International Business: Entry Modes (I)

1. International Business: Entry Modes (I) 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 and external operations when it comes to entry modes for foreign market?

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. 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 Entry Decision Making Under Uncertainty: Trade-off Between Flexibility and Commitment

8. 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.

9. School of Management

10. 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

11. 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

12. 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

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

14. Entry Strategies School of Management

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

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

17. 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 School of Management

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

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

20. 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) School of Management

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

22. 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 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. • When Is Licensing Appropriate? • Well codified knowledge • Strong property rights regime • Location advantage

23. Franchising: Similar but different from licensing School of Management

24. 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) School of Management

25. 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?

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

27. Acquisitions Mergers 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

28. 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.

29. 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 Acquisition: The purchase of one business or company by another company or other business entity. • When Is Acquisition Appropriate? • Developed market for corporate control • Acquirer has high “absorptive” capacity • High synergy

30. 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.

31. Potential Issues: Management of Entry Modes School of Management