MGW2351: International Business

Lecture 6
Entry Mode to Foreign Markets:
Joint venture and wholly owned
subsidiary (WOS);
Entry mode in relation to
internationalisation process

Learning Objectives
To describe different modes of entry
To outline the advantages and disadvantages of
the different modes that firms use to enter
foreign markets - FDI:
- Joint venture
- Wholly owned subsidiary
- Merger & acquisition
Understand the usefulness of Uppsala model in
explaining internationalisation process (from
zero export to FDI)

Entry modes FDI: Joint ventures

A joint venture is the establishment of a firm that is jointly
owned by two or more otherwise independent firms.
Advantages
A firm can benefit from a local partners knowledge of the host
countrys competitive conditions, culture, language, political
systems and business systems.
- DMG Shanghai vs Astro in Indonesia: what is the
difference in terms of JV outcomes?
The costs and risks of opening a foreign market are shared with
the partner.
Political considerations may make joint ventures the only feasible
entry mode.
- India does not allow wholly foreign owned subsidiary;
Only until recently just for IKEA after IKEA lobbied.

Good JV: Top 10 Passenger Vehicle Manufacturing in China (2009)

- By 2010, top 10 passenger vehicle manufacturerers (7 are JVs with foreign
players) make up almost 90% of Chinas market share;
- Nearly every major global vehicle manufacturer has JV operations in China.
Rank

Company

HQ

JV Partner

Market Share

Saic

Shanghai

GM, VW

19.83%
2,705.5K sales units

Faw

Changchun

VW, Toyota,
Mazda

14.25%
1,944.6K

Dongfeng

Wuhan

PSA, Nissan,
Honda

13.91%
1,897.7K

Chana (incl.
Hafei)

Chongqing

Ford, Mazda,
Suzuki

13.70%
1,869.8K

Beijing Auto

Beijing

Hyundai, Daimler

9.11%
1,243.0K

Guangzhou Auto

Guangzhou

Honda, Toyota,
Isuzu, Fiat

4.45%

Chery

Hefei

N/A

3.67%

BYD

Shenzhen

N/A

3.29%

Brialliance

Shenyang

BMW, Toyota

2.55%

10

Geely

Taizhou

N/A

2.41%

Others
Source:CAAM

12.84%
1,750K

Entry modes FDI: Joint ventures

Disadvantages
A firm risks giving control of its technology to its partner risks
of losing technological advantage; ethics.
The firm may not have the tight control over subsidiaries that it
could need to realise experience curve or location economies;
- E.g., Astro in terms of pricing, understanding the
Indonesian market & promotion strategy??
Shared ownership can lead to conflicts and battles for control if
goals and objectives differ or change over time.
- Chinese partners may tend to have
short-term goals - profits

Entry modes FDI: Wholly owned subsidiaries (WOS)

In a wholly owned subsidiary, the firm owns 100% of
the stock.
Establishing a wholly owned subsidiary in a foreign
market can be done two ways:
Greenfield: the firm can set up a new operation in that
country.
Acquisition: the firm can acquire an established firm;
- e.g., Mittal Steel is skilful not only in acquiring
but in enhancing acquired firms poor performance
internalization advantage.

Entry modes FDI: WOS

Advantages
A wholly owned subsidiary reduces the risk of losing control
over core competencies.
A wholly owned subsidiary may be required if a firm is trying
to realise location and experience curve economies.
A wholly owned subsidiary gives a firm the tight control over
operations in different countries that is necessary for
engaging in global strategic coordination
- i.e., using profits from one country to support competitive
attacks in another
- easier to have global integration/convergence and
coordination (i.e., policies, corporate image, business
strategies)

Entry modes FDI: WOS

Disadvantages
Firms bear the full costs and risks of setting up overseas
operations.
Acquisitions raise additional problems, including those
associated with trying to marry divergent corporate cultures.
Poor knowledge of local work culture implement less
suitable reward and punishment systems staff productivity
and motivation.
If it is a hostile acquisition or takeover, there may be
problems with resentment, resistance to change & etc that
may affect organizational efficiency and effectiveness.

Entry mode: Merger

Merger is a strategy through which two firms willingly
agree to integrate their operations on a relatively coequal basis
Why because they believe they have the resources and
capabilities that together may create a stronger competitive
advantage

Both previous entities disappear into the new

organisation. Shares are commuted into new shares
and usually revalued to account for new market value.
In practice the two partners are usually of comparable
size .

Entry mode: Acquisition

Acquisition is a strategy through which one firm buys
a controlling, or 100% interest in another firm
Why intent of using a core competence more effectively by
making the acquired firm a subsidiary business within its
portfolio.

Usually involves the joining of unequal partners.

The large firm subsumes the smaller one into its
structure (Stonehouse et al 2001)
Can be agreed or hostile
Agreed is where target company accept the price offer for
shareholding
Hostile acquisition (also called hostile take-over) is where
the shares are acquired from the shareholders at a price that
the target company directors do not recommend.

Advantages of acquisitions
1. Increased market power
Main aim is to increase size and scope (Gucci vs LVMH)
Gain efficiencies
Horizontal acquisitions
Taking over of a firm in the same industry eg competitors
Research shows these work if businesses have similar
characteristics ie corporate cultures (Gucci lost to LVMH in
acquisition of Fendi ), but national pride may hinder (Italian
Gucci vs French LVMH)
Vertical acquisitions
Taking over of a supplier or distributor
Aim is to control the value chain: Toyota in China for strong
supplier network
Related acquisitions
Taking over a firm in a related industry
Example: Sony in pursuing convergence in music, movies,
games & communications.

Advantages of acquisitions
2. Overcoming entry barriers
Barriers to market entry might include economies of scale
requirements and differentiated products (different to own product
& services)
The higher the barrier to entry the more likely a take over.
Overseas acquisition provides more control than alliances.
3. Cost of new product development
Taking over existing products rather than developing own R&D.
Almost 88% of innovations fail to achieve adequate returns
60% of innovations are successfully imitated within 4 years after
patent is obtained
Matsushita with LED technology 25 years of investment
VF Corps acquisition of Timberland which is well known for its
tough leather footwear to compete in a different industry

Advantages of acquisitions
4. Increased diversification
Provides product diversification in unfamiliar
markets
Diversification strategies can be related or
unrelated
To mitigate latex cost increases in the future, Top
Glove has started moving upstream by acquiring
land and diversifying into rubber plantation
Under related diversification, VF Corp (The North
Face, Nautica, Lee & Wrangler Jeans) expected
to benefit from acquisition of Timberland to add
footwear into its existing product line.

Advantages of M&A
1. Reshaping the firms competitiveness
(strategic)
May want to reduce dependence on a
single market or product range (i.e. LVMH
acquiring Fendi from Prada).
VF Corp acquired Timberland
2. The competitive situation
Market may be static and only chance enter
a market is via buying existing capacity.
3. Human asset networks
Access to key people or known quantity.

Advantages of M&A
4. New opportunities identified
Leaders move between different businesses
and see opportunities

May take over business CEO previously worked

for.

5. Increased speed to market

Provide a quick route to new products and new
markets e.g process via internal development
is too slow
i.e an e-commerce business
6. Lower risk compared to
developing new products (R&D)
Buying known quantity rather than needing to
develop your own.

Advantages of M&A
7. Low share value
Buying under valued companies Gucci a
potential target in 1999
8. Buying cost efficiency
Established company may be well down
experience curve and have achieved
efficiencies difficult to match by internal
development
Necessary innovation and organisational
learning would be too slow
VF Corp acquisition of Timberland

HBR 2012: Where Japan Inc. Leadsand Where It Doesnt

A study of six product categories in BRIC and Indonesia reveals that only a few
Japanese firms are leaders in these markets, where MNCs dominate. WHY? 4
reasons: (1) reluctance for M&A; (2) lack of managerial talents; (3) target premium
market; (4) lack of commitment for emerging economies.

BRAZIL

RUSSIA

INDIA

CHINA

INDONESIA

Automotive:
FIAT

AVTOVAZ

SUZUKI

VW

TOYOTA

TVs:
LG

SAMSUNG

LG/
SAMSUNG

HISENSE

LG

Home appliance: INDESIT

WHIRLPOOL

LG

HAIER

SHARP

Retail hygiene:
P&G

P&G

P&G

P&G

UNICHARM

Personal care:
NATURA

P&G

UNILEVER

P&G

UNILEVER

Package food:
NESTLE

WIMM-BILL
-DANN

GUJARAT
COOP MILK
MKTG

INNER
MONGOLIA
MENG NIU
DAIRY

INDOFOOD
SUKSES
MAKMUR

BLUE: MNCS

BLACK: LOCAL

RED: JAPANESE

Problems with M&A

Integration difficulties
Difficult to meld different corporate cultures
Integration most important step
Positive link between speed of integration and success.
Need to deal with unpopular issues first and be honest with
people on likely results of integration on them

Inadequate evaluation of target

Needs to cover more than finance
Need to look at cultures, tax consequences, workforce
attributes
Failure of proper due diligence is likely to be paying a
premium eg AMP purchase of GIO

Problems with M&A

Large or extraordinary debt
Debt can be positive or negative
Too much debt reduces spending on key resources eg people
and R&D
Principle and interest can send the company into bankruptcy.

Inability to achieve synergy especially if too large

Must identify if increasing value together or more
valuable apart - Need to look at transaction costs
required to achieve planned outcomes
(i.e. Toyota in China has shareholding with its longterm suppliers in China).
Public relations problems
Taking over local icon can have negative
consequences Mittal Steel in Europe

The stage models of

internationalisation: an incremental
sequential approach
The Uppsala Models (U-Models)
The internalisation process is an incremental
process
Stage 1: No regular export activity.
Stage 2: Export via independent representatives
(agents).
Stage 3: Establishment of an overseas sales
subsidiary.
Stage 4: Overseas production/manufacturing units.

The stage models of internationalisation: an

incremental sequential approach
Johanson and Vahlnes Uppsala-Model

Insert Figure 2.3 about here

Figure 2.6 The theoretical and operational level of the knowledge and foreign market
commitment development U-Model
SOURCE: O. Andersen, On the internationalization process of firms: a critical analysis, Journal of International Business
Studies, 24(2) (1993), pp. 20931.

The stage models of internationalisation:

Johanson and Vahlnes Uppsala-Model
Assumption 1: market commitment affects not only
commitment decisions but also the way current
activities are operated changes in knowledge and
commitment.
In other words, the firm aims to increase its long-term
profit along with growth shape decision making of
the firm through the the above influence

The stage models of internationalisation:

Johanson and Vahlnes Uppsala-Model
Assumption 2: firms target markets that are physically
close to have a communication advantage.
similar language, culture & economic/political systems
The internationalisation process is an incremental
process owing to the progressive reduction of psychic
distance through managers gradual accumulation of
knowledge of foreign markets
Highlighted the importance of knowledge in export
market development: Psychic distance plays a role
Johanson and Vahlne have highlighted the importance
of networks.

Conservative Toyotas 3-stage plan in China: an

incremental sequential process too!

Stage 1: No regular export activity; 1936: export only 4 trucks.

Stage 2: 1964 - Export direct & regularly (a large MNC).
Stage 3: 1980 - Establishment an overseas sales network in Beijing, China.
Stage 4: Built wholly owned & JV autoparts manufacturing bases
(Japanese JV suppliers)
2000 Built manufacturing plant: Tianjin FAW Toyota Motor
2002 Built manufacturing plant via JV with FAW
(Chinese partner): Toyota Motor (China) Investment Co. Ltd.
First car model: Toyota Vios.
2004 Via JV to manufacture 9 models
Continue import of other models & by 2004 become
strong in the Chinese market with 50,000 units annually;
2004 Toyota has 57 JVs; Try localization to stay competitive as
Western players increase sourcing from local Chinese suppliers.
http://www.toyota-global.com/company/history_of_toyota/75years/data/automotive_bu
siness/sales/activity/china/index.html

The Chinese automotive market

By 2009, China became the worlds largest automobile producer
and market.
Sales from Tier 1 & Tier 2 cities rural areas
Rapid sales moved from eastern China to central & western
China.

Extracted from a 2010 market report by

APCO Worldwide

The Chinese automotive market

Chinas local players are weak in R&D, domestic
innovation & design capabilities intl competitiveness??
With governments encouragement, domestic firms opted
for strategic partnerships with foreign players,
technology transfer & improve engineering capabilities
environmentally friendly strategy (electric vehicles!!)
Lower import tariff over the years helps Toyota to continue
import of certain car models while others are
manufactured in China:
Complete built-up (CBU): 70% to 25%
Complete knocked-down (CKD): 50% to 25%

Extracted from a market report by APCO

Worldwide

Haiers 3-stage plan for international expansion:

NOT an incremental sequential process!
Stage 1: No regular export activity;
Stage 2: 1985 - Export started after licensing agreement with a leading home
appliance German manufacturer, Liebherr (also Haiers JV
partner from 1985) to gain refrigerator technology
1988 dominated Chinese market.

- Stage 2: XXXX Sales alliance for the U.S. market with Welbit Appliance;
Stage 2: 1992 Established Haier ASEAN export to Indonesia.
Stage 4: 1996 Set up a manufacturing plant in Indonesia.
Stage 3: XXXX Use external sales agents to import fridge from China to EU
Stage 4: 2000 Set up manufacturing plant and WOS in the U.S.
Stage 4: 2001 Merged with Italian fridge firm (Meneghetti) conquered
EU markets in fridge and freezer.
- Stage 4: 2001 JV in Nigeria, Africa to centralize production for the African
continent.
- Stage 3: 2003 Built trading subsidiary for air cond in Italy & Spain.