International Business: Actions Entry modes (II)

1. International Business: Actions Entry modes (II) Business College School of Management

2. 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

3. 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.

4. Key Questions • How do organisations internationalise? • How does international business manage its internal operations? • How does international business manage its external operations (e.g. relationship with the host country/communities)?

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

6. 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

7. Profit Investment Going it Alone: “Green Field” Entry HOME COUNTRY HOST COUNTRY MNE New Subsidiary Company

8. Advantages Normally feasible Avoids risk of overpayment Avoids problem of integration Still retains full control Disadvantages Slower startup Requires knowledge of foreign management High risk and high commitment Going it Alone: “Green Field” Entry • When Is “Green Field” Entry Appropriate? • Lack of proper acquisition target • In-house local expertise • Embedded competitive advantage

9. Between 2007 and 2011, a total of 1,243 foreign direct investment (FDI) projects were recorded in Australia from 933 companies. This represents an average annual growth rate of 15.4 per cent with a total capital investment of US$122 billion. Greenfield investments accounted for 84.8 per cent of projects over this five year period.  (Brisbanemarketing, 2012)

10. Activity 1: Hyundai goes greenfield in Czech Republic • In 2008, Hyundai invested in the form of greenfield investment in Czech republic (http://www.eurofound.europa.eu/eiro/2006/04/articles/cz0604029i.htm). Please discuss the choice of doing greenfield investment. Why this strategy? What are the benefits and pitfalls for Hyundai?

11. Management Fees Profit Technological Inputs Management Contract HOME COUNTRY HOST COUNTRY MNE Local Firm Managerial Service Wholly-Owned Subsidiary

12. Contractual entry modes Management contracts One company supplies another with managerial expertise for a specific period of time + Low risk + Receive awards from governments + Governments use to develop the skills of local workers - Managers’ lives in danger when countries are undergoing political or social turmoil - Can create future competitors Franchising Licensing Management contracts Turnkey projects

13. Advantages Access to local management skills Avoids buying unwanted assets Retains strategic control Disadvantages Potential incentive problem Potential adverse selection problem How do you know the competencies of the manager? Management Contract • When Is a Management Contract Appropriate? • Manager has a reputation to protect • Hotels • Consulting companies • Performance-based contract provides no perverse incentives

14. Turnkey projects One company designs, constructs, and tests a production facility for a client firm + Permit firms to specialize in their core competencies + Allow governments to obtain designs for infrastructure projects from the world’s leading companies - Company may be awarded project for political reasons Can create future competitors No long term interests. Contractual entry modes Franchising Licensing Management contracts Turnkey projects

15. Inputs Share of Profit Joint Venture HOME COUNTRY HOST COUNTRY MNE Local Firm Share of Profit Inputs Joint Venture Company

16. Advantages Access to partner’s local knowledge Reduction of concern about overpayment Both parties have some performance incentives Significant control over operation Disadvantages Potential loss of proprietary knowledge Potential conflicts between partners Neither partner has full performance incentive Neither partner has full control Joint Venture • When Is a Joint Venture Appropriate? • Both partners contribute hard-to-measure inputs • Large expected mutual gains in the long-run • Trade secrets can be walled off

17. Air Asia – Tata Joint Venture • This is the story of IJV between TATA and Air Asia in India: Case Study School of Management

18. Activity 3: International Joint Venture Case Study • Please read this IJV case study and answer the following questions: http://cws.cengage.co.uk/doole5/students/case_studies/chap_07.pdf • What are the factors that MNCs should consider when deciding to use an international joint venture as a market entry strategy? • What are the potential benefits and risks in taking this course of action? School of Management

19. Common Market Entry Modes HOME COUNTRY HOST COUNTRY Licensing Acquisition MNE Local Firm Export Joint Venturing Joint Venture Company “Green Field” Entry New Subsidiary Company

20. Activity 3: Is Nigeria an attractive place for FDI? • Please watch this and discuss the question. http://www.youtube.com/watch?v=I77sUqQx8i4

22. Future Reading • Anderson, Erin and Hubert Gatignon. 1986. Modes of Foreign Entry: A Transaction Cost Analysis.  Journal of International Business Studies, 17: 1-26. • Kogut, B. and H. Singh. 1988. The effect of national culture on the choice of entry mode. Journal of International Business Studies, 19: 411-432. - Hennart, J.-F. and Y.-R. Park. 1993. Greenfield vs. acquisition: The strategy of Japanese investors in the United States. Management Science, 39(9): 1054-1070. - Hennart, J. F., and Reddy, S. 1997. The Choice Between Mergers/Acquisitions and Joint Ventures: The Case of Japanese Investors in the United States. Strategic Management Journal 18: 1-12. - Barkema, H. G. and Vermeulen, F. 1998. International Expansion Through Start-up or Acquisition: A Learning Perspective. Academy of Management Journal 41: 7-26. • - Brouthers, K. D. and Brouthers, L. E. 2000. Acquisition or Greenfield Start-up? Institutional, Cultural and Transaction Cost Influences. Strategic Management Journal 21: 89-97.