How firms expand their international reach (topic 15)

Question 1

Exporting

Answer 1

The sale of goods and services produced by a firm based in one country, to consumers living in another country. Includes: goods, services, IP.

Question 2

Exporting is the most common form of IB, because…

Answer 2

It imposes minimum business risk; requires relatively low resource commitment; improves marketplace flexibility; reduces dependency on the home market; and stabilises seasonal fluctuations.

Question 3

Firms export to:

Answer 3

Make a profit, improve productivity, and diversify activities.

Question 4

Indirect exporting

Answer 4

The exporting process is handled by an ‘intermediary’ in the producer’s home country who arranges: documentation, physical movement of goods, distribution channels.

Question 5

Direct exporting

Answer 5

The producer actively undertakes exports of its own products. Develops international contracts; undertakes market research; arranges transportation/documentation; establishes pricing policies, etc.

Question 6

The challenges of exporting

Answer 6

Financial risks (getting paid); managing customers; understanding foreign business practices; market barriers; top management commitment/resources; different regulations in destination countries; trade documentation/paperwork; logistics.

Question 7

Reasons to import

Answer 7

Input optimisers: to optimise, in terms of price and quantity, the inputs fed into a supply chain (cost pressures).

Opportunistic: filling gaps in local markets, importing products only available by foreign suppliers.

Arbitrageurs: to secure the highest quality product and the lowest possible price - exploits differences in price when the same, or similar, commodities are traded in two or more markets.

Diversification and risk management: developing alternative suppliers.

Importers are also likely to be exporters.

Question 8

Contractual modes

Answer 8

Include: franchising, licensing, sub-contracting, alliances.

Generally regarded as: lower risk; lower commitment; lower cost (than investment modes).

Question 9

Licensing

Answer 9

A contract involving a transfer of technology or know-how in return for value.

Motives include: the licensee may be better equipped to produce at a lower cost and start more quickly; PLC motives; may provide route to cross-licensing, which could increase potential market size; insufficient sales volumes to justify setting up own manufacturing/sales facilities; host country constraints may favour licensing.

Pitfalls: loss of control; competitors may be created from ex-licensees; products can be over-licensed which dilutes brand value.

Question 10

Franchising

Answer 10

Suitable in the service/retail industry; seen as a means to achieve rapid and extensive global penetration via the motivation, financial commitment, and market knowledge of local franchisees. Provides access to local resources and knowledge, especially regarding the need for adaptation and innovation.

Question 11

Product and trade name franchising

Answer 11

Where dealers use the trade name, trademark, and product line.

Question 12

Direct franchising

Answer 12

Franchisor controls numerous franchisees in a foreign country.

Question 13

Indirect franchising

Answer 13

Franchisor controls a ‘master franchisee’ or ‘subfranchisor’ in the foreign country, who then controls individual franchisees.

Question 14

Disadvantages of franchising

Answer 14

Keeping a standardised franchise format and replicating it in culturally different countries is challenging; host country differences/differences make task standardisation difficult; monitoring issues isn’t easy (particularly with an indirect route).

Question 15

Alliances

Answer 15

An important operation mode for internationalising firms - distinguished from a JV which usually involves equity cooperation, with a new company formed.

Can assist a firm to penetrate markets through linking with another firm; can help an internationalising firm to overcome challenges relating to language, culture, govt. regulations.

Question 16

International sub-contracting

Answer 16

Occurs when one firm (the principal) interacts with another firm (the supplier) for a given production cycle. The output is generally incorporated into the principal’s final products.

Advantages: being close to foreign customers; low production costs; lower transportation costs; overcoming tariffs/quotas…without making an FDI commitment.

Suitable for: firms with few resources; offers flexibility; common in the fashion industry; can risk leakage of IP.

Question 17

Investment modes

Answer 17

FDI modes: firms that engage in them are generally seen as more productive. They involve high costs and commitment - bring risk to small/new international firms.

Question 18

Equity joint venture (EJV)

Answer 18

When two or more firms create a separate legal entity to carry out a productive economic activity in which each partner takes an active role in decision-making.

Three principal objectives: entering new markets, reducing manufacturing costs, developing and diffusing technology.

Question 19

Resource-driven EJVs

Answer 19

Partner provides: financing, key raw materials, under-used physical plant facilities, technology, access to distribution networks.

Question 20

Market-driven EJVs

Answer 20

Partner provides: local market access, knowledge, products that broaden/diversify the company’s product line, preferential treatment (by govt. and customers).

Question 21

Risk-driven EJVs

Answer 21

Partner provides: greater economies of scale, cost-sharing, expedience.

Question 22

Challenges/risks of EJVs

Answer 22

Choosing the right partner; lack of control and threat of technology leakage; repatriation of profits; cultural and communication problems; decision making; diminishing returns.

Question 23

Wholly-owned subsidiary (WOS)

Answer 23

Also known as a hierarchical mode. Firms can either set up a completely new operation (on a greenfield site), or merge with/acquire an existing foreign company (M&A).

Question 24

Acquisition (M&A)

Answer 24

Rapid entry, access to distribution channels, existing customer base, established brand names, existing staff, etc.

Question 25

Greenfield investment

Answer 25

Establish operations from the ground up, latest technology, avoid problems with existing practices.

Question 26

WOS are suitable for:

Answer 26

competitive markets/ones with entry barriers; there are high costs attached to failure (particularly with M&A); the success is dependent on a company’s experience.

Question 27

WOS are suitable for:

Answer 27

competitive markets/ones with entry barriers; there are high costs attached to failure (particularly with M&A); the success is dependent on a company’s experience.

Question 28

Firm size and experience

Answer 28

Size is an indicator of the resources available to the firm. Small firms = limited resources, so they choose export modes. As the firm grows, it will increasingly use hierarchical modes.
Experience: following the Uppsala model, when firms are less experienced, they are more likely to choose export modes. Accumulated experience leads to hierarchical modes.

Question 29

Product

Answer 29

The characteristics of the product/service may affect entry mode. E.g. a highly technical product may use a hierarchical mode because in many foreign areas exporting may not be able to handle such work.

Firms may have an impulse to protect their competitive advantages through the use of a hierarchical mode - ownership advantages such as brands, technologies, resources.

Entry with lower control is acceptable for firms with mature products.

Question 30

Strategy

Answer 30

A firm’s choice may depend on the perceived level of control required to make an impact.

Short/long-term objectives in entering a market.

A firm may wish to keep up with competitors in a ‘follow the leader’ fashion.

Question 31

Factors influencing the choice of international expansion method

Answer 31

Experience, trust, psychic distance.

Control, trust, risk

Question 32

Risk factors in the foreign market entry decision

Answer 32

Environmental, economic, political risk; risk of opportunistic behaviour.
Risks can effect: when, why, how, where, what.

Question 33

Control factors in the foreign market entry decision

Answer 33

Strategic issues (having a say, profit distribution, investment and divestment decisions)

Intellectual property and other firm-specific assets.

Day-to-day decisions (marketing, production, HRM)

Question 34

Cost factors in the foreign market entry decision

Answer 34

Operational costs: managerial costs, transport and logistics costs, communication costs, bribery and corruption costs.

Knowledge costs: the political system, the economic system, the local market, the legal system, the cultural environment.

Question 35

Return factors in the foreign market entry decision

Answer 35

Return on foreign market entry = potential revenue.

Question 36

Internalise transactions

Answer 36

When firms do things themselves, but at greater risk/control.

Question 37

Externalise transactions

Answer 37

When firms divest or accept the consequences of lower risk/control modes.

Question 38

The control/risk trade off is balanced by revenue expectations

Answer 38

Revenue-related factors:
When returns on entry are to be maximised; when markets are large and/or growing; when demand is uncertain; when quick returns on entry are required.

Question 39

Internal administration costs

Answer 39

Cost of gaining knowledge about the local market, production environment, local suppliers, etc.

Also governance costs of exercising cross-border control.

These costs are higher with hierarchical modes.

Question 40

Transactions costs

Answer 40

E.g. Writing and enforcing contracts, shipping, agency costs, commissions, risk of dissipation of knowledge.

Lower in hierarchical modes.

Question 41

Market

Answer 41

In a market with a large potential, a sales subsidiary may be justified; small market - agent/indirect export modes.

Use of investment modes in high potential markets; but still invest in low potential markets if this suits strategic objs (future growth/profits etc).

Govt. policies can restrict market entry choice.

Question 42

The market entry decision

Answer 42

FDI decision is complex and not always therefore determined by rational analytical means.
Consider: govt. restrictions, production costs, existing market experience.