Lecture 5
Key question: Where do you locate what type of activity in which way, and what effect does this
have on firm and environment?
Which way: organizational aspect, e.g. entry modes and headquarter-subsidiary relationships.
Entry modes
Non-equity (contract) :
1. Exporting
2. Licensing = A form of contracting where firm A licenses to firm B in another country the right to
use firm A’s technology or trademark for a certain fee. For example, the license to use Microsoft
on the computer
3. Franchising = Firm B in a host country uses the business model developed by firm A, and firm A
provides assistance in making the local activity a success. The franchise has the right to use the
franchisor’s logo,trademark, way of working, etc. for which the franchisor receives a fee. A
higher degree compared to licensing.
Equity (ownership) :
1. Greenfield = A firm expands to a foreign country by establishing a completely new firm from
scratch that it fully owns.
2. Acquisition
3. A firm buys shares of a firm established in a foreign country. Full acquisitions implies buying all
shares, while partial acquisitions occur when a firm only buys part of the shares of the foreign
firm.
4. Joint venture = two firms create a third firm and the other two still continuous to exist. Firm A
from country 1 and firm B from country 2 join forces and jointly establish a new firm C in a
foreign country, country 1,2 or a third country.
❏ Alliances can be both equity as non-equity
First step in internationalization often:
1. Establish relation with foreign distributor, because:
- They have local knowledge
- They know potential customers
Their FSA is location bound and helps overcome the distance that the internationalizing firm has to deal
with.
Hence, local distributors often serve as a ‘beachhead’ in the first stage of internationalization.
Internationalization and level of commitment:
1. Foreign distributors
2. Strategic alliances
3. Mergers and acquisitions
Level of commitment increases from 1 - 3
, Key is to balance three competing objectives:
1. To maintain strategic control over important customers
2. To benefit from the local partner’s market knowledge and market access
3. To reduce risk associated with high demand uncertainty in the host market
How?
- Proactively select location and only then distributors
- Focus on distributor’s market development capabilities
- Manage distributors as long-term partners
- Provide resources to support distributors
- Do not delegate marketing strategy
- Secure access to critical information
- Link national distributors
Many factors determine optimal entry mode:
- The degree of control,
Control highest in Greenfield & acquisition; lowest in licensing
- The level of resource commitment,
Highest in greenfield & acquisition; lowest in licensing
- The dissemination risk
Lowest for Greenfield & acquisition; highest for licensing
! optimal entry mode is a trade off!!!
Over time often following pattern:
1st stage: initial success
2nd stage: flattening sometimes declining
3rd stage: MNE starts questioning local partner and may:
a) Take control of distribution channel
b) Build a self owned distribution channel
Result --> local partner and MNE will not invest in each other.
But: successful firms go from a beachhead strategy to developing a long term relationship
with the local partner
Strategic alliance = A SA implies you start to cooperate with a (potential) rival.
- Challenge → learn as much as possible from this partner while giving away as few of your own
FSAs as possible.
- Advantage → share risks and costs (eg R&D), learn from partners complementary resources, and
quicker development of capabilities to deliver products and services.
Costs of an alliance:
1. The own FSAs could be appropriated by the alliance partner (so important to develop safeguards
against such reverse knowledge flows). ‘Learning race’ → risky:
- Dysfunctional knowledge sharing: bounded reliability
- Managers may pay too much attention to learning race and forget about goal of the SA in the first
place
Key question: Where do you locate what type of activity in which way, and what effect does this
have on firm and environment?
Which way: organizational aspect, e.g. entry modes and headquarter-subsidiary relationships.
Entry modes
Non-equity (contract) :
1. Exporting
2. Licensing = A form of contracting where firm A licenses to firm B in another country the right to
use firm A’s technology or trademark for a certain fee. For example, the license to use Microsoft
on the computer
3. Franchising = Firm B in a host country uses the business model developed by firm A, and firm A
provides assistance in making the local activity a success. The franchise has the right to use the
franchisor’s logo,trademark, way of working, etc. for which the franchisor receives a fee. A
higher degree compared to licensing.
Equity (ownership) :
1. Greenfield = A firm expands to a foreign country by establishing a completely new firm from
scratch that it fully owns.
2. Acquisition
3. A firm buys shares of a firm established in a foreign country. Full acquisitions implies buying all
shares, while partial acquisitions occur when a firm only buys part of the shares of the foreign
firm.
4. Joint venture = two firms create a third firm and the other two still continuous to exist. Firm A
from country 1 and firm B from country 2 join forces and jointly establish a new firm C in a
foreign country, country 1,2 or a third country.
❏ Alliances can be both equity as non-equity
First step in internationalization often:
1. Establish relation with foreign distributor, because:
- They have local knowledge
- They know potential customers
Their FSA is location bound and helps overcome the distance that the internationalizing firm has to deal
with.
Hence, local distributors often serve as a ‘beachhead’ in the first stage of internationalization.
Internationalization and level of commitment:
1. Foreign distributors
2. Strategic alliances
3. Mergers and acquisitions
Level of commitment increases from 1 - 3
, Key is to balance three competing objectives:
1. To maintain strategic control over important customers
2. To benefit from the local partner’s market knowledge and market access
3. To reduce risk associated with high demand uncertainty in the host market
How?
- Proactively select location and only then distributors
- Focus on distributor’s market development capabilities
- Manage distributors as long-term partners
- Provide resources to support distributors
- Do not delegate marketing strategy
- Secure access to critical information
- Link national distributors
Many factors determine optimal entry mode:
- The degree of control,
Control highest in Greenfield & acquisition; lowest in licensing
- The level of resource commitment,
Highest in greenfield & acquisition; lowest in licensing
- The dissemination risk
Lowest for Greenfield & acquisition; highest for licensing
! optimal entry mode is a trade off!!!
Over time often following pattern:
1st stage: initial success
2nd stage: flattening sometimes declining
3rd stage: MNE starts questioning local partner and may:
a) Take control of distribution channel
b) Build a self owned distribution channel
Result --> local partner and MNE will not invest in each other.
But: successful firms go from a beachhead strategy to developing a long term relationship
with the local partner
Strategic alliance = A SA implies you start to cooperate with a (potential) rival.
- Challenge → learn as much as possible from this partner while giving away as few of your own
FSAs as possible.
- Advantage → share risks and costs (eg R&D), learn from partners complementary resources, and
quicker development of capabilities to deliver products and services.
Costs of an alliance:
1. The own FSAs could be appropriated by the alliance partner (so important to develop safeguards
against such reverse knowledge flows). ‘Learning race’ → risky:
- Dysfunctional knowledge sharing: bounded reliability
- Managers may pay too much attention to learning race and forget about goal of the SA in the first
place
