Introduction to Global Business

Chapter 8
Entry Strategies in
Global Business
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 After
After studying
studying this
this chapter,
chapter, you
you should
should be
be able
able to:
to:

1. Summarize the major entry strategies used by

companies, especially those from emerging-market
economies, in the globalization process.
2. Explain the evolution of multinational enterprises
(MNEs).
3. Explain the major strategic reasons why MNEs invest
abroad.
4. Explain the pros and cons of foreign direct investment
(FDI) from a host country perspective.
5. Describe what countries can do to successfully attract
FDI.

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 Strategy
Strategy Choice
Choice and
and Implementation:
Implementation:
Going
Going International
International
• Risk profile
– The potential financial loss that entrepreneurs are willing to take in
a business
• Risk–return trade-off
– The greater the risk (loss of capital invested) entrepreneurs are
willing to take, the greater the rewards (profit) they are likely to
reap
• Sources of risk
– Ownership, operation, or asset transfer

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EXHIBIT 8.1 ENTRY STRATEGIES IN GLOBAL BUSINESS

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 Strategies
Strategies That
That Minimize
Minimize Financial
Financial Risk
Risk

Export-Import
Licensing Franchising
Business
• Penetrating • Providing a • A franchisor pro-
foreign markets foreign partner vides
by exporting or with the rights specialized
importing and/or tech- equipment,
merchandise at nology to manu- service, and/or
competitive facture and sell startup costs to
prices for products or a franchisee in
domestic services in a return for an
consumption target country for annual fee for
an annual rights to
license fee manufacture/sell
its products

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 Export-Import
Export-Import Business
Business
• The export-import business is a relatively low-risk
operation given the fact that capital is not tied up and it is
relatively easy to enter or exit the business.
• Well-established techniques for financing trade (trade
finance) are aimed at facilitating trade and minimizing
financial risk.
• Firms can conduct export-import business with as few as
three or four employees, though large trading companies
may employ hundreds or thousands of workers.
• With the rise of the Internet, conducting international
trade has become even easier and more exciting.

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 Licensing
Licensing
• Licensing makes the relationship between the trader and
the overseas partner closer.
• Licensing involves slightly more risk to the licensor than
those in pure international trade business.
• Why license rather than export?
– Manufacturing a product in the target country can take advantage
of lower transportation, labor, and raw material costs.
– The licensor may not have the financial resources for investing in
overseas plant and equipment or may have better uses for those
resources.
• A common approach to protect the licensor is to
incorporate penalty clauses in the license that can work
as an exit strategy if necessary.
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 Franchising
Franchising
• In franchising, the parent firm assumes relatively more
risk than with licensing.
• Most fast-food franchises are owned and operated by
local residents who use local capital to start the business.
• Franchising allows for penetration of international markets
without significant capital investment abroad by the
parent company.
• The parent company’s objective is to make sure that
quality of products and services are similar at any location
in any country.

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 Strategies
Strategies That
That Share
Share Financial
Financial Risks
Risks

Strategic Alliances

• An agreement between two or more firms that do not

involve the creation of a separate entity with joint
ownership and in which the firms stand to gain
revenues and maximize profits through cooperation
for a given period of time

International Joint Ventures

• A business jointly owned and operated by two or more

firms (one local host country and one foreign) that
pool their resources to penetrate the host country’s
markets, share in profits, and share commercial risk

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 Strategic
Strategic Alliances
Alliances
• Strategic alliances involve relationships between two or
more firms that stand to gain revenues through
cooperation.
• Strategic alliances do not involve the creation of a
separate entity with joint ownership.
• Strategic alliances are primarily aimed at enhancing
revenues.
• A challenge for strategic alliances is that any member
could prematurely quit the alliance, negatively affecting
other partners.

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 International
International Joint
Joint Ventures
Ventures
• Firms looking to invest overseas may set up joint
ventures to share increased risk with a local corporate
entity.
• Joint ventures make sense when capital investments are
so large that no single company would be willing to come
up with all the needed funds.
• In most cases, international joint ventures include at least
one local firm.
– The local partner knows domestic economic, cultural, and political
environments.
– The local partner can help overcome country-specific logistics and
bureaucracy.

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 Higher
Higher Risk
Risk Strategies
Strategies

Foreign Acquisitions

• Acquisition is the purchase of established firms abroad with the goal

of using the existing production, marketing, and distribution networks
and of having instant access to foreign markets that fit the purchasing
firm’s global strategy.

Wholly Owned Foreign Subsidiaries

• Subsidiaries are new facilities built and operated overseas that require
large investment of capital because these new establishments are
tailored to the exact needs of the home country firm.

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 Cross-Border
Cross-Border Mergers
Mergers and
and Acquisitions
Acquisitions
• Domestic companies with clearly identified core
competencies or competitive advantages may enter
foreign markets by merging with or acquiring firms
overseas.
• In acquisitions, the home country firm purchases the host
country firm and implements its own international
strategy.
• In the case of mergers, the management of both
companies play an active role in business development
and execution.

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 Wholly
Wholly Owned
Owned Subsidiaries
Subsidiaries
• As an alternative to acquiring a foreign firm, a home
country firm may build and operate its own new facilities
overseas, called “green field” plants.
• Wholly owned subsidiaries generally require a large
capital investment; hence, risks and rewards are high.
• Subsidiaries can require major marketing efforts to
penetrate the international market because of cultural
differences and because the entrant is new and relatively
unknown.

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 Multinational
Multinational Enterprises
Enterprises (MNEs)
(MNEs)
• Multinational enterprises (MNEs) are firms that are
headquartered in one country, but own and control
significant manufacturing, services, R&D (research and
development) facilities, or other business entities in other
countries
– Developed largely after World War II as international trade and
investment regulations were liberalized
– Are now challenged by the rise of MNEs from emerging market
economies

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EXHIBIT 8.2 THE WORLD’S TEN LARGEST COMPANIES (YEAR END 2013)

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 MNEs
MNEs and
and Their
Their Global
Global Strategic
Strategic Motives
Motives
• In a free enterprise system, the overriding objective of
firms wanting to invest abroad is to maximize
shareholder wealth.
• Three strategic motives for companies that invest abroad:
– To increase revenues
– To cut costs
– To diversify operations to minimize risk

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 Strategies
Strategies for
for Going
Going Abroad
Abroad
• Revenue maximizing strategies include
– Entering high-growth markets
– Entering stable, high-income markets
– Entering countries with monopolistic market structures
– Entering trade-restricted sectors
• Cost minimizing strategies include
– Gaining economies of scale in overseas production
– Minimizing factor input costs by relocating overseas
– Reacting to exchange rate movements to take advantage of long-
term appreciation of FDI assets

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 Strategies
Strategies for
for Going
Going Abroad
Abroad (continued)
(continued)
• Risk minimizing strategies include
– Diversification to minimize risk and foster stability in global
corporate cash flows and earnings
– Correlation of returns to identify overseas projects with
performance levels that are not highly correlated to domestic cash
flows or project returns over time
– Diversifying to gain foreign consumption that helps maximize
overall corporate profitability during the maturity stage of the life
cycle of firm’s products

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 Dunning’s
Dunning’s Eclectic
Eclectic Theory
Theory of
of
Foreign
Foreign Direct
Direct Investment
Investment (FDI)
(FDI)
• Key economic advantages for using FDI:
– Ownership or firm-specific internal transfer advantages
– Location or country-specific advantages
– Internalization (mode of market entry) advantages

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 Host
Host Country
Country Perspective
Perspective of
of
Foreign
Foreign Direct
Direct Investment
Investment

Benefits of FDI Costs of FDI

• Generation of significant • Environmental pollution that
financial inflows results from exploitation of
• Creation of new jobs natural resources by MNEs
• Access to new technologies • Exploitation of the host country
• Facilitation of the transfer of labor force reduces human
management and employee capital development
skills • MNE’s lack of corporate social
• Increased domestic competition responsibility for the social
and choice consequences of their decisions
• Generates tax revenues for • Political interference by MNEs
economic development in the host country’s affairs

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 Improving
Improving Host
Host Country’s
Country’s
Investment
Investment Climate
Climate
Attractive Investment Climate Contributions of Domestic
Characteristics Firms and MNEs
• Proper economic reforms • Invest profitably
• Transparent governance • Create jobs
structure • Contribute to economic growth
• Rule of law • Reduce poverty

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 Key
Key Terms
Terms
risk profile subsidiaries
export-import business multinational enterprises
licensing (MNEs)
franchising maximizing shareholder
strategic alliances wealth
product life cycle theory
international joint venture
governance
acquisition

© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.