Modes of Entry
Chapter 9, pages 260-268
Modes of Entering a Country
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Wholly owned subsidiary. Sometimes created by an
acquisition.
Joint venture. Sometimes created by a merger.
Licensing
Franchising
Exporting and importing
Strategic alliances.
See also: Table 9-1, page 267.
Modes of Entry
Wholly Owned Subsidiary
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A wholly owned subsidiary is an overseas operation that
is totally owned and controlled by one MNC. Used when
 The MNC wants total control
 The MNC believes that the firm will be more efficient
without outside partners.
Some countries prohibit wholly owned subsidiaries
Some host countries are concerned that local firms will
not be able to compete with the MNC.
Modes of Entry
Wholly Owned Subsidiary (2)
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Home-country unions often view foreign subsidiaries
as an attempt to “export jobs”
Today many multinationals opt for a merger, alliance,
or joint venture rather than a wholly owned
subsidiary
Modes of Entry
Joint Ventures
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An international joint venture (IJV) is An agreement
under which two or more companies from different
countries own or control a business
 In a non-equity joint venture, one firm provides
services to another
 In an equity joint venture, each firm invests in the
business. The firms share the risks and the profits.
Modes of Entry
Advantages of Joint Ventures
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Can create economies of scale or scope that improve
efficiency
Access to knowledge: Usually, each partner contributes
knowledge or skills
Political factors: The host-country partner can deal with
political problems, such as a hostile government or
restrictive laws
Avoiding collusion among host-country competitors or
restrictions on foreign-owned firms
Example: U.S. firms often enter the Japanese market
with a Japanese partner, who handles marketing
Modes of Entry
Mergers and Acquisitions
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This involves a cross-border purchase or exchange of
equity (stock) involving two or more companies
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If one company buys another, the buying company makes an
acquisition. This may create a wholly owned subsidiary, or the
acquired company may be absorbed into the buying company.
If each company contributes financially to the new company,
the transaction is a merger. Creates a joint venture
The strategic plan of merged companies often calls for
each to contribute a series of strengths toward making
the firm a highly competitive operation
Acquisition Example
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Bowater was a U. S. paper manufacturer.
Abitibi is a Canadian paper manufacturer.
The paper industry has more capacity than is
needed.
In 2007, Abitibi bought Bowater. The new
company is called Abitibibowater.
Abitibi is now managing Bowater’s assets and
employees.
Modes of Entry
Merger Example – Springs Global
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In 2005, Springs Industries merged with Coteminas, a Brazilian
textile firm that had previously done contract manufacturing for
Springs
Both companies had been privately owned.
The new company was called Springs Global
Former Springs employees handled marketing and sales in the
United States.
Some manufacturing remained in the United States.
Manufacturing headquarters and most manufacturing were in
Brazil
Joint supply chain management department
Co-CEO's until 2007
Springs Global
From Private to Public Ownership
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In an effort to keep some manufacturing in the U. S.,
Springs made incremental efficiency improvements in
technology.
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Springs’ U. S. manufacturing was still not cost-competitive.
The last U. S. plants were shut down in 2007.
In 2007, Springs Global made an initial public offering in
the Brazilian stock market.
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The 2 families that owned Springs Global (U.S. and Brazilian)
sold a substantial portion of their stock.
The founder of Coteminas is now the sole CEO of Springs
Global.
Modes of Entry
Licensing
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A licensor owns an intangible property, such as a
patent, copyright, trademark, formula, process, or
design
The licensor grants another firm, a licensee the
exclusive right to make or sell the good in a particular
geographic area for a specified period of time.
The licensee pays a fee (usually a percentage of
sales) to the licensor
Often used to market mature products, when
competition is strong, and profit margins are low.
Modes of Entry
Franchising
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A franchisor owns a trademark, logo, product
line, and management methods.
The franchisor allows a franchisee to use these
assets to run a business in a particular location or
geographic area, in return for a an initial fee, plus
a percentage of sales.
The franchise may be granted for a certain period
of time.
Common in hotel, restaurant, and fast food
industries
Modes of Entry
Exporting and Importing
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Often the only available choices for small and new
firms wanting to go international
Provide an avenue for larger firms that want to begin
their international expansion with a minimum of
investment
Exporting and importing can provide easy access to
overseas markets
For exporting, the choice of a distributor is a key
decision
Export/import is usually a first step in globalization
Modes of Entry
Strategic Alliances
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A strategic alliance is a cooperative
agreement between firms
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Includes joint ventures, long-term
contracts, short-term contracts
Modes of Entry
Advantages of Strategic Alliances
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To acquire marketing expertise and political
savvy in a foreign market
To share costs and risks
To trade complementary skills and assets
To set an industry standard in technology
Strategic Alliance Example
NUMMI
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New United Motors Corporation (NUMMI)
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Toyota’s goals:
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Joint venture between Toyota and General Motors
Start building products in the U. S.
Learn about the U. S. market for autos
Learn to manage American workers
G. M.’s goal
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Build cars more cheaply
Learn Toyota’s lean production methods
Modes of Entry
Selecting an Alliance Partner
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The two firms should help each other achieve strategic
goals
 Each must have some skills or assets that the other
lacks
The two firms should have a shared vision for the
partnership.
The potential partner should have a reputation for "fair
play" with partners.
Modes of Entry
Strategic Alliance Structure
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Make it difficult to transfer technology that is
not supposed to be transferred. ("Wall off"
other technology).
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Example: Boeing and Japanese companies
cooperated to build the Boeing 767.
 Boeing shared production technology with the
Japanese firms.
 Boeing did not share other research, design, or
marketing information.
Modes of Entry
Strategic Alliance Structure (2)
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Put restrictions on marketing, technology,
research, or design into the contract as
needed.
Agree to swap complementary technologies
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Each partner has an incentive to live up to the
contract.
If possible, each partner should make a
significant financial commitment to the
alliance.
Modes of Entry
Managing a Strategic Alliance
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Build trust through informal contacts between
objectives.
Communicate effectively and frequently.
Both firms should live up to their
commitments.
Learn from your partner.
Selecting an Entry Mode
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Firms whose core competency is proprietary
technology that must be protected
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These firms often export or set up a wholly owned
subsidiary – these provide the greatest protection for
proprietary technology
When these firms use joint ventures or strategic alliances,
they try to "wall off" or protect critical technology
 This may be hard to do in countries where the legal
system does not protect intellectual property
Selecting an Entry Mode (2)
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Licensing of proprietary technology is risky but
is sometimes done
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To establish an industry standard
To discourage competitors from developing superior
technology
A foreign government will not allow a company to
enter its market otherwise
Selecting an Entry Mode (3)
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Firms whose core competency is management
know-how often set up a wholly owned
subsidiary or joint venture (j.v.)
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Foreign governments often prefer a joint venture
Joint venture provides local knowledge
A joint venture may have a better public image in
the host country than a wholly owned subsidiary
Subsidiary or j.v. may own some service outlets
and also sell franchises to other owners (hotel
chains are a good example)