International Business: Actions Entry modes (II)

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 operations?

• How does international business manage its external operations (e.g. relationship with the host country/communities)?

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

Going it Alone: “Green Field” EntryGoing it Alone: “Green Field” Entry

New Subsidiary Company

Investment

HOME COUNTRY HOST COUNTRY

MNEProfit

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

Between 2007 and 2011, a total of 1,243 foreign direct investment (FDI) projects were recorded in Australia from 933 companies. This represents an average annual growth rate of 15.4 per cent with a total capital investment of US$122 billion. Greenfield investments accounted for 84.8 per cent of projects over this five year period.  (Brisbanemarketing, 2012)

Activity 1: Hyundai goes greenfield in Czech Republic

• In 2008, Hyundai invested in the form of greenfield investment in Czech republic (http://www.eurofound.europa.eu/eiro/2006/04/articles/cz0604029i.htm). Please discuss the choice of doing greenfield investment. Why this strategy? What are the benefits and pitfalls for Hyundai?

Management ContractManagement Contract

Management Fees

Local Firm

Technological Inputs

HOME COUNTRY HOST COUNTRY

Profit

MNE

Wholly-Owned Subsidiary

Managerial Service

Contractual entry modes

• Management contracts

One company supplies another with managerial expertise for a specific period of time+ Low risk

+ Receive awards from governments

+ Governments use to develop the skills of local workers

- Managers’ lives in danger when countries are undergoing political or social turmoil

- Can create future competitors

Lice

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Man

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cont

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Turnkey

projects

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

– Hotels– Consulting companies

• Performance-based contract provides no perverse incentives

• Turnkey projects

One company designs, constructs, and

tests a production facility for a

client firm+ Permit firms to specialize in their core

competencies

+ Allow governments to obtain designs for infrastructure projects from the world’s leading companies

- Company may be awarded project for political reasons

- Can create future competitors

- No long term interests.

Lice

nsin

gFranchising

Man

agem

en

t con

tract

s Turnkey

projects

Contractual entry modes

Joint VentureJoint Venture

Joint Venture Company

Inputs

MNE Local Firm

HOME COUNTRY HOST COUNTRY

Inputs

Share of Profit

Share of Profit

Joint Venture

Advantages

• Access to partner’s 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

Air Asia – Tata Joint Venture

• This is the story of IJV between TATA and Air Asia in India:

Case Study

RMIT University School of Management 17

Activity 3: International Joint Venture Case Study

• Please read this IJV case study and answer the following questions:http://cws.cengage.co.uk/doole5/students/case_studies/chap_07.pdf

1)What are the factors that MNCs should consider when deciding to use an international joint venture as a market entry strategy?

2)What are the potential benefits and risks in taking this course of action?

RMIT University School of Management 18

Common Market Entry ModesCommon Market Entry Modes

Joint Venture Company

Licensing

Acquisition

Joint Venturing

Local Firm

New Subsidiary Company

“Green Field” Entry

HOME COUNTRY HOST COUNTRY

ExportMNE

Activity 3: Is Nigeria an attractive place for FDI?

• Please watch this and discuss the question.

http://www.youtube.com/watch?v=I77sUqQx8i4

Modes of entry

Exporting Contractual Agreement

Joint Venture

Acquisition Greenfield Investment

Risk Low Low Moderate High High

Return Low Low Moderate High High

Control Moderate Low Moderate High High

Integration Negligible Negligible Low Moderate High

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.