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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
nsin
gFranchising
Man
agem
e
nt
cont
ract
s
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.
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