to be acquired, including a detailed auditing of operations, financial position, and management culture, can help to make sure the firm •1) does not pay too much for the acquired unit •2) does not uncover any nasty surprises after the acquisition •3) acquires a firm whose organization culture is not antagonistic to that of the acquiring enterprise oit is also important for the acquirer to allay any concerns that management in the acquired enterprise might have •Managers must move rapidly after an acquisition to put an integration plan in place and to act on that plan Pros and Cons of Greenfield Ventures •Pros Gives the firm a much greater ability to build the kind of subsidiary company that it wants •It is much easier to build an organization culture from scratch than it is to change the culture of an acquired unit •It is also much easier to establish a set of operating routines in a new subsidiary than it is to convert the operating routines of an acquired unit •Cons oSlower to establish oRisky oA degree of uncertainty is associated with future revenue and profit prospects oPossibility of being preempted by more aggressive global competitors who enter via acquisitions and build a big market presence that limits the market potential for the greenfield venture Greenfield Venture or Acquisition? •Choice between is not an easy one •Both modes have their advantages and disadvantages If the firm is seeking to enter a market where there are already well-established incumbent enterprises, and where global competitors are also interested in establishing a presence, it may pay the firm to enter via an acquisition oA greenfield venture may be too slow to establish a sizable presence •If the firm is considering entering a country where there are no incumbent competitors to be acquired, then a greenfield venture may be the only mode oEven when incumbent exist, if the competitive advantage of the firm is based on the transfer of organizationally embedded competencies, skills, routines, and culture, it may still be preferable to enter via a greenfield venture Strategic Alliances

•Refer to cooperative agreements between potential or actual competitors •Strategic alliances run the range from formal joint ventures, in which two or more firms have equity stakes, to short-term contractual agreements, in which two companies agree to cooperate on a particular task (such as developing a new product) Advantages of Strategic Alliances •May facilitate entry into a foreign market Allow firms to share the fixed costs (and associated risks) of developing new products or processes •A way to bring together complementary skills and assets that neither company could easily develop on its own •It can make sense to form an alliance that will help the firm establish technological standards for the industry that will benefit the firm Disadvantages of Strategic Alliances •Give competitors a low cost route to new technology and markets •Alliances have risks oUnless a firm is careful it can give away more than it receives Making Alliances Work •The failure rate for international strategic alliances seem to be high •The success of an alliance seems to be a function of three main factors: partner selection, alliance structure, and the manner in which the alliance is managed Partner Selection •To select the right ally •A good ally or partner has three characteristics a good partner helps the firm achieve its strategic goals, whether they are market access, sharing the costs and risks of product development, or gaining access to critical core competencies •must have capabilities that the firm lacks and that it values oa good partner shares the firm’s vision for the purpose of the alliance •If two firms approach an alliance with radically different agendas, the chances are great that the relationship will not be harmonious oa good partner is unlikely to try to opportunistically exploit the alliance for its own ends, that is, to expropriate the firm’s technological know-how while giving away little in return •“fair play” oTo select a partner with these characteristics a firm should

•Collect as much pertinent, publicly available information on potential allies as possible •Gather data from informed third parties ?These include firms that have had alliances with the potential partners, investment bankers that have had dealings with them, and former employees •Get to know the potential partner as well as possible before committing to an alliance ? This should include face-to-face meetings between senior managers to ensure that the chemistry is right Alliance Structure The alliance should be structured so that the firm’s risks of giving too much away to the partner are reduced to an acceptable level oAlliances can be designed to make it difficult to transfer technology not meant to be transferred oContractual safeguards can be written into an alliance agreement to guard against the risk of opportunism by a partner (opportunism includes the theft of technology and/or markets) oBoth parties to an alliance can agree in advance to swap skills and technologies that the other covets, thereby ensuring a chance for equitable gain •Cross-licensing agreements are one way to achieve this goal oThe risk of opportunism by an alliance partner can be reduced if the firm extracts a significant credible commitment from its partners in advance Managing the Alliance The task now facing the firm is to maximize its benefits from the alliance oSeems to involve the building trust between partners and learning from partners •An important factor is sensitivity to cultural differences •Requires building interpersonal relationships between the firms’ managers or what is sometimes referred to as relational capital •How much acquiring knowledge a company gains from an alliance is its ability to learn form its alliance partner oA firm must try to learn from its partner and then apply the knowledge within its own organization •The managers involved in the alliance should educate their colleagues about the skills of the alliance partner

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