Chapter 13

What are the 2 benefits of equity modes of entry?1

1. Demonstrates strategic commitment to certain markets, local customers and suppliers 2. Deter potential entrants/rivals

What are the 3 benefits to the host nation of FDI?

1. Knowledge spillovers 2.Backward and forward linkages 3.Competition leads to better service

What are the 2 approaches to expanding globally?

1. The stages model 2. The born global approach

What are the 2 benefits of non-equity modes of entry?

1.Cheaper 2.Potential for gradual organizational learning i.e stages model

What 3 considerations are there for entering a market

1.Cultural similarity with target market 2.Nature of information sought 3.Possibly target a region

What are the two types of exporting?

1.Direct export: Product shipped directly from home country to foreign nation 2. Indirect export: Product sold to 3rd party intermediary in home country, 3rd party sells it to foreign nation

What are the 3 non equity forms of market entry?

1.Export 2.Franchising/licensing 3. Turnkey projects

What are the categories within wholly owned subsidiary?

1.Green fields 2. Acquisitions/ brown fields

What are the 3 costs to a home nation from which FDI flows from?

1.Job loss 2.Capital outflow 3.Loss of value added

What 3 uncertainties do managers face when operating abroad?

1.Lack of market knowledge 2.Lack of international experience 3.Perceptions of risk in dealing with foreign clients

What are the 3 benefits to a home nation from which FDI comes from?

1.Learning from abroad 2.Increased income through increased trade 3.Profit repatriation

When do firms choose FDI? (3)

1.Ownership: Firm has unique, rare or valuable assets to help them overcome liability of foreignness 2.Location: If the country has location specific assets or endowments (market, resources or labor) firm wishes to access 3.Internalization: If there are benefits to replacing arms length trade (import or export) such as tariffs, rising shipping costs etc with intra firm trade

What are 2 costs to a host nation of FDI?

1.Profit repatriation 2.Loss of sovereignty re: Capital flows and macroeconomic stability

What are the 4 benefits of alliances?

1.Reduces risk, cost and uncertainty 2.Can help in the case of resource dependency 3.Reduce transaction costs by establishing mutual tolerance 4.Enables knowledge transfer between two partners combo of best complementary assets

With which 5 factors do you assess countries which have the best potential?

1.Size and growth rate 2.Market intensity (consumer buying power) 3.Country receptivity to imports 4.Infrastructure for doing business 5. Economic freedom and country risk

What 3 factors cause an alliance to go well?

1.When the environment is stable 2.When both partners transfer a lot of knowledge 3.When both partners have a lot of alliance experience

What are the 2 equity forms of entering a market?

1.Wholly owned subsidiary 2.Joint ventures

What is the stages model and what are its 4 stages?

A model that prescribes expansion as process of organizational learning. Expansion is slower and risk adverse managers learn as they go 4 stages are Stage 1: home market only Stage 2: Indirect export Stage 3:Direct export Stage 4: Foreign production

Turnkey Project

A type of entry in which a third party firm sets up an operating plant for the foreign client. Included in this is training of operating personnel. At completion foreign client is handed key to a plant that is fully ready for operation. Most common in chemical, pharma etc

What are the 3 First Mover advantages

Advantages accrued to the first firm to enter a market. Include ability to preempt rivals and capture demand by establishing brand name, build sales volume and ride experience curve to get a cost advantage and undercut rivals, third and final advantage is to create switching costs.

What are the 4 advantages and disadvantages of licensing/franchising?

Advantages: 1.Lower cost vs FDI since non equity form of entry 2.Less transportation costs 3.Share resources from licensee/ franchisee 4.Lower production costs vs export Disadvantages: 1.May lose control of IP if laws aren't strong 2.May lose control of product quality 3.May create potential competitor 4.Not recognizing full benefits of sales vs FDI

Why is exporting attractive (2) and when is it not attractive (4)?

Attractive because: 1. relatively low cost 2.Firms may achieve experience cost curve economies Not attractive when: 1.Lower cost manufacturing areas exist 2.Tariffs exist 3.Transport costs are high 4.Foreign agent does not act in best interest

Timing of Entry

Can either be early or late entry. Early entry is when a firm enters a foreign market before other firms. Late is when other firms have already entered.

Pioneering costs

Costs an early entrant bears that later entrants avoid such as the time and effort in learning rules, failure due to ignorance of rules and norms the cost of educating new consumers and promoting and establishing a new a product offering.

First mover disadvantage

Disadvantages that come with being the first firm to enter a market. Include: Pioneering costs due to the fact that the new market is so different that the firm needs to invest considerable time and effort into making the venture work, liability of foreignness, higher risk due to not being able to learn from the mistakes of other firms.

Joint venture

Establishment of a new firm that is owned by two otherwise independent firms. Typically 50/50. Sometimes required to enter some nations.

Licensing agreement

Firm grants the rights to intangible property such as patents, trademarks, inventions and formulas to another entity for a specified period. The licensee pays a royalty fee for this right.

Wholly owned subsidiary

Firm owns 100% of a subsidiary. Can be done two ways, firm sets up a completely new operation (green field) or buys an existing foreign company wholly.

How does the product life cycle affect FDI?

Firms offering new products first produce product in home nation due to skill and tech requirement, production shifts to developed nation as cost pressures increase due to firms moving in and the process becoming standardized, later product consumed by developing nations as it gets cheaper and late in cycle.

What 2 things make establishing overseas operations difficult?

Formal barriers i.e registration, licensing, taxation, laws etc. Informal barriers i.e Culture, perception of difficulty

What is the born global/ rapid internationalization approach and what 3 things make it successful?

Idea is if you wait too long may miss window of opportunity so you start as a global company. Rapid internationalization can be successful if: 1.Venture capital present 2.Strong ownership "o" advantages can be exploited 3.First mover advantages exist

What is BOT (build operate transfer)

Like a turnkey project but the firm continues to operate for a while after the project is complete

What 4 things do the most favorable markets for FDI have?

Politically stable free market economies with low inflation and low private sector debt.

What 5 condition create the least favorable markets for FDI?

Politically unstable, mixed or command economies with high inflation and private sector debt or nations where speculation bubbles have led to excess borrowing.

Franchising

Similar to licensing but the franchiser sells intangible property to franchisee and sets rules of conducting business. Franchiser, assists franchisee frequently. Franchiser receives royalty payments. Done mainly by service firms.