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Lecture Global business today (8/e): Chapter 13 - Charles W.L. Hill

The objectives of this chapter: Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter, when to enter those markets, and on what scale. Compare and contrast the different modes that firms use to enter foreign markets. Identify the factors that influence a firms choice of entry mode. Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy. | Global Business Today 8e © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. by Charles W.L. Hill Chapter 13 Entering Foreign Markets Introduction Question: How can firms enter foreign markets? Firms can enter foreign markets through: Exporting Licensing or franchising to host country firms A joint venture with a host country firm A wholly owned subsidiary in the host country The advantages and disadvantages of each entry mode is determined by: Transport costs and trade barriers Political and economic risks Firm strategy Basic Entry Decisions Question: What are the basic entry decisions for firms expanding internationally? A firm expanding internationally must decide: Which markets to enter When to enter them and on what scale How to enter them - the choice of entry mode Entry Modes Question: What is the best way to enter a foreign market? Firms can enter foreign market through: Exporting Turnkey projects Licensing Franchising Joint ventures Wholly owned subsidiaries Each mode has advantages and disadvantages Selecting an Entry Mode Question: How should a firm choose a specific entry mode? All entry modes have advantages and disadvantages The optimal entry mode depends to some degree on the nature of a firm’s core competencies Core competencies can involve: Technological know-how Management know-how Selecting an Entry Mode Firms facing strong pressures for cost reductions are likely to pursue some combination of exporting and wholly owned subsidiaries This will allow the firms to achieve location and scale economies as well as retain some degree of control over worldwide product manufacturing and distribution Greenfield or Acquisition? Question: Should a firm establish a wholly owned subsidiary in a country by building a subsidiary from the ground up (greenfield strategy) or by acquiring an established enterprise in the target market (acquisition strategy)? The number of cross border acquisitions is increasing Over the last decade, 50-80 percent of all FDI inflows have been mergers and acquisitions Greenfield or Acquisition? Acquisitions: Are quick to execute Enable firms to preempt their competitors Can be less risky than greenfield ventures Acquisitions fail when: The firm overpays for the assets of the acquired firm There is a clash between the cultures of the acquiring and acquired firm Attempts to realize synergies by integrating the operations of the acquired and acquiring entities run into roadblocks and take much longer than forecast There is inadequate pre-acquisition screening Greenfield or Acquisition? Question: How can firms reduce the problems associated with acquisitions? Firms can reduce the problems associated with acquisitions: Through careful screening of the firm to be acquired By moving rapidly once the firm is acquired to implement an integration plan Greenfield or Acquisition? Question: Why are greenfield ventures attractive? Greenfield ventures are attractive because they allow the firm to build the kind of subsidiary company that it wants However, greenfield ventures: Are slower to establish Are risky because they have no proven track record Can be problematic if a competitor enters via acquisition and quickly builds market share