Class rules

Three basics Three ethics

Phone in the bag Be respectful!

Notebook on the table Use the back door during the class
Nametag hanging on the edge Late comers: 15 minutes
“Two students out” rule
Know the timing!
 Chapter 1: Introduction and Globalization

Chapter 2: National Differences in Political, Economic, and Legal Systems

Chapter 3: National Differences in Economic Development

Chapter 4: Differences in Culture

Chapter 5: Ethics, Corporate Social Responsibility, and Sustainability

Chapter 6: International Trade Theory

Chapter 7: Government Policy and International Trade

Chapter 8: Foreign Direct Investment

Today… Mid-term

Chapter 9: Regional Economic Integration

Chapter 10: The Foreign Exchange Market

Chapter 13: The Strategy of International Business

Chapter 14: The Organization of International Business

Chapter 15: Entering Developed and Emerging Markets

Reading Week & Exam Review

Final exams (comprehensive)

Entering
Develope
d and
Emerging
Markets
2.0

Valijon Turakulov, PhD

  15-1 Explain the three basic decisions
firms must make when they decide on
foreign expansion: which markets to
enter, when to enter those markets,
and on what scale.
 15-2 Compare the different modes
firms use to enter foreign markets.
Learning  15-3 Identify the factors that
influence a firm’s choice of entry
Objectives 
mode.
15-4 Recognize the pros and cons of
acquisitions versus greenfield
ventures as an international market
entry strategy.
 15-5 Evaluate the pros and cons of
entering into strategic alliances
when going international.
ATTENDANC
E
Review
Basic Entry Decisions

Choice based on
Which Foreign assessment of a
Markets? nation’s long-run
profit potential.

Present and
Size of the likely future
Costs and risks.
market. wealth of
consumers.
First-mover advantages First-mover disadvantages

• Preempt rivals and capture demand by • The enterprise has to devote considerable
establishing a strong brand name and effort, time, and expense to learning the
customer satisfaction. rules of the game.

• Build sales volume in that country and • Costs of business failure.

ride down the experience curve ahead
of rivals.
• Create switching costs that tie • Costs of promoting and establishing a
customers into their products or services. product offering, including the costs of
educating customers.
• Regulations that change in a way that
diminishes the value of an early entrant’s
investments.

Basic Entry Decisions

Timing of Entry
Basic Entry Decisions

 Rapid large-scale market

entry
 Small-scale market entry
 Exporting.

Entry Turnkey projects.

Modes: Six Licensing.

Different
Modes Franchising.

Joint ventures.
Entry Modes

 Exporting
 Sale of products
produced in one country
to residents of another
country.
Advantages of Exporting Disadvantages of Exporting
• Avoids the often-substantial costs of
establishing manufacturing operations in host
country.

• May help firm achieve experience curve and

location economies.

Entry Modes
Exporting continued
Advantages of Exporting Disadvantages of Exporting
• Avoids the often-substantial costs of • May not be appropriate if lower-cost locations
establishing manufacturing operations in host for manufacturing the product can be found
country. abroad.

• May help firm achieve experience curve and • High transport costs can make exporting
location economies. uneconomical, particularly for bulk products.

• Tariff barriers can make exporting

uneconomical.

• Local agents for marketing, sales and service may

have divided loyalties.

Entry Modes
Exporting continued
Entry Modes

 Turnkey Projects
 Contractor agrees to
handle every detail of
the project for a foreign
client, including the
training of operating
personnel.
 Means of exporting
technology to other
countries.
Advantages of Turnkey Projects Disadvantages of Turnkey Projects

• Can earn great economic returns.

• Can be less risky than conventional F D

I.

Entry Modes
Turnkey Projects continued
Advantages of Turnkey Projects Disadvantages of Turnkey Projects

• Can earn great economic returns. • Firm will have no long-term interest in the
foreign country.

• Can be less risky than conventional F D • Selling a technology through a turnkey

I. project is also selling competitive advantage
to potential and/or actual competitors.

Entry Modes
Turnkey Projects continued
Entry Modes 6

 Licensing
 Licensor grants rights to intangible
property to another entity: patents,
inventions, formulas, processes,
designs, copyrights, and trademarks.
(Nike, Disney)
Advantages of Licensing Disadvantages of Licensing

• No development costs and risks associated • Does not give a firm the tight control over
with entering a foreign market. manufacturing, marketing, and strategy required for
realizing experience curve and location economies.

• Used when a firm wishes to participate in a • Limits a firm’s ability to coordinate strategic
foreign market but is prohibited from doing so moves across countries by using profits earned in one
by barriers to investment. country to support competitive attacks in another.

• Used when a firm possesses some • Risk associated with licensing technological
intangible property that might have know-how to foreign companies.
business applications but does not want to
develop those applications itself.

Entry Modes
Licensing continued
Advantages of Licensing Disadvantages of Licensing

• No development costs and risks associated

with entering a foreign market.

• Used when a firm wishes to participate in a

foreign market but is prohibited from doing so
by barriers to investment.

• Used when a firm possesses some

intangible property that might have
business applications but does not want to
develop those applications itself.

Entry Modes
Licensing continued
Entry Modes
8

 Franchising
 Franchiser sells
intangible property
(normally a trademark)
to the franchisee and
insists that the
franchisee agree to
abide by strict rules
as to how it does
business. (McDonalds’,
Subway)
Advantages of Disadvantages of
Franchising Franchising
• Firm experiences lower • May inhibit firm’s ability to
costs and risks than take profits out of one country
opening a foreign market
on its own.
• Helps build a global • Quality control.
presence quickly.

Entry Modes 9
Franchising continued
Advantages of Disadvantages of
Franchising Franchising
• Firm experiences lower
costs and risks than
opening a foreign market
on its own.
• Helps build a global
presence quickly.

Entry Modes 9
Franchising continued
Entry Modes
10

 Joint Ventures
 Cooperative
undertaking between
two or more firms.
 50-50 ventures are
most common.
 Sony Ericsson (Sony's
expertise in consumer
electronics with
Ericsson's knowledge
in
telecommunications)
Advantages of Joint Ventures Disadvantages of Joint Ventures
• Local partner’s knowledge of the host • Loss of technology control.
country’s competitive conditions, culture,
language, political systems, and business.

• Shared costs and risks. • Lack of control over subsidiaries that it might need
to realize experience curve or location economies.

• Political considerations (government • Can lead to conflicts and battles for control between
interference, nationalism, etc.). the investing firms if their goals and objectives change
or if they take different views as to what the strategy
should be.

Entry Modes 11
Joint Ventures continued
Advantages of Joint Ventures Disadvantages of Joint Ventures
• Local partner’s knowledge of the host
country’s competitive conditions, culture,
language, political systems, and business.

• Shared costs and risks.

• Political considerations (government

interference, nationalism, etc.).

Entry Modes 11
Joint Ventures continued
Entry Modes
12

 Wholly Owned
Subsidiaries
 Firm owns 100 percent of
the subsidiary.
 Greenfield venture –
set up a new operation
in host country.
 Acquisition – acquire
an established firm in a
host nation.
Wholly Owned Subsidiaries Wholly Owned Subsidiaries
Advantages Disadvantages

• Reduces the risk of losing control

over technology.

• Can tightly control operations in

different countries.

• Location and experience curve

economies.

• 100 percent share of profits.

Entry Modes 13
Wholly Owned Subsidiaries continued
Wholly Owned Subsidiaries Wholly Owned Subsidiaries
Advantages Disadvantages

• Reduces the risk of losing control • Bear full cost and risk of establishing new
over technology. market.

• Can tightly control operations in • Risks with conducting business in a new

different countries. culture.

• Location and experience curve • Can be other problems associated with

economies. acquisitions that outweigh the benefits.

• 100 percent share of profits.

Entry Modes 13
Wholly Owned Subsidiaries continued
Selecting an Entry Mode
(Role playing)
 ANY
QUESTION
S?

International Business | Valijon Turakulov, PhD

 THANK
S

International Business | Valijon Turakulov, PhD

Selecting an Entry Mode
(Optional)
Selecting an Entry Mode 1

Core Competencies and Entry Mode

Technological Know-How.
Often shared through a wholly owned subsidiary.
Licensing and joint-venture arrangements should be avoided unless
the technological advantage is transitory.

Management Know-How.
Less risk for franchises or joint ventures.
Selecting an Entry Mode 2

 Pressures for Cost Reductions and Entry Mode

 The greater the pressures for cost reductions, the more likely a firm will
want to pursue some combination of exporting and wholly owned
subsidiaries.
 Wholly owned marketing subsidiaries give firm tight control that might be
required for coordinating a globally dispersed value chain.
 Also gives firm ability to use profits generated in one market to improve
its competitive position in another market.
Table 15.1 Advantages and Disadvantages of Entry Modes 1

Entry Mode Advantages Disadvantages

Exporting • Ability to realize • High transport
location and costs.
experience curve • Trade barriers.
economies. • Problems with
• Increased speed and local marketing
flexibility of engaging agents.
target markets.
Turnkey • Ability to earn returns • Creation of
contracts from process efficient
technology skills in competitors.
countries where FDI • Lack of long-term
is restricted. market presence.
Table 15.1 Advantages and Disadvantages of Entry Modes 2

Entry Mode Advantages Disadvantages

Licensing • Low development • Lack of control
costs and risks. over technology.
• Moderate • Inability to realize
involvement and location and
commitment. experience curve
economies.
• Inability to
engage in global
strategic
coordination.
Franchising • Low development • Lack of control
costs and risks. over quality.
• Possible • Inability to
circumvention of engage in global
import barrier. strategic
• Strong sales coordination.
Table 15.1 Advantages and Disadvantages of Entry Modes 3

Entry Mode Advantages Disadvantages

Joint ventures • Access to local partner’s • Lack of control over
knowledge. technology.
• Shared development • Inability to engage
costs and risks. in global strategic
• Politically acceptable. coordination.
• Typically no ownership • Inability to realize
restrictions. location and
experience
economies.
Wholly owned • Protection of • High costs and
subsidiaries technology. risks.
• Ability to engage in • Need for more
global strategic human and
coordination. nonhuman
• Ability to realize resources;
location and experience interaction and
economies. integration with
local employees.
Introduction

 Strategic alliances include:

 Cross-shareholding deals.
 Licensing arrangements.
 Formal joint ventures.
 Informal cooperative
arrangements.
Greenfield Venture or Acquisition? 1

 Pros and Cons of Acquisitions

 Quick to execute.
 May help preempt competitors.
 May be less risky than greenfield ventures.
 Acquisitions often produce disappointing results.
Greenfield Venture or Acquisition? 2

 Pros and Cons of Acquisitions continued

 Why Do Acquisitions Fail?
 Overpaying.
 Hubris hypothesis of why acquisitions fail.

 Culture clash.
 Integrating the operations of the acquired and acquiring entities often run
into roadblocks and take much longer than forecast.
 Inadequate pre-acquisition screening.
Greenfield Venture or Acquisition? 3

 Pros and Cons of Acquisitions continued

 Reducing the Risks of Failure.
 Detailed audit of operations, financial position, and management culture.
 Reduce unwanted management attrition.
 Put integration plan quickly in place.
Greenfield Venture or Acquisition? 4

 Pros and Cons of Greenfield Ventures

 Gives firm a much greater ability to build the kind of subsidiary company
it wants.
 Slower to establish.
 Risky, but less risky than acquisitions.
 Preemption possible by more aggressive global competitors.
Greenfield Venture or Acquisition? 5

 Which Choice?
 Acquisition when:
 The firm is seeking to enter a market where there are already well-
established incumbent enterprises.
 Global competitors are also interested in establishing a presence.

 Greenfield when:
 There are no incumbent competitors to be acquired.
 The competitive advantage of the firm is based on the transfer of
organizationally embedded competencies, skills, routines, and culture.
Strategic Alliances 1

Advantages of Strategic Disadvantages of Strategic

Alliances Alliances
• May facilitate entry into a • May give competitors a low-
foreign market. cost route to new technology
and markets.
• Allow firms to share the fixed • May generate short-term
costs (and associated risks) of profits, but the result is to
developing new products or “hollow out” U.S. firms,
processes. leaving them with no
competitive advantage in the
global marketplace
• Brings together complementary
skills and assets that neither
company could easily develop
on its own.
• May help the firm establish
technological standards for the
industry that will benefit the
firm.
Strategic Alliances 2

 Making Alliances Work

 Partner Selection.
 A good partner:
 Helps the firm achieve its strategic goals.
 Has capabilities the firm lacks.
 Is unlikely to try to opportunistically exploit its partner.
 Choosing a partner:
 Collect as much pertinent, publicly available
information on potential allies as possible.
 Gather data from informed third parties.
 Get to know potential partner as well as possible
before committing to an alliance.
Strategic Alliances 3

 Making Alliances Work continued

 Alliance Structure.
 Reduce the risk of giving away too much to the partner.
 Contractual safeguards guard against risk of opportunism by a partner.
 Agree in advance to swap skills and technologies that the other covets,
thereby ensuring a chance for equitable gain.
 Cross-licensing agreements.

 Extract a significant credible commitment from the partner in advance.

Strategic Alliances 4

 Making Alliances Work continued

 Managing the Alliance.
 Be sensitive to cultural differences.
 Build trust.
 Build relational capital.
 Learn from the alliance partner and apply the knowledge within one’s
own organization.
360° View: Impact of the Macro
Environment 1

 Political Economy and Entry Choices

 Long-run economic benefits of market entry depend upon factors
such as market size, purchasing power of consumers in that market,
and likely future wealth of consumers.
 May change due to changes in political, economic and legal
systems.
 Example: Venezuela.

 Changes in the macro environment, such as the legal rules

governing foreign investments, can have a profound impact upon
the favored entry mode.
 Example: India.
360° View: Impact of the Macro
Environment 2

 Political Economy and Entry Choices continued

 Two recent trends:
 Declining trade barriers have made exporting more attractive as entry
mode.
 Countries have mostly become more welcoming to foreign investment
and more willing to allow foreign enterprises to establish wholly owned
entities in their nations.