International Business Chapter 13

Large-scale entry

- strategic commitments - a decision that has a long-term impact and is difficult to reverse - may cause rivals to rethink market entry - may lead to indigenous competitive response

Greenfield is best when....

There are no incumbents for a company to acquire Competitive advantage is based on the transfer of organizationally embedded competencies, skills, routines, and culture

Advantages and disadvantages of entrance methods are determined by

Transportation costs, trade barriers, political, economic risks, costs, firm strategy

True/False: There is no "Right" decisions with foreign markets, just decisions that are associated with different levels of risk and rewards

True

How to reduce the risk of the loss of intangible technology or property

Use cross-licensing agreements or link the agreement with the decision to form a joint venture

Acquisition is best when....

Well-established incumbents exist within the market in question

Technological know-how

When competitive advantage is based on proprietary technological know-how, firms should avoid licensing and joint venture arrangements in order to minimize the risk of losing control over the technology

Question 2

When should the firm enter

Question 1 a firm should ask

Which foreign market should a firm enter?

Small-scale entry

has the advantage of allowing a firm to learn about a foreign market while simultaneously limiting the firm's exposure to that market

Licensing Disadvantages

lack of control over technology Inability to realize location and experience curve economies Inability to engage in global strategic coordination

advantages of wholly owned subsidiaries

protection of technology, ability to engage in global strategic coordination ability to realize location and experience economies 100% share of profits

Turnkey Project

the contractor handles every detail of the project for a foreign client, including the training of operating personnel At the contract's completion, client is handed the "key" to a plant that is ready for full operation

First mover disadvantages 4

Regulation changes that diminish the early entrant's investments' value

If a technological advantage is only transitory, or the firm can establish its technology as the dominant design in the industry, ___________________ may be attractive

Licensing

Advantages of franchising

-avoids the costs and risks of opening up a foreign market -firms can quickly build a global presence

Disadvantages of Franchising

-inhibits the firm's ability to take profits out of one country to support competitive attacks in another -geographic distance of firm from its franchisees can make it difficult to detect poor quality

Six modes to enter foreign markets

1. Exporting 2. Turnkey Projects 3. Licensing 4. Franchising 5. Joint Ventures 6. Wholly owned subsidiaries

Wholly Owned Subsidiaries

100% ownership of the subsidiary Firms establishing a wholly owned subsidiary can: Set up a new operation in that country Acquire an established firm

Disadvantages of Greenfield Ventures

Slower to establish No proven track record problematic if a competitor enters via acquisition and quickly builds market share

Advantages of turnkey projects

Ability to earn returns from process technology skills in countries where FDI is restricted Less risky in countries where the political and economic environment is such that a longer-term investment might expose the firm to unacceptable political and/or economic risk

Advantages of greenfield ventures

Allow the firm to build the kind of subsidiary company that it wants

Advantages of Joint Ventures

Allows for risk sharing-financial and political Provides opportunity to learn new environment Provides opportunity to achieve synergy by combining strengths of partners May be the only way to enter market given barriers to entry

Advantages of exporting

Avoids the often substantial costs of establishing manufacturing operations in a host country Firms may achieve experience curve and location economies

First mover advantage 2

Build up sales volume in the country and ride down the experience curve ahead of rivals resulting in a cost advantage over later entrants

Disadvantages of Exporting

Lower-cost manufacturing locations exist Transportation costs can be high Tariff barriers can make it uneconomical Foreign agents fail to act in the exporter's best interest

Ways to reduce the risk of acquisition failure

Carefully screening the firm to be acquired Reduce unwanted management attrition Moving rapidly once the firm is acquired to implement an integration plan

First mover disadvantages 3

Costs associated with having to establish and promote the product offering, and also educating customers

Competitive advantage of many service firms is based upon __________________ know-how

Management

Question 3

On what scale should the firm enter

Often the first method firms use to enter foreign markets

Exporting

Ways a firm can enter foreign markets

Exporting, Licensing, Franchising, Joint venture, Wholly owned subsidiary

First mover disadvantages 2

Failing due to ignorance of the foreign environment

True/False: There is a clear-cut method to entering a foreign market that makes all other methods inadequate

False

Disadvantages of Wholly Owned subsidiaries

Firm bears full costs and risks of setting up foreign competition

Disadvantages of Turnkey Projects

Firm has no long-term interest in the country Firm can inadvertently create a competitor The firm's process technology is a source of competitive advantage

Disadvantages of acquisitions

Firm might overpay for the assets of the acquired firm Clash between cultures of the acquiring and the acquired firm might occur Attempts to realize synergies by integrating the operations of the acquired and acquiring entities run into roadblocks and take longer than forecast

Disadvantages of Joint Ventures

Firm risks giving control of its technology to its partner Firm may not have tight control over subsidiaries that it needs to realize experience curve or location economies Shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time

Exporting and wholly owned subsidiaries most likely to be pursued by:

Firms facing strong pressures for cost reductions

Firms with management know-how would benefit most from a ___________________ or ____________________ ___________________

Franchisee; Joint Venture

Franchising

Franchisor sells intangible property and requires the franchisee to agree to abide by strict rules as to how it does business

First mover disadvantages 1

Having to devote many resources to learning how to properly do business in the country

First mover disadvantages 5

Having to educate customers about the product

The experiences of firms in developed countries can...

Help firms in developing countries learn

First mover advantages 3

Keep customers tied to product by creating switch costs that make it difficult for later entrants to win business

Advantages of Licensing

Outsources development costs and risks associated with opening a foreign market Avoids barriers to investment Allows a firm with intangible property that has business applications, but which doesn't want to develop those applications itself, to capitalize on market opportunities

Most favorable foreign markets

Politically stable, developed/developing, free market, low inflation, low private debt, larger market, mass of middle class

Less desirable foreign markets

Politically unstable, developing with mixed/control economies, high inflation, high private debt.

First mover advantages 1

Pre-empt rivals and capture demand by establishing a strong brand name.

Advantages of acquisitions

Quick to execute Enable firms to preempt their competitors Less risky than greenfield ventures

Licensing

a licensor grants the rights to intangible property to the licensee for a specified time period, and in return, receives a royalty fee from the licensee

Joint Venture

establishing a firm that is jointly owned by two or more otherwise independent firms

International trademark laws are generally ___________ (effective/ineffective) for protecting trademarks

effective