Foreign Market Entry Strategies Ruth V. Aguilera Principal Motives for Int’l Expansion World Market Locations Economies To seek lower production factor costs Economies of Scale To expand sales and production volume Economies of Scope To exploit proprietary assets Forms of FDI  Ownership  Wholly owned operations Green-field investment  Full acquisition   Partially owned operations Partial acquisition  Joint venture   Relatedness    Horizontal FDI Vertical FDI Unrelated diversification Forms of FDI: Ownership Home Country Green Field 100% Owned Host Country New Entity Full Acquisition (i.e., 100%) MNE Local Firm Partial Acquisition (e.g., 50%) Ownership = s% Ownership = (1 - s)% Joint Venture Entry Decision Making Under Uncertainty: Trade-off Between Flexibility and Commitment  Timing: When is a good time to enter?     Potential gain from waiting Cost of delay Speed of expansion: How fast to grow?    Scale of entry   Small scale: Establish a foothold to learn Large scale: Acquire first mover advantage  Value of learning Preemption of competitors Constraints of internal resources Mode   Some modes have more flexibility embedded Some modes reduce resource requirements Choice of Market Entry Mode Value Chain of an MNE Company Infrastructure R&D Innovative Capabilities   Production Marketing and Sales Advanced Technology & KnowHow IndustrySpecific Marketing 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 Firm Company Infrastructure R&D Imitative Capabilities Production Marketing and Sales Older Technology and KnowHow CountrySpecific Marketing Expertise Organization, Coordination & HRM What may the MNE desire from a local firm?  Complementary resources  Not necessarily strength in every area Complementarity of Resources MNE’s Resources     Innovative capabilities Advanced technology and know-how Industry-specific marketing expertise Organization structure and systems Local Firm’s Resources     Imitating capabilities Older technology and know-how Country-specific marketing expertise Country specific organization skills Going it Alone: Export HOME COUNTRY HOST COUNTRY Revenues Customers MNE Export of Goods Going it Alone: Export     Advantages Low initial investment Reach customers quickly Complete control over production Benefit of learning for future expansion         Disadvantages Potential costs of trade barriers Transportation cost Tariffs and quotas 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 Licensing Agreement HOME COUNTRY HOST COUNTRY Licensing of Technology MNE Local Firm Fees and Royalties Licensing Agreement      Advantages Low initial investment Avoids trade barriers Potential for utilizing location economies Access to local knowledge Easier to respond to customer needs      Disadvantages Lack of control over operations 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 Foreign Acquisition HOME COUNTRY HOST COUNTRY Investment MNE Local Firm Profit Foreign Acquisition Advantages Access to target’s local knowledge Control over foreign operations Control over own technology          Disadvantages Uncertainty about target’s value Difficulty in “absorbing” acquired assets 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 Going it Alone: “Green Field” Entry HOME COUNTRY HOST COUNTRY MNE Profit Investment New Subsidiary Company 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 Management Contract HOME COUNTRY HOST COUNTRY Management Fees MNE Local Firm Profit Technological Inputs Managerial Service Wholly-Owned Subsidiary Management Contract Advantages Access to local management skills Avoids buying unwanted assets Retains strategic control       How do you know the competencies of the manager? When Is a Management Contract Appropriate? Manager has a reputation to protect     Disadvantages Potential incentive problem Potential adverse selection problem Hotels Consulting companies Performance-based contract provides no perverse incentives Joint Venture HOME COUNTRY HOST COUNTRY MNE Local Firm Share of Profit Joint Venture Company Inputs Inputs 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 Common Market Entry Modes HOME COUNTRY HOST COUNTRY Licensing Acquisition MNE Local Firm Export Joint Venturing “Green Field” Entry Joint Venture Company New Subsidiary Company Kumar & Subramaniam (1997) A Contingency Framework for the Mode of Entry Decision    Risk Return Control Modes of entry Exporting Contractual Agreeme nt Joint Venture Acquisition Greenfield Investm 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    What’s Freixenet core competency? Evaluate Freixenet’s 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.