International Business
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Gaspar2eChapter08.pptx© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Chapter 8 Entry Strategies in Global Business
Introduction to Global Business
Summarize the major entry strategies used by companies, especially those from emerging-market economies, in the globalization process.
Explain the evolution of multinational enterprises (MNEs).
Explain the major strategic reasons why MNEs invest abroad.
Explain the pros and cons of foreign direct investment (FDI) from a host country perspective.
Describe what countries can do to successfully attract FDI.
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After studying this chapter, you should be able to:
Strategy Choice and Implementation: Going International
Risk profile
The potential financial loss that entrepreneurs are willing to take in a business
Risk–return trade-off
The greater the risk (loss of capital invested) entrepreneurs are willing to take, the greater the rewards (profit) they are likely to reap
Sources of risk
Ownership, operation, or asset transfer
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EXHIBIT 8.1 ENTRY STRATEGIES IN GLOBAL BUSINESS
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Strategies That Minimize Financial Risk
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Export-Import Business
Penetrating foreign markets by exporting or importing merchandise at competitive prices for domestic consumption
Licensing
Providing a foreign partner with the rights and/or tech-nology to manu-facture and sell products or services in a target country for an annual license fee
Franchising
A franchisor pro-vides specialized equipment, service, and/or startup costs to a franchisee in return for an annual fee for rights to manufacture/sell its products
Export-Import Business
The export-import business is a relatively low-risk operation given the fact that capital is not tied up and it is relatively easy to enter or exit the business.
Well-established techniques for financing trade (trade finance) are aimed at facilitating trade and minimizing financial risk.
Firms can conduct export-import business with as few as three or four employees, though large trading companies may employ hundreds or thousands of workers.
With the rise of the Internet, conducting international trade has become even easier and more exciting.
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Licensing
Licensing makes the relationship between the trader and the overseas partner closer.
Licensing involves slightly more risk to the licensor than those in pure international trade business.
Why license rather than export?
Manufacturing a product in the target country can take advantage of lower transportation, labor, and raw material costs.
The licensor may not have the financial resources for investing in overseas plant and equipment or may have better uses for those resources.
A common approach to protect the licensor is to incorporate penalty clauses in the license that can work as an exit strategy if necessary.
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Franchising
In franchising, the parent firm assumes relatively more risk than with licensing.
Most fast-food franchises are owned and operated by local residents who use local capital to start the business.
Franchising allows for penetration of international markets without significant capital investment abroad by the parent company.
The parent company’s objective is to make sure that quality of products and services are similar at any location in any country.
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Strategies That Share Financial Risks
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Strategic Alliances
An agreement between two or more firms that do not involve the creation of a separate entity with joint ownership and in which the firms stand to gain revenues and maximize profits through cooperation for a given period of time
International Joint Ventures
A business jointly owned and operated by two or more firms (one local host country and one foreign) that pool their resources to penetrate the host country’s markets, share in profits, and share commercial risk
Strategic Alliances
Strategic alliances involve relationships between two or more firms that stand to gain revenues through cooperation.
Strategic alliances do not involve the creation of a separate entity with joint ownership.
Strategic alliances are primarily aimed at enhancing revenues.
A challenge for strategic alliances is that any member could prematurely quit the alliance, negatively affecting other partners.
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International Joint Ventures
Firms looking to invest overseas may set up joint ventures to share increased risk with a local corporate entity.
Joint ventures make sense when capital investments are so large that no single company would be willing to come up with all the needed funds.
In most cases, international joint ventures include at least one local firm.
The local partner knows domestic economic, cultural, and political environments.
The local partner can help overcome country-specific logistics and bureaucracy.
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Higher Risk Strategies
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Foreign Acquisitions
Acquisition is the purchase of established firms abroad with the goal of using the existing production, marketing, and distribution networks and of having instant access to foreign markets that fit the purchasing firm’s global strategy.
Wholly Owned Foreign Subsidiaries
Subsidiaries are new facilities built and operated overseas that require large investment of capital because these new establishments are tailored to the exact needs of the home country firm.
Cross-Border Mergers and Acquisitions
Domestic companies with clearly identified core competencies or competitive advantages may enter foreign markets by merging with or acquiring firms overseas.
In acquisitions, the home country firm purchases the host country firm and implements its own international strategy.
In the case of mergers, the management of both companies play an active role in business development and execution.
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Wholly Owned Subsidiaries
As an alternative to acquiring a foreign firm, a home country firm may build and operate its own new facilities overseas, called “green field” plants.
Wholly owned subsidiaries generally require a large capital investment; hence, risks and rewards are high.
Subsidiaries can require major marketing efforts to penetrate the international market because of cultural differences and because the entrant is new and relatively unknown.
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Multinational Enterprises (MNEs)
Multinational enterprises (MNEs) are firms that are headquartered in one country, but own and control significant manufacturing, services, R&D (research and development) facilities, or other business entities in other countries
Developed largely after World War II as international trade and investment regulations were liberalized
Are now challenged by the rise of MNEs from emerging market economies
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EXHIBIT 8.2 THE WORLD’S TEN LARGEST COMPANIES (YEAR END 2013)
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MNEs and Their Global Strategic Motives
In a free enterprise system, the overriding objective of firms wanting to invest abroad is to maximize shareholder wealth.
Three strategic motives for companies that invest abroad:
To increase revenues
To cut costs
To diversify operations to minimize risk
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Strategies for Going Abroad
Revenue maximizing strategies include
Entering high-growth markets
Entering stable, high-income markets
Entering countries with monopolistic market structures
Entering trade-restricted sectors
Cost minimizing strategies include
Gaining economies of scale in overseas production
Minimizing factor input costs by relocating overseas
Reacting to exchange rate movements to take advantage of long-term appreciation of FDI assets
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Strategies for Going Abroad (continued)
Risk minimizing strategies include
Diversification to minimize risk and foster stability in global corporate cash flows and earnings
Correlation of returns to identify overseas projects with performance levels that are not highly correlated to domestic cash flows or project returns over time
Diversifying to gain foreign consumption that helps maximize overall corporate profitability during the maturity stage of the life cycle of firm’s products
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Dunning’s Eclectic Theory of Foreign Direct Investment (FDI)
Key economic advantages for using FDI:
Ownership or firm-specific internal transfer advantages
Location or country-specific advantages
Internalization (mode of market entry) advantages
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Benefits of FDI
Generation of significant financial inflows
Creation of new jobs
Access to new technologies
Facilitation of the transfer of management and employee skills
Increased domestic competition and choice
Generates tax revenues for economic development
Costs of FDI
Environmental pollution that results from exploitation of natural resources by MNEs
Exploitation of the host country labor force reduces human capital development
MNE’s lack of corporate social responsibility for the social consequences of their decisions
Political interference by MNEs in the host country’s affairs
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Host Country Perspective of Foreign Direct Investment
Attractive Investment Climate Characteristics
Proper economic reforms
Transparent governance structure
Rule of law
Contributions of Domestic Firms and MNEs
Invest profitably
Create jobs
Contribute to economic growth
Reduce poverty
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Improving Host Country’s Investment Climate
risk profile
export-import business
licensing
franchising
strategic alliances
international joint venture
acquisition
subsidiaries
multinational enterprises (MNEs)
maximizing shareholder wealth
product life cycle theory
governance
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Key Terms
