MGX9660: International Business Theory & Practice

Foreign Entry Strategies in International Markets Week 6 Dr Alex Newman

OPENING CASE: Pearl River Piano enters foreign markets

How can an industry based on traditional craft-based skills expand internationally?

Building Blocks of Entry Strategy

Establishing a Subsidiary Abroad Natural resource seeking Market seeking Efficiency seeking Innovation seeking

Four Basic Strategies

High High

Pressure for cost reduction

Global
standardisation

strategy

Transnational strategy

International strategy

Localisation strategy

Low Low Pressure for local responsiveness High

Four Basic Strategies

High High

Pressure for cost reduction

Global
standardisation

strategy

Transnational strategy

International strategy

Localisation strategy

Low Low Pressure for local responsiveness High

Four Basic Strategies

High High

Pressure for cost reduction

Global
standardisation

strategy

Transnational strategy

International strategy

Localisation strategy

Low Low Pressure for local responsiveness High

Four International Businesses Strategies

Strategy Interdependence Performance Costs of control Low

Location

Low

Low

International

Moderate

Moderate

Moderate

Global

High

High

High

Transnational

Very High

Very High

Very High

Hill (2013), p. 467

Ford in Vietnam
How did it enter? What did Ford gain? Fist movers gain or loss

First-mover and Late-mover Advantages

Choice of FDI Entry Modes

High Degree of equity control Wholly Owned Subsidiary Full Acquisition

Newly Created Joint Venture

Partial Acquisition

Low

Resource Growth

What is a Subsidiary?
any operational unit controlled by an MNE and situated outside the home country (Birkinshaw et al., 1998, p.224) May be the totality of an MNEs holdings in a host country or a single entity (such as a sales operation) More than one subsidiary within a host country (Birkinshaw & Hood, 1998).

Characteristics
Small in relation to parent corporation Relatively low on power Traditional flow of resources from HQ to subsidiaries Can be strictly managed Majority of subsidiary staff tend to be host country nationals

Role of a Subsidiary
Dual role (Zanfei 2000) Needs to be locally responsive A high degree of autonomy is required (Zanfei, 2000) to be effective Balance between control & autonomy

Subsidiary roles: a typology

HI BLACK HOLE STRATEGIC LEADER

Competitiveness of subsidiary local environment

IMPLEMENTOR

CONTRIBUTOR

LO
Source: Bartlett & Ghoshal (1986)

LO

Competence of subsidiary

HI

Wholly Owned Subsidiary Advantages Disadvantages Risks

Knowledge Flows in MNEs

Two aspects of knowledge flows that concern the relationship between HQ and the subsidiary: The extent to which subsidiaries engage in knowledge transfer with HQ The directionality of the transaction (are the subsidiaries the providers or receivers of knowledge)

Joint Ventures
Advantages Disadvantages Risks

Greenfield Joint Venture

A venture from the ground up Acquiring an enterprise in the target market
Pros Cons

Danone and Wahaha: failed joint ventures

How can global brand manufacturers like Danone manage their brands when entering a market through a joint venture?

Strategic Alliances
Cooperative agreements Formal (Fuji & Xerox) equity stake Short-term contractual (particular tasks) A low costs route to technology or market

Institutional constraints on foreign entry

1.Certain operations and transactions are not permitted. 2. Need for local knowledge 3. Higher transaction costs due to costly contract enforcement 4. Higher transaction costs due to lack of financial intermediaries

MNEs Growth
From an economic perspective
Vertical expansion locate assets or employees in a foreign country securing the production of a raw material, component, or input (backward) the distribution and sale of a good and service (forward) Horizontal expansion Set up a plant or service delivery facility overseas with the goal of selling in that market without abandoning the similar business in the home country Protectionist barriers, high transportation costs, unfavorable currency exchange rate.
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MNEs Growth
From a sociological perspective
The mechanism by which organizational practices are transferred and replicated from one country to another.

Expanding from relatively rich and technologically advanced countries (first-world MNEs)
Tangible assets financial, physical and human resources Intangible assets brands, technology, know-how (marketing and managerial strengths

Possessing comparative advantages

Overcoming the liability of foreignness effect

From an institutional perspective

Powerful institutional actors of the contemporary world
Economic development Employment opportunities

Change agent
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IB and Human Capital Environment

Dunning (2006) argues that the human environment as a new trajectory for research in FDI and other aspects of international business. Dunning (2006) stresses the need for more explicit consideration to be given to the human aspect of FDI as it is the most important driver for economic advancement. Zhu et al., (2011) Extending the Investment Development Path Model to include the Human Environment Factor, Thunderbird International Business Review.

IDP

Outward FDI

Economic Characteristics

Outward FDI Implications for IHRM

None

Under developed Low level of PCI* & education, poor infrastructure, untrained labour force Government policies and economic systems inadequate to attract FDI DevelopingGrowing domestic market Government policies designed to entice inward FDI Developing Increase in wages/PCI Noticeable decrease in government FDI enticements Developing to developed More advanced technological production Government protects competitive advantages Developed MNEs truly internationalized Government plays little to no role

Few or no implications of outward FDI

Negligible

Few or no implications of outward FDI

Increasing to significant amount

Firms based in developing countries endeavour to adopt or mimic HRM policies and practices of firms in host locations (developed countries) HRM is seen as associated with firms competitive advantage MNEs build IHRM systems HR Director involved in corporate strategy formation. MNEs increase the use of expats Established strong IHRM system Strategic IHRM is emphasized. MNEs use a range of international assignments, key role in cross-national intra-MNE knowledge transfer

Equal to or greater than inward FDI

Equal to inward FDI

Investment development path (IDP) Model

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A model of IHRM Dowling et al., 2008: 3

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HRM issues in MNEs

Expatriation for which purpose? Fire-fighting - to fill positions or solve staffing shortages
To exert parent firm control and coordination in local

units Technological and information exchange Succession planning and leadership development Develop the organisation

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International staffing policies

The Ethnocentric Approach
(reflecting home-country bias in selecting candidates PCNs parent-country nationals) Competency, Control, Communication Adaptation, Compensation, Promotion of HCNs

The Polycentric Approach

(reflecting a host-country bias in selecting employees HCNs host-country nationals) Localisation (knowledge, practices, government support), Long-term, Low cost Control, Fief, Limited career opportunities for both

The Regiocentric Approach

(selecting best candidates on a regional basis without bias to any particular country in that region PCNs, TCNs third-country nationals)
Regionalisation (regional resources and coordination), A bridge to a geocentric approach Lack of global view, Career opportunities for PCNs

The Geocentric Approach

(selecting best candidates on a worldwide basis without any bias to any particular country - HCNs, PCNs, TCNs)
International executive team, No federation Constrained by local government regulations, Training and relocation costs

The Ad Hoc Approach The adoption of the approach(es) should consider companys strategy, structure, size, development of internationalisation, availability of staff, headquarters attitudes, and government regulations
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