Principal Motives for Intl Expansion

World Market
Locations
Economies

To seek lower
production factor costs

Economies
of Scale

To expand sales and

production volume

Economies
of Scope

To exploit proprietary
assets

LOCATION EFFICIENCIES

LOCATION EFFICIENCIES CAN BE ACHIEVED BY LOCATING THE PRODUCTION &

R &D DEPARTMENT IN COUNTRIES WHERE LABOUR IS CHEAP OR WHERE SKILLED
WORKFORCE IS AVAILABLE.

FOR EX. VOLKSWAGEN PRODUCES ITS PARTS IN CHINA IN ORDER TO TAKE

ADVANTAGE OF CHEAP CHINESE LABOUR.

SIMILARLY, INDIAS SUPPLY OF SKILLED AND HARD WORKING PROGRAMMERS

IS CERTAINLY A REASON WHY IBM HAS A LOT OF THEIR PROGRAMMING DONE
IN THIS COUNTRY.

ECONOMIES OF SCALE

ECONOMIES OF SCALE CAN BE ACHIEVED BY MANUFACTURING A PRODUCT

WITH ONE MACHINE IN A HIGHER VOLUME. THIS IS BECAUSE THE FIXED COST IS
DISTRIBUTED AMONG MORE OUTPUT AND SO, AVERAGE FIXED COST FALLS.
SINCE AVERAGE FIXED COST IS A PART OF AVERAGE COST, EVEN AVERAGE COST
ALSO FALLS.
DAIMLER PRODUCES ITS M CLASS SUV IN ALABAMA AND THEN DELIVERS IT
TO THE WHOLE WORLD. THIS IS STILL CHEAPER FOR THE COMPANY THAN
BUILDING FACTORIES IN EVERY MAJOR MARKET TO SERVE THE LOCAL
CUSTOMERS.

ECONOMIES OF SCOPE

ECONOMIES OF SCOPE CAN BE ACHIEVED BY BOARDING COMPANYS

PRODUCT LINES IN EACH OF THE COUNTRIES IT ENTERS TO LOWER THEIR

COSTS AND TO ENHANCE THEIR BOTTOM LINES. FOR EX. IF A COMPANY

ENTERS A NEW MARKET WITH ONLY ONE PRODUCT, THE DISTRIBUTION AND
MARKETING COSTS FOR THIS ONE PRODUCT MIGHT BE VERY HIGH. THE COST
PER UNIT WOULD BE LOWER WHEN THE COMPANY STARTS PUSHING MORE
PRODUCTS INTO THE MARKET, SINCE THE DISTRIBUTION CHANNELS AND
MARKETING EFFORTS CAN BE SHARED.

A COMPANY WILLING TO EXPAND BEYOND ITS HOME COUNTRY HAS TO DECIDE;

WHERE TO OPERATE
THE ORDER OF ENTRY INTO POTENTIAL COUNTRIES
THE ALLOCATION OF RESOURCES AMONG THESE COUNTRIES
THE RATE OF EXPANSION IN THESE COUNTRIES

SELECTION OF DESTINATION COUNTRY IS FOLLOWED BY THE DECISION OF

ENTRY STRATEGY
CHOOSING THE RIGHT ENTERY STRATEGY SAVES TIME AND MONEY
PROVIDES STRATEGIC ADVANTAGES
REDUCES THE RISK

IT IS POSSIBLE THAT ONCE A COMPANY SELECTS A PARTICULAR

ENTRY OPTION, IT MIGHT DECIDE TO SHIFT INTO ANOTHER MODE
BASED ON INTERNAL AND EXTERNAL CHANGES.

FOR EX. TOYOTA MOTORS ENTERED THE U.S. MARKET WITH EXPORTS
OF ITS VEHICLES FROM JAPAN; EVENTUALLY IT BUILT MANUFACTURING
PLANTS IN THE UNITED STATES TO SERVE THE GROWING MARKET IT
HAD CAPTURED.
AFTER MANY YEARS OF OPERATIONS IN INDIA, IBM LEFT THE COUNTRY

AND RETURNED AS AN EXPORTER OF ITS HARDWARE AND SOFTWARE.

Export
HOME COUNTRY

HOST COUNTRY

Revenues

MNE

Customers

Export of Goods

Exporting
Indirect Exporting
Export merchants
Export agents
Export management companies (EMC)
Cooperative Exporting
Piggyback Exporting
Direct Exporting
Firms set up their own exporting departments

Export

Advantages
Low initial investment
Reach customers quickly
Complete control over
production
Benefit of learning for
future expansion

Disadvantages
Potential costs of trade
barriers
Transportation cost
Tariffs and quotas

Foregoes potential location

economies
Difficult to respond to
customer needs well

When Is Export Appropriate?

Low trade barriers
Home location has cost advantage
Customization not crucial

TURNKEY PROJECTS
UNDER THIS SYSTEM, A FOREIGN COMPANY IS GIVEN THE CONTRACT TO SET
UP THE ENTIRE PLANT OR A PROJECT INCLUDING THE TRAINING OF OPERATING

PERSONNEL. AFTER THE COMPLETION OF THE CONTRACT THE FOREIGN CLIENT IS

HANDED THE KEY TO THE PLANT THAT IS READY FOR THE OPERATION. TURNKEY
PROJECTS ARE COMMON IN CHEMICAL, PHARMACEUTICAL AND REFINWERY
INDUSTRY. EVEN SETTING UP OF AERODROME COULD BE A TURNKEY PROJECT.

Licensing Agreement
HOME COUNTRY

HOST COUNTRY

Licensing of Technology

MNE

Local Firm

Fees and Royalties

Licensing Agreement

Advantages
Low initial investment
Avoids trade barriers
Potential for utilizing
location economies
Access to local knowledge
Easier to respond to
customer needs

Disadvantages
Lack of control over operations
Difficulty in transferring tacit
knowledge
Negotiation of a transfer price
Monitoring transfer outcome

Potential for creating a

competitor

When Is Licensing Appropriate?

Well codified knowledge
Strong property rights regime
Location advantage

Franchising Agreement
FRACHISING IS A FORM OF LICENSING IN WHICH A COMPANY
(FRANCHISOR) ALLOWS OTHER INDEPENDENT COMPANY (FRANCHISEE) IN
A FOREIGN TARGET COUNTRY TO CONDUCT BUSINESS UNDER THE
FRANSISORS TRADE NAME, POLICIES AND PROCEDURES.

THE MAIN GROWTH PERIOD OF FRANCHISING WAS AFTER THE

SECOND WORLD WAR. NOWADAYS, FRANCHISING IS COMMON IN
BUSINESS FIELDS SUCH AS FAST-FOOD RESTAURANTS, CAR RENTAL
CHAINS, SOFT DRINKS, HOTEL CHAINS AND MANY OTHER SERVICE
BUSINESSES.

Joint Venture
HOME COUNTRY

HOST COUNTRY

MNE

Local Firm
Inputs
Inputs

Share of Profit

Share of
Profit

Joint Venture
Company

Joint Venture

Advantages
Access to partners local
knowledge
Reduction of concern about
overpayment
Both parties have some
performance incentives
Significant control over
operation

Disadvantages
Potential loss of proprietary
knowledge
Potential conflicts between
partners
Neither partner has full
performance incentive
Neither partner has full
control

When Is a Joint Venture Appropriate?

Both partners contribute hard-to-measure inputs
Large expected mutual gains in the long-run
Trade secrets can be walled off

Foreign Acquisition
HOME COUNTRY

HOST COUNTRY

Investment

MNE

Local Firm

Profit

Merger & Acquisition

MERGER IS GENERALLY BETWEEN TWO EQUIVALENT ENTITIES.

ACQUISITION MAY BE;

1] A MINORITY
2] A MAJORITY
3] FULL OUTRIGHT STAKE

ACQUISITION OF FULL OUTRIGHT STAKE IS ALSO CALLED BROWN-FIELD INVESTMENT

Foreign Acquisition
Advantages
Access to targets local
knowledge
Control over foreign
operations
Control over own
technology

Disadvantages
Uncertainty about targets
value
Difficulty in absorbing
acquired assets
Infeasible if local market for
corporate control is
underdeveloped

When Is Acquisition Appropriate?

Developed market for corporate control
Acquirer has high absorptive capacity
High synergy

Going it Alone: Green Field Entry

HOME COUNTRY

HOST COUNTRY

MNE
Profit

Investment

New Subsidiary
Company

Going it Alone: Green Field Entry

Advantages
Normally feasible
Avoids risk of
overpayment
Avoids problem of
integration
Still retains full control

Disadvantages
Slower startup
Requires knowledge of
foreign management
High risk and high
commitment

When Is Green Field Entry Appropriate?

Lack of proper acquisition target
In-house local expertise
Embedded competitive advantage