INTERNATIONAL BUSINESS

Firms expanding internationally must decide
 which markets to enter
 when to enter and on what scale
 which entry mode to use
 Exporting
 Licensing or Franchising
 Joint venture
 New wholly owned subsidiary

 The choice of foreign markets will depend on their long run
profit potential.
 Long run economic benefits are functions of factors such as,
 Size of the market
 Present wealth
 Future wealth

Several factors affect the choice of entry mode including,
• Firm size
• Trade barriers
• Country risks
 Political risks
 Economic risks
• Costs

 Favorable markets,
 are politically stable
 have free market systems
 have relatively low inflation rates
 have low private sector debt
 Unfavorable markets,
 are politically unstable
 have mixed or command economies
 have excessive levels of borrowing

1. Entry is early when the firm enters a foreign market before
other foreign firms
2. Entry is late when the firm enters the market after firms have
already established themselves in the market

FIRST MOVER ADVANTAGE
 Preempt rivals and capture demand.
 Build sales volume.
 Move down experience curve before rivals and achieve cost
advantage.
 Create switching costs.
Disadvantages:
 Pioneering costs.
 Changes in government policy.

Large Scale Entry
 Commitment of significant resources.
 Easier to attract customers (will remain in market).
 May cause rivals to rethink market entry.
Small Scale Entry
 Time to learn about the market.
 Limits company exposure.

 Exporting
 Turnkey contracts
 Licensing
 Franchising
 Joint ventures
 Wholly owned subsidiaries

 Firms initially begin global expansion by exporting
 Advantages
-avoids substantial cost of establishing manufacturing plant in host country
-help achieve experience curve and location economies
 Disadvantages
-Exporting may be inappropriate if location economies can be realized by moving
production elsewhere
-High transport costs can make exporting uneconomical
-Threat of tariff barriers by host-country government
-Risk due to delegation of marketing ,sales and services in each country to another
country

 In turnkey projects, the contractor handles every detail of the project for a foreign
client
 On completion, the foreign client is handed a plant that is fully ready for operation
 Advantages
-Know-how required to run and assemble a technologically complex technology is a
valuable asset
-Way of earning economic returns from that asset
-Less risky than conventional FDI

 Disadvantages
-Will have no long-term interest in the foreign country
-The firm may inadvertently create a competitor
-If the technology process is a source of competitive advantage, selling this
technology through a turnkey project is selling competitive advantage to
potential competitors

 A licensing agreement is an agreement whereby a licensor grants the rights to
intangible property to another entity for a specified period and in return the
licensor receives a royalty fee from the licensee
 Intangible properties may be patents, copyrights, formulas, inventions, processes,
designs and trademarks
 Advantages
-The firm does not have to bear the development costs and risk associated with
opening a foreign market
-Attractive for firms lacking the capital to develop overseas operations
-Frequently used when a firm possesses some intangible property but does not
want to develop those applications itself

 Disadvantages
-Does not give the firm a tight control over manufacturing, marketing and strategy
-Competing in a global market may require a firm to coordinate strategic moves
across countries by using profits earned in one country to support competitive
attacks in another
-Risk associated with licensing know-how to foreign companies

Explain franchising, joint venture and wholly
owned subsidiaries with its advantages and
disadvantages.

 Specialized form of licensing in which the franchiser sells
the intangible property to the franchisee and assist the
franchisee to run the business on an on going basis.
 Franchisee pays some percentage of revenue as royalty
payment to the franchiser.
Advantages Disadvantages
Franchisee assumes the cost
and risk
Quality control

 Establishing a firm that is jointly owned by two or more
otherwise independent firms
Advantages Disadvantages
Knowledge of host country
Sharing of cost and risk
Political conditions
Risk of giving control of its technology to the
partner
No tight control over the subsidiaries to realize
the experience curve
Conflicts and battle for control

 A firm acquires 100% of stock of an established firm or
set up a new operation in that country ( green field
venture )
Advantages Disadvantages
Reduce the risk of loosing competence
Tight control over operations
Easy to realise location and experience
curve
Full capital cost and risk

 Technological know-how
 Management know-how (Ex:McDonald’s)

 Greenfield venture:
A market strategy with establishment of a new wholly
owned subsidiary in a foreign country by constructing its facilities
from start.
 Acquisition:
Process of acquiring a company’s stock, equity, interests or
assets.

 Quick to execute
 Build presence in the target foreign market.
Ex: Daimler-Benz to DaimlerChrysler, Spanish
Telecommunication Telefonica (Latin America)
 Deregulations within nations and Liberalization of governing
cross-border FDI
Ex: $60million (Vodafone), $13million (Deutsche Telekom),
$6.4million (TeleglobeCanada)

 Acquisition is less risky than Greenfield ventures with tangible
assets (css, factories…) and intangible assets (brand name,
managers…)
 Often produce disappointing results by the survey conducted
by KPMG, McKenzie

 Hubris hypothesis.
 Cultural difference.
Ex: DaimlerChrysler.
 Inadequate pre acquisition screening.

 Does not pay too much for the acquired unit.
 Does not uncover any nasty surprises after acquisition.
 The organisational culture is not antagonistic to that of the
acquiring enterprise.

 To build an organisational culture from scratch.
 To set its own operating routines.
Ex: Lincoln Electric.
 Very risky.
 Uncertainty associated with revenue.
Ex: McDonald’s
 Limits the market presence globally.

 What is strategic alliance?
 What are the advantage and disadvantages of strategic
alliance?
 What are the factors contributing to the success of an
alliance?

 Strategic alliance refers to cooperative agreements between
potential or actual competitors. In international business it is
strategic alliances between firms from different countries.
 Strategic alliances run from formal joint ventures, in which two
or more firms have equity stakes, to short-term contractual
agreements, In which two companies agree to corporate on a
particular task.

 Strategic alliance may facilitate entry into foreign market.
Example: Warner Bros has entered into a joint venture with
China Media Capital to develop and produce a slate of Chinese-
language films, including global tent poles, for worldwide
distribution.
 It allows firms to share the fixed costs. Example: alliance
between Boeing and Japanese firms.

 An alliance is way to bring together complementary skills and
that neither company could easily develop on its own.
 Example: Biel Crystal Manufactory (HK) Ltd., one of the biggest
suppliers of cover glass to Apple Inc. and Samsung Electronics
Co.
 An alliance that will help the firm establish technological
standards for the industry that will benefit the firm. Example:
Palm computer and Sony.

 Alliances have risk.
 It give competitors a low-cost route to new technology and
markets.
Factors contributing to success of alliance
 Partner selection
 Alliance structure
 Managing the alliance