Modes of entry - continued

Ing. Radek Čajka, Ph.D.

November 14, 2019
 Outline of the lecture
• Wholly owned subsidiaries
• Selecting an entry mode
• Strategic alliances
• More about investment

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 Wholly owned subsidiaries
• A subsidiary 100% owned by the firm
(typically 100% of stocks)
• Can be established in two ways
– Greenfield venture (→ a new operation)
– Acquisition (→ an established firm)

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 Wholly owned subsidiaries
• Advantages
– Protection of core competencies (when these are
technological)
– Tight control over operations (necessary for strategic
global coordination)
– Important when realizing location and experience
curve economies
– 100% share in the profits

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 Wholly owned subsidiaries
• Disadvantages
– Most costly method in terms of capital
– 100% costs and risks
• Could be reduced by acquisition – local knowledge and
experience
– On the other hand – divergent corporate cultures

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 Wholly owned subsidiaries
Pros of acquisitions
• Quick to execute
– Immediate presence in the
target market
• Preemption of competitors
– In industries with rapid
globalization
• Less risky
– Set of assets with profit stream
Cons of acquisitions
• Hubris hypothesis
– Overestimation of additional value
created
• Clash between the cultures
• Everything takes longer than
expected
– Mainly gains from integration of
operations
• Inadequate preacquisition
screening
– Due diligence
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 Wholly owned subsidiaries
Pros of GFV Cons of GFV
• Firm gets exactly what it • Slower to establish
wants • Risky
– Internal operations, – Revenue
organizational culture
– Profit
– Distribution channel
– Total costs
• Less “unpleasant surprises”

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 Selecting an entry mode
• All entry modes have advantages and
disadvantages
• Thus, trade-offs are inevitable
• Following table summarizes all pros and cons

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 Selecting an entry mode
Entry mode Advantages Disadvantages
Exporting Ability to realize location High transport costs
and experience curve
economies Trade barriers
Increased speed and Problems with local
flexibility of engaging marketing agents
target markets
Turnkey contracts Ability to earn returns from Creation of competitors
process technology skills Lack of long-term presence

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 Selecting an entry mode
Entry mode Advantages Disadvantages
Licensing Low development costs Lack of control over
and risks technology
Moderate involvement and Inability to realize location
commitment and experience curve
economies
Franchising Low development costs Lack of control over quality
and risks

Possible circumvention of Inability to engage in global

import barriers, and strong strategic coordination
sales potential
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 Selecting an entry mode
Entry mode Advantages Disadvantages
Joint ventures Access local partner’s Lack of control over
knowledge technology
Shared development costs Inability to realize location
and risks and experience curve
economies
Politically acceptable Inability to engage in global
strategic coordination

Typically no ownership
restrictions
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 Selecting an entry mode
Entry mode Advantages Disadvantages
Wholly owned subsidiaries Protection of technology High costs and risks
Ability to realize location Intercultural issues
and experience curve
economies
Ability to engage in global
strategic coordination

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 Selecting an entry mode
• Core competencies and entry mode
– Optimal entry mode depend to some degree on
the nature of core competencies
– Technological vs. management know-how
– Wholly owned subsidiary vs. franchising, joint
ventures

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 Selecting an entry mode
• Pressures for cost reductions and entry mode
– The greater the pressure for cost reductions, the
more likely exporting and wholly owned
subsidiaries will be undertaken
– To realize location and experience curve
economies

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 Strategic alliances
• Cooperative agreements between potential or
actual competitors
• Forms:
– Joint ventures (long-term cooperation)
– Short-term contractual agreements (to cooperate
on particular task)

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 Strategic alliances
• Advantages
– Facilitation of entry into a foreign market
• China as a good example
– Sharing fixed costs of developing new products
– Bringing together complementary skills and assets
that neither company could easily develop on its own
• Software + hardware

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 Strategic alliances
• Disadvantages
– Giving competitors a low-cost route to new
technology and markets
• Japan, China

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 Strategic alliances
• How to make them work?
– Good partner selection
• Value added, motivation, financial results, reputation
– Alliance structure
• Rights, obligations, technology transfer
– Managing the alliance
• Cultural differences, relationship capital

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 Foreign investment
• Discussed separately using the World
Investment Report 2019

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