Chapter 10 Foreign Market Entry& 12 Alliances and Acquisitions Terms

Question 1

Overall Liability of Foreignness comes from 3 groups

Answer 1

1. Liability of Non-Native Status
2. Liability of Newness
3. Liability of emergingness

Question 2

Institutional void:

Answer 2

Institutional conditions of a country lacking market-supporting infrastructure

Question 3

Debate 1: Liability versus Asset of Foreignness

Answer 3

Country-of-origin effect: The positive or negative perception of firms and products from a certain country

A contrasting view to liability of foreignness argues that under certain circumstances, being foreign can be an asset (comparative advantage)

Question 4

Country-of-origin effect:

Answer 4

The positive or negative perception of firms and products from a certain country

Question 5

Institutions, Resources, and Foreign Market Entries

Answer 5

IBV:
1. Regulatory Risks
2. Trade and investment barriers
3. Differences in cultures, norms, and values

RBV
1. Value
2. Rarity
3. Imitability
4.Organization

Foreign Market Entries: (IBV & RBV combine into this to shape entry)
1. Where
2. When
3. How

Question 6

Core Decisions in Foreign Market Entries

Answer 6

Where/Why: location advantages & strategic motivations; distance
When: First-mover vs. late-mover
How: entry / establishment modes

Question 7

Location-specific advantage:

Answer 7

The benefits a firm reaps from the features specific to a place

Question 8

Matching Strategic Goals with Locations

Answer 8

Table 10.1

Question 9

Strategic Goals: Natural resource seeking

Answer 9

Location-Specific Advantages: Possession of natural resources and related transport and communication infrastructure

Question 10

Strategic Goals: Market seeking

Answer 10

Abundance of strong market demand and customers willing to pay

Question 11

Strategic Goals: Efficiency seeking

Answer 11

Economies of scale and abundance of low-cost factors

Question 12

Strategic Goals: Innovation seeking

Answer 12

Abundance of innovative individuals, firms, and universities

Question 13

Factors for Choosing Foreign Entry Locations

Answer 13

Strategic goals
–> Location-specific advantages
Cultural and institutional distances

C. cultural
A. administrative
G. geographical
E. economic

Question 14

Ghemewat’s CAGE Framework for Assessing Country Differences: Distance between two countries increases with:

Answer 14

1. Cultural Distance: Different languages, ethnicities, religions, social norms, Lack of connective ethnic or social networks
2. Administrative and Political Distance: Absence of shared political or monetary association, Political hostility, Weak legal and financial institutions
3. Geographical Distance: Lack of common border, water-way access, adequate transportation or communication links, Physical remoteness
4. Economic Differences: Different consumer incomes
   Different costs and quality of natural, financial, and human resources, Different information or, knowledge

Question 15

Ghemewat’s CAGE Framework for Assessing Country Differences: Industries most affected by source of distance

Answer 15

1. Cultural Distance: Industries with high linguistic content
   (TV, publishing) and cultural content (food, wine, music)
2. Administrative and Political Distance: Industries viewed by government as strategically. important (e.g., energy, defense, telecoms)
3. Geographical Distance: Products with low value-to-weight (cement), are fragile or perishable (glass, milk), or dependent upon communications (financial services)
4. Economic Differences: Products whose demand is sensitive to consumer income levels (luxury goods), Labor-intensive products (clothing)

Question 16

First-mover advantage:

Answer 16

Benefits that accrue to firms that enter the market first and that late entrants do not enjoy

Question 17

Examples of First-mover advantage:

Answer 17

1. Proprietary, technological leadership
2. Pre-emption of scarce resources
3. Establishment of entry barriers for late entrants
4. Avoidance of clash with dominant firms at home
5. Relationships with key stakeholders such as governments

Question 18

Late-mover advantage:

Answer 18

Benefits that accrue to firms that enter the market later and that early entrants do not enjoy

Question 19

Examples of Late-mover advantage:

Answer 19

1. Opportunity to free ride on first mover investments
2. Resolution of technological and market uncertainty
3. First mover’s difficulty to adapt to market changes

Question 20

Scale of entry:

Answer 20

The amount of resources committed to entering a foreign market

Question 21

Benefits of Large-Scale Entry

Answer 21

A demonstration of strategic commitment to certain markets, which helps assure local customers and suppliers and deters potential entrants

Question 22

Drawbacks of Large-Scale Entry

Answer 22

Limited Strategic flexibility elsewhere

Huge losses if these large-scale “bets” turn out to be wrong

Question 23

Benefits of Small-Scale Entry

Answer 23

Less Costly

Question 24

Drawbacks of Small-Scale Entry

Answer 24

Lack of strong commitment, which may lead to difficulties in building market share and in capturing first-mover advantages

Question 25

Entry mode:

Answer 25

A form of operation that a firm employs to enter foreign markets

Question 26

Nonequity mode:

Answer 26

A mode of entry (exports and contractual agreements) that reflects relatively smaller commitments to overseas markets

Question 27

Equity mode:

Answer 27

A mode of entry (joint ventures and wholly owned subsidiaries) that indicates relatively larger commitments to overseas markets

Question 28

Types of Contractual Agreements

Answer 28

1. Turnkey project: 2. Build-operate-transfer (BOT) agreement: 3. Research-and-development (R&D) contract: 4. Co-marketing:

Question 29

Turnkey project:

Answer 29

A project in which clients pay contractors to design and construct new facilities and train personnel

Question 30

Build-operate-transfer (BOT) agreement:

Answer 30

A nonequity entry mode used to build a longer-term presence by first constructing and then operating a facility for a period of time before transferring operations to a domestic agency or firm

Question 31

Wholly owned subsidiary (WOS)

Answer 31

A subsidiary located in a foreign country that is entirely owned by the parent multinational

Question 31

Research-and-development (R&D) contract:

Answer 31

An outsourcing agreement in R&D between firms

Question 32

Means to set up a WOS (establishment mode)

Answer 32

Greenfield operations: Building new factories and offices from scratch Acquisitions: Acquiring the control of another firm’s operations and management from one firm (target). The target becomes the subsidiary.

Question 32

Co-marketing

Answer 32

Efforts among a number of firms to jointly market their products and services

Question 33

Equity Modes

Answer 33

Joint venture (JV): A new corporate entity jointly created and owned by two or more parent companies Wholly owned subsidiary (WOS) --> A subsidiary located in a foreign country that is entirely owned by the parent multinational Means to set up a WOS (establishment mode) --> Greenfield operations: Building new factories and offices from scratch --> : Acquiring the control of another firm’s operations and management from one firm (target). The target becomes the subsidiary.

Question 33

Joint venture (JV):

Answer 33

A new corporate entity jointly created and owned by two or more parent companies

Question 34

Motives for Acquisitions: Synergistic motives (IB Issues & RB Issues)

Answer 34

IB: Respond to formal institutional constraints and transitions RB: --> Leverage superior managerial capabilities --> Enhance market power and scale economies --> Access to complementary resources

Question 35

Hubris:

Answer 35

Overconfidence in one’s capabilities

Question 35

Motives for Acquisitions: Hubristic motives (IB Issues & RB Issues)

Answer 35

IB: Herd behavior—following norms and chasing fads of M&As RB: Managers’ overconfidence in their capabilities

Question 35

Motives for Acquisitions: Managerial motives (IB Issues & RB Issues)

Answer 35

IB: Self-interested actions such as empire-building guided by informal norms and cognitions

Question 36

Strategic investment:

Answer 36

One firm investing in another as a strategic investor

Question 36

Equity-based alliance:

Answer 36

Alliance based on ownership or financial interest between the firms --> Strategic investment: One firm investing in another as a strategic investor --> Cross-shareholding: Both firms investing in each other to become cross-shareholders

Question 36

Contractual (nonequity-based) alliance:

Answer 36

Alliance between firms that is based on contracts and does not involve the sharing of ownership --> Includes co-marketing, research and development (R&D) contracts, turnkey projects, strategic suppliers, strategic distributors, and licensing/franchising

Question 36

Managerial motive

Answer 36

Managers’ desire for power, prestige, and money, which may lead to decisions that do not benefit the firm overall in the long run

Question 36

Cross-shareholding:

Answer 36

Both firms investing in each other to become cross-shareholders

Question 37

Strategic alliance:

Answer 37

A voluntary agreement of cooperation between firms

Question 38

Market Transactions (Contractual (nonequity-based) alliances) towards Acquisitions (Equity-based alliances)

Answer 38

1. co-marketing 2. R&D contracts 3. turnkey projects 4. strategic suppliers 5. strategic distributors 6. licensing/franchising 7. Strategic investment 8. Cross-shareholding: 9. Joint Ventures

Question 39

1. Nonequity modes: Exports- Direct Exports (Advantages and Disadvantages)

Answer 39

Advantages: -> Economies of scale in production concentrated in home country -> Better control over distribution Disadvantages: ->High transportation costs for bulky products ->Marketing distance from customers -> Trade barriers and protectionism

Question 40

1. Nonequity modes: Exports - Indirect Exports (Advantages and Disadvantages)

Answer 40

Advantages: -> Focus on production -> Avoid export processes Disadvantages: ->Less control over distribution -> Inability to learn how to compete overseas

Question 41

2. Nonequity modes: Contractual Agreements - Licensing/Franchising (Advantages and Disadvantages)

Answer 41

Advantages: ->Low development costs ->Low risk in overseas expansion Disadvantages: ->Little control over technology and marketing ->May create competitors ->Inability to engage in global coordination

Question 42

2. Nonequity modes: Contractual Agreements - Turnkey projects (Advantages and Disadvantages)

Answer 42

Advantages: ->Ability to earn returns from process technology in countries where FDI is restricted Disadvantages: ->May create efficient competitors ->Lack of long-term presence

Question 43

2. Nonequity modes: Contractual Agreements - R&D contracts (Advantages and Disadvantages)

Answer 43

Advantages: ->Ability to tap into the best locations for certain innovations at low costs Disadvantages: ->Difficult to negotiate and enforce contracts ->May nurture innovative competitors ->May lose core innovation capabilities

Question 44

2. Nonequity modes: Contractual Agreements - Co-marketing (Advantages and Disadvantages)

Answer 44

Advantages: ->Ability to reach more customers Disadvantages: ->Limited coordination

Question 45

3. Equity modes: Partially owned subsidiaries (Joint Venture) (Advantages and Disadvantages)

Answer 45

Advantages: ->Sharing costs, risks, and profits ->Access to partners’ assets ->Politically acceptable Disadvantages: --> Divergent goals and interest of partners --> LImited equity and operational control --> Difficult to coordinate globally

Question 46

4. Equity modes: Wholly owned subsidiaries- Greenfield operations - (Advantages and Disadvantages)

Answer 46

Advantages: ->Complete equity and operational control ->Protection of know-how ->Ability to coordinate globally Disadvantages: ->Potential political problems and risks ->High development costs ->Add new capacity to industry -> Slow entry speed (relative to acquisitions)

Question 47

4. Equity modes: Wholly owned subsidiaries- Acquisitions - (Advantages and Disadvantages)

Answer 47

Advantages: ->Same as Greenfield (above) ->Do not add new capacity ->Fast entry speed Disadvantages: ->Same as Greenfield (above), except adding new capacity and slow speed ->Post-acquisition integration problems

Question 48

Equity-Based versus Non-Equity-Based Alliances

Answer 48

Driving Forces

Question 49

Driving Force: Nature of shared resources and capabilities (degree of tacitness)

Answer 49

Equity-Based Alliances: = High Nonequity-Based Alliances: = Low

Question 50

Driving Force: Importance of direct organizational monitoring and control

Answer 50

Equity-Based Alliances: = High Nonequity-Based Alliances: = Low

Question 51

Driving Force: Potential as real options

Answer 51

Equity-Based Alliances: = High (for possible upgrading to M&As) Nonequity-Based Alliances: = High (for possible upgrading to equity-based relationships)

Question 52

Driving Force: Influence of formal institutions

Answer 52

Equity-Based Alliances: = High (when required or encouraged by regulations) Nonequity-Based Alliances: = High (when required or encouraged by regulations)

Question 53

Learning by doing:

Answer 53

A way of learning, not by reading books but by engaging in hands-on activities

Question 54

IBV and RBV combine to form _ __and ___

Answer 54

Alliances and Acquisitions

Question 55

IBV:

Answer 55

Formal Institutions (Antitrust and entry mode concerns) Informal Institutions (normative and cognitive pillars)

Question 56

RBV:

Answer 56

Value Rarity Imitability Organization

Question 57

FORMAL INSTITUTIONS

Answer 57

Antitrust authorities are more likely to approve alliances than they are acquisitions. Many countries ban acquisitions to establish wholly owned subsidiaries (W O S), thereby leaving some sort of alliances with local firms to be the only entry choice for foreign direct investment (F D I).

Question 58

INFORMAL INSTITUTIONS

Answer 58

Due diligence: Investigation prior to signing contracts

Question 59

Relational (collaborative) capability:

Answer 59

Ability to manage interfirm relationships --> Alliances without trust and understanding between partners have a hard time imitating each other’s resources and capabilities. -> Alliances without trust and understanding between partners have a hard time imitating each other’s resources and capabilities. - > Some successful alliance relationships are organized in a way that makes it difficult to replicate. -> Firms in unsuccessful alliances find it challenging, if not impossible, to effectively organize and manage their interfirm relationships.

Question 60

Acquisition premium:

Answer 60

The difference between the acquisition price and the market value of target firms ->For acquisitions to add value, one or all of the firms involved must have rare and unique skills that enhance the overall strategy. -> Firms that excel in integration possess hard-to-imitate capabilities that are advantages in acquisitions.

Question 61

Strategic fit:

Answer 61

The effective matching of complementary strategic capabilities

Question 62

Organizational fit:

Answer 62

The similarity in cultures, systems, and structures

Question 63

Implications for Action - MGMT Savy

Answer 63

1. Understand the rules of the game - both formal and informal - governing competition in foreign markets 2. Develop overwhelming resources and capabilities to offset the liability of foreignness. 3. Match efforts in market entry and geographic diversification with strategic goals.