Foreign Market Entry Strategy II International Business Strategy 301LON Unit: 7 Knowledgecast: 2 Module Learning Outcomes • Integrate and apply practical situations organisations strategic approaches in various types to of • Resolve management problems in the area of strategic management by evaluating alternative outcomes Internal Strategy Developmental Methods External Organic Development “Organic development is where strategies are developed by building on and developing an organisation’s own capabilities”. ( Johnson & Scholes 2008:357) FDI and Collaborative Ventures? Foreign direct investment (FDI): Strategy in which the firm establishes a physical presence abroad by acquiring productive assets, such as capital, technology, labor, land, plant, and equipment • International collaborative venture: A cross-border business alliance in which partnering firms pool their resources and share costs and risks of a venture • Joint venture (JV): A form of collaboration between two or more firms to create a jointly-owned enterprise Motives for Foreign Direct Investment Marketseeking motives Resourceor assetseeking motives Efficiencyseeking motives • Gain access to new markets or opportunities • Follow key customers • Compete with key rivals in their own markets • Access raw materials • Gain access to knowledge or other assets • Access technological and managerial knowhow available in a key market • Reduce sourcing and production costs • Locate production near customers • Take advantage of government incentives • Avoid trade barriers Key Features of Foreign Direct Investment 1. Represents substantial resource commitment. 2. Implies local presence and operations. 3. Firms invest in countries that provide specific comparative advantages. 4. Entails substantial risk and uncertainty. 5. Direct investors deal more intensively with specific social and cultural variables in the host market. Examples of FDI • Vodafone, a British firm, acquired the Czech telecom Oskar Mobil. • eBay, a U.S. firm, acquired Luxembourg’s Skype Technologies, a prepackaged software company. • Japan Tobacco Inc. acquired the British cigarette maker Gallaher Group PLC for almost $15 billion. • Dubai International Capital Group acquired the British theme park operator Tussauds Group for $1.5 billion. Factors Relevant to Selecting Locations for FDI FDI Types (Ownership and level of integration) • Greenfield investment vs. mergers and acquisitions • Nature of ownership: Wholly owned direct investment vs. equity joint venture • Level of integration: Vertical vs. Horizontal FDI Greenfield Investment vs. M&As • Greenfield investment: Firm invests to build a new manufacturing, marketing, or administrative facility, as opposed to acquiring existing facilities OR • “Organic development is where strategies are developed by building on and developing an organisation’s own capabilities” Mergers and Acquisitions “A merger is a mutually agreed decision for joint ownership between organisations”. “An acquisition is where an organisation takes ownership of another organisation”. http://www.youtube.com/watch?v=mja3b56pSm w ( Johnson & Scholes 2008:357) Level of Integration • Vertical integration: Firm owns, or seeks to own, multiple stages of a value chain for producing, selling, and delivering a product • E.g., Toyota owns some Toyota car dealerships around the world. Ford once owned steel mills that produced steel used to make Ford cars. • Horizontal integration: Arrangement whereby the firm owns, or seeks to own, the activities involved in a single stage of its value chain • E.g., Microsoft acquired a Montreal-based firm that makes software used to create movie animation. International Collaborative Venture Collaborative ventures, sometimes called international partnerships or international strategic alliances, are essentially partnerships between two or more firms. Strategic alliance is where two or more organisations share resources and activities to pursue a strategy”. International Collaborative Venture • A partnership between two or more firms • Includes equity joint ventures and non-equity, project-based ventures • Helps overcome the often substantial risk and high costs of international business • Makes possible the achievement of projects that exceed the capabilities of the individual firm Equity vs. Project-Based Joint Ventures • Equity Joint Ventures are normally formed when no one party has all the assets needed to exploit an opportunity. Typically, the local partner contributes a factory, market navigation know-how, connections, or low-cost labor. • A project-based joint venture has a narrow scope and limited timetable. No new legal entity is created. Typically, partners collaborate on joint development of new technologies, products, or share other expertise with each other. Such cooperation helps them catch up with rivals in technology development. Other Types of Collaborative Ventures • Consortium: Project-based, usually nonequity venture with multiple partners fulfilling a large-scale project • E.g., commercial aircraft manufacturing (Boeing and Airbus) • Cross-licensing agreement: Type of project-based, nonequity venture where each partner agrees to access licensed technology developed by the other on preferential terms E.g., Telecommunications industry for inventing new technologies Advantages and Disadvantages of Collaborative Ventures Success Factors in Collaborative Ventures • Half of all global collaborative ventures fail in the first 5 years of operations due to unresolved disagreements, confusion, and frustration. Thus, partners should: Be aware of cultural differences Pursue common goals Pay attention to planning and management of the venture Safeguard core competencies Adjust to shifting environmental circumstances Knowledgecast Summary • Integrate and apply strategic approaches to practical situations in various types of organisations • Resolve management problems in the area of strategic management by evaluating alternative outcomes Seminar Mini case: Internationalization of French Retailer—Carrefour (found in chapter 5, page 148 of recommended text by Frynas & Mellahi) 1. What are the factors responsible for Carrefour's internationalization? 2a. Assess Carrefour's internationalization effort and profile its choices (host countries) based on market and economies (developing, developed and emerging). 2b. Give a generic description of the each classification and its attractiveness to carrefour. 3. What internationalization strategy is adopted by Carrefour? (International, Transnational etc.) Support your answer with specific example from the case. Group Activity Assessing National Competitive Advantage Opening Mini Case: Dubai: The Path to Creating a KnowledgeBased Economy (found on page 177 of your required text) Requirement 1. Consider the Persian Gulf City-State of Dubai and discuss the key contributory factor to its National Competitive Advantage. 2. Conduct a brief independent research on the city of Shanghai and present a comparative analysis assessing competitive advantage between Shanghai and Dubai and draw some conclusion on their attractiveness.