International Business: Entry Modes (I) Business College School of Management

Key Learning Objective This session will help you to understand the concepts of: 1) Internationalisation of business organisations 2) Key international business theories 3) Complexities of choices and approaches in internationalisation

Aims of the Session: To understand different forms of internationalisation and market entry. To consider the benefits and problems of firm internationalisation from different perspectives. 3

Key Questions How do organisations internationalise? How does international business manage its internal and external operations when it comes to entry modes for foreign market?

Recap We looked at the concept of ‘internationalisation’ of firms and rationale behind their decision-making process. Advantages and Risks of internationalisation

Modes of Entry Organisations contemplating foreign expansion must consider the following: Which foreign market(s) to enter Timing of entry What form of entry to use What scale of entry to establish Which mode of entry to adopt

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

Which Foreign Markets The choice must be based on an assessment of a country’s degree of alignment with firm strategy and likely contribution to revenue and profit The attractiveness of a country depends upon balancing the various associated benefits, costs, and risks These relate to: customer identification, production capabilities, or financial opportunities Benefits may relate to: market expansion, production flexibility, investment opportunity, etc. Risks may be competitive, political, financial, etc.

RMIT University School of Management

Timing the Entry ‘First-mover advantages’ that may be derived from entering a market early: Preempting rivals and capturing demand Establishing a strong brand name Building sales volume Creating ‘switching costs’ for customers and clients ‘First-mover disadvantages’ may derive from: Pioneering costs that early entrant incurs Unanticipated political, legal, regulatory etc. risks Additional costs of entry that may not be recouped before competition increases and profit margins decline

Scale of Entry Large scale entry: Involves ‘strategic commitment’ - a decision with long-term impact that is difficult to reverse May lead rivals to rethink market entry May prompt competitive response from existing players Small scale entry: Requires limited financial and other resource commitment Provides time to learn about market Reduces exposure to risk

Activity 1: International Market Choice Considering concept of Timing/Scale/Speed, please return to the case of e-retail market in China and discuss potential success or failure of Walmart e-retail in China. Why China? What else that Walmart should consider in this situation? http://www.youtube.com/watch?v=VThkcxEqa7I

Choice of Market Entry Mode Modes? Markets? Art? Science?

Overseas assembly/mixing/ Entry Strategies Manufacturing at Home Exporting Direct or Indirect Manufacturing Abroad Contractual Licensing/Franchising/ Turnkey/MGT Contract Investment Entry Overseas assembly/mixing/ Investment Greenfield/Joint Venture Merger/Acquisition RMIT University School of Management

Complementarity of Resources (Source: Peng, 2011) MNC’s Resources Innovative capabilities Advanced technology and know-how Industry-specific marketing expertise Organisation structure and systems Local Firm’s Resources Imitating capabilities Older technology and know-how Country-specific marketing expertise Country specific organization skills

MNC Customers Going it Alone: Export HOME COUNTRY HOST COUNTRY Revenues MNC Customers Export of Goods

- Coordination between modes and shippers Key Export Tasks Transportation - Negotiation - Coordination between modes and shippers Export licenses and permissions Customs clearing Warehousing Financing -Quotes - Point of transfer (FOB) - Credit: Risk assessment/letters of credit - Exchange rate risk Repatriation/ counter-trade RMIT University School of Management

Potential Problems for Export Price escalation Dumping regulations Finding local distribution - Screening - Negotiation After sales support Imitation by importer/failure to learn local market RMIT University School of Management

When Is Export Appropriate? Going it Alone: Export…producing product and shipping them to the receiving countries. Disadvantages Potential costs of trade barriers Transportation cost Tariffs and quotas Foregoes potential location economies Difficult to respond to customer needs well Advantages Low initial investment Reach customers quickly Complete control over production Benefit of learning for future expansion When Is Export Appropriate? Low trade barriers Home location has cost advantage Customization not crucial

Import-Export can be influenced by Political Economy Factors? Look at this story “Iran’s Hospitals Feel Pain of Sanctions” (http://www.youtube.com/watch?v=t5s4HI_oggw) RMIT University School of Management

Licensing of Technology Licensing Agreement HOME COUNTRY HOST COUNTRY Licensing of Technology MNC Local Firm Fees and Royalties

When Is Licensing Appropriate? Licensing Agreement: granting a foreign entity the right to produce and sell the firm’s product in return for a royalty fee on every unit sold. 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

Franchising: Similar but different from licensing Minimum expenses on overseas operations International Market Knowledge Control & Quality Potential relationship management Brand Management Advantages Selection of partners Trust (or mistrust) Cultural problems in management and communication Creativity Misunderstanding in legal and socio-economic issues in the host countries. Disadvantages RMIT University School of Management

Licensing: Lesson Learnt for International Management Thailand’s Local Cola Rivals Giant Brand: What do you learn from this story? (http://www.youtube.com/watch?v=rCVcogwHK8M) RMIT University School of Management

Activity 2: Licensing Case Discussion You and your team are the assistant to the CEO of a small textile firm that manufactures quality, premium-priced, stylish clothing (Italian Brand). The Italian CEO has decided to see what the opportunities are for exporting, franschising, or licensing and has asked you and your team for advice as to the steps the company should take. What advice would you give the CEO?

Merger and Acquisition HOME COUNTRY HOST COUNTRY Investment MNE Local Firm Profit

Mergers & Acquisitions Defined • one firm buys another firm • two firms are combined on a relatively co-equal basis • the words are often used interchangeably even though they mean something very different • merger sounds more amicable, less threatening 27

Do Mergers and Acquisitions Create Value? The Logic Related M&A Activity • value creation would be expected due to synergies between divisions • economies of scale • economies of scope • transferring competencies • sharing infrastructure, etc. 28

When Is Acquisition Appropriate? Acquisition: The purchase of one business or company by another company or other business entity. Advantages Access to target’s local knowledge Control over foreign operations Control over own technology Disadvantages Uncertainty about target’s 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

Activity 3: Merger and Acquisition Please watch this clip on international merger and acquisition http://www.youtube.com/watch?v=EKArEQ_8xFM Then, list factors affecting the success of international merger and acquisitions.

Potential Issues: Management of Entry Modes Culture A Culture B Planning Retain business flexibility Maintain congruency between the venture and the state plan Contracts Detailed, enforceable Brief and adaptable Negotiations Sequential, issue by issue Holistic Staffing Maximize productivity; fewest people per given output Maximum number of ‘the community’ Technology Match organisation with technical sophistication Always look for the most advanced technology Profits Long-term Short-term but frequently Process High Quality High quantity Control Reduce political/economic controls on decision making Accept technology and capital but preclude foreign authority infringement on sovereignty and ideology RMIT University School of Management