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CU BUS 5223 - LECTURE NOTES

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IntroductionWhich Foreign Markets Timing the EntryScale of EntryEntry ModesExportingTurnkey projectsLicensing: AdvantagesFranchisingJoint VenturesWholly Owned SubsidiaryAdvantages and Disadvantages of Entry ModesCore Competencies and Entry ModeCore Competencies and Entry ModeAcquisitions Pros and ConsGreenfield Ventures Pros and ConsAcquisition or GreenfieldStrategic AlliancesAlliances are popularGlobal Alliances are DifferentPartner SelectionStructuring the Alliance to Reduce OpportunismLooking Ahead to Chapter 15Chapter FourteenEntry Strategy and Strategic Alliances14 - 3McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Introduction• Any firm contemplating foreign expansion must struggle with the following decisions- Which foreign market(s) to enter, when to enter them, and on what scale- Which mode of entry will be utilized14 - 4McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Which Foreign Markets • The choice must be based on an assessment of a nation’s long-run profit potential• The attractiveness of a country depends upon balancing the benefits, costs, and risks associated with doing business in that country• Benefits include- Size of market- Present wealth of the consumers in the market- Likely future wealth of consumers- Economic growth rates14 - 5McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Timing the Entry• Advantages frequently associated with entering a market early are commonly known as first-mover advantages- The ability to preempt rivals and capture demand by establishinga strong brand name- Ability to build sales volume- Ability of early entrants to create switching costs• Disadvantages associated with entering a foreign market before other international businesses are referred to as first-mover disadvantages - Pioneering costs are costs that an early entrant has to bear- Possibility that regulations may change14 - 6McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Scale of Entry• Large scale entry- Strategic Commitments - a decision that has a long-term impact and is difficult to reverse- May cause rivals to rethink market entry- May lead to indigenous competitive response• Small scale entry- Time to learn about market- Reduces exposure risk14 - 7McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Entry Modes• Firms can use six different methods to enter a market- Exporting- Turnkey Projects- Licensing- Franchising- Joint Ventures- Wholly Owned Subsidiaries14 - 8McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.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 reps14 - 9McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Turnkey projects• Advantages:- Can earn a return on knowledge asset- 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 wellContractor agreesto handle everydetail of projectfor foreign client14 - 10McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.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 propertyAgreement wherelicensor grants rights to intangible property to another entity for a specified period of time in returnfor royalties.14 - 11McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Franchising• Advantages:- Reduces costs and risk of establishing enterprise• Disadvantages:- May prohibit movement of profits from one country to support operations in another country- Quality controlFranchiser sellsintangible propertyand insists on rules for operating business14 - 12McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.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 conflict14 - 13McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.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 risk14 - 14McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Advantages and Disadvantages of Entry Modes14 - 15McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Core Competencies and Entry Mode• The optimal entry mode for firms depends to some degree on the nature of their core competencies• A distinction can be drawn between firms whose core competency is- Technological know-how- Management know-how• The greater the pressures for cost reductions are, the more likely a firm will want to pursue some combination of exporting and wholly owned subsidiaries14 - 16McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Core Competencies and Entry Mode• Technological Know-How- Licensing and joint-venture arrangements should be avoided if possible- Should probably use a wholly owned subsidiary- Exceptions include• An arrangement can be structured to reduce the risk of licensees• If the technological advantage is only transitory• Management Know-How- The firms valuable asset is normally a brand name- The result is that franchising and


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