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Lecture6a1.pptxSM9632 Contemporary Issues in International Business
Lecture 6a: Foreign Operation (Entry) Modes
Dr Arrian Cornwell
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What is unique about the IB space
Why and how do firms become MNEs
Digital environment and Internationalisation
International Entrepreneurship and SMEs Internationalisation
International Financial Management
Internal Analysis – opening up the firm
Dynamic capabilities in international business
R&D Internationalisation
Previously on SM9632
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To explore how multinational enterprises operate in, and enter into, foreign countries
To introduce the main determinants of foreign entry/operation modes
To unbundle the advantages, disadvantages and challenges associated with modes
To uncover the stimuli for increases or reductions in entry modes, and mode switching
What are we doing here today?
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How is this lecture related to your assessment?
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Lecture 6a: Foreign Operation Modes
Q2: Synergy Realisation
Q3: Post-Acquisition Integration
Q4: Spillovers
Q1: Operation mode response to external issues
The internationalisation agenda:
The setting of firm boundaries, and subsequent entry mode decisions, have profound impacts of the performance of the MNE
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Primary issue of concern is in establishing effective boundaries for the firm
Based on these boundaries, firms must explore the forms of operations available to enter foreign markets
Forces of globalisation drive firms to expand outside their home market
Foreign Operation Modes (1)
Exporting
Licensing
Franchising
Joint Venture
Wholly Owned Subsidiary
Extent of Investment and Risk
Degree of Ownership and Control
Low
High
High
Greenfield
Brownfield (Acquisition)
FDI – Equity-based
Investment modes
Contractual
Non-equity based
Non-equity or equity-based
Contractual agreements
Cross-shareholdings
Strategic Alliance
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Modes: Advantages and Disadvantages (1)
| Mode | Advantages | Disadvantages |
| Exporting | Relatively low financial exposure, permit gradual market entry, possible channels to acquire knowledge about local market, low levels of commitment | Increased vulnerability to tariffs and Bilateral relationship deviations, added logistical complexities, potential conflicts within supply chain management |
| Licensing | Lower costs and risks, licensee provides knowledge of the local market | No tight control of host market operations, potential for disputes, risk for losing know-how, weakened control mechanisms |
| Franchising | Low financial risk, low cost way to assess market potential, ability to maintain more control than with licensing | Limits market opportunities, dependent on franchisee, potential for disputes and conflict with franchisee, weakened control mechanisms |
Contractual, non-equity based entry modes:
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Modes: Advantages and Disadvantages (2)
| Mode | Advantages | Disadvantages |
| Strategic Alliance | Enter new business territories, build valuable intellectual capital, reduction is risks and costs, leapfrog the competition, gain new resources and improve existing resources | Potential returns could be limited by contractual agreement, which may unintentionally transfer proprietary knowledge and techniques to SA partner |
| Joint Venture | Benefit gains from local partner, shared costs and risks, political gains from local partner knowledge, possible access to local networks, new market penetration, new revenue streams, possible synergy orchestration | Complexities in coordination mechanisms, potential for conflicts, disagreements and disputes, limited control of partner, restrictions imposed by JV agreement |
| Wholly Owned Subsidiary (WOS) | Low financial risk, low cost way to assess market potential, ability to maintain more control than with licensing, speedy strategic decision making | Higher risk than other modes; requires higher levels of resources and greater degrees of commitment. Possible loss in operational flexibility, operational risks |
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Unrelated
Related
Tuck-in
Acquisition
Acquisitions (WOS): Unbundling the Mode
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Platform Acquisition
Bolt-On (Product)
Acquisition
Bolt-On
(Technology and Talent)
Acquisition
Main determinants of Mode
All four levels will combine, or influence each other, which will translate into a additive impact on Mode decisions
Determinants
Country-Level
Industry-Level
Subsidiary-Level
Firm-Level
Determinants (1)
Firm-Level
Parent firm (organizational) size
Product diversification and subsequent management control systems
Investment relatedness
Technological relatedness
Advertising / marketing intensity
Parent firm international experience
Host country experience
FOM mode experience
International strategy
Strategic flexibility
Top management team strategic orientation
Asset specificity – high asset specificity equates to modes with higher control mechanisms
Determinants (2)
Country-Level
Cultural distance – gravity theorem and M&As
Institutional distance and institutional development
Linguistic and geographic barriers
Economic development
Industry-Level
Industry growth rate (disequilibrium conditions?)
Industry attractiveness / unattractiveness (Porter’s 5 forces)
Industry concentration
High industry advertising intensity
Industry-level demand uncertainty
Subsidiary-Level
Relative size of subsidiary – RBV theory
Subsidiary autonomy – integration / responsiveness
Subsidiary dependence
Modes: permanence versus change
Are FOM decisions permanent?
Do MNEs change/switch their FOM decisions? If so, under what circumstances?
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The Mode Change Phenomenon The Demise of Permanence?
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Declining Permanence?
UK’s 25 largest MNEs enacted 203 FOM changes
30% of 94 Sino-foreign JVs in China has been scaled up to WOS in less than 5 years
From 265 German firms, there were 320 changes on FOM
85% of Finnish firms operating in Germany underwent FOM changes
The MCP: Three Categories
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Between-mode changes
Replacing the mode of a foreign operation in a host country with a new mode of lower or higher commitment in the same host country
Within-mode changes
Keeping the mode of a foreign operation in a host country but adjusting the form it takes
Adding a new foreign operation of higher or lower mode to existing operations OR eliminating existing operation(s) in a given host country
Changes in mode combination
For example: changes between JV and WOS modes
For example: changes from a 60% to a 70% JV / changes from a minority to a majority JV
For example: mode additions and deletions, mode elevation and duplication
Through operating in foreign markets executive learn, and their perceptions of risks and benefits of being involved in those market change – this may lead to increased commitment decisions implying a movement from one type of operation mode (with a lower market commitment) to another one (with a higher market commitment).
Mode increases: two determinants for change, the need for greater adaptation to the market and the dissatisfaction with the previous mode – power imbalances between parents and high levels of conflict increase the likelihood of a JV being transformed to a Wholly Owned Production Subsidiary (WOPS). The creation of local knowledge, internal isomorphic pressures and reduction of external uncertainty increase the likelihood of a conversion. Firms may switch to more controlled modes when they find partnerships unsatisfactory
Mode reductions: “any voluntary or forced action that reduces a company’s engagement in or exposure to current cross-border activities” (partial vs. full divestment). – switch option value
Mode Changes: Shifts, Switches or Conversions
Performance
Internal environment
External environment
Managerial attitudes
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Between-Mode Increase: Example
Announcement Tuesday 5th November 2019
Fujifilm will acquire Xerox’s JV share in FujiXerox transforming in into a WOS rather than JV
Escalation in commitment to FOM
Within-Mode Increase: Example
Uber Middle East FZ LLC
WOS in the region (pre-acquisition)
Acquired Careem, which became a WOS of Uber
Represents an increase in resource commitment, and increase in scale of Uber’s Middle East WOSs
Mode Change: Stimuli
Performance
Internal environment
Likelihood of mode increases relative to mode reductions
Economic perspective: poor performing intermediaries are divested to improve MNE financial standing
Learning perspective: increased levels of learning increase commitment to foreign market
Internal capabilities: capabilities are developed from operating in foreign markets – builds commitment
Industrial Organization Theory: prime aim is to exploit company-specific advantages
Accumulation of local knowledge
Internal isomorphic pressure
Asset specificity
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Mode Change: Stimuli
External environment
Managerial Attitudes
Likelihood of mode increases relative to mode reductions
Management characteristics: intuitive expectations, managerial learning, behavioural process models (e.g. dominant logic / rational vs. irrational)
Economic perspective: motivation to exploit favourable conditions
Favourable vs. adverse environmental conditions
Direction and intensity of environmental change
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Commitment: Elevation or Duplication?
MNE depth of international experience
MNE breadth of international experience
Host-country institutional quality
Likelihood of effectuating mode elevation over mode duplication when increasing commitment in a host country via mode change
Are we witnessing a rise in path dependency re. elevation vs. duplication decision making?
Leveraged Learning
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Frequent assumption is that the international expansion of firms follows an incremental path (positive evolution), with increasing levels of commitment
Limited consideration of the possibility of negative evolution – i.e. actions such as divestments, pulling-out of a market, downsizing foreign operations, and/or switching from high to low commitment modes of operation.
Negative evolution will take into account the impact of sunk versus flexible assets
Typology of partial/full and defensive/offensive de-internationalisation
A trend toward de-internationalisation?
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Divestments
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Summary:
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Lecture 6a: Foreign Operation Modes
Q2: Synergy Realisation
Q3: Post-Acquisition Integration
Q4: Spillovers
Q1: Operation mode response to external issues
Next Lecture
6b: Post-Acquisition Integration (Q3)
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