2. Foreign Market Entry StrategiesForeign Market Entry Strategies
Ruth V. AguileraRuth V. Aguilera
3. World Market
Principal Motives for Int’l ExpansionPrincipal Motives for Int’l Expansion
Locations
Economies
Economies
of Scale
Economies
of Scope
To seek lower
production factor costs
To expand sales and
production volume
To exploit proprietary
assets
5. Host CountryHome Country
Forms of FDI: OwnershipForms of FDI: Ownership
MNE
New Entity
Local Firm
Joint Venture
Full Acquisition
(i.e., 100%)
Green Field
100% Owned
Partial Acquisition
(e.g., 50%)
Ownership = s%
Ownership = (1 - s)%
6. Entry Decision Making Under Uncertainty:Entry Decision Making Under Uncertainty:
Trade-off Between Flexibility and CommitmentTrade-off Between Flexibility and Commitment
Timing: When is aTiming: When is a
good time to enter?good time to enter?
Potential gain fromPotential gain from
waitingwaiting
Cost of delayCost of delay
Scale of entryScale of entry
Small scale: EstablishSmall scale: Establish
a foothold to learna foothold to learn
Large scale: AcquireLarge scale: Acquire
first mover advantagefirst mover advantage
Speed of expansion: HowSpeed of expansion: How
fast to grow?fast to grow?
Value of learningValue of learning
Preemption of competitorsPreemption of competitors
Constraints of internalConstraints of internal
resourcesresources
ModeMode
Some modes have moreSome modes have more
flexibility embeddedflexibility embedded
Some modes reduceSome modes reduce
resource requirementsresource requirements
8. Marketing
and Sales
ProductionR&D
Company Infrastructure
Organization, Coordination & HRM
Value Chain of an MNEValue Chain of an MNE
Innovative
Capabilities
Advanced
Technology
& Know-
How
Industry-
Specific
Marketing
Expertise
What additional resources may the MNE need to
enter a foreign market?
Local expertise: marketing, government relations, etc.
9. Marketing
and Sales
ProductionR&D
Company Infrastructure
Organization, Coordination & HRM
Typical Value Chain of a Local FirmTypical Value Chain of a Local Firm
Imitative
Capabilities
Older
Technology
and Know-
How
Country-
Specific
Marketing
Expertise
What may the MNE desire from a local firm?
Complementary resources
Not necessarily strength in every area
10. Complementarity ofComplementarity of
ResourcesResources
Local Firm’s
Resources
Imitating capabilities
Older technology and
know-how
Country-specific
marketing expertise
Country specific
organization skills
MNE’s Resources
Innovative capabilities
Advanced technology
and know-how
Industry-specific
marketing expertise
Organization structure
and systems
11. Going it Alone: ExportGoing it Alone: Export
HOME COUNTRY HOST COUNTRY
Export of Goods
MNE
Revenues
Customers
12. Going it Alone: ExportGoing it Alone: Export
AdvantagesAdvantages
Low initial investmentLow initial investment
Reach customers quicklyReach customers quickly
Complete control overComplete control over
productionproduction
Benefit of learning forBenefit of learning for
future expansionfuture expansion
DisadvantagesDisadvantages
Potential costs of tradePotential costs of trade
barriersbarriers
Transportation costTransportation cost
Tariffs and quotasTariffs and quotas
Foregoes potentialForegoes potential
location economieslocation economies
Difficult to respond toDifficult to respond to
customer needs wellcustomer needs well
When Is Export Appropriate?When Is Export Appropriate?
Low trade barriersLow trade barriers
Home location has cost advantageHome location has cost advantage
Customization not crucialCustomization not crucial
14. Licensing AgreementLicensing Agreement
AdvantagesAdvantages
Low initial investmentLow initial investment
Avoids trade barriersAvoids trade barriers
Potential for utilizingPotential for utilizing
location economieslocation economies
Access to localAccess to local
knowledgeknowledge
Easier to respond toEasier to respond to
customer needscustomer needs
DisadvantagesDisadvantages
Lack of control overLack of control over
operationsoperations
Difficulty in transferring tacitDifficulty in transferring tacit
knowledgeknowledge
Negotiation of a transfer priceNegotiation of a transfer price
Monitoring transfer outcomeMonitoring transfer outcome
Potential for creating aPotential for creating a
competitorcompetitor
When Is Licensing Appropriate?When Is Licensing Appropriate?
Well codified knowledgeWell codified knowledge
Strong property rights regimeStrong property rights regime
Location advantageLocation advantage
16. Foreign AcquisitionForeign Acquisition
AdvantagesAdvantages
Access to target’s localAccess to target’s local
knowledgeknowledge
Control over foreignControl over foreign
operationsoperations
Control over ownControl over own
technologytechnology
DisadvantagesDisadvantages
Uncertainty about target’sUncertainty about target’s
valuevalue
Difficulty in “absorbing”Difficulty in “absorbing”
acquired assetsacquired assets
Infeasible if local market forInfeasible if local market for
corporate control iscorporate control is
underdevelopedunderdeveloped
When Is Acquisition Appropriate?When Is Acquisition Appropriate?
Developed market for corporate controlDeveloped market for corporate control
Acquirer has high “absorptive” capacityAcquirer has high “absorptive” capacity
High synergyHigh synergy
17. Going it Alone: “Green Field” EntryGoing it Alone: “Green Field” Entry
New Subsidiary
Company
Investment
HOME COUNTRY HOST COUNTRY
MNE
Profit
18. Going it Alone: “Green Field” EntryGoing it Alone: “Green Field” Entry
AdvantagesAdvantages
Normally feasibleNormally feasible
Avoids risk ofAvoids risk of
overpaymentoverpayment
Avoids problem ofAvoids problem of
integrationintegration
Still retains full controlStill retains full control
DisadvantagesDisadvantages
Slower startupSlower startup
Requires knowledge ofRequires knowledge of
foreign managementforeign management
High risk and highHigh risk and high
commitmentcommitment
When Is “Green Field” Entry Appropriate?When Is “Green Field” Entry Appropriate?
Lack of proper acquisition targetLack of proper acquisition target
In-house local expertiseIn-house local expertise
Embedded competitive advantageEmbedded competitive advantage
20. Management ContractManagement Contract
AdvantagesAdvantages
Access to localAccess to local
management skillsmanagement skills
Avoids buying unwantedAvoids buying unwanted
assetsassets
Retains strategic controlRetains strategic control
DisadvantagesDisadvantages
Potential incentivePotential incentive
problemproblem
Potential adversePotential adverse
selection problemselection problem
How do you know theHow do you know the
competencies of thecompetencies of the
manager?manager?
When Is a Management Contract Appropriate?When Is a Management Contract Appropriate?
Manager has a reputation to protectManager has a reputation to protect
HotelsHotels
Consulting companiesConsulting companies
Performance-based contract provides no perversePerformance-based contract provides no perverse
incentivesincentives
21. Joint VentureJoint Venture
Joint Venture
Company
Inputs
MNE Local Firm
HOME COUNTRY HOST COUNTRY
Inputs
Share of Profit
Share of
Profit
22. Joint VentureJoint Venture
AdvantagesAdvantages
Access to partner’s localAccess to partner’s local
knowledgeknowledge
Reduction of concern aboutReduction of concern about
overpaymentoverpayment
Both parties have someBoth parties have some
performance incentivesperformance incentives
Significant control overSignificant control over
operationoperation
DisadvantagesDisadvantages
Potential loss ofPotential loss of
proprietary knowledgeproprietary knowledge
Potential conflicts betweenPotential conflicts between
partnerspartners
Neither partner has fullNeither partner has full
performance incentiveperformance incentive
Neither partner has fullNeither partner has full
controlcontrol
When Is a Joint Venture Appropriate?When Is a Joint Venture Appropriate?
Both partners contribute hard-to-measure inputsBoth partners contribute hard-to-measure inputs
Large expected mutual gains in the long-runLarge expected mutual gains in the long-run
Trade secrets can be walled offTrade secrets can be walled off
23. Common Market Entry ModesCommon Market Entry Modes
Joint Venture
Company
Licensing
Acquisition
Joint Venturing
Local Firm
New Subsidiary
Company
“Green Field” Entry
HOME COUNTRY HOST COUNTRY
Export
MNE
24. Kumar & Subramaniam
(1997)
A Contingency Framework for
the Mode of Entry Decision
RiskRisk
ReturnReturn
ControlControl
25. Modes of entry
Exporting Contractual
Agreeme
nt
Joint
Venture
Acquisition Greenfield
Investm
ent
Risk Low Low Moderate High High
Return Low Low Moderate High High
Control Moderate Low Moderate High High
Integration Negligible Negligible Low Moderate High
28. The Australian ChallengeThe Australian Challenge
What’s FreixenetWhat’s Freixenet corecore competency?competency?
Evaluate Freixenet’s market entry modesEvaluate Freixenet’s market entry modes
Freixenet in AustraliaFreixenet in Australia
What lessons can we draw?What lessons can we draw?
Where next?Where next?
Adds: what is the theme?Adds: what is the theme?
Is it a global theme (standarization/adaptaion?Is it a global theme (standarization/adaptaion?
GloGloccalization (Akio Morita)alization (Akio Morita)
30. Future ReadingFuture Reading
- Anderson, Erin and Hubert Gatignon. 1986. Modes of Foreign Entry:- Anderson, Erin and Hubert Gatignon. 1986. Modes of Foreign Entry:
A Transaction Cost Analysis. Journal of International BusinessA Transaction Cost Analysis. Journal of International Business
Studies, 17: 1-26.Studies, 17: 1-26.
- Kogut, B. and H. Singh. 1988. The effect of national culture on the- Kogut, B. and H. Singh. 1988. The effect of national culture on the
choice of entry mode. Journal of International Business Studies, 19:choice of entry mode. Journal of International Business Studies, 19:
411-432.411-432.
- Hennart, J.-F. and Y.-R. Park. 1993. Greenfield vs. acquisition: The- Hennart, J.-F. and Y.-R. Park. 1993. Greenfield vs. acquisition: The
strategy of Japanese investors in the United States. Managementstrategy of Japanese investors in the United States. Management
Science, 39(9): 1054-1070.Science, 39(9): 1054-1070.
- Hennart, J. F., and Reddy, S. 1997. The Choice Between- Hennart, J. F., and Reddy, S. 1997. The Choice Between
Mergers/Acquisitions and Joint Ventures: The Case of JapaneseMergers/Acquisitions and Joint Ventures: The Case of Japanese
Investors in the United States. Strategic Management Journal 18: 1-12.Investors in the United States. Strategic Management Journal 18: 1-12.
- Barkema, H. G. and Vermeulen, F. 1998. International Expansion- Barkema, H. G. and Vermeulen, F. 1998. International Expansion
Through Start-up or Acquisition: A Learning Perspective. Academy ofThrough Start-up or Acquisition: A Learning Perspective. Academy of
Management Journal 41: 7-26.Management Journal 41: 7-26.
- Brouthers, K. D. and Brouthers, L. E. 2000. Acquisition or Greenfield- Brouthers, K. D. and Brouthers, L. E. 2000. Acquisition or Greenfield
Start-up? Institutional, Cultural and Transaction Cost Influences.Start-up? Institutional, Cultural and Transaction Cost Influences.
Strategic Management Journal 21: 89-97.Strategic Management Journal 21: 89-97.