Ruth V. Aguilera Forms of FDI Ownership Wholly owned

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Foreign Market Entry Strategies

• Ruth V. Aguilera

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Principal Motives for Intl Expansion
To seek lower production factor costs
To expand sales and production volume
To exploit proprietary assets
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Forms of FDI

• Ownership
• Wholly owned operations
• Green-field investment
• Full acquisition
• Partially owned operations
• Partial acquisition
• Joint venture

• Relatedness
• Horizontal FDI
• Vertical FDI
• Unrelated diversification

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Forms of FDI Ownership
Green Field100 Owned
New Entity
Full Acquisition (i.e., 100)
MNE
Local Firm
Partial Acquisition (e.g., 50)
Ownership (1 - s)
Ownership s
Joint Venture
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The Form of FDI Acquisitions versus Green-Fields

• The majority of investments is in the form of
  mergers and acquisitions
• Represents about 77 of all flows in developed
  countries.
• Represent about 33 of all flows in developing
  countries.
• Fewer target firms.

• Why the preference for mergers and acquisitions?
• Quicker to execute.
• Foreign firms have valuable strategic assets.
• Believe they can increase the efficiency of the
  acquired firm.

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Entry Decision Making Under Uncertainty
Trade-off Between Flexibility and Commitment

• Timing When is a good time to enter?
• Potential gain from waiting
• Cost of delay
• Scale of entry
• Small scale Establish a foothold to learn
• Large scale Acquire first mover advantage

• Speed of expansion How fast to grow?
• Value of learning
• Preemption of competitors
• Constraints of internal resources
• Mode
• Some modes have more flexibility embedded
• Some modes reduce resource requirements

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Choice of Market Entry Mode
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Value Chain of an MNE

• What additional resources may the MNE need to
  enter a foreign market?
• Local expertise marketing, government relations,
  etc.

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Typical Value Chain of a Local Firm

• What may the MNE desire from a local firm?
• Complementary resources
• Not necessarily strength in every area

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Complementarity of Resources

• Local Firms Resources
• Imitating capabilities
• Older technology and know-how
• Country-specific marketing expertise
• Country specific organization skills

• MNEs Resources
• Innovative capabilities
• Advanced technology and know-how
• Industry-specific marketing expertise
• Organization structure and systems

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Going it Alone Export
Revenues
MNE
Customers
Export of Goods
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Going it Alone Export

• Advantages
• Low initial investment
• Reach customers quickly
• Complete control over production
• Benefit of learning for future expansion

• Disadvantages
• Potential costs of trade barriers
• Transportation cost
• Tariffs and quotas
• Foregoes potential location economies
• Difficult to respond to customer needs well

• When Is Export Appropriate?
• Low trade barriers
• Home location has cost advantage
• Customization not crucial

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Licensing Agreement
HOME COUNTRY
HOST COUNTRY
Local Firm
MNE
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Licensing Agreement

• Advantages
• Low initial investment
• Avoids trade barriers
• Potential for utilizing location economies
• Access to local knowledge
• Easier to respond to customer needs

• Disadvantages
• Lack of control over operations
• Difficulty in transferring tacit knowledge
• Negotiation of a transfer price
• Monitoring transfer outcome
• Potential for creating a competitor

• When Is Licensing Appropriate?
• Well codified knowledge
• Strong property rights regime
• Location advantage

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Foreign Acquisition
HOME COUNTRY
HOST COUNTRY
Local Firm
MNE
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Foreign Acquisition

• Advantages
• Access to targets local knowledge
• Control over foreign operations
• Control over own technology

• Disadvantages
• Uncertainty about targets value
• Difficulty in absorbing acquired assets
• Infeasible if local market for corporate control
  is underdeveloped

• When Is Acquisition Appropriate?
• Developed market for corporate control
• Acquirer has high absorptive capacity
• High synergy

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Going it Alone Green Field Entry
HOME COUNTRY
HOST COUNTRY
MNE
New Subsidiary Company
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Going it Alone Green Field Entry

• Advantages
• Normally feasible
• Avoids risk of overpayment
• Avoids problem of integration
• Still retains full control

• Disadvantages
• Slower startup
• Requires knowledge of foreign management
• High risk and high commitment

• When Is Green Field Entry Appropriate?
• Lack of proper acquisition target
• In-house local expertise
• Embedded competitive advantage

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Management Contract
HOME COUNTRY
HOST COUNTRY
Local Firm
MNE
Managerial Service
Wholly-Owned Subsidiary
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Management Contract

• Advantages
• Access to local management skills
• Avoids buying unwanted assets
• Retains strategic control

• Disadvantages
• Potential incentive problem
• Potential adverse selection problem
• How do you know the competencies of the manager?

• When Is a Management Contract Appropriate?
• Manager has a reputation to protect
• Hotels
• Consulting companies
• Performance-based contract provides no perverse
  incentives

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Joint Venture
HOME COUNTRY
HOST COUNTRY
MNE
Local Firm
Share of Profit
Inputs
Joint Venture Company
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Joint Venture

• Advantages
• Access to partners local knowledge
• Reduction of concern about overpayment
• Both parties have some performance incentives
• Significant control over operation

• Disadvantages
• Potential loss of proprietary knowledge
• Potential conflicts between partners
• Neither partner has full performance incentive
• Neither partner has full control

• When Is a Joint Venture Appropriate?
• Both partners contribute hard-to-measure inputs
• Large expected mutual gains in the long-run
• Trade secrets can be walled off

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Common Market Entry Modes
HOME COUNTRY
HOST COUNTRY
Licensing
Acquisition
Local Firm
MNE
Export
Joint Venturing
Joint Venture Company
Green Field Entry
New Subsidiary Company
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Intl Sourcing
HOME COUNTRY
HOST COUNTRY
MNE
Local Firm

• Applicable to manufacturing of mature products
  (e.g., shoes)
• Access to location economies
• Competition among OEM producers lowers costs.

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Compensation Trade
HOME COUNTRY
HOST COUNTRY
MNE
Local Firm

• Common reason Local firms lack money to buy
  equipment
• Economic benefits
• Enhanced incentives for MNE to make sure that
  equipment works
• MNEs skills in marketing the products in its
  home country

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Kumar Subramaniam (1997)A Contingency
Framework for the Mode of Entry Decision

• Risk
• Return
• Control

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(No Transcript)
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Decision Strategies

• Rational Analytic Strategy
• Cybernetic Strategy
• Serendipity

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Discovers
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The Australian Challenge

• Whats Freixenet core competency?
• Evaluate Freixenets market entry modes
• Freixenet in Australia
• What lessons can we draw?
• Where next?
• Adds what is the theme?
• Is it a global theme (standarization/adaptaion?
• Glocalization (Akio Morita)

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Good luck!
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Future Reading

• - Anderson, Erin and Hubert Gatignon. 1986. Modes
  of Foreign Entry A Transaction Cost Analysis.
   Journal of International Business Studies, 17
  1-26.- Kogut, B. and H. Singh. 1988. The effect
  of national culture on the choice of entry mode.
  Journal of International Business Studies, 19
  411-432.- Hennart, J.-F. and Y.-R. Park. 1993.
  Greenfield vs. acquisition The strategy of
  Japanese investors in the United States.
  Management Science, 39(9) 1054-1070.- Hennart,
  J. F., and Reddy, S. 1997. The Choice Between
  Mergers/Acquisitions and Joint Ventures The Case
  of Japanese Investors in the United States.
  Strategic Management Journal 18 1-12.- Barkema,
  H. G. and Vermeulen, F. 1998. International
  Expansion Through Start-up or Acquisition A
  Learning Perspective. Academy of Management
  Journal 41 7-26.- Brouthers, K. D. and
  Brouthers, L. E. 2000. Acquisition or Greenfield
  Start-up? Institutional, Cultural and Transaction
  Cost Influences. Strategic Management Journal 21
  89-97.