Modes of Entry

Chapter 9, pages 260-268

Modes of Entering a Country

Wholly owned subsidiary. Sometimes created by an acquisition.

Joint venture. Sometimes created by a merger. Licensing Franchising Exporting and importing Strategic alliances. See also: Table 9-1, page 267.

Modes of EntryWholly Owned Subsidiary

A wholly owned subsidiary is an overseas operation that is totally owned and controlled by one MNC. Used when The MNC wants total control The MNC believes that the firm will be more

efficient without outside partners. Some countries prohibit wholly owned

subsidiaries Some host countries are concerned that local

firms will not be able to compete with the MNC.

Modes of EntryWholly Owned Subsidiary (2)

Home-country unions often view foreign subsidiaries as an attempt to “export jobs”

Today many multinationals opt for a merger, alliance, or joint venture rather than a wholly owned subsidiary

Modes of EntryJoint Ventures

An international joint venture (IJV) is An agreement under which two or more companies from different countries own or control a business In a non-equity joint venture, one firm

provides services to another In an equity joint venture, each firm invests in

the business. The firms share the risks and the profits.

Modes of EntryAdvantages of Joint Ventures

Can create economies of scale or scope that improve efficiency

Access to knowledge: Usually, each partner contributes knowledge or skills

Political factors: The host-country partner can deal with political problems, such as a hostile government or restrictive laws

Avoiding collusion among host-country competitors or restrictions on foreign-owned firmsExample: U.S. firms often enter the Japanese market with a Japanese partner, who handles marketing

Modes of EntryMergers and Acquisitions

This involves a cross-border purchase or exchange of equity (stock) involving two or more companies

If one company buys another, the buying company makes an acquisition. This may create a wholly owned subsidiary, or the acquired company may be absorbed into the buying company.

If each company contributes financially to the new company, the transaction is a merger. Creates a joint venture

The strategic plan of merged companies often calls for each to contribute a series of strengths toward making the firm a highly competitive operation

Acquisition Example

Bowater was a U. S. paper manufacturer. Abitibi is a Canadian paper manufacturer. The paper industry has more capacity

than is needed. In 2007, Abitibi bought Bowater. The new

company is called Abitibibowater. Abitibi is now managing Bowater’s assets

and employees.

Modes of EntryMerger Example – Springs Global

In 2005, Springs Industries merged with Coteminas, a Brazilian textile firm that had previously done contract manufacturing for Springs

Both companies had been privately owned. The new company was called Springs Global Former Springs employees handled marketing and sales

in the United States. Some manufacturing remained in the United States. Manufacturing headquarters and most manufacturing

were in Brazil Joint supply chain management department Co-CEO's until 2007

Springs GlobalFrom Private to Public

Ownership

In an effort to keep some manufacturing in the U. S., Springs made incremental efficiency improvements in technology.

Springs’ U. S. manufacturing was still not cost-competitive.

The last U. S. plants were shut down in 2007. In 2007, Springs Global made an initial public

offering in the Brazilian stock market. The 2 families that owned Springs Global (U.S. and

Brazilian) sold a substantial portion of their stock. The founder of Coteminas is now the sole CEO of

Springs Global.

Modes of EntryLicensing

A licensor owns an intangible property, such as a patent, copyright, trademark, formula, process, or design

The licensor grants another firm, a licensee the exclusive right to make or sell the good in a particular geographic area for a specified period of time.

The licensee pays a fee (usually a percentage of sales) to the licensor

Often used to market mature products, when competition is strong, and profit margins are low.

Modes of EntryFranchising

A franchisor owns a trademark, logo, product line, and management methods.

The franchisor allows a franchisee to use these assets to run a business in a particular location or geographic area, in return for a an initial fee, plus a percentage of sales.

The franchise may be granted for a certain period of time.

Common in hotel, restaurant, and fast food industries

Modes of EntryExporting and Importing

Often the only available choices for small and new firms wanting to go international

Provide an avenue for larger firms that want to begin their international expansion with a minimum of investment

Exporting and importing can provide easy access to overseas markets

For exporting, the choice of a distributor is a key decision

Export/import is usually a first step in globalization

Modes of EntryStrategic Alliances

A strategic alliance is a cooperative agreement between firms Includes joint ventures, long-term

contracts, short-term contracts

Modes of EntryAdvantages of Strategic

Alliances

To acquire marketing expertise and political savvy in a foreign market

To share costs and risks To trade complementary skills and

assets To set an industry standard in

technology

Strategic Alliance ExampleNUMMI

New United Motors Corporation (NUMMI) Joint venture between Toyota and General

Motors Toyota’s goals:

Start building products in the U. S. Learn about the U. S. market for autos Learn to manage American workers

G. M.’s goal Build cars more cheaply Learn Toyota’s lean production methods

Modes of EntrySelecting an Alliance Partner

The two firms should help each other achieve strategic goals Each must have some skills or assets that the

other lacks The two firms should have a shared vision for the

partnership. The potential partner should have a reputation

for "fair play" with partners.

Modes of EntryStrategic Alliance Structure

Make it difficult to transfer technology that is not supposed to be transferred. ("Wall off" other technology). Example: Boeing and Japanese companies

cooperated to build the Boeing 767. Boeing shared production technology

with the Japanese firms. Boeing did not share other research,

design, or marketing information.

Modes of EntryStrategic Alliance Structure (2)

Put restrictions on marketing, technology, research, or design into the contract as needed.

Agree to swap complementary technologies Each partner has an incentive to live up to

the contract. If possible, each partner should make a

significant financial commitment to the alliance.

Modes of EntryManaging a Strategic Alliance

Build trust through informal contacts between objectives.

Communicate effectively and frequently.

Both firms should live up to their commitments.

Learn from your partner.

Selecting an Entry Mode

Firms whose core competency is proprietary technology that must be protected

These firms often export or set up a wholly owned subsidiary – these provide the greatest protection for proprietary technology

When these firms use joint ventures or strategic alliances, they try to "wall off" or protect critical technology

This may be hard to do in countries where the legal system does not protect intellectual property

Selecting an Entry Mode (2)

Licensing of proprietary technology is risky but is sometimes done To establish an industry standard To discourage competitors from developing

superior technology A foreign government will not allow a

company to enter its market otherwise

Selecting an Entry Mode (3)

Firms whose core competency is management know-how often set up a wholly owned subsidiary or joint venture (j.v.)

Foreign governments often prefer a joint venture Joint venture provides local knowledge A joint venture may have a better public image in

the host country than a wholly owned subsidiary Subsidiary or j.v. may own some service outlets

and also sell franchises to other owners (hotel chains are a good example)