Transcript ENTRY MODES
ENTRY MODES Eugene Jaffe תשע"ה/אב/'א 1 THE INTERNATIONALIZATION CONCEPT THE OUTWARD MOVEMENT IN A FIRM’S INTERNATIONAL OPERATIONS. A PROCESS IN WHICH SPECIFIC ATTITUDES OR “ORIENTATIONS” ARE ASSOCIATED WITH SUCCESSIVE STAGES IN THE EVOLUTION OF INTERNATIONAL OPERATIONS. THE PROCESS OF INCREASING INVOLVEMENT IN INTERNATIONAL OPERATIONS. THE PROCESS OF ADAPTING FIRMS’ OPERATIONS (STRATEGY, STRUCTURE, RESOURCES) TO INTERNATIONAL 2 THE PROCESS OF ADAPTING EXCHANGE TRANSACTION MODALITY TO INTERNATIONAL MARKETS. 3 INTERNATIONALIZATION DECISION DOMESTIC VS. FOREIGN GROWTH 4 MARKET SELECTION WHICH MARKETS HOW MANY MARKETS 5 MARKET ENTRY MODE EXPORT LICENSE JV DIRECT INVESTMENT STRATEGIC ALLIANCE ETC. 6 MARKETING OPERATING DECISIONS PRODUCT PRICE PROMOTION PLACE 7 ORGANIZATION AND CONTROL EXPORT DEPARTMENT INTERNATIONAL DIVISION ORGANIZATION BY AREA MATRIX 8 ENTRY MODE FRAMEWORKS STAGES TRANSACTION COST ECLECTIC ORGANIZATIONAL CAPABILITY BASIC THEORY RESOURCE BASED TRANSACTION COST RESOURCE BASED UNIT OF ANALYSIS FIRM TRANSACTION TRANSACTION COST, TRADE THEORY, RESOURCE BASED FIRM EXPLANATORY VARIABLES EXPERIENTAL KNOWLEDGE TRANSACTION CHARACTERISTICS OLI FIRM’S CAPABILITIES BEHAVIORIAL ASSUMPTIONS BOUNDED RATIONALITY TRADE-OFFS BETWEEN GROWTH & RISK ENTRY MODES STAGES BOUNDED RATIONALITY & OPPORTUNISM TRADE OFFS BETWEEN RETURN, RISK, CONTROL & RESOURCES SEVERAL, e.g., INDEPENDENT, COOPERATIVE, INTEGRATED BOUNDED RATIONALITY DECISION CRITERIA BOUNDED RATIONALITY & OPPORTUNISM TRANSACTION COST MINIMIZATION SEVERAL, e.g., CONTRACTUAL TRANSFER, JV, FDI FIRM TRADE OFFS BETWEEN VALUE AND COST INTERNALIZATION VS. COLLABORATION 9 RESOURCE DIMENSIONS OF ENTRY MODE CHOICE RESOURCES RESOURCES HELD BY REQUIRED LOCAL FIRMS FOR STRATEGIC RESOURCES HELD BY OBJECTIVES THE INVESTOR RESOURCES AVAILABLE ON THE MARKET Source: Meyer and Estrin, “Entry Mode Choice in Emerging Markets”, October 16, 1998. MARKET VALUATION OF LOCAL FIRMS TECHNOLOGY INDUSTRY CONCENTRATION INDUSTRY GROWTH TRANSFERABLE KNOWLEDGE MANAGERIAL SERVICES FINANCIAL CAPITAL REAL ESTATE MANAGERIAL STAFF OPERATION PERMITS 10 LOCUS OF CONTROL EXPORT LICENSE FRANCHISE MANAGEMENT CONTRACT little to little to moderate moderate moderate moderate MOTIVATION TIME STRATEGIC FLEXIBILITY RESOURCE COMMITMENT 11 SUBSIDIARY LOCUS OF CONTROL JV STRATEGIC ALLIANCE CONTRACT MANUFACT. highest MOTIVATION TIME STRATEGIC FLEXIBILITY RESOURCE COMMITMENT 12 ENTRY CHOICE = ƒ (CULTURAL HARACTERISTICS, FIRM VARIABLES, INDUSTRY VARIABLES). 13 FIRM LEVEL VARIABLES DIVERSIFICATION. Firms following diversification strategies are more likely to choose acquisition over greenfield. COUNTRY EXPERIENCE. More experience of the local environment leads to acquisition. MULTINATIONAL EXPERIENCE. A firm with greater multinational experience is able to bear the risk of an acquisition and to integrate subsidiaries of diverse managerial nationality. ASSET SIZE. The larger the investing firm, the greater its ability to acquire. 14 FIRM LEVEL VARIABLES MARKETING KNOWLEDGE. Firms can acquire local, established brand names and combine them with their firm-specific marketing skills. 15 THE IMPACT OF CULTURE ON STRATEGY NATIONAL CHARACTER THEORY. MNC subsidiary ownership policies will reflect the characteristics of the countries in which they are domiciled. Managers of MNCs based in high power distance and high uncertainty avoidance countries are more likely to prefer wholly owned subsidiaries over shared-equity. CULTURAL DISTANCE. High cultural distance between the home base of the investor and the target market will lead, everything else constant, to sharedequity ventures. 16 SHARED EQUITY LACK OF KNOWLEDGE OF LOCAL MARKET. LACK OF KNOWLEDGE OF HOW TO OPERATE IN A GIVEN INDUSTRY. R&D INTENSITY. EXPERIENCE IN THE TARGET MARKET. 17 GREENFIELD VS. ACQUISITION VARIABLE ACQ GF Lower, Less uncertain - + NS Market Concentration + - NA NS -- Divers.of Parent + - .001 NS NS Host country’s GNP/POP (develop) High growth in host market4 Mkt diff. Of Parent’s Prime Product Line + - .05 -- .01 - + .05 .01 -- + - NS .01 NS Rate of Return Int’l Exp of Parent Zejan Hennart Cho (1990)1 & Park (1995)3 (1993)2 NS 1 Swedish MNE’s expansion into 35 countries Japanese MNE’s entry into the USA. 3 Japanese Manufacturing FDIs in 45 countries, 1969-1991. 4 Zejan=growth of production; Hennart=growth of demand. 2 18 GREENFIELD VS. ACQUISITION VARIABLE Size of Host Market ACQ GF Zejan Hennart Cho (1990)1 & Park (1995)3 (1993)2 ? NS --- R & D Intensity - + -- .01 .05 Stronger Value of ¥/$ Lower US/Japanese Stock Mkt Prices Market Follower + - -- NS -- + - -- Opp sign -- Experience in Host Market Low Endownment of Human Resources Rel. Size: Subsidiary/Parent Cultural Distance + - -- NS NS + - -- -- + - -- Opp Sign .01 .10 .05 19 STRATEGIC VARIABLES ENVIRONMENTAL VARIABLES •COUNTRY RISK •LOCATION FAMILIARITY •DEMAND CONDITIONS •VOLATILITY OF COMPETITION •EXTENT OF NATIONAL DIFFERNCES •EXTENT OF SCALE DIFFERENCES •GLOBAL CONCENTRATION ENTRY MODE DECISION TRANSACTION VARIABLES •VALUE OF FIRM-SPECIFIC KNOW-HOW •TACIT NATURE OF KNOWHOW Source: Hill, Hwang & Kim, 1990. 20 ENTRY MODE DECISIONS STRATEGIC VARIABLES MULTI-DOMESTIC STRATEGY GLOBAL STRATEGY NEED FOR GLOBAL STRATEGIC COORDINATION ENVIROMENTAL VARIABLES HIGH COUNTRY RISK HIGH PSYCHOLOGICAL DISTANCE UNCERTAIN DEMAND VOLATILE COMPETITION TRANSACTION-SPECIFIC VARIABLES HIGH DISSEMINATION RISK OF TACIT (INCOME GENERATING) ENTRY MODE LOW CONTROL HIGH CONTROL HIGH CONTROL LOW RESOURCE COMMITMENT LOW RESOURCE COMMITMENT LOW RESOURCE COMMITMENT LOW RESOURCE COMMITMENT HIGH CONTROL 21 JOINT VENTURE OBJECTIVES Establish strategic objectives and specify time period for achieving them. 22 COST/BENEFIT ANALYSIS Evaluate advantages and disadvantages of JV compared to alternative modes of entry: financial commitment management commitment risk reduction control long-run market penetration 23 SELECTING PARTNER(S) Profile of desired candidates Identify/screening of candidates Initial contact/discussions Choice of partner 24 DEVELOP BUSINESS PLAN Partner’s inputs. Venture outputs. Management decision making processes. Performance evaluation system. Marketing mix. Production and procurement policies. Personnel policies. R&D policy. 25 NEGOTIATION OF JV AGREEMENT Final agreement on business plan. 26 CONTRACT WRITING PURPOSE AND CHARACTER OF JV. CONTRIBUTIONS OF EACH PARTNER. RESPONSIBILTIES AND OBLIGATIONS. EQUITY OWNERSHIP. CAPITAL STRUCTURE. MANAGEMENT AND MANAGERIAL POLICIES. ACCOUNTING AND FINANCIAL STATEMENTS. SETTLEMENT OF DISPUTES. 27 PERFORMANCE EVALUATION Establish control systems for measuring venture performance. 28 GOODYEAR - SUMITOMO JOINT VENTURE S.Afr. Phil .. Buys 1.3% of Goodyear stock Pol India Buys 10% of Sumitomo stock; pays Sumitomo $936 million for difference in equity value that both contribute to JV %50 %50 %75 %75 %25 14 plants in W. Europe %75 %50 29 WORLD TIRE SHARES BEFORE JV (1998) Bridgeton Michelin Goodyear Sumitomo Others TOTAL SALES $75 BILLION 18.6% 18.3 17.1 5.5 41.5 30 GOODYEAR-SOMITOMO JV LEVEL OF CONTROL Goodyear controls European and USA operations of Somitomo Somitomo controls JV in Japan 31 GOODYEAR-SOMITOMO JV MOTIVATION Strengthens Goodyear in North America and Europe against Michelin Heavy debts of Somitomo because of Dunlop operation and the recession in Japan Savings of $300 million (starting at end of 3rd year) in R&D and purchasing costs 32 CORNING-VITRO JOINT VENTURE - 1991 $130 million CORNING VITRO 51% 49% 49% 51% 33 CORNING VITRO JV - MOTIVATION Joint Risk Reduction Exchange of complementary technologies and patents Forward Integration Share facilities, distribution and brand recognition in those markets where one partner is not the leader. 34 MOTIVATION Glass raw material in Mexico less expensive than in the U.S. Corning gains access to less expensive products made in Mexico. 35 MOTIVATION Co-opting competition (Anchor in Mexico) Rationalization Corning strong in the U.S., Europe and Asia. Vitro strong in Mexico, South and Central America. 36 LOCUS OF CONTROL Merging of consumer housewares division - including research, manufacturing, marketing and distribution into two separate entities, one based in Mexico, the other in the U.S. Selected the 51-49 ratio to comply with existing Mexican restrictions on foreign ownership. Give the agreement greater agility by conferring primary responsibility and control to the local partner. 37 THE RESTRUCTURE (JAN.1994) Too many decision layers. Heightened competition during start-up period. Impact of Asian imports into Mexico. Slowing U.S. economy. Lower Mexican tariff barriers. 38 THE CROSS-DISTRIBUTION AGREEMENT Cross-supply of products. Corning sales in Mexico increased from less than $1 million to $52 million. Vitro product sales in the U.S. were $140 million. 39 STRATEGIC ALLIANCES BENEFITS Economies of scale Technology development Risk reduction Shaping competition New market opportunities RISKS Imbalance of benefits Imbalance in commitment & motivation Communication problems Conflict between partners 40 TYPES OF STRATEGIC ALLIANCES TECHNOLOGY DEVELOPMENT COALITIONS OPERATIONS AND LOGISTICS COALITIONS Co-operation aimed at reducing the costs and sharing the risks associated with technology development; the pooling of R&D transfer from “leaders” to “followers”. Improving manufacturing/production efficiency through scale and/or learning benefits; transferring manufacturing know-how. 41 TYPES OF STRATEGIC ALLIANCES MARKETING, SALES AND LOGISTICS COALITIONS MULTIPLEACTIVITY COALITIONS SINGLECOUNTRY AND MULTICOUNTRY COALITIONS Motivated by the need for market access. Cooperation that involves some combination of the above. Refers to the geographical scope of the coalition. 42 TYPES OF STRATEGIC ALLIANCES X AND Y COALITIONS Refers to the value activities undertaken by each partner. In X coalitions, value activities are divided (e.g., one partner manufactures, the other markets). In Y coalitions, the partners share the performance of one or more activities. 43 44 COUNTRY STRATEGIC IMPORTANCE/COMPETITIVE STRENGTH MATRIX DANGER/FIX HI e.g., Japan AVOID/RAID MAINTAIN/ ENHANCE/ PREEMPT e.g., United States, Germany DEFEND LO e.g., Australia e.g., Brazil HI LO COMPETITIVE STRENGTH OF BUSINESS IN COUNTRY 45 CONVENIENCE PORTFOLIO MATRIX Quadrant II (emulating/latent countries) High convenience orientation Israel Spain Greece, Russia Ability to Turkey, Hungary pay - low Pakistan Bangladesh Sudan Somalia Afghanistan USA Japan Saudi Arabia Singapore Germany France Ability to UK pay - high Switzerland Denmark Sweden Norway Australia New Zealand Low convenience orientation Source: Luqmani, et al, 1994. Quadrant III (Traditional countries) Quadrant I (Innovator/leader countries) Quadrant IV (Utopian countries) 46 NIKE EUROPE WEAK “MOLES” GERMANY AUSTRIA SPAIN PORTUGAL FINALND “RESISTANCE” STRONG BENELUX GREECE SWITZERLAND STRONG MARKET POTENTIAL WEAK 47 BUSINESS GROWTH/COMPETITIVE STRENGTH MATRIX HI ¥ WILDCAT COUNTRIES STAR COUNTRIES e.g., Italy e.g., Japan, Spain, Hungary L $ DOG COUNTRIES LO £ CASH COW COUNTRIES e.g., United States, United Kingdom LO HI COMPETITIVE STRENGTH OF BUSINESS IN COUNTRY 48 Multiple factor index and political activity index Country USA Canada Bahamas Jamaica Puerto Rico Sweden UK France W. Germany Switzerland Mexico Libya Italy Australia Japan P15 a .081 .090 .129 .138 .111 .063 .072 .075 .075 .069 .138 .132 .072 .087 .072 APGb .016 .024 .092 .030 .028 .006 .006 .012 .000 .020 .066 .062 .014 .038 .024 GNP/N c .428 .333 .207 .060 .149 .364 .204 .279 .264 .299 .060 .159 .158 .254 .173 EAI d .288 .267 .039 .007 .086 .225 .228 .219 .240 .093 3065 .024 .186 .255 .258 MFI e .813 .714 .467 .235 .374 .658 .510 .585 .579 .481 .329 .377 .480 .634 .527 PAIf .800 .793 .218 .384 .712 .697 .789 .668 .706 .728 .408 .002 .441 .702 .742 49 50 Political Risk