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Week 4
Modes of International Expansion

Section I. Theories, mindsets and strategies

Section II. Market entry modes.

I. Theories, mindsets and strategies

  • Internationalization is a difficult process and mistakes can be costly

  • Despite the challenges, companies increasingly need foreign markets to offset home country/region performance

  • Question is how much managers are willing to commit to internationalization

Commitment to internationalization

  • Different modes of market entry require different amounts of financial capital, human capital and knowledge

‘Scale of commitment’ (descending order)

Import/export from home

Licensing/franchising

Joint venture (form of FDI)

Wholly owned subsidiary (form of FDI)

Decision-makers’ psychology

  • Tendency to be more conservative when faced with perceived unknown
  • May affect MNE market entry choice and form

“Manager cognition potentially influences sequential/non-sequential entry decision making… The contingent role of international experience further stresses that the influence of cognition in internationalization decision making is both important and complex, involving, at least, innate cognitive processes, idiosyncratic knowledge, and international experience.”

Clark, D. et al (May 2018), “Country familiarity in the initial stage of foreign market selection”, Journal of International Business Studies, Volume 9, Issue 4

Leaving home

Uppsala ‘stages of internationalization’ approach

(Johanson and Vahlne 1977)

  • Internationalization is a learning process - firms operate on a step-by-step, incremental basis

  • Tend to start with neighbouring countries/cultures - familiarity

  • Crucial to understand which resources are required abroad

cf. Williams, D. and Grégoire (2015), “…seeking commonalities or avoiding differences?”

Network theory

“ The Uppsala internationalization process model is revisited in the light of changes in business practices and theoretical advances that have been made since 1977. Now the business environment is viewed as a web of relationships, a network, rather than as a neoclassical market with many independent suppliers and customers. Outsidership, in relation to the relevant network, more than psychic distance, is the root of uncertainty. The change mechanisms in the revised model are essentially the same as those in the original version, although we add trust-building and knowledge creation, the latter to recognize the fact that new knowledge is developed in relationships”.

https://www.researchgate.net/publication/227470275_The_Uppsala_Internationalization_Process_Model_Revisited_From_Liability_of_Foreignness_to_Liability_of_Outsidership

TED TALK (3.30) https://www.youtube.com/watch?v=eM1KaaTez0A&t=54s

Managerial mindsets

  • Managers’ willingness to invest resources abroad reflects their mindset

‘Global’ vs. ‘domestic’ attitudes

Level of comfort with ‘foreignness’

Reaction to past experiences overseas

cf. Cuypers et al (2015), “acquirers take lower equity stakes in foreign targets when linguistic distance and differences in lingua franca proficiency between them are high…higher stakes when the combined lingua franca proficiency of the parties is high”

Go it alone or with partner?

  • c.f. Ohmae – the world is a complicated place!

  • But partner can lead you astray

  • Psychological aspects of cross-border collaboration (uncertainty, known knowns and psychic distance)

Company size also affects market entry

  • SMEs are major players in international business but face specific obstacles:

- Lesser human/capital resources to invest

- Problems gathering info foreign markets (cost)

- Family owners – domestic mindset?

- Inability to engage in mass R&D / marketing

- Strategic inflexibility – problems covering whole value chain

- Weaker bargaining position (w/suppliers or distributors)

- Lesser name / publicity

Often reaction = niche strategies and seek partnerships

Trade vs. FDI:
drawing the boundaries of the firm

  • Some firms believe ‘small is beautiful’ and only occupy part of their global value chain

  • Aim is to benefit from other companies’ specialisations, cost advantages, etc.

  • Influence on internationalization:

- Such firms tend to engage in trade rather than FDI

- When FDI, they tend to run some corporate functions, not all

- Therefore need partners

Risks for firms with narrow boundaries

  • Contractual

- Incomplete (contacts may not cover all eventualities)

- Performance (poor quality, late deliveries/payments)

- Intellectual property – confidentiality?

  • Strategic

- Opportunistic expansion by supplier/customer

Risks of minimal internationalization  large-scale FDI

  • Studies of what makes a successful FDI

- Knowledge-based or property-based resources?

- Extension of existing business or development of new one(s)?

- Vertical or horizontal internationalization?

Vertical FDI – Breaking the value chain up into functions

accomplished in ‘focused factories’

Horizontal FDI – Knowledge transfers used to more or less

reproduce abroad same activities as at home

Vertical vs. horizontal internationalization

  • Vertical FDI

- Specialized plants trade large volumes with one another =

plant-level economies of scale

- But high ‘trade costs’ (freight, tariffs, time lost)

  • Horizontal FDI

- Duplicated facilities = high overheads

- But greater internalization = more control over resources: better for hi-tech production (confidentiality)

Reasons for choosing a given FDI location

  • Proximity to dynamic market (country/region)

  • Institutional environment in host country

(inc. politics, culture, tax, repatriation, regulations, incentives, unions, etc.)

  • Diversify country and FX exposures

  • Follow customers (Keiretsus in ASEAN)

  • Undermine rivals (Michelin in US)

  • Remember that FDI can also exist for import reasons
  • access to new resources (rice/California)
  • access to local workforce (software/India)

II. Market entry modes

Internationalization =succession of choices

Build a new operation or take over an existing one?

Fully owned or partially owned FDI?

Non-equity collaborations with partners?

Greenfield vs. brownfield investments

  • Greenfield better suited when exploiting technological know-how – preserve intellectual property. First mover advantage - ‘Push’ orientation’?

  • Brownfield better suited when servicing a local market – take advantage of target company’s brand name/networks. ‘Pull’ orientation?

  • Subjective element: How comfortable are managers in entering the new market?

‘Build vs. buy’ dilemma

  • Why build a new entity?

- Impossible to find a suitable target

- Technological capabilities are lacking

- Goodwill may be too expensive

  • Why buy an existing entity?

- Avoid problems inherent to all start-ups

- Benefit from existing capabilities - quicker

- Avoid sectorial over-supply

International Mergers and Acquisitions –prime example of brownfield FDI

  • M&A occurs in waves – sign of managerial imitativeness? Leads to global consolidation

  • International M&A still dominated by OECD countries but this may change.

  • Fewer manufacturing M&As, rise in service-related (and recently in primary sector)

  • General categories of M&A: search for greater resources, efficiency or markets.

  • Is deal aimed at exporting from host country or selling into it?

Motivations for international M&A

  • Upstream (backwards integration)

Acquisition of inputs

  • Downstream (forward integration)

Acquisition of market share

  • Search for complementarities

Geographic

Product-related

  • Efficiency savings

Synergies

Strategic Alliances

  • Can involve ad hoc foreign cooperation in functions like R&D or marketing

  • International Joint Ventures: partners share equity capital (not always 50-50)

- Can be enforced by host government seeking to maintain national control (economic patriotism)

- Can be MNE’s choice to share risks/costs with partners / leverage their contacts (e.g. banks in China)

Non-equity collaborations

  • Turnkey projects: coordination of tasks during huge construction jobs

  • International licensing/franchising:

- Rapid modes of market entry

- High returns (royalties)

- But generate collaboration risks (performance, brand image, intellectual property rights)

Recap: advantages of international collaboration

  • Spread and reduce costs and risks
  • Actors specialise in area where they are competent
  • Reduce competitive pressures
  • Access to each others’ knowledge base
  • Avoid restrictions on foreign ownership
  • Gain location-specific assets

The world is becoming an

increasingly complex place (c.f., Ohmae)

Recap: risks of international collaboration

  • Factoid: estimated 30-60% of IJVs fail within 5 yrs.

  • Confidentiality (intellectual property)
  • Visibility/product image
  • Misses out on economies/horizontal integration
  • Control of technological transfer
  • Arbitrage control/liability
  • Under-performance
  • Change in strategic objectives
  • Lack of trust
  • Culture/communications problems
  • Shifts in external environment

Conclusions

Internationalisation trends

  • Cyclicality of M+A waves
  • Fewer greenfield FDIs, more brownfield
  • Proliferation of turnkey projects in LDCs (giganticism?)
  • Increasing number of JVs (China, militant LDCs)
  • Rise in Service Sector FDIs between OECD countries
  • OECD countries move into LDCs = manufacturing FDIs

= this is a political issue: CSR (see week 3)

= this is a production issue (see week 7)

Conclusions (cont.)

  • First strategic decision is whether and how to enter foreign markets = this week

  • Second is how to organise and control existing units worldwide = next week