International Business

Lecture 5 by Dr Vasilis Gotsis – Entry into

International markets
 - Understand the necessity to overcome the liability of foreignness

- Factors to consider during Foreign Expansion

- Match the quest for location-specific advantages with strategic goals

(where to enter)

- Compare & contrast first-

mover and late-mover
advantages (when to enter)
ENTRY INTO
- Follow a decision model that
INTERNATIONAL outlines specific steps for
MARKETS foreign market entrance
(how to enter)

- Entry modes
- Debates on foreign market entries

- Draw strategic implications for action

A General Framework for Thinking about Strategy

A firms’s strategy:

 The actions that managers take to attain the 1. Managers to pursue strategies to increase
goals of the firm profitability How?
Pursue strategies that Reduce costs or
Add value to the firm’s products (=raise prices)
Objective: 1. I

To maximise the value of the firm 2. Pursue strategies to increase Profit

How? Growth How?
Sell more domestic & Enter new markets abroad

Reduce Costs

…1) Profitability
Maximise value through
increased…
Add Value and Raise
Prices
Enterprise Valuation

Sell More in Existing

markets
…2) Profit Growth
Pursue strategies to
increase…
Figure:
Determinants of Enterprise Value Enter New Markets
What is Different about International Strategy?

An important question is what is different about

global strategy? Tallman & Yip (2009, p308) capture the essence:
It is important to acknowledge a point
“Our answer is that international from Rugman and Verbeke that:
strategy, while still business strategy, brings forward
“Very few firms have a truly global strategy in the
an explicit consideration for the effects of locational
sense that they have operations which are
differences and institutional contexts that requires
reasonably evenly spread across the world”
adaptations in the application of classic strategic
analysis techniques and adoption of additional
analytical frameworks.”
 “The first, low cost, express bus service to
offer city-to-city travel for as low as $1 So what caused Megabus to
via the Internet” turn around things?

4 features stand out:

“It has fundamentally changed the way
American – especially the young – travel” 1. Tickets=super cheap (even $1 – usually one or two persons).
Uses a yield management system like airlines (early
passengers – very cheap deals, late passengers progressively
higher prices, still quite cheap – 1/10 of Amtrak’s (train). All
: A national icon, but in tickets have to be booked online
1990 bankruptcy. A turmoil period
followed. In 2007: 2. No depots use, only regular city bus stops (reduce costs)
acquired

3. Free Wi-Fi & power outlets (37% of passengers said that as

the central point on their decision)
In between: “Chinatown
buses” emerged – route
among Chinatowns of NY  Backed by 4. Unbeatable “green” advantage (8 cents/mile – 4 times more
& Boston 5 hubs: Stagecoach Group fuel efficient than car, that is equivalent to 11 million gallons
(UK) /year save = 24,000 cars off the road automatically)
 It is a brand of
Stagecoach’s (2007)
Chicago NY W.O.US. Subsidiary “Others talk about high-speed
Pittsburgh Philadelphia Coach USA rail with $10 billion budget just
to jump-start infrastructure,
DC  No frills entrant Megabus carries 13 million
That trend made more
clear the idea for
into US market passengers with 0 additional
Megabus  Late mover investment”
 Overcoming the Liability of Foreignness
How do firms like
Stagecoach Group
enter foreign
markets?

Why go to some
particular ones only?
• The Liability of Foreignness: • Foreign firms:
Why Stagecoach …are often discriminated against
managed to transform The inherent disadvantage foreign firms
a lacklustre travel experience in host countries because of their non- i.e. Coca Cola & PepsiCo in India
mode? (particularly native status
for young & educated Activists there claim that both have products contain higher than
permitted level of pesticides, and did not test Indian-branded
customers) The liability is manifested in 2 ways: soft drinks even though pesticides residues are present in
• Differences: …in formal and informal institutions virtually all groundwater in India. Although both Coca-Cola &
PepsiCo denied these charges their sales suffered.
govern the rules of the game in different countries
So how do Foreign firms crack new markets?
Local firms knows that, it’s
the foreign ones that have …deploy overwhelming resources and
to learn the rules quickly. capabilities to counterbalance the liability
i.e. EU firms in USA
of foreignness
i.e. GE in China
Governments ban
The Chinese government: more interested to
foreigners from owing
promote “indigenous innovation”, but finally the
assets in certain strategic
200-seat C919 jetliner got GE’s engines because
sectors
of the overwhelming capabilities in advanced
Governments in Central
engines that GE had a factor that overcome the
and Eastern Europe are
political incorrectness.
concerned about
investments from Russia
Understanding the Propensity to Internationalize

Firm Size, Domestic Market Size, and

• Not every firm is ready to go abroad, specially the Propensity to Internationalize
smaller ones MARKET SIZE
2 important factors here: Usually their overseas activities
are slower (not always) than
Large Occasional Slow those of enthusiastic
The size of the firm
Internationalizer Internationalizer internatinalizers. i.e. Wal-Mart
Pour resource pace of internationalization is
The size of the domestic market base slower than Carrefour and Metro
This leads to a 2x2 framework (Germany)

• The propensity:
Enthusiastic internationalizer Small
Follower Enthusiastic Nestle in Swiss
Internationalizer Internationalizer (7 million only)
Small countries such as
Follower internationalizer Austria, Denmark, Finland,
New Zealand, Singapore,
Slow internationalizer Taiwan are active overseas
Occasional internationalizer
Small Large FIRM SIZE
 A Comprehensive Model of Foreign Market Entries
To overcome the liability of
Porter’s 5 forces
(more is on Chapter 2 of
foreignness a
Peng’s book)
comprehensive model is
developed based on the Overall how an industry is structured and how its five forces are played out
strategy tripod significantly affect foreign entry decisions.

Rivalry
Strategy tripod
i.e. in oligopolistic industries if one enter the rival will follow soon

High Entry Barriers

The higher the entry barriers the more intense the competition
i.e. a strong presence abroad can be seen as a major entry barrier
1. 2.
Industry Resource 3. Bargaining power of Suppliers
based based Institu- It may prompt certain foreign markets (often called backward vertical integration
tional because of the multiple stages of the value chain involvement)
Many industries feature extensive backward integration (i.e. bauxite mining) in order to
based
provide a steady supply of raw materials to late stage production (i.e. aluminium
smelting).
Since natural resources are not always found in politically stable countries many firms
We then focus on the have no choice but to enter political unstable countries (i.e. Libya, Venezuela) as this at
3 crucial dimensions: the end of the day still is cheaper rather than having to deal with an unfriendly supplier.
Where, when and
how Bargaining power of buyers
It may lead to certain foreign market entries (often called vertical integration) i.e.
instead of working with retail chains where buyers often extract significant price
concessions, Apple has established a series of Apple stores in major cities worldwide.

Substitutes
It might encourage firms to bring them abroad. i.e. a generation ago, Kodak and Fuji
dominated the film industry. Their products were substituted by digital camera makers
such as Canon. Then cell phones makers incorporated the camera function within the
phone which substituted a lot of single-purpose digital cameras.
 A Comprehensive Model of Foreign Market Entries
(…continue)
The VRIO framework sheds light on entry decisions

Value
The value of firm-specific resources and capabilities plays a key role behind
decisions to internationalize. It is often the superb value of firm-specific assets
foreign entrants (i.e. Stagecoach) to overcome the liability of foreignness The VRIO framework
(more is on Chapter 3 of
Rarity Peng’s book)
Encourage firms to leverage those rare assets overseas (i.e. cars)

Imitability
If those are expropriated in certain countries then they wont enter because the
transaction costs will be very high. This is because of dissemination risks (the risks
associated with the unauthorized imitation and diffusion of firm specific assets).

Organization
The organization specific-resources and capabilities as a bundle favours firms and
encourage them to utilise these assets overseas. Many MNEs are organised in a way
that protects them against entry and favours them as entrants into other markets
(consider the near total vertical integration at ExxonMobil and BP)
 A Comprehensive Model of Foreign Market Entries
(…continue)

Institution-based considerations (Chpt 4)

Informal institutional differences (Culture) – chpt 4

Here on Formal:
Regulatory risks:
- Risks associated with unfavourable government policies
i.e. JV in China (share technology, increasing the dissemination risk)
A well-known risk is the obsolescing bargain:
A deal struck by an MNE and a host government which change the requirements after the entry of the MNE.

Expropriation
Confiscation of foreign assets invested in one country

1970’s Coca-Cola in India: the Indian government demanded the secret formula of Coca cola. When this happened the
company had already invested a lot there and then left the country through huge loss.
Similarly in the 1950s/60s/70s in Africa, Asia and Latin America local governments did the same and then through
nationalization turned the MNE’s assets to SOE’s property.

1980s onwards: the local governments in most cases realised that nationalization of the foreign MNE assets does not
maximize their national interests. So the new global trend was privatization. Many MNEs push for transparency and
predictability in host-government decision making before committing to new deals.

In 1990s coca cola agreed to return to India though explicit promise that the secret formula would stay untouched.
These days regulatory risks (mostly for expropriation) had drastically improved, still countries vary considerably on those risks.
I.e. Argentina in 2012, expropriated Spanish Repsol assets.
 A Comprehensive Model of Foreign Market Entries
(…continue)

Institution-based considerations (Chpt 4)

Trade Barriers: they include:

(1) Tariff (taxes levied on imports) and nontariff barriers*

(2) Local content requirements (Government requirements that certain products be subject to higher import tariffs and
taxes unless a given percentage of their value is produced domestically) Even after entrance into a foreign market
through setting a local factory there some governments impose local content requirements mandating that a
“domestically produced” product can still be subject to tariff and nontariff barriers unless a certain fraction of its value
(51% in US) is truly produced domestically

(3) Restriction on certain entry modes

i.e. In the US foreign airlines are not allowed to operate a W.O.S. or acquire US airlines. In Russia W.O.S. is banned for foreign
firms if they operate in the oil and gas industry.

Currency risks
Risks stemming from exposure to unfavourable movements of the currencies to which firms are exposed.
i.e. if the Chinese yuan appreciates (as demanded by the US government) production there for both domestic and foreign firms
will mean a loss on the low-cost advantage there. Since a majority of Wal-Mart products made in China (mostly by non-
Chinese-owned producers) a 30% appreciation of the yuan (all else being equal) may result in a 30% cost increase on many *= Dutch tulips in Japan. Japanese
Wal-Mart’s products. Therefore Wal-Mart and its US-owned suppliers that produce in China face severe currency risks if the custom inspectors required on
yuan appreciates. cutting every tulip bulb exported
from Netherlands vertically down the
Currency hedging: a transaction that protects traders and investors from exposure to the fluctuations of middle to prevent bacteria from
the spot rate. It protects firms from exposure to foreign exchange fluctuations. This is risky in the case of abroad. Although Dutch claim this is
wrong bets of currency movements. Strategic hedging means spreading out activities in a number of not an issue for the rest of the world
countries in different currency zones in order to offset the currency losses in certain regions through exports in Japan it is. Hence these
gains in other regions. When Toyota set up a new factory in France instead of expanding its British nontariff barriers encourage foreign
operations (which would have cost less in the short run) because France has the euro currency. entrants to produce locally and
discourage them from exporting.
Foreign expansion: Factors of consideration

Any firm when thinking of foreign expansion must:

Pros and cons
1. Decide: associated with each entry mode
1) Which foreign markets to enter
Determined by a number of factors:
2) When to enter
• Transport costs
3) On what scale (rate of expansion)
• Trade barriers
2. The choice of entry mode:
• Political risks
a. Exporting
• Economic risks Build the
b. Turnkey projects
• Business risks optimal
c. Licensing to host-country firms entry mode
d. Franchising to host-country firms • Costs
e. Establishing Joint-Ventures with a host- • Firm strategy
country firm i. From scratch:
f. Setting up a new (Greenfield venture)
wholly owned ii. From an established
subsidiary enterprise
(Acquisition)
 Location-specific advantages – (1) Which foreign markets to enter

Geographical ones, i.e. Dubai airport (ideal stopping point

between Europe & Asia, between Africa & Asia) STRATEGIC GOALS LOCATION-SPECIFIC EXAMPLES IN THE
ADVANTAGES TEXT
Natural resource seeking Possession of natural Oil in the Middle East,
Clustering of economic activities in certain locations
resources and related Russia, and Venezuela
(Agglomeration) transport and
communication
infrastructure
(1) Makes easier to hire from competitors
(2) Skilled labour force that lives nearby Market seeking Abundance of strong GM in China
market demand and
(3) Pool of suppliers & buyers located in the same region customers willing to pay
i.e. Dallas (US), Telecom companies
Efficiency seeking Economies of scale and Manufacturing in China
abundance of low-cost (especially in Shanghai)
Different locations provide different benefits factors
Innovation seeking Abundance of innovative IT in Silicon Valley and
individuals, firms, and Bangalore; telecom in
If factors change, i.e. raising taxes, companies overcrowd, bid up land/talents = some firms may
universities Dallas; aerospace in Russia
move out
i.e. until the early 90’s BMW & Mercedes were projecting the “Made in Germany” image, later
with expansions to Brazil, China, Mexico, SA, USA, Vietnam they instead boast the “Made by
BMW” and “Made by Mercedes”
 Location-specific advantages – (1) Which foreign markets to enter) …(continue)

o More than 200 nation-states in the world, not all of them Another important factor:
with the same profit potential  The value an international business company that
can create there:
o The choice must be based on a long-run profit potential  Depends on the nature of local
competition and the suitability of its
product offering
The  If the intl business can offer a product that
…that associated
attractiveness with doing is not widely available there & satisfies an
depends on unmet need the value of that product is
balancing: Benefits Costs & Risks business in that
country likely to be much greater (and hence
(+ Economic and Political factors):
probably charge it more)
Typical lower costs in economic advanced / politically stable democratic nations

 The size of the market (demographics) So there has to be countries

ranking in terms of attractiveness
 The present wealth (purchasing power) of
& long-run profit potential
consumers
 Future economic growth rates

(2) When to enter
Entry timing is linked to as there are compelling
reasons to have an early or late entrant in a country
Early entrance – (First mover advantage):
When an international business enters a foreign market before others
Late entrance – (Late mover advantage):
When a firm enters after the others
i.e. First-movers:
“Google it”
Generic term for toothpaste.
Unilever is called the “Red
Colgate” in African countries
FIRST-MOVER
ADVANTAGES
Proprietary, technological
leadership
Pre-emption of scarce
resources
Establishment of entry
barriers for late entrants
Avoidance of clash with
dominant firms at home
Relationship with key
stakeholders such as
governments
Research shows:
The probability of survival increases if a firm enters
a foreign market after several others have already
done so (late entrant may benefit by observing
and learning from others mistakes)
First-mover advantages:
e.g. went to China
• The ability to preempt rivals and capture demand by after did so
establishing a strong brand name
• The ability to build sales volume there and ride down the
experience curve ahead of rivals giving a cost advantage over
later entrants
• The ability to create switching costs that tie customers into
their products or services (switching costs make it difficult for
later entrants to win business)
Examples LATE-MOVER Examples
ADVANTAGES
Apple’s iPod, iPad, iPhone Opportunity to free ride on Ericsson won big contracts
first mover investments in Saudi Arabia, free riding
on Cisco’s efforts
Japanese MNEs in Resolution of technological GM and Toyota wait to see
Southwest Asia and market uncertainties Nissan’s Leaf solving
uncertainties on the electric
car
Poland’s F-16 fighter jet First mover difficulty to Greyhound is stuck with the
contract adapt to market changes bus depots, whereas
Megabus simply uses
curbside stops
Sony, Honda and Epson
went to the US market
ahead of their Japanese
rivals
Citigroup, JP Morgan Chase
First-mover disadvantages:
 Pioneering costs (particularly if there is signicant differences in
infrastructure between the two countries) whereas a later
entrance can avoid
Pioneering costs include:
• The costs of business failure if due to ignorance of the
foreign environment the firm makes major mistakes
• Costs of promoting and establishing product offerings
• Costs of educating customers
 Also during an early entrant if suddently regulations
change that can be a serious risk
 (3) How to enter (scale of entry)

The amount of resources committed to enter a foreign market

Large scale entry Small scale entry

Positive: Positive:

• It will make easier for the company to attract customers and distributors • Allows the firm to learn about a foreign market, reduce the risk

• Such scale of entry gives extra confidence to customers and agents that the firm will stay Negative:
on the market for a long time
• Lack of commitment make it more difficult to build market share and capture
• Might attract other foreign investors to enter first-mover advantages

Negative:

• The firm may have fewer resources available to support expansion in other desirable
markets
• Huge losses if these large-scale “bets” turn out to be wrong
 Equity & Non-equity modes

Consideration for small/large

scale expansion usually boil down
to the equity (ownership) issue (No ownership) (Ownership)
Non-equity modes:
Smaller commitments to
overseas markets

Equity modes:
Larger & harder-to-reverse
commitments as they involve
independent establishments
overseas

The distinction between

Equity & non-equity is not
insignificant, it defines an MNE
A firm that has non-equity modes
is usually not regarded an MNE
Classify dimensions Equity mode
Direct Exports
Exports Indirect Exports
Licensing/Franchising
Non-Equity
Contractual Turnkey project
agreement
R&D contracts
Degree of ownership Co-marketing
Minority JVs
Joint Venture 50/50 JVs
Equity Majority JVs
Greenfield Investment
Wholly-owned
subsidiary Mergers and
Acquisitions
High level Wholly-owned subsidiary
Degree of resource Intermediate level Joint Venture
commitment
Low level Licensing/Franchising
Sources: Erramilli, 1991;
Full-control Wholly-owned subsidiary Canabal and White 2008;
Degree of control Anderson and Gatignon, 1986
Shared-control Joint Venture
 OLI Framework
• A strategic decision must be made in
terms of whether to undertake FDI and
become an MNE by selecting equity
modes

An MNE has 3 principal advantages: DOES THE COMPANY HAVE AN…ADVANTAGE?

Ownership (O)
Location (L)
Internalization (I)
OLI advantage by John Dunning, 1979:

An MNE that operates in certain desirable locations

O YES L YES I YES FOREIGN
OWNERSHIP LOCATION INTERNALIZA DIRECT
enjoys a combination of all those 3 advantages TION INVESTMENT

We have already discussed Location - lets focus on the (O) & (I): NO NO NO

Ownership (O): by owning assets is better able to coordinate cross-border activities

PRODUCE AT
REMAIN LICENCE
HOME AND
Internalization (I): The process of replacing a market relationship with a single MNE DOMESTIC
EXPORT
spanning both countries
More on OLI framework:
The removal of the market relationship between an importer and an exporter, which may
suffer from high transaction costs. Using the market, deals have to be negotiated, prices https://www.business-to-you.com/choosing-the-right-entry-mode-strategy/
agreed upon, and deliveries verified, all of which entail significant costs (plus the
possibility of opportunism from both sides) Example
An oil importer may refuse to accept a shipment after its arrival citing unsatisfactory quality, but the real reason
could be the importer’s inability to sell refined oil downstream (people may drive less due to high oil prices).
Therefore the exporter of it is then forced to find a new buyer for a boatload of crude oil on a last-minute “fire
sale” basis. On the other hand, the oil exporter may demand higher-than-agreed-upon prices, citing a variety of
reasons ranging from inflation to natural disasters. The importer thus has to either (1) pay more or (2) refuse to
• Overall the first step in pay and suffer from the huge costs of keeping expensive refinery facilities idle. These transaction costs increase
international market inefficiencies and imperfections. By replacing such a market relationship with a single
entry mode choice is organization spanning both countries (a process called internationalization, basically transforming external
extremely critical markets with in-house links), the MNE thus reduces cross-border transaction costs and increases efficiencies. This
advantage is called internationalization advantage.
 Entry modes

Firms can use 6 different modes to enter

foreign markets:

1) Exporting (Non-equity mode)

2) Turnkey projects (Non-

equity mode)

3) Licensing (Non-equity mode)

4) Franchising (Non-equity
mode)

5) Joint Venture (JV) –

(Equity mode)
i. Greenfield

6) W.O.S. = Wholly Owned

Subsidiary (Equity mode)
i. I
ii. Acquisition
 1. Exporting (Non-equity mode)
Advantages Disadvantages
Direct exports
1. It avoids the costs of establishing 1.
• The most basic entry mode capitalizing on economies of scale manufacturing operations there
• While direct exports may work if the export volume is small, they are not optimal 2. May help firm achieve experience
when the firm has a large number of foreign buyers curve and location economies:
In that case an FDI is more preferable as direct exports may provoke (optimal combination of trade
protectionism, potentially triggering antidumping actions barriers & transportation )
a. By manufacturing the product
Indirect exports (exporting through domestic intermediaries*) in a centralised location and
then exporting it the firm will
• Enjoys scale economies apply economies of scale from 2.
its global sales volume
• Worry free
• Third parties (i.e. trading companies) may not share the same objectives as exporters 3.
4.
*= in certain cases because of information asymmetry on foreign markets, something which they
(intermediaries) take as advantage as they make a living from this.
Exporting from home base maybe more
expensive when lower-cost
manufacturing production can be found
abroad
(It may be preferable to manufacture
where the mix of factor conditions is
most favourable from a value creation
perspective and to export from that
particular place. E.g. U.S. Electronic
firms moved to the Far East)
High transportation costs can make
exporting uneconomical particularly for
bulk products
Tariff barriers can make exporting
uneconomical
The marketing / sales & service activities
in each country are taking place usually
through a local agent
This agent often carry products of
competing firms hence divided loyalties
appear
Experience effects (Learning effects + Economies of scale)
Experience effects
Learning effects
It refers to systematic reduction in production costs that It refers to cost savings
have been observed to occur over the life of a product that comes from learning
by doing
First observed in the airline industry: Labour for example through repetition
achieves the target more efficiently
Each time cumulative output of airframes was doubled The higher the repetition the more significant
are the learning effects. After a while they
unit costs typically declined to 80% of their previous level will disappear but they are quite important at
the start-up period
Production A:
1 aeroplane
+
A: 100%
Economies of scale
e.g. £1,000,000
It refers to the reduction in unit cost achieved
by producing a large volume of a product
Production B:

.
2 aeroplanes

Production Unit Costs

B: 80% of A A
So £1,000,000 X 80% = £800,000
The Experience Curve

Production C:
4 aeroplanes
.
B

C: 80% of B Cumulative Output

So £800,000 X 80% = £640,000
The relationship is for cumulative output
over time and not output in any one period
such as a year
This relationship explains two things:
Learning effects and Economies of scale
Location economies

Countries differ along a range of dimensions: This strategy is being refer as location economies
Economic It is the optical combination of:
Can either raise or lower - trade barriers
Political
- transportation costs
Legal the cost of doing
Cultural business The optimal location can have 2 effects:
• It can lower the costs of value creation and
Due to differences in factor costs certain
help the firm achieve a low-cost position
countries have a comparative advantage in the
production of products &
• It can enable the firm to differentiate its
E.g. Japan: automobiles, consumer electronics
product from the competitors
U.S.: Computer software, Pharmaceuticals,
Biotechnology, Financial services
Switzerland: Precision Instruments, Pharmaceuticals
South Korea: Semiconductors
China: Apparel India: Information technology services

If the best designers Firm should base

That is what
of a product live in design operations
France: in France IBM did with
moving to run
its global
information
If most productive Then technology
labour is in e.g. Mexico
Mexico services in
India
2. Turnkey projects (Non-equity mode)

Advantages Disadvantages
Here the contractor agrees to handle every detail of the project for
a foreign client, including training • Gain know-how knowledge • The firm that enters in a turnkey deal will
have no long-term interest in the foreign
At completion the foreign client is handed the “key”, hence the term • This strategy is very useful when country *
turnkey the host-government regulations
limit the foreign FDI • May create a competitor (e.g. Oil & gas sector
Such exporting of technology can be found in industries such as:
- Western firms passed know-how to local
• Less risky than conventional FDI firms of Saudi Arabia, Kuwait etc)
• Chemicals • Petroleum refining Complex &
expensive • Initial competitive advantage of the firm is
• Pharmaceuticals • Metal refining technologies now passing to competitor
*=Unless if it’s a BOT agreement
Build-Operate-Transfer (BOT) agreement:

• A special kind of turnkey project in which contractors

first build facilities, then operate them for a period of
time (can be many years) and then transfer them back
to clients

• It is an non-equity mode of entry

Research and development (R&D) contracts / Co-marketing (Non-equity modes both)
Research and development (R&D) contracts
• They refer to outsourcing agreements in R&D between firms
Firm A agrees to perform certain R&D work for Firm B. Firms thereby tap
into the best locations for certain innovations at relatively low costs, such
as aerospace research in Russia
However, 3 drawbacks may emerge:
• First, these contracts are difficult to negotiate and enforce (delivery time &
costs, easy to negotiate, but quality is hard to access)
• Second, such contracts may cultivate competitors. A number of Indian IT firms,
nurtured by such work, are now on a global offensive to take on their Western
rivals
• Third, firms that rely on outsiders to perform a lot of R&D may lose some of
their core R&D capabilities in the long run.
Co-marketing
• It refers to efforts among a number of firms to jointly market their products
and services
i.e. Toy makers and movie studios often collaborate in co-marketing
campaigns with fast-food chains such as McDonald’s to package toys
based on movie characters in kids’ meals or…
…Airline alliances such as One World and Star Alliance engage in extensive
co-marketing through code sharing
• The advantage is the ability to reach more customers
• The drawback centers on limited control and coordination
3. Licensing (Non-equity mode)

Advantages
It is an arrangement whereby a licensor grants the rights to intangible
property to another entity (the licensee) for a specified period and in • The firm does not have to bear the development costs
return the licensor receives a royalty fee from the licensee and risks
The licensee puts up most of the capital necessary to
Intangible property: get the overseas operation going
Patents: • Very attractive for firms lacking the capital to develop
operation overseas
• Inventions • Designs
• Also when a firm is unwilling to commit substantial
• Formulas • Copyrights financial resources to an unfamiliar or politically volatile
foreign market
• Processes • Trademarks
• Finally licensing is used when a firm has intangible
property that might have business applications but it
does not want to develop those applications itself
e.g. Fuji Xerox (established 1962)
Coca-Cola’s famous trademark to clothing manufactures
Xerox licenced its xerographic know-how to Fuji Xerox for 10 years
(renegotiated several times since)
Bell Laboratories at AT&T facilities invented transistor but AT&T did not
wanted to produce them and licensed it to Texan Instruments and others
In return Fuji Xerox paid royalty fee 5% of the net sales
Disadvantages
• It does not give the firm tight control over
manufacturing, marketing and strategy that
is required for realizing experience curve and
location economies. Typically it involves each
licensee setting up its own production
operations
• Competing in a global market for a firm
might involve transfer of profits from one
country’s licensee to another country’s
licensee. By it’s nature licensing limit this.
• The risk associated with licensing
technological know-how to foreign
companies (may easily loose control)
• Remedies:
• Cross-licensing agreement which means both
sides reveal know-how
• Fuji-Xerox joint-venture with both sides take
important equity stakes to align the interests
and ensure that the venture is successful
4. Franchising (Non-equity mode)
• Similar to licensing, although franchising tends to involve longer-
term commitments
• Franchising is a specialised form of licensing in which the
franchiser not only sells intangible property (normally a
trademark) to the franchisee but also insists that the franchisee
agree to abide by strict rules as to how it does business
• The franchiser will also assist the franchisee to run the business
on an on-going basis
• Typically the franchiser receives a royalty payment which
amount to some percentage of the franchisee’s revenues
• Primarily:
Licensing: pursued by manufacturing firms
Franchising: is employed by service firms
E.g.
• Control over the menu
• Cooking methods
McDonald’s strict rules as to how franchisees
should operate a restaurant extend to: • Staffing policies
• Design & location
Advantages Disadvantages (continue…)
Similar to those of licensing One way around this is to set up a
subsidiary in each country in which the firm
• The firm is relieved from many costs and risks of opening a expands. The subsidiary might be wholly
foreign market on its own owned by the company or a joint venture
Typically the franchisee will take this costs and risks, but this with a foreign company.
creates a good incentive for him to build a profitable
E.g. McDonald’s establishes a master franchisee in
operation as quickly as possible many countries. It is a joint venture between
McDonald’s and the local firm. As it is partly owned
• A service firm can build a global presence quickly at a relatively McDonalds set up its own managers to help ensure
low cost and risk as McDonald’s did that it is doing a good job of monitoring the
franchises. KFC’s does the same.
Disadvantages McDonald’s also:
• Quality control  Organises the supply chain for its franchisees
The geographical distance can make poor quality
difficult to detect  Provides management training and financial
assistance
e.g. Four Season Hotel in New York and in Hong Kong
• No need to consider coordination of
manufacturing to achieve experience
curve and location economy
5. Joint-Venture (JV)-(Equity mode)
• It entails establishing a firm that is jointly owned by two or more
otherwise independent firms
- It is a popular mode for entering a new market
- It has 3 principal forms: Minority JV (less than 50%
equity), 50/50 JV (equal equity) – most common, and
majority JV (more than 50% equity)
Advantages
• The firm benefits from the local partner knowledge of the host
country’s competitive conditions, culture, language, political
systems and business systems
• When the development of costs / risks of opening in a foreign
market are high sharing is the most sensible approach
• Many countries political considerations make joint ventures the
only feasible entry mode
Disadvantages
• The risk of giving control of its technology to its partner
Option to minimize that: Hold majority of ownership in the
venture. But this is difficult to be accepted from the
partner side
• A joint venture does not give the firm tight control over
subsidiaries
Nor does it give tight control over a foreign subsidiary that
it might need for engaging in coordinated global attacks
against its rivals
• The shared ownership can lead to conflicts for control
something which research shows that it does often arise
which are greater between different nationality firms
6. Wholly-owned subsidiary (W.O.S.)-(Equity mode)

• Here the firms owns 100% of the stock Greenfield – Disadvantages Which is better, Greenfield or Acquisition?

Establishing a wholly owned subsidiary in a foreign market can be
done in 2 ways:
1. Set up a new operation in that country (Greenfield) or
2. It can acquire an established firm in the host nation and use
that firm to promote its products (Acquisition)
Greenfield – Advantages
(i) It gives to an MNE complete equity and management
control, thus eliminating the headaches associated with
JVs
(ii) This undivided control provides better protection of
proprietary technology
(iii) A WOS allows for centrally coordinated global actions
It is preferable when the firm is trying to realize location and
experience curve economies
(i) The most costly method of serving a foreign market. It is
risky as well, not only financially but also politically. Its
conspicuous foreignness may become a target for
nationalistic sentiments
(ii) It adds new capacity to an industry which will make it
(industry) more crowded. i.e. Japanese car plants in US, they
squeezed the market share of the US car manufacturers
(iii) It suffers from a slow entry speed of at least one to several
years
Acquisition – Advantages
Similar to Greenfield, plus 2 extras:
(i) Adding no new capacity
(ii) Faster entry speed
Acquisition – Disadvantages
Similar to Greenfield except of adding new capacity and slow
entry speed. Additionally:
Post-acquisition integration problems – marry divergent
corporate cultures
The choice depends on the situation confronting the
firm
Greenfield:
- It may be better when the firm needs to transfer
organizationally embedded competencies, skills,
routines, and culture
Acquisition:
- It may be better when there are well-established
competitors or global competitors interested in
expanding
- It is less risky than Greenfield
It can fail when:
- There is inadequate pre-acquisition screening
- There is overpayment for the acquisition
- Culture clash: acquiring vs acquired
- Attempts to realize synergies run into roadblocks
and take much longer than forecast
To avoid these problems firms should:
- Carefully screen the firm to be acquired
- Move rapidly to implement an integration plan
 Debates & Extensions

i.e. Pearl River has identified the gap between what its pianos can
(1) Liability versus asset of foreignness (2) Global versus regional geographic diversification actually offer and what price to charge. In order to avoid the
negative country-of-origin effect associated with Chinese products
• The view remains tricky Age of Globalization, however Alan Rugman and what it did was:
• One view argues that being foreign can be an asset colleagues report surprisingly that even among the (i) Develop Economies of Scale to bring down the unit cost of
(competitive advantage) largest Fortune Global 500 MNEs few are truly “global” pianos while maintaining high standard of quality
(ii) Acquire and revive Ritmuller brand (German) to reduce the
Country-of-origin effect – (positive or negative): negative country-of-origin effect
o German cars are viewed of higher quality in the (3) Old-line versus emerging multinationals
US & Japan Emerging MNEs from countries such as China, Russia, SA “Leverage” – refers to the emerging MNEs ability to take
o In China consumers discriminate against made-in- are aware and conform with the OLI framework but advantage of their unique resources and capabilities which are
China goods Although these sport Western mostly on its 2 latter letters (“L”-Location & “I”- typically based on a big understanding of customer needs & wants
brands, they are viewed as inferior to made-in- “Internalize” transactions), not on the first one (“O”-
France handbags and made-in-Switzerland Ownership) as they do not own better proprietary “Learning” – the most unusual, in contrast with the “I-will-tell-
watches technology & management capabilities you-what-to-do” of old-line MNEs, many MNEs from emerging
o American cigarettes: “cool” in Central & Eastern economies openly profess that they go abroad to learn. From
Europe LLL – “Linkage, Leverage, Learning” – a new framework basic English skills to high-level executive skills in transparent
o Anything Korean: “cool” in the Southeast Asia (by John Mathews) governance, market planning and management of diverse culture
o Haagen-Dazs ice cream? Is it “Linkage” – refers to the emerging MNEs ability to workforces.
German/Belgium/Swiss? No it’s American identify & bridge gaps
o Tokyo Disneyland: very popular in Japan for its There is of course overlapping between OLI & LLL, the debate boils
American look but down to whether the differences are fundamental, but given the rapidly
o Paris Disneyland: received negative press in moving progress of these emerging MNEs one thing for certain is that
France because of its American look our learning and debate them will not stop anytime soon
Overtime the country-of-origin effect may shift:
o i.e. in the past it was “British Telecom” and “British Petroleum” now it is simply BT & BP

One lesson that can be draw is that foreignness can be either a liability or an asset and that changes are possible
One solution is to blur the country of origin
i.e. Gucci positions itself as a firm with Italian roots, that has a Dutch address (where it is registered) and sells French fashion
The Savvy Strategist

Foreign market entries are crucial in global strategy, without these steps firms will
remain domestic players

4 implications for action: Overall the lecture sheds light in 4 fundamental questions:
(i) Understand the dynamism underlying in a foreign market (1) Why firms differ in their propensity to internationalize: it boils down to the size of
i.e. 2000’s ABN Amro, HSBC, ING Group, all in the US spend millions to enter
the market through a series of acquisitions. They failed to realize the forthcoming the firm and that of the domestic market
collapse of the industry engulfed in the Great Recession
(2) How firms behave: depends on how considerations for industry competition, firm
(ii) Develop overwhelming resources and capabilities to offset the liability of capabilities and institutional differences influence market entry decisions
foreignness
(i.e. Pearl River, previous slide) (3) What determines the scope of the firm: in this case is the scope of its international
involvement – fundamentally depends on how to acquire and leverage the 3 OLI
(iii) Understand the rules of the game – both formal and informal – governing advantages
competition in foreign markets
Failure on this can be costly. i.e. Dubai Ports World (DP World) & China National
(4) What entry strategies: appropriate entry strategies is important but are only a
Offshore Oil Corporation (CNOOC), both misread the xenophobic US sentiments
against foreign acquisitions which resulted their acquisition attempts to be beginning, it takes a lot more to success overseas
torpedoed politically

(iv) Match efforts in market entry and geographic diversification with strategic goals
if the goal is to deter rivals in their home markets by slashing prices there, then be
prepared to fight a nasty price was and lose money; if the goal is to generate
decent returns then withdrawing from some tough nuts to crack may be
necessary (i.e. Wal-Mart withdrew from Germany)
How Do Core Competencies Influence Entry Model?
 The optimal entry mode depends to some degree on the
nature of a firm’s core competencies
 When competitive advantage is based on technological
know-how:
 Avoid licensing and joint ventures unless the
technological advantage is only temporary, or can be
established as the dominant design
 When competitive advantage is based 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 is significant
How Do Cost Reduction Pressures Influence Entry Model?
 When pressure for cost reductions is high, firms are more
likely to pursue some combination of exporting and wholly
owned subsidiaries
 Allows the firm to achieve location and scale
economies and retain some control over product
manufacturing and distribution
 Firms pursuing global standardization or
transnational strategies prefer wholly owned
subsidiaries
What Are Strategic Alliances?

What Makes Strategic Alliances Successful?

 Strategic alliances refer to cooperative agreements between
potential or actual competitors
The success of an alliance is a function of
 Range from formal joint ventures to short-term
contractual agreements 1. Partner selection  Have contractual
safeguards to guard
 The number of strategic alliances has exploded in  A good partner: against the risk of
recent decades opportunism by a
 Helps the firm achieve its strategic goals partner
and has the capabilities the firm lacks
Why Choose Strategic Alliances? and that it values  Allow for skills and
technology swaps with
 Strategic alliances are attractive because they  Shares the firm’s vision for the purpose equitable gains
 Facilitate entry into a foreign market of the alliance
 Allow firms to share the fixed costs and risks of  Minimize the risk of
developing new products or processes  Will not exploit the alliance for its own opportunism by an
ends alliance partner
 Bring together complementary skills and assets that
neither partner could easily develop on its own 2. Alliance structure 3. The manner in which the
 Help a firm establish technological standards for the alliance is managed
industry that will benefit the firm  The alliance should:
 But, the firm needs to be careful not to give away more  Requires:
than it receives  Make it difficult to transfer technology
not meant to be transferred  Interpersonal
relationships between
managers

 Learning from alliance

partners