Internationalisation of Firms and Entry Strategies

Internationalisation of Firms

  • Definition: The process of increasing involvement in international operations.
  • Decision to Internationalise:
    • Rationale vs. bounded rationality.
    • Risk vs. uncertainty.
  • Stage Theory of MNE Evolution: Also known as the Uppsala Model.
  • Born Global Firms

Entry Strategies

Learning Objectives

  • Understand the three basic decisions a firm must make when deciding on foreign expansion:
    • Which markets to enter.
    • When to enter those markets.
    • On what scale to enter.
  • Compare the different modes firms use to enter foreign markets.
  • Identify the factors that influence a firm’s choice of entry mode.

Basic Decisions for Global Expansion

  • Where: Which markets to enter.
  • When: When to enter those markets and on what scale.
  • How: Which entry mode to use:
    • Exporting
    • Licensing or franchising
    • Joint venture
    • Wholly-owned subsidiary
    • Mergers and acquisitions

Market Selection: Where to Enter?

  • The choice of location depends on long-run profit potential.
  • Favourable Markets
  • Less Desirable Markets

Country Screening

  • Objective: To reduce the number of countries that warrant in-depth investigation as potential target markets to a manageable few.
  • Outcomes: Identify 5 or 6 of the highest potential country markets.
  • Criteria:
    • Market size/growth rate.
    • Market intensity (consumption capacity).
    • Country’s receptivity to imports.
    • Infrastructure appropriate for doing business.
    • Economic freedom.
    • Political risk, etc.

Funnel Approach

  • From general to specific.
  • Broad screen data are readily available from sources such as globalEdge.
  • Macro-level market potential indicators (population or income-related measures).
  • A short list of countries that represent the most attractive markets.

Market Entry Strategy Exercise: Eco-Friendly Sports Water Bottle

  • Target Markets:
    1. Australia: High demand for sustainable products but competitive market.
    2. South Africa: Emerging interest in sustainability but economic challenges.
    3. India: Growing market with interest in health and fitness but high price sensitivity.
  • Use the GlobalEdge data source to gather data on the three target markets.
  • Focus on:
    • Economic Indicators: GDP, growth rate, disposable income.
    • Market Size & Demand: Trends in consumer interest for sustainable products.
    • Regulatory Environment: Import restrictions, labeling requirements.
    • Consumer Preferences: Attitudes toward sustainability.
  • Each group selects the most attractive market and provides one key reason for their choice.

Timing of Entry: When to Enter?

  • FIRST MOVER ADVANTAGES
    • The ability to pre-empt rivals by establishing a strong brand name.
    • The ability to build up sales volume and ride down the experience curve ahead of rivals and gain a cost advantage over late entrants.
    • The ability to create switching costs that tie customers into products or services making it difficult for late entrants to win businesses.
  • FIRST MOVER DISADVANTAGES
    • Pioneering costs: when the foreign business system is so different from that in the home market, the firm must devote considerable time, effort, and expense to learning the rules of the game.
    • Costs of business failure.
    • Costs of promoting and establishing a product offering.
    • Liability of foreignness: all additional costs a firm operating in a market overseas incurs that a local firm wouldn’t incur (Zaheer, 1995: 343).

Scale of Market Entry: How to Enter?

  • Entering a foreign market on a significant scale is a major strategic commitment that changes the competitive playing field.
  • Scale of market entry = Strategic Commitment
  • Long-term impact and difficult to reverse.

Factors Influencing Entry Strategy

  • Long-term strategic importance of the market
  • Degree of control firm wants to maintain over the decisions, operations, and strategic assets involved in the venture.
  • Degree of risk Willingness to tolerate, and the timeframe in which it expects returns.
  • Resources Organizational and financial resources: capital, managers, technology
  • Partners Availability and capabilities of these partners
  • Value-adding activities By itself or by partners

Foreign Market Entry Strategies

  • Low-control strategies
    • Exporting and countertrade
    • Global sourcing
  • Moderate-control strategies
    • Licensing, franchising, and other contractual strategies
    • Project-based (nonequity) collaborative ventures
    • Minority-owned equity joint venture
  • High-control strategies
    • Majority-owned equity joint venture
    • Wholly-owned subsidiary (FDI)
  • Control available to the focal firm over foreign operations: Minimum to Maximum
  • Resource commitment: Minimum to Substantial
  • Flexibility: Maximum to Minimum
  • Risk: Low to High

Traditional Entry Strategies - Export

  • Exporting as the first foreign entry strategy
    • Low risk, low cost, and flexible
    • Trade, trade deficits, and trade surpluses are related to exporting
    • Channels: independent distributor or agent or own marketing subsidiary abroad
    • Mainly merchandise, as most services cannot be transported

Exporting: Pros and Cons

  • PROS
    • Avoids the costs of establishing local manufacturing operations
    • Helps the firm achieve experience curve and location economies
  • CONS
    • There may be lower-cost manufacturing locations
    • High transport costs and tariffs
    • Large firms: proactively seek new export opportunities
    • Smaller firms: may export reactively – intimidated by the complexities of exporting

Licensing: Pros and Cons

  • PROS
    • ✓avoids development costs and risks associated with opening a foreign market
    • ✓Avoids barriers to investment
    • ✓Capitalise on market opportunities without developing those applications itself
  • CONS
    • ➢Doesn’t have the tight control required for realising experience curve and location economies
    • ➢Doesn’t have the ability to coordinate strategic moves across countries is limited
    • ➢Proprietary or intangible assets could be lost

Franchising: Pros and Cons

  • PROS
    • ❑Avoids the costs and risks of opening up a foreign market
    • ❑Quickly build a global presence
  • CONS
    • ❑Inhibits the firm’s ability to take profits out of one country to support competitive attracts in another
    • ❑The geographic distance of the firm from franchisees can make it difficult to detect poor quality

FDI and Collaborative Ventures

  • Foreign direct investment (FDI): Strategy in which the firm establishes a physical presence abroad by acquiring productive assets such as capital, technology, labour, land, plant, and equipment.
  • International collaborative venture: A cross-border business alliance in which partnering firms pool their resources and share costs and risks of a venture.

Wholly Owned Subsidiary: Pros and Cons

  • PROS
    • Reduce the risk of losing control over core competencies
    • Give a firm the tight control over operations in different countries in order to engage in global strategic coordination required in order to realize location and experience curve economies.
  • CONS
    • Bears the full cost and risk of setting up overseas operations
  • Greenfield
    • Build a subsidiary from the ground up
    • Better when the firm needs to transfer organizationally embedded competencies, skills , routines and culture
  • Acquisition
    • Acquire an existing company
    • Better when there are well-established competitors or global competitors interested in expanding

Acquisition: Pros and Cons

  • PROS
    • quick to execute
    • Pre-empt their competitors
    • Less risky than greenfield ventures
  • CONS
    • overpays for the acquired firm
    • cultural clash
    • Fail to realise synergies
    • Inadequate preacquisition due diligence

Joint Ventures: Pros and Cons

  • PROS
    • benefit from a local partner’s knowledge
    • The costs and risks of entering a foreign market are shared
    • Satisfy political considerations for market entry
  • CONS
    • Give control of its technology to its partner
    • May not have the tight control to realize experience curve or location economies
    • Shared ownership may lead to conflicts and battles for control

International Strategic Alliances: Pros and Cons

  • PROS
    • bring together complementary skills and assets that neither partner could easily develop
    • allow firms to share the fixed costs and associated risks of developing new products or processes
    • Facilitate entry into a foreign market
    • Can help firms to establish industry standards
  • CONS
    • can give competitors low-cost routes to new technology and markets
    • Contributions of partners may be less than expected

How to Make Strategic Alliances Work?

  • Partner selection
  • Alliance structure
  • The manner in which the alliance is managed

New Entry Strategy: Digital Platforms and Ecosystems (DPE)

  • Technology
  • Strategic decisions:
    • the number of sides to bring on board;
    • design;
    • how to provide search functionality?
    • pricing structures;
    • governance rules.
  • Search time reduction – findability instead of place

Platforms and International Business

  • Platform as a venue for innovation: Apple (iOS); Google (Android)
  • Platform as a multi-sided marketplace: uber, Airbnb, Alibaba, Facebook
  • ➔ New ways of internationalization
  • New ways of building knowledge and relationships
  • New ways of creating and delivering value to global customers

Managerial Implications

  • Is there a ‘Right’ way to enter foreign markets?
    • No. There are just decisions that are associated with different levels of risk and reward
  • A company may have a variety of entry choices for different countries and tasks
  • Entry strategies even when successful, do not guarantee international success – post entry strategies are also critical.
  • Entry strategies change over time: entry, exit and re-entry