International Business (INE 2028)

Instructor: MA. Nguyen Thi Phuong Linh

Email: phuonglinhnt@vnu.edu.vn
Phone: 0967257858
Address: Room 407, E4, University of Economics and Business – VNU.
 Course calendar
Part 1: Introduction and
Part 2: Country difference
Overview
Chapter 1: Globalisation Chapter 2: National difference in Political Economy
Chapter 3: Differences in Culture
Chapter 4: Ethics in International Business

Part 3: Competing in a Global marketplace

Chapter 5: The strategy of IB Chapter 8: Global production, outsourcing &

Chapter 6: Entry strategy and Strategic Logistics
Alliances Chapter 9: Global marketing and R&D
Chapter 7: Exporting, Importing and Chapter 10: Global human resources management
Countertrade
Chapter 6: Entry
strategy and
Strategic Alliances
 Chapter Objectives
Firms expanding internationally must decide

Which markets to enter

When to enter markets

When to enter them and on what scale

Which entry mode to use

14-4
 Which markets to enter?

❖ Based on assessments of a country's long-term

potential profits.
❖ This potential is a combination of factors (Market
attractiveness).
❖ Political factors
❖ Economic factors (economic system, future
economic growth rate, ...)
❖ Demographic factors (market size)
❖ Current wealth factor (purchasing power of the
market)
❖ ...
Which markets to enter?

Benefits
Risk Costs

Overall
attraction
 When Should A Firm Enter A Foreign Market?
Once attractive markets are identified, the firm must consider the timing of entry
1. First mover – when an international business enters a foreign market before other foreign
firms
Advantages of the first mover:
❖ the ability to pre-empt rivals by establishing a strong brand name and connection with
customers
❖ the ability to create switching costs that tie customers into products or services, making it
difficult for later entrants to win business
Disadvantages of the first mover:
❖ pioneering costs - (the cost of a business failure)
❖ Expenses to learning the rules of the game (cost of advertising, setting up product delivery -
cost to guide customers)

2. Later Entrant - Enterprise joins a market when other companies have established their positions in that
market
Advantages of later entrant: Benefit from observing and learning from mistakes made by predecessors
(minimizing pioneering costs, mining costs)
14-7
Disadvantages of later entrant: not winning a large share in the market.
On What Scale Should A Firm
Enter Foreign Markets?

After choosing which market to enter and the

timing of entry, firms need to decide on the
scale of market entry
❖ Significant-scale entry: Firms make a
strategic commitment to the market - the
decision has a long term impact and is
difficult to reverse
❖ Small-scale entry: Allowing a firm to learn
about a foreign market while
simultaneously limiting the firm’s exposure
to that market

14-8
Is There A “Right” Way To
Enter Foreign Markets?

 No, there are no “right” decisions when

deciding which markets to enter, and
the timing and scale of entry - just
decisions that are associated with
different levels of risk and reward

14-9
 Which entry mode to use?
6 Methods to entry foreign market

Turnkey
Exporting Licensing
Projects

Wholly owned
Franchising Joint Venture
subsidiaries
 Exporting
Sale of products produced in one country to residents of another country.

Advantages Disadvantages

• it avoids the costs of establishing local • there may be lower-cost manufacturing

manufacturing operations
• it helps the firm achieve experience
curve and location economies
locations that firms can not take advantages of
• high transport costs and tariffs can make
exporting becoming uneconomical
• agents in a foreign country may not fully support
for exporter
 Turnkey Projects

❖ Project in which a foreign enterprise agrees to build an

operating base for a host country partner and hands it over
when it is ready to operate
❖ The party performing this contract is usually businesses in the
fields of construction, design, and architecture.
❖ Turnkey projects are most common in the chemical,
pharmaceutical, petrochemical, metal refining, and
industries that use complex and expensive manufacturing
technologies.
❖ Example: Video: “Turnkey Construction Projects
Introduction”
https://www.youtube.com/watch?v=iuSnkd7vtMM
 Turnkey Projects
• Advantages
• This is a way of earning huge economic
returns from the know-how required to
assemble and run a technologically
complex process
• they can be less risky than long-term
investment like FDI
• Disadvantages
• the firm has no long-term interest in the
foreign country
• if the firm's process technology is their
competitive advantage, then selling this
technology through a turnkey project is
also selling competitive advantage to
potential and/or actual competitors →
the firm may create a competitor
 Licensing

❖ Licensing: A licensing agreement is an

arrangement whereby a licensor grants the
rights to intangible property to another entity
(the licensee) for a specified period, and in
return, the licensor receives a royalty fee
from the licensee
❖ Intangible property includes: patents,
inventions, formulas, processes, designs,
copyrights, trademarks
 Licensing
Advantages
• the firm avoids development costs and risks
associated with operating business in the
foreign market
• Licensing can be attractive for firms lacking the
capital to develop operations overseas.
• the firm can capitalize on market opportunities
without developing the operation itself
Disadvantages
• the firm doesn’t have the tight control required
for realizing experience curve and location
economies
• the firm’s ability to coordinate strategic moves
across countries is limited
• proprietary (or intangible) assets could be lost
• to reduce this risk, firms can use cross-
licensing agreements
 Franchising

❖ Franchising - a specialized form of licensing

in which the franchisor not only sells the
intangible property to the franchisee but also
insists that the franchisee agree to abide by
strict rules as to how it does business:
✓ Regularly assisting the franchisee in running
the business.
✓ Used primarily by service businesses
✓ The franchisor receives a fee, a certain
percentage of the franchisee's profits
 Franchising

Advantages Disadvantages

• it avoids the costs and risks of opening up • it inhibits the firm's ability to take profits
a foreign market out of one country to support
• firms can quickly build a global presence competitive attacks in another
• the geographic distance of the firm from
franchisees can make it difficult to
detect poor quality
 Joint Venture

❖ Joint ventures with a host country firm - a

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

❖ most joint ventures are 50:50 partnerships

 Joint Venture

Advantages Disadvantages
• firms benefit from a local partner's knowledge • the firm risks giving control of its technology
of local conditions, culture, language, political to its partner
systems, and business systems • the firm may not have the tight control to
• the costs and risks of opening a foreign realize experience curve or location
market are shared economies
• they satisfy political considerations for market • shared ownership can lead to conflicts and
entry battles for control if goals and objectives
differ or change over time
Case study: JCB in India
 Wholly Owned Advantages Disadvantages
Subsidiary • they reduce the risk of losing • the firm bears the full
control over core cost and risk of setting up
competencies overseas operations
• they give a firm the tight
❖ Wholly owned subsidiary - the control over operations in
firm owns 100 percent of the different countries that is
stock necessary for engaging in

✓ set up a new operation global strategic coordination

• they may be required in
✓ acquire an established
order to realize location and
firm
experience curve economies
Which Entry
Mode Is Best?
  The optimal entry mode depends to
some degree on the nature of a firm’s
core competencies
 When competitive advantage is based
How Do Core on proprietary technological know-how
 avoid licensing and joint ventures
Competencies unless the technological advantage
is only transitory, or can be
Influence Entry established as the dominant design
 When competitive advantage is based
Mode? on management know-how
 the risk of losing control over the
management skills is not high, and
the benefits from getting greater use
of brand names are significant
 ❖ When pressure for cost reductions is
How Do high, firms are more likely to pursue
some combination of exporting and
Pressures For wholly-owned subsidiaries

Cost ❖ allows the firm to achieve location

and scale economies and retain
Reductions some control over product
manufacturing and distribution
Influence ❖ firms pursuing global

Entry Mode? standardization or transnational

strategies prefer wholly-owned
subsidiaries
 What Are Strategic Alliances?

❖ Strategic alliances refer to

cooperative agreements between
potential or actual competitors
✓ range from formal joint ventures to
short-term contractual agreements
✓ the number of strategic alliances
has exploded in recent decades
 Why Choose Strategic Alliances?

Strategic alliances are attractive because they

• facilitate entry into a foreign market

• allow firms to share the fixed costs and risks of developing new products or processes
• bring together complementary skills and assets that neither partner could easily
develop on its own
• help a firm establish technological standards for the industry that will benefit the firm

But, the firm needs to be careful not to give away more than it
receives
 What Makes Strategic Alliances Successful?
1. Partner selection: A good partner:
❖ helps the firm achieve its strategic goals and has the capabilities the firm lacks and that it
values
❖ shares the firm’s vision for the purpose of the alliance
❖ will not exploit the alliance for its own ends

2. Alliance structure: The alliance should

❖ make it difficult to transfer technology not meant to be transferred
❖ have contractual safeguards to guard against the risk of opportunism by a partner
❖ allow for skills and technology swaps with equitable gains
❖ minimize the risk of opportunism by an alliance partner

3. The manner in which the alliance is managed: Requires:

❖ interpersonal relationships between managers
❖ learning from alliance partners
Closing case:
General
Motors in
China
Review Question

_______ refers to the time and effort spent

learning the rules of a new market.

a) First-mover advantages
b) Strategic commitments
c) Pioneering costs
d) Market entry costs

14-29
 Review Question

What is the main disadvantage of wholly owned subsidiaries?

a) they make it difficult to realize location and experience curve economies

b) the firm bears the full cost and risk of setting up overseas operations
c) they may inhibit the firm's ability to take profits out of one country to support competitive
attacks in another
d) high transport costs and tariffs can make it uneconomical

14-30
 Review Question

If a firm wants the option of global strategic

coordination, the firm should choose

a) franchising
b) joint ventures
c) licensing
d) a wholly owned subsidiary

14-31
 Review Question

All of the following are advantages of

acquisitions except

a) they are quicker to execute

b) it is easy to realize synergies by integrating the operations of the acquired entities
c) they enable firms to preempt their competitors
d) they may be less risky

14-32
 Review Question

Which of the following is not important to a

successful strategic alliance?

a) establishing a 50:50 relationship with partner

b) creating strong interpersonal relationships
c) a shared vision
d) learning from the partner

14-33