Foundations of

International Business

Foreign Market Entry Decision

Univ. Prof. Dr. Emmanuella Plakoyiannaki

Chair of International Business
University of Vienna

emmanuella.plakoyiannaki@univie.ac.at
 Learning objectives

• To introduce investment modes of foreign

market entry (‘foreign direct investment’ or
‘FDI’)
– Equity joint ventures
– Wholly-owned subsidiaries
– Mergers and acquisitions

• To consider factors that may influence the

choice of foreign expansion strategy

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 Uppsala model: Progressive
Internationalisation

• Increasing market commitment over time…

• More spatially-distant markets entered over time…
• More psychically-distant markets entered over time…
as a consequence of firms’ gaining (i) experience with operating internationally and (ii)
knowledge about specific foreign markets

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 Once again… many ways to
internationalise!
Choice of international entry mode

Non-equity modes Equity modes (FDI)

Exporting Contractual
agreements Joint ventures Wholly-owned
•Direct (JVs) subsidiaries
•Indirect •Licensing/ (WOS)
•Minority %
franchising •50-50 •Greenfield
•R&D contracts •Majority % •Acquisitions
•Co-marketing
•Subcontracting

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Foreign direct investment – what is it?

• FDI is when ‘A foreign investor acquires a lasting

interest in an enterprise operating outside the economy
of the investor’ (UNCTAD, 2016)
• Definitions vary… but typically involves at least 10%
ownership by the foreign investor
– Shared ownership  ‘equity joint venture’ (EJV or JV)
– 100% ownership  ‘wholly-owned subsidiary’ (WOS)
• Can result from ‘greenfield’ investment or merger /
acquisition (M&A)
• FDI involves active participation and control.
– Production and/or sales subsidiaries

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 FDI entry modes (from Peng & Meyer, 2016: 347)

High Wholly-owned 100% acquisition

greenfield
Degree of
equity
Newly-created Partial
Low
joint venture acquisition
Internal External (acquisitive)
(organic)

Resource growth

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 The foreign market entry decision

• Three fundamental considerations:

– Where? (Host country location)
– How? (Entry mode)
– How much? (Amount to invest)

These decisions need to be made in the face

of tremendous uncertainty!

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 An important theoretical framework:
John Dunning’s ‘eclectic paradigm’ (1977)

• Under what conditions does it make sense for a firm to

internationalise using FDI?

• Considers three sets of advantages that a firm may (or may not)
possess:
– Ownership-specific advantages of the firm (resources)
– Location-specific advantages of the host country
(institutions)
– Internalisation advantages (transaction costs)

Reference: Dunning and Lundan (2008)

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Dunning’s eclectic paradigm

Source: Welch et al (2007) 9

 Equity joint ventures (JVs)

Two or more firms create a separate legal entity… in which each

partner takes an active role in decision-making.

Together, they provide capital,

‘Parent’ Firms Firm A Firm B technology, marketing and managerial
expertise, personnel, physical assets,
access to distribution channels…

‘Child’ Firm JV C

• Decision-making is shared (regarding most, if not all, business functions).

• Assets are pooled or shared (often around 50:50%).
• Profits and losses are shared in proportion to capital contribution.
• There is a quasi-autonomous JV management team (i.e., independent of parents).
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 Some cross-border JVs

India

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 JV: Why do it?

• Reduce political and economic risk

• Ability to utilise partner’s specialist skills and local knowledge
• Technology transfer/organisational learning
• Access to partner’s distribution network
• Access to capital, managerial capability
• Lower equity requirement than ‘going it alone’
• Sometimes a governmental requirement

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 JVs: Challenges and risks

• Sharing control  less freedom with respect to

operational flexibility

• Choosing the right partner:

• Complementarity/compatibility of goals and strategies

• Trust

• Repatriation of profits

• Cultural and communication problems

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 Wholly-owned subsidiary (WOS)

• Why do it?

– Take advantage of lower-costing labour

– Avoid high import taxes

– Reduce transportation costs

– Gain access to raw materials

– Gain entry to neighbouring markets

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 Potential issues with WOS

• Political risks

• Social and cultural strains

• Problems associated with repatriating assets

• Difficulties in financing operations and expansion

• Host country antagonism (especially with acquisition)

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 Operational benefits with WOS

• Protection of corporate image, technology,

brand name (intangible assets)

• Easier integration of parent company production

• Ability to have more standardised marketing

programs

• Control over product and service quality

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A Japanese WOS in the UK

‘In the UK, Takeda has three organisations:

•Takeda UK, established in High Wycombe in 1997 to

commercialise products in the UK
•Pre-clinical research division, supplements our R&D
network in Japan, Europe and the USA with world-class
target identification and validation capabilities
•Takeda Development Centre Europe - with more than
400 employees in the UK, Switzerland and Denmark,
TDC was set up in London in 2004 to establish a
system for conducting clinical trials and formulating
applications for approval for our US and European R&D
functions’

https://www.takeda.com/en-gb/who-we-are/ 17
Greenfield Investments

The Japanese car maker maintained its market position

by establishing new manufacturing plants increasing
the company’s capacity.
The plant in China started production in 2018, and the
plant in Mexico started production in 2019.

Manufacturing plants in both countries were built from

scratch, with their own entities, distribution logistics,
offices and even living facilities for employees 
Greenfield Investment

https://www.theguardian.com/business/2015/apr/03/toyota-plans-new-
factories-in-china-and-mexico-reports 18
https://global.toyota/en/detail/7578255
 Not all WOSs start that way

• Founded in 1949, Knottingley, West Yorkshire, England

• Acquired various firms, including Allied Carpets, 61 Gateway supermarkets, MFI

(furniture, etc.)

• Acquired by Walmart in 1999  now a WOS

• Walmart sold ASDA in 2009 to Corinth Services Limited

• Was considering merging with Sainsbury’s…

• 2021 acquired by the Issa Brothers and TDR Capital

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 Mergers and acquisitions (M&As)

• Very popular during the late 1990s... then dipped in the early 2000s
and now back in vogue (https://www.reuters.com/article/us-europe-usa-deals/cross-border-ma-
between-u-s-and-european-firms-at-10-year-high-idUSKBN18I1M6)

– Quick expansion
– Value creation
• Synergies
• Increased market power
• Economies of scale
• Access to distribution channels and customer base
• Replacement of ineffective management (and retention of effective management)

• Challenge of merging two distinct organisational cultures  high

failure rates!

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Cross-border M&As

Source: investmentbank.com 21
Merger example

https://hbr.org/20
07/05/why-the-
daimlerchrysler-
merger?cm_sp=
Article-_-Links-
_-Comment

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Merger example

http://money.cnn.com/2000/
01/17/europe/glaxo_deal/

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 Mergers vs. acquisitions

• Mergers:
– Two firms agree to become a single entity
– Often a ‘merger of equals’
– Merging units cease to exist, and a new company is created,
e.g.,
• GlaxoWellcome and SmithKlineBeecham became GlaxoSmithKline
• Halifax and Bank of Scotland became HBOS
• Acquisitions:
– One company takes over another – the acquired firm often
ceases to exist.
• Sony acquired EMI Music Publishing
• Nokia acquired Alcatel-Lucent

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 Reasons for acquisitions (Bower, 2001)

• Deal with overcapacity through consolidation in mature

industries
– Eliminate capacity, gain market share, efficiency
• Roll-up competitors in geographically-fragmented industries
– Geographic expansion, but operating units remain local
– Banc One acquired many local banks in 1980s
– Kone expanded internationally by acquiring competitors
• Extend into new products or markets
– Extension of product line or international coverage
– Quaker Oats acquired Snapple

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 Reasons for acquisitions (cont’d)
(Bower, 2001)

• Substitute for R&D

– Acquisitions in lieu of in-house R&D to build market position quickly
– Cisco acquired 62 companies
• Exploit eroding industry boundaries by inventing an industry
– Company bets that a new industry is emerging and tries to establish a
position by culling resources from existing industries whose
boundaries are eroding
– Viacom acquired Paramount and Blockbuster
– AT&T acquired NCR, McCaw and TCI

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Twitter before Musk
Company Milestones
• Founded in 2006 by Jack Dorsey, Biz Stone, Evan
Williams, and, though only acknowledged later, Noah
Glass
• In November 2013 Twitter goes public with an initial
share price of $26 / share and a company value of
14.2 billion dollar
• The stock exited trading at just under $45 and the
company's value increased to $24.6 billion on the
first day
• Largest individual share holders used to be Evan
Williams, Al-Walid ibn Talal (Saudi-arabian investor),
Steve Ballmer (former Microsoft CEO) and Jack
Dorsey
• Largest corporate shareholders: The Vanguard Group,
Inc., Morgan Stanley, BlackRock Inc., State Street
Corp.
Controversials – Why Musk
decided to acquire the firm
• Twitter is known to censor users that spread false
information and ban users that repeatedly do so
• Example: Ban of Donald Trump after encouraging
riots at the Capitol on January 6th 2021 via Twitter
• Musk criticized this behaviour as censoring free
speech
• Musk has used the platform in the past to publish
and determine business decisions, initiating a vote
on whether or not he should sell a 10% of his stake
in Tesla
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 Acquisition Timeline
End of March:
Musk addresses his followers on
Twitter :
"Free speech is essential to a
functioning democracy. Do you
believe Twitter rigorously adheres to
this principle?"
He then asked:
"Is a new platform needed?"
Result: Share prices on the
rise
Shares in the platform soared
following Monday's revelation that
the Tesla founder had become the
largest shareholder in the company -
meaning that stake has already
grown in value and is now worth
more than $3bn.
April 25th 2022:
Twitter agreed to sell itself to Elon Musk
for $54.20 a share, a 38 percent
premium over the company’s share Transaction
price. valued at
Scrutiny is likely to be intense. Twitter is approx.
not the biggest social platform — it has $ 44 billion
more than 217 million daily users,
compared with billions for Facebook and
total
Instagram — but it has had an outsize
role in shaping narratives around the
world.

Elon Musk becomes Twitter's biggest Elon Musk makes offer to buy Twitter
shareholder with a stake of 9.2 % in “Free speech is the bedrock of a
Largest the company. In a surprise announcement, Mr Musk functioning democracy, and Twitter is
shareholders said he would pay $54.20 a share for the digital town square where matters
pre-acquisition Twitter, valuing it at about $40bn. vital to the future of humanity are
• The Vanguard Musk becomes then offered a seat on This is considered to be a hostile debated”
Group, Inc. the company’s board which he later move (placing a poison pill), as Musk
declined “Twitter has tremendous potential — I
• Morgan threatened to retract his investment look forward to working with the
Stanley as a shareholder if his offer was not company and the community of users
accepted.
• BlackRock Inc. April 4th 2022: to unlock it.”
• State Street
Result: Twitter is to be
Corp. April 14th 2022: made a private company
and is to emphasize more
on free speech
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 What factors help to explain entry mode
choices?
• Size
– An indicator of the firm’s resource availability
– Exporting requires fewer resources than higher-commitment modes.
• Experience
– The Uppsala model suggests that, when firms are less experienced, they are
more likely to choose export modes.
• With accumulated international experience, firms gain knowledge and are more likely
to use hierarchical modes.

• Product
– High-complexity, with pre- and post-sales service, may be better suited to FDI
– Highly-differentiated products may require more control  FDI
– Ownership advantages (e.g., brands, technologies, capabilities)  market
imperfections  allows firm to overcome liabilities of foreignness.

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 Factors (cont’d)

• Strategy
– How much control does the firm want/need?

– What are the firm’s short-, medium-, and long-term objectives?

– Is the firm going overseas to keep up with global competitors (‘follow-

the-leader’)?

– Is the firm going overseas to follow key customers?

• Market
– Large market potential may justify establishing a sales subsidiary (FDI)
– while a small market may be served effectively via exporting.

– Government policies may restrict entry modes.

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 On foreign entry mode strategies…

• Foreign investment decision is complex and not always

determined by rational analytical means.
• Managers’ investment decisions can often be highly
idiosyncratic or subject to biases (of which they may not be
aware).
• Host-country government restrictions, production costs,
and previous experience also need to be considered.
• Firms often use a variety of foreign operation modes.
– Flexibility in market servicing can be one way to gain competitive
advantage.

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 Today’s takeaways
for FDI...

• What are the advantages and disadvantages of using joint ventures to

internationalise? Use specific examples.

• What are the advantages and disadvantages of internationalising via

wholly-owned subsiary? Use specific examples.

• What are the advantages and disadvantages of internationalising via

merger or acquisition? Use specific examples.

• What are some key motivations that drive entry mode choices?

• What are some motivations for FDI, relative to non-equity modes?

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Additional Slides

Univ. Prof. Dr. Emmanuella Plakoyiannaki

Chair of International Business
University of Vienna

emmanuella.plakoyiannaki@univie.ac.at

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Factors Relevant to Selecting
Locations for FDI

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Motives for Foreign Direct Investment

Market- Resource- Efficiency-

seeking or asset- seeking
motives seeking motives motives
• Gain access to • Access raw • Reduce sourcing
new markets materials and production
or opportunities costs
• Gain access to • Locate production
• Follow key knowledge or near customers
customers other assets • Take advantage of
• Compete with • Access government
key rivals in their technological and incentives
own markets managerial know- • Avoid trade
how available in a barriers
key market

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