Chapter 12 Flashcards
Foreign subsidiary:
An operation abroad set up by foreign direct investment
Entry strategy:
A plan that specifies the objectives of an entry and how ti achieve them
Natural resource-seeking FDI:
Investor’s’ quest to pursue natural resources in certain locations
Market-seeking FDI:
Investors’ quest to go after countries that offer string demand for their
products and services
=> They expand internationally to capture new customers and build market presence before competitors do => prioritise early entry
Efficiency-enhancing FDI:
Investors’ quest to single out the most efficient locations for each
value chain activity
Capability-enhancing FDI:
Investors’ quest for new ideas and technologies to upgrade their own
technological and managerial capabilities
Location-specific advantages:
Advantages that can be exploited by those present at a location
Global cities:
Cities that are globally connected, culturally diverse, and provide high-level services like finance, law, and consulting — acting as key hubs in the world economy
Non-equity modes:
A mode of entry that does not involve owning equity in a local firm
Equity modes:
A mode of entry (JV that involves taking full or partial) equity ownership in a local
firm
Wholly owned subsidiary (WOS):
A subsidiary located in a foreign country that is entirely owned
by the parent multinational
Greenfield investment:
Building factories and offices from scratch
Four common objectives for MNEs establishing foreign subsidiaries abroad
1) Natural resource-seeking FDI
2) Market-seeking FDI
3) Efficiency-enhancing FDI
4) Capability-enhancing FDI
Wholly owned Greenfield
Degree of equity control: HIGH
Resource growth: INTERNAL (organic)
- Design operations to fit the parent
- Complete equity and operational control
- Better protection of know-how
- Option to scale operation to needs
Full acquisition
Degree of equity control: HIGH
Resource growth: EXTERNAL (acquisitive)
- Complete equity and operational control
- Better protection of know-how
- Don’t add new capacity
- Faster entry speed
Newly created joint venture
Degree of equity control: LOW
Resource growth: INTERNAL (organic)
- Sharing costs, risks and profits
- Access to partners’ knowledge and assets
- Politically acceptable
Partial acquisition
Degree of equity control: LOW
Resource growth: EXTERNAL (acquisitive)
=> Acquisition of an equity stake in another firm
- Access to operation that the previous owner is reluctant to give up
- Previous owners’ continued commitment
Entry mode depends on:
1) How do we access complementary local resources?
2) How much control will we attain?
Acquisition:
The transfer of the control of operations and management from one firm (target) to
another (acquirer), the former becoming a unit of the latter
When constraint in the institutional environment in the host economy is higher transaction costs due to lack of financial intermediates, then a sensible entry strategy is to…
… avoid full or partial acquisitions of local firms
In countries with weak financial systems or high institutional barriers, it’s risky and costly to acquire local firms.
A sensible strategy would be to minimize exposure, often by choosing joint ventures, partnerships, or even exports instead of acquisitions.
Strategic alliance:
Collaboration between independent firms using equity modes, non-equity
contractual agreements or both
Scale of entry:
The amount of resources committees to foreign market entry
Platform investment:
An investment that provides a small foothold in a market or location
Multiple acquisitions:
A strategy based on acquiring and integrating multiple businesses
