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International Business Strategy

Lecture 5
Entry mode strategies

Assoc. Prof. Dr. Vo Van Dut

Email: vvdut@ctu.edu.vn

Key question: Where do you locate what type of activity in which

way, and what effect does this have on firm and environment?

Type: Efficiency & natural resource seeking

Market seeking,
Strategic asset (e.g. knowledge seeking)

Where: location decision / geography (distance is

multidimensional concept, geographical, institutional,
cultural, economic)

Which way: organizational aspect, e.g. entry modes and

headquarter-subsidiary relationships

What effect: impact of MNE on home and host country economy and
society (competition effects, spillover effects)

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“Plan de campagne” for today:

1. Different entry modes

2. Foreign distributors
3. Strategic alliances (SA)
4. Mergers and acquisitions (M&A)
5. Strength and weaknesses of these entry modes
6. Comparing M&A versus SA

Entry modes

Non-equity: Equity:

Exporting Greenfield
Licensing Acquisition
Franchising Joint venture

Alliances can be both equity and non-equity based.

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Licensing:
a form of contracting where firm A licenses to firm B in another country the
right to use firm A’s technology or trademark for a certain fee

Franchising:
firm B in a host country uses the business model developed by firm A, and
firm A provides assistance in making the local activity a success. The
franchisee has the right to use the franchisor’s logo, trademark, way of
working, etc. for which the franchisor receives a fee.

A higher degree of control compared to licensing.

e.g. McDonalds

Greenfield:
a firm expands to a foreign country by establishing a completely new firm
from scratch (e.g. by building a new factory) that it fully owns.

Acquisition:
a firm buys shares of a firm established in a foreign country this is called an
acquisition. Full acquisitions implies buying all shares, while partial
acquisitions occur when a firm only buys part of the shares of the foreign
firm.

Joint venture (JV):

firm A from country 1 and firm B from country 2 join forces and jointly
establish a new firm C in a foreign country, either country 1, 2 or a third
country.

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Many factors determine optimal entry mode, Hill, Hwang and Kim (1990):

(i)the degree of control,

Control highest in GF & Acq; lowest in licensing

(ii)the level of resource commitment, and

Highest in GF & Acq; lowest in licensing

(iii)the dissemination risk

Lowest for GF & full Acq; highest for licensing

Optimal entry mode is trade off

Verbeke:

1. Foreign distributors

2. Strategic alliances

3. Merger and acquisition

Level of commitment increases from 1 3

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First step in internationalization often:

Establish relation with foreign distributor, because:

- They have local knowledge
- They know potential customers

Their FSA is location bound and helps overcome the distance that
the internationalizing firm has to deal with.

Hence, local distributors often serve as a “beachhead” in the first

stage of internationalization.

Key is to balance three competing objectives:

1. To maintain strategic control over important customers

2. To benefit from the local partner’s market knowledge and
market access
3. To reduce risk associated with high demand uncertainty in
the host market

(p. 288-289 in Verbeke, 7 best practices are listed)

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Over time often following pattern:

1st stage: initial success

2nd stage: flattening sometimes declining
3rd stage: MNE starts questioning local partner and may
a) take control of distr. channel
b) build a self owned distr. channel.

Result: local partner and MNE will not invest in each other.
But: successful firms go from a beachhead strategy to
developing a long term relationship with the local partner

Besides foreign distributor, another option is to form a

strategic alliance (SA).

A SA implies you start to cooperate with a rival!

Challenge: learn as much as possible from this parter while

giving away as few of your own FSAs as possible.

Advantage: share risks and costs (eg R&D), learn from

partners complementary resources, and quicker development
of capabilities to deliver products and services.

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“Costs” of an alliance:

1. The own FSAs could be appropriated by the alliance partner (so

important to develop safeguards against such reverse knowledge
flows)
“learning race”-> risky:
- dysfunctional knowledge sharing: bounded reliability
- managers may pay too much attention to learning race and forget
about goal of the SA in the first place

2. If the MNE has too many SAs, this reduces coherence and
increases management problems.

From low level of commitment (foreign distributor) to

medium level of commitment (SA) to high level of
commitment: merger or acquisitions

M&A done to create larger firms “that are supposedly better

able to deal with globalized markets”.

(Note that Verbeke contests this notion of the need to deal

with globalization in this way)

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M&A is not easy:

1. Pre – and post integration obstacles:

each firm has its own FSA, which are partly location bound. If the
distance is large, more difficult to integrate these FSAs. Plus even
for FSAs that are transferable, it is not easy to integrate these.

2. “Purchase price premiums”:

as a result of firms competing for a firm that can be taken over.
E.g ABNAmro: too many parties wanted it, price increases

So why do managers still do M&A? Cognitive bias

Verbeke lists six sources of biases why managers like M&A (p. 342)

1. Topline obsession: focus on growth of sales, not profits

2. Stock price exploitation: in case of overvalued stock prices, managers
would like to benefit from that
3. Grooved thinking: “this is the way we always did it”
4. Herd behavior: copy paste behavior of managers: do what the
competitor does
5. Personal commitments
6. Trust in interested parties: Investment banks can push firms out of own
interests

Mergers and Acquisitions come and go: see M&A over time next slide

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Merger and acquisition waves 1895-2012: six waves

Source: Number of acquisition deals, updated figure provided by McCarthy (2011,

p.16).

SA versus M&A

Alliance preferred over M&A when:

- Each firm only needs a subset of the FSAs of the partner

MNE only wants this

FSAs
part of the FSA, so why buy
the whole firm?

- It is difficult to dispose of the prospective partner’s unusable

resources because they are firm specific: if you buy the whole
firm and cannot sell the parts of it you dont like

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Exercise questions entry modes

1. What are equity and non-equity entry modes? Which entry mode
is best?

2. What is the typical first step in the traditional internationalization

process? Why?

3. What is the goal when allying with a foreign distributor? Why is

this difficult?

4. Verbeke describes the internationalization process in stages. What

three stages?
5. What is the best strategy according to Verbeke?

6. What is the key advantage of a strategic alliance (SA)?

7. What is key challenge for partners in a SA?

8. What are the “costs” of an alliance?

9. Why is the merger and acquisition presented as the “highest level of

commitment”?

10. Why is a M&A not easy?

11. Why do managers have a bias towards M&As?

12. When is a SA preferred over a M&A?

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Thank you for your attention

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