2013-11-06
Process & Entry Strategies
Ramsin Yakob, PhD
ramsin.yakob@liu.se
IEI/Linköpings Universitet
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2013-11-06
Internationalization as process
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The Internationalization Process involve the extension of
economic activities across national boundaries. A
quantitative and qualitative process which leads to a
more extensive geographical pattern of economic
activity…
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Challenge: Liability of Foreignness - The costs of
doing business abroad that result in a competitive
disadvantage for an MNE subunit
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Arises predominantly from the unfamiliarity of the
environment
•
What are these disadvantages (costs)?
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Challenge: Liability of Foreignness
All additional costs a firm operating in a
market overseas incur that a local firm would
not incur.
1. Geographic or Spatial Distance
2. Cultural Distance
3. Administrative or Institutional Distance
4. Economic Distance
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The Strategic Challenge
Challenges associated with engaging in FDI
means that a number of questions has to be
asked by the TNC!
LIABILITY OF
FOREIGNESS
INTERNATIONALIZATION
Economic Extension, Cross-border, Qualitative/
Quantitative,
•Unfamiliarity
•Spatial Distance
•Firms Specific costs
•Host/Home country
•environment
FDI
• Ownership
• Control
Internationalization ”questions”
Why? What? When? Where? How?
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Theoretical Paradigms
Trade theories
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Transaction Theories
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Comparative Advantage
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Foreign Direct Investment
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Economics of Trade
Internationalization of the firm – Strategic Perspectives
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Eclectic Paradigm
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Life-Cycle Theories
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Internationalization Process
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Multinational/Global Management
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Competitive Advantage
Basic Entry Decisions &
Contrasting Paradigms
WHY?
External context (e.g.
Porter): - environment,
competitors, competitive
advantage
WHAT?
HOW?
Process view (e.g.
Mintzberg):
Management: process of
change actions,
interactions
Internationalization
Strategy
WHERE?
Economic Geography
(e.g. Dicken):
Location specific
advantages and
disadvantages,
location endowment
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Resource-based
approach (e.g. Hamel &
Prahalad): firm specific
resources, forward
looking, pools of
competencies
WHEN?
First-mover advantages
(e.g. Lieberman &
Montgomery):
Pioneering advantages
and costs
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What are our motives (the Why?)
Market?
Production volume?
Innovation/product
related?
Resources?
Costs?
Risk?
Foreign Authorities?
Personal knowledge?
Success (domestic)?
Competition?
Etc…
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What to use for market entry
• Firm advantages can be attributed to the control over
bundles of unique material, human, organizational and
location resources and skills that enable unique valuecreating strategies.
• To be a source of sustained above-average performance,
resources must be:
(1)Valuable, meaning buyers are willing to purchase the
resources' outputs at prices significantly above their costs
(2)Rare, so that buyers cannot turn to competitors with the
same or substitute resources
(3)Imperfectly imitable, meaning it is difficult for competitors to
either imitate or purchase the resources
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2013-11-06
When to Enter
•
Mechanisms that confer advantages and disadvantages on firstmover firms. First-mover advantages in terms of the ability of
pioneering firms to earn positive economic profits.
•
Advantages associated with entering early are “first-mover
advantages”
”
•
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Ability to preempt rivals, establishing a strong brand name quickly
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Ability to build sales volume
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Ability of early entrants to create switching costs
Disadvantages are “first-mover disadvantages”
”
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Pioneering costs: costs only an early entrant has to bear
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Possibility that regulations may change
Where to locate
Factors and sub-factors that may influence
international location decisions:
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Costs
Labour characteristics
Infrastructure
Proximity to suppliers
Proximity to markets/ customers
Proximity to parent company’s
facilities
• Proximity to competition
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•
•
•
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•
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Legal and regulatory framework
Economic factors
Government and political
Factors
Social and cultural factors
Characteristics of a specific
Location
Quality of life
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Where to locate
Summary of preferred or expected procedure in
making international location decisions:
1. Make clear the purpose for the overall business at the
beginning of the process
2. Investigate countries, regional factors, geographical
considerations, location alternatives and conduct market
analysis/ economic analysis and feasibility studies
3. Identify both international and local factors involved for each
alternative location
4. Evaluate the alternatives against established criteria
5. Make a selection and implement.
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Example of Value Chain Configuration
• The German automaker BMW employs 70,000 factory personnel at 23
sites in 13 countries to manufacture its vehicles.
• Workers at the Munich plant build the BMW 3 Series and supply
engines and body components to other BMW factories abroad.
• In the United States, BMW has a plant in South Carolina, which makes
over 500 vehicles daily for the world market.
• In NE China, BMW makes cars in a joint venture with Brilliance China
Automotive Holdings Ltd.
• In India, BMW has a manufacturing presence to serve the needs of the
rapidly growing South Asia market.
• BMW must configure sourcing at the best locations worldwide, in
order to minimize costs (e.g., by producing in China), access skilled
personnel (by producing in Germany), remain close to key markets (by
producing in China, India and the United States).
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From Cavusgil et al., 2007)
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Internationalization as a sequential process (the How?)
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The Internationalization Process of Firms:
(Johanson & Vahlne, 1977)
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The Internationalization Process of Firms
(Johansson & Vahlne, 2009)
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Four stages of Internationalization
The establishment chain:
Increasing degree of market
knowledge and market
commitment. Decreasing
psychic distance
1. No regular export activities –
export
2. Export via independent
representatives (Agents)
3. Establishment of foreign sales
subsidiary
4. Establishment of foreign
manufacturing facilities and
subsidiaries
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2013-11-06
But be
be aware!...alternative
aware: Alternative explanation
But
explanation
Born Global (Oviat & McDougall, 2005)
• “An international new venture as a business organization that,
from inception, seeks to derive significant competitive
advantage from the use of resources and the sale of outputs in
multiple countries”
• A firm that is international from inception, or early on, “Frog leaping”.
• Foreign direct investment (ownership) is not a requirement.
• Changing International Environment
• Dramatic increases in the speed, quality, and efficiency of
international communication and transportation
• Increasing homogenization of many markets in distant countries
• International financing opportunities are increasingly available
• Human capital is more internationally mobile
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Born Global (Oviat & McDougall, 2005)
Based on four elements:
1. Internalization of some transactions (ownership is
not a must)
2. Alternative governance structures (the network
structure)
3. Foreign location advantage (private knowledge)
4. Unique Resources (protected through patents,
copyrights, imperfect imitability, licensing, network
governance)
Types of International New Ventures
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Types of International New Ventures
TYPE OF INTERNATIONAL NEW VENTURES
DEFINING CHARACTERISTICS
(I,II) New International Market Makers
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Moving goods,
systems and knowledge of inbound and
outbound logistics
Alternative structures
Direct investment kept at a minimum
Discovery of imbalances of resources between
countries
(II) Geographically Focused Start-ups
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Serves the needs of a particular region
geographically restricted
More activities coordinated
Competitive advantage
in coordination of multiple value chain activities
(IV) Global Start-ups
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Extensive coordination
among multiple organizational activities
Network alliances in multiple countries
Complex inimitability
Skills at both geographic and activity
coordination
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The Choice of Entry Mode? (the HOW)
Indirect
Exporting
Direct
Advantages and Disadvantages?
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Foreign Market Entry Forms
• Three generic forms
• Importance will differ due to industry and/or
firm specific factors
1. Domestic production + Exports
2. International + Contract based agreement
3. International + Equity control
Modes of Internationalization
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2013-11-06
Choosing the Mode of Entry
• Decision Criteria for Mode of Entry:
- Market Size and Growth
- Risk
- Government Regulations
- Competitive Environment/Cultural Distance
- Local Infrastructure
- Scale of entry
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Advantages & Disadvantages of Entry Modes
ENTRY MODE
ADVANTAGE
DISADVANTAGE
EXPORTING
e.g. Trading
companys,
Mitsubishi
Corp
• Domestic representatives have
market firm/product knowledge
• Reliant on drive and character of
local representatives
• High level of market control
• High transport costs
• Ability to realize location and
experience-curve economies
• Problem with local marketing
agents
• Avoid establishment costs
• Competition with low-cost
location manufacturers
SALES AGENTS • Allows increased market control
e.g. Airline
• Agents have good local knowledge
sales rep.,
of host market
• Agents have permanent presence
in the market
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• Contractual complexity
• Problems identifying good Agents
• Agents may sell conflicting
products
• Agreements can be costly and
difficult to terminate
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Advantages & Disadvantages of Entry Modes
ENTRY MODE
ADVANTAGE
DISADVANTAGE
LICENSING
e.g. CocaCola, Disney
• Licensee bares capital costs – low
financial risk
• Lack of control over technology
• Low cost way to access market
potential
• Licensee provides knowledge of
markets
• Avoid tariffs, NTBs , quotas, and
restrictions on foreign investment
FRANCHISING • Low financial risk
Body-Shop,
• Low-cost way to access market
KFC,
potential
McDonalds
• Avoid tariffs, NTBs and restrictions
on foreign investment
• Maintain more control that with
licensing
• Inability to engage in global
strategic coordination
• Limited market
opportunities/profits
• Dependence on licensee
• Possibility of creating future
competitor
• Limited market
opportunities/profits
• Dependence on franchisee
• Potential conflicts with
franchisee
• Prohibited movements of profits
• Quality controls
• Franchise provides knowledge of
local market
Advantages & Disadvantages of Entry Modes
ENTRY MODE
ADVANTAGE
DISADVANTAGE
JOINT
VENTURES
e.g. SonyEricsson,
FujitsoSiemens
• Eased market entry
• Incompability of partners
• Shared expertise
• Need to share knowledge and
know-how
WHOLLY
OWNED
SUBSIDIARY
e.g. Airlines,
Automotive,
Manufact.,
Assembly
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• Synergy effects
• Vested interests by both parties
• Allows for sharing of risks
• Conflicts in distribution of
earnings – contractual
complexity
• Opportunity to learn about new
market
• Loss of autonomy
• High profit potential
• Maintain control over operations
• High financial and managerial
investments
• Acquire knowledge of local market
• Higher exposure to political risks
• Avoid tariffs and NTBs
• Vulnerability to restrictions on
foreign investments
• Protection of technology
• Ability to engage in global strategic
coordination
• Requires strong coordination
• Greater managerial complexity
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Advantages & Disadvantages of Entry Modes
ENTRY MODE
ADVANTAGE
DISADVANTAGE
TURNKEY
CONTRACTS/
PROJECTS
e.g.
Automotive,
Hospitals,
Power-plants
• Can earn a return on knowledge
assets
• Less risky than conventional FDI
• No long-term interest in the
foreign market
• May create a competitor
• Selling process tech
• May be selling competitive
advantage
STRATEGIC
ALLIANCES
e.g. Starbucks
& BarnesNoble,
Hewlett
Packard &
Disney
• Facilitate entry into market
• Share fixed costs
• Bring together skills and assets
that neither company has or can
develop
• Establish industry technology
standards
• Competitors get low cost route
to technology and markets
• Giving up some
authority/control
• Loss of technological knowhow
• Loss of management practices
• Loss of operating procedures
Scale of Entry
Large scale entry
- Strategic Commitments: decisions that have long-term
impact and are difficult to reverse
• Local distributors, partners will take you seriously
- May cause rivals to rethink market entry
- But may lead local firms to attack aggressively
Small scale entry
- Time to learn about market
- Reduces exposure risk
- But fast-moving competitor may beat you
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Types of Alliances
Strategic Importance
Acquisition
Minority Interest
High
Joint Venture
Joint Marketing
Joint Development Projects
Medium
Licensing Agreements
Alliance/Consortia
Commercial Contracts
Low
Technology Trials
Low
High
Level of Commitment
Entry Mode and Competitive Advantage
ADVANTAGE BASED ON
TECHNOLOGICAL KNOW-HOW
MANAGEMENT KNOW-HOW
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TYPE
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Exporting
Licensing
Sales Agent
Turnkey
Joint Venture
Subsidiary
Alliance
E.g. Automotive, Tech.
Companies, Aero, Defence
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Franchising
Joint Venture
Subsidiary
Alliance
e.g. Leisure, Fast food, Hotels
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A Contingency Framework for the Mode of Entry Decision
(Kumar & Subramaniam, 1997)
Modes of entry
Exporting
Contractual
Agreement
Joint
Venture
Acquisition
Greenfield
Investment
Risk
Low
Low
Moderate
High
High
Return
Low
Low
Moderate
High
High
Control
Moderate
Low
Moderate
High
High
Integration
Negligible
Negligible
Low
Moderate
High
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