Foreign Market Entry Strategies

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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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Modes of entry Modes of entry Modes of entry Modes of entry Modes of entry
Exporting Contractual Agreement Joint Venture Acquisition Greenfield Investment
Risk Low Low Moderate High High
Return Low Low Moderate High High
Control Moderate Low Moderate High High
Integration Negligible Negligible Low Moderate High
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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.