Modal Choice by MNCs
Basic foreign expansion entry decisions
A firm contemplating foreign expansion must make three decisions
Which markets to enter
When to enter these markets
What is the scale of entry
Figure
Modes of Entry: The First Step
The crucial first step: equity or non-equity modes. This is what defines a multinational enterprise (MNE) and a non-MNE
Equity modes: Through foreign direct investment (FDI)
Direct control and management of value-adding activities overseas—key word is direct, as opposed to foreign portfolio investment (FPI)
If a firm does not have FDI, it can still engage in international business (through non-equity modes), but it is not an MNE.
Exporting
Simply shipping goods produced in the company’s home country to other countries for marketing, is a good way to minimise risk and to experiment with a specific product
The company could choose to handle all critical functions itself, or it could contract these function to an export management company.
Exporting
Advantages:
Avoids cost of establishing manufacturing operations
May help achieve experience curve and location economies
Disadvantages:
May compete with low-cost location manufacturers
Possible high transportation costs
Tariff barriers
Possible lack of control over marketing reps
Local Agent Problems
Licensing
Under a licensing agreement, the licensing firm grants rights to another firm in the host country to produce and/or sell a product. The licensee pays compensation to the licensing firm in return for technical expertise.
This is especially useful strategy if the trademark or brand name is well known but the MNC doesn’t have sufficient funds to finance its entering the country directly
Licensing: Advantages
Reduces development costs and risks of establishing foreign enterprise.
Lack capital for venture.
Unfamiliar or politically volatile market.
Overcomes restrictive
investment barriers.
Others can develop business
applications of intangible
property.
Franchising
Franchiser sells intangible property and insists on rules for operating business
Advantages:
Reduces costs and risk of establishing enterprise
Disadvantages:
May prohibit movement of profits from one country to support operations in another country
Quality control
Joint ventures
Companies often form joint ventures to combine the resources and expertise needed for the development of new product or technologies.
A joint venture also enables an MNC to enter a country that restricts foreign ownership
The corporation can enter another country with less assets at stake and thus lower risk
Joint Ventures
Advantages:
Benefit from local partner’s knowledge.
Shared costs/risks with partner.
Reduced political risk.
Disadvantages:
Risk giving control of technology to partner.
May not realize experience curve or location economies.
Shared ownership can lead to conflict
Acquisitions
A relatively quick way to move into another country is to purchase a company already operating there.
Synergistic benefits can result if the MNC acquire a firm with strong complementary product lines and a good distribution network.
Green-field developments
If a corporation doesn’t want to obtain another firm’s existing facilities through acquisition, it may choose a green-field development
This approach usually is far more complicated and expensive than acquisition, but it allows the MNC more freedom in designing the plant, choosing suppliers, and hiring a work force.
Wholly owned subsidiary
Subsidiaries could be Greenfield investments or acquisitions
Advantages:
No risk of losing technical competence to a competitor
Tight control of operations.
Realize learning curve and location economies.
Disadvantage:
Bear full cost and risk
Acquisition and Green-field- pros & cons
Pro:
Quick to execute
Preempt competitors
Possibly less risky
Con:
Disappointing results
Overpay for firm
optimism about value creation (hubris)
Culture clash.
Problems with proposed synergies
Pro:
Can build subsidiary it wants
Easy to establish operating routines
Con:
Slow to establish
Risky
Preemption by aggressive competitors
Acquisition
Greenfield
Turnkey projects
Contractor agrees to handle every detail of project for foreign client
Advantages:
Can earn a return on knowledge asset
Earn $ on Know How
Less risky than conventional FDI
Disadvantages:
No long-term interest in the foreign country
May create a competitor
Selling process technology may be selling competitive advantage as well
Strategic Alliances
Cooperative agreements between potential or actual competitors.
Advantages:
Facilitate entry into market
Share fixed costs
Bring together skills and assets that neither company has or can develop
Establish industry technology standards
Disadvantages:
Competitors get low cost route to technology and markets
Alliances are popular
High cost of technology development
Company may not have skill, money or people to go it alone
Good way to learn
Good way to secure access to foreign markets
Host country may require some local ownership
Global Alliances, however, are different
Firms join to attain world leadership
Each partner has significant strength to bring to the alliance
A true global vision
When competing in markets not part of alliance, they retain their own identity
Partner selection
Get as much information as possible on the potential partner
Collect data from informed third parties
Former partners
Investment bankers
Former employees
Get to know the potential partner before committing
