1 CHAPTER 15 The choice of which markets to enter should be driven by an assessment of relative long-run growth and profit potential TRUE The choice of which markets to enter should be driven by an assessment of relative long run growth and profit potential AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-01 Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter; when to enter those markets; and on what scale Topic: Introduction The attractiveness of a country as a potential market for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country TRUE The attractiveness of a country as a potential market for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-01 Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter; when to enter those markets; and on what scale Topic: Basic Entry Decisions The costs and risks associated with doing business in a foreign country are typically high in an economically advanced and politically stable democratic nation FALSE The costs and risks associated with doing business in a foreign country are typically lower in economically advanced and politically stable democratic nations, and they are greater in less developed and politically unstable nations AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 15-01 Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter; when to enter those markets; and on what scale Topic: Basic Entry Decisions 15-1 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education The value an international business creates in a foreign market depends on the suitability of its product offering to that market and the nature of indigenous competition TRUE The value an international business can create in a foreign market depends on the suitability of its product offering to that market and the nature of indigenous competition AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-01 Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter; when to enter those markets; and on what scale Topic: Basic Entry Decisions First-mover advantages are the advantages associated with entering a market early TRUE The advantages frequently associated with entering a market early are commonly known as first-mover advantages AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-01 Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter; when to enter those markets; and on what scale Topic: Basic Entry Decisions Costs that an early entrant has to bear that a later entrant can avoid are known as first-mover costs FALSE Pioneering costs are costs that an early entrant has to bear that a later entrant can avoid AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-01 Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter; when to enter those markets; and on what scale Topic: Basic Entry Decisions 15-2 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Educating customers is a part of pioneering costs TRUE Pioneering costs include the costs of promoting and establishing a product offering, including the costs of educating customers AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-01 Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter; when to enter those markets; and on what scale Topic: Basic Entry Decisions A strategic commitment can be reversed by the top management according to their convenience FALSE A strategic commitment has a long-term impact and is difficult to reverse AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 15-01 Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter; when to enter those markets; and on what scale Topic: Basic Entry Decisions Large strategic commitments increase strategic flexibility FALSE Strategic commitments, such as rapid large-scale market entry, can have an important influence on the nature of competition Large strategic commitments limit strategic flexibility AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 15-01 Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter; when to enter those markets; and on what scale Topic: Basic Entry Decisions 15-3 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 10 A small-scale entrant is more likely than a large-scale entrant to capture first-mover advantages associated with demand preemption, scale economies, and switching costs FALSE The large-scale entrant is more likely than the small-scale entrant to be able to capture first-mover advantages associated with demand preemption, scale economies, and switching costs AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-01 Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter; when to enter those markets; and on what scale Topic: Basic Entry Decisions 11 Small-scale entry allows a firm to learn about a foreign market while limiting the firm's exposure to that market TRUE Small-scale entry allows a firm to learn about a foreign market while limiting the firm's exposure to that market AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-01 Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter; when to enter those markets; and on what scale Topic: Basic Entry Decisions 12 Exporting is advantageous because it avoids the cost of establishing manufacturing operations in the host country and because it may help a firm achieve experience curve and location economies TRUE Exporting has two distinct advantages First, it avoids the often substantial costs of establishing manufacturing operations in the host country Second, exporting may help a firm achieve experience curve and location economies AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 15-4 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 13 Exporting is most appropriate when lower-cost locations for manufacturing the product can be found abroad FALSE Exporting may not be appropriate if lower-cost locations for manufacturing the product can be found abroad AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 14 In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client TRUE In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 15 An advantage of turnkey projects is that the firm that enters into a turnkey deal will have no long-term interest in the foreign country FALSE A drawback of turnkey projects is that the firm that enters into a turnkey deal will have no long-term interest in the foreign country AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 16 Tangible property includes patents, designs, copyrights, and trademarks FALSE Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember 15-5 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Difficulty: Easy Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 17 Licensing limits the firm's ability to realize experience curve and location economies by producing its product in a centralized location TRUE Licensing limits the firm's ability to realize experience curve and location economies by producing its product in a centralized location AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 18 By its very nature, licensing increases a firm's ability to utilize a coordinated strategy FALSE Competing in a global market may require a firm to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another By its very nature, licensing limits a firm's ability to this AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 19 McDonald's is an example of a firm that uses a franchising strategy FALSE The franchiser often assists the franchisee to run the business on an ongoing basis As with licensing, the franchiser typically receives a royalty payment, which amounts to some percentage of the franchisee's revenues McDonald's is a good example of a firm that has grown by using a franchising strategy AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 15-6 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 20 Franchising enables a firm to quickly build a global presence TRUE Using a franchising strategy, a service firm can build a global presence quickly and at a relatively low cost and risk AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 21 The most typical joint venture is a 25/75 venture FALSE The most typical joint venture is a 50/50 venture, in which there are two parties, each of which holds a 50 percent ownership stake and contributes a team of managers to share operating control AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 22 An advantage of joint ventures with a local partner is the knowledge of the local environment that the local partner contributes to the venture TRUE A firm benefits from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business systems AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 23 A wholly owned subsidiary limits a firm's control over operations in different countries FALSE A wholly owned subsidiary gives a firm tight control over operations in different countries AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand 15-7 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Difficulty: Easy Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 24 Firms entering a market via a wholly owned subsidiary must bear all the costs and risks associated with the venture TRUE Establishing a wholly owned subsidiary is generally the most costly method of serving a foreign market from a capital investment standpoint Firms doing this must bear the full capital costs and risks of setting up overseas operations AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 25 Brand names are generally well-protected by international laws pertaining to trademarks TRUE Brand names are generally well-protected by international laws pertaining to trademarks AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-03 Identify the factors that influence a firm's choice of entry mode Topic: Selecting an Entry Mode 26 A joint venture is often politically more acceptable than a wholly owned subsidiary and brings a degree of local knowledge to the subsidiary TRUE The subsidiaries may be wholly owned or joint ventures, but most service firms have found that joint ventures with local partners work best for the controlling subsidiaries A joint venture is often politically more acceptable and brings a degree of local knowledge to the subsidiary AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 15-03 Identify the factors that influence a firm's choice of entry mode Topic: Selecting an Entry Mode 15-8 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 27 Firms pursuing global standardization or transnational strategies tend to prefer joint-venture arrangements over wholly owned subsidiaries FALSE Firms pursuing global standardization or transnational strategies tend to prefer establishing wholly owned subsidiaries AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 15-03 Identify the factors that influence a firm's choice of entry mode Topic: Selecting an Entry Mode 28 Acquisitions are quick to execute TRUE By acquiring an established enterprise, a firm can rapidly build its presence in the target foreign market AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-04 Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy Topic: Greenfield Venture or Acquisition? 29 Acquisitions rarely produce disappointing results FALSE Acquisitions often produce disappointing results AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-04 Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy Topic: Greenfield Venture or Acquisition? 30 Overpayment for assets of an acquired firm is one reason acquisitions fail TRUE Acquisitions fail for several reasons The acquiring firms often overpay for the assets of the acquired firm AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-04 Recognize the pros and cons of acquisitions versus greenfield ventures as an entry 15-9 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education strategy Topic: Greenfield Venture or Acquisition? 31 The main advantage of greenfield investment is that it gives the firm a much greater ability to build the kind of subsidiary company that it wants TRUE The big advantage of establishing a greenfield venture in a foreign country is that it gives the firm a much greater ability to build the kind of subsidiary company that it wants AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-04 Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy Topic: Greenfield Venture or Acquisition? 32 Greenfield ventures are less risky than acquisitions in the sense that there is less potential for unpleasant surprises TRUE Greenfield ventures are less risky than acquisitions in the sense that there is less potential for unpleasant surprises AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-04 Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy Topic: Greenfield Venture or Acquisition? 33 If a firm is trying to enter a market where there are already well-established companies, and where global competitors are also interested in establishing a presence, the firm should choose a greenfield investment FALSE If the firm is seeking to enter a market where there are already well-established incumbent enterprises, and where global competitors are also interested in establishing a presence, it may pay the firm to enter via an acquisition AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 15-04 Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy Topic: Greenfield Venture or Acquisition? 15-10 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education C Th ey li mi t th e en try of fir m s int o for ei gn m ar ke ts 15-129 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education D Fir m ris ks gi vi ng aw ay te ch no lo gic al kn ow ho w an d m ar ke t ac ce ss to its alli an ce pa rtn er The disadvantage of a strategic alliance is that the firm risks giving away technological know-how and market access to its alliance partner AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 15-05 Evaluate the pros and cons of entering into strategic alliances Topic: Strategic Alliances 15-130 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 82 Managing an alliance successfully requires building interpersonal relationships between the firms' managers This is sometimes referred to as A rel ati on al ca pi tal Brel ati on al as se ts Cop er ati on al as se ts Dve nt ur e ca pi ta l Managing an alliance successfully requires building interpersonal relationships between the firms' managers, or what is sometimes referred to as relational capital AACSB: Analytic Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 15-05 Evaluate the pros and cons of entering into strategic alliances Topic: Strategic Alliances Essay Questions 15-131 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 83 What are first-mover advantages? Discuss the advantages associated with them First-mover advantages are the advantages frequently associated with entering a market early One first-mover advantage is the ability to preempt rivals and capture demand by establishing a strong brand name A second advantage is the ability to build sales volume in that country and ride down the experience curve ahead of rivals, giving the early entrant a cost advantage over later entrants A third advantage is the ability of early entrants to create switching costs that tie customers into their products or services Such switching costs make it difficult for later entrants to win business AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 15-01 Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter; when to enter those markets; and on what scale Topic: Basic Entry Decisions 84 Explain the relationship between first-mover disadvantages and pioneering costs When a firm enters a market prior to other international businesses, it can have first-mover disadvantages These disadvantages may give rise to pioneering costs, costs that an early entrant has to bear that a later entrant can avoid Pioneering costs arise when the business system in a foreign country is so different from that in a firm's home market that the enterprise has to devote considerable effort, time, and expense to learning the rules of the game Pioneering costs also include the costs of promoting and establishing a product offering Finally, an early entrant may be put at a disadvantage, relative to a later entrant, if regulations change in a way that diminishes the value of the early entrant's investments AACSB: Reflective Thinking Blooms: Understand Difficulty: Hard Learning Objective: 15-01 Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter; when to enter those markets; and on what scale Topic: Basic Entry Decisions 15-132 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 85 Discuss the trade-offs associated with large-scale entry versus small-scale entry It is important for a firm to think through the implications of large-scale entry into a market and act accordingly Of particular relevance is trying to identify how actual and potential competitors might react to large-scale entry into a market Also, the large-scale entrant is more likely than the small-scale entrant to be able to capture first-mover advantages associated with demand preemption, scale economies, and switching costs Balanced against the value and risks of the commitments associated with largescale entry are the benefits of a small-scale entry Small-scale entry allows a firm to learn about a foreign market while limiting the firm's exposure to that market Small-scale entry is a way to gather information about a foreign market before deciding whether to enter on a significant scale and how best to enter By giving the firm time to collect information, small-scale entry reduces the risks associated with a subsequent large-scale entry But the lack of commitment associated with small-scale entry may make it more difficult for the small-scale entrant to build market share and to capture first-mover or early-mover advantages The riskaverse firm that enters a foreign market on a small scale may limit its potential losses, but it may also miss the chance to capture first-mover advantages AACSB: Reflective Thinking Blooms: Understand Difficulty: Hard Learning Objective: 15-01 Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter; when to enter those markets; and on what scale Topic: Basic Entry Decisions 86 Discuss Bartlett and Ghoshal's perspective on how firms from developing countries should approach international expansion Bartlett and Ghoshal suggest that companies based in developing countries should use the entry of foreign multinationals as an opportunity to learn from these competitors by benchmarking their operations and performance against them They argue that the local company might be able to find ways to differentiate itself from foreign companies by focusing on market niches that the multinational ignores or is unable to serve effectively if it has a standardized global product offering Then, the firm from the developing nation may then be in a position to pursue its own international expansion strategy AACSB: Reflective Thinking Blooms: Understand Difficulty: Hard Learning Objective: 15-01 Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter; when to enter those markets; and on what scale Topic: Basic Entry Decisions 15-133 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 87 Why should a firm choose exporting as a means of foreign market expansion? Discuss the advantages and disadvantages of exporting Exporting has two distinct advantages First, it avoids the often substantial costs of establishing manufacturing operations in the host country Second, exporting may help a firm achieve experience curve and location economies However, there are several disadvantages of exporting First, exporting may not be appropriate if lower-cost manufacturing locations are available abroad Second, high transportation costs may make exporting uneconomical Finally, tariff barriers may make exporting less attractive AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 88 Explain the idea of a turnkey project Why should a firm use this arrangement to expand internationally? In what industries are turnkey arrangements most common? In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation The know-how required to assemble and run a technologically complex process is a valuable asset Turnkey projects are a way of earning great economic returns from that asset The strategy is particularly useful where FDI is limited by hostgovernment regulations A turnkey strategy can also be less risky than conventional FDI In a country with unstable political and economic environments, a longer-term investment might expose a firm to unacceptable political or economic risks Turnkey projects are most common in the chemical, pharmaceutical, petroleum refining, and metal refining industries AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 15-134 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 89 Define licensing agreements What are the advantages of this mode of international expansion? A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity for a specified period in exchange for royalties The primary advantage of licensing is that the firm does not have to bear the development costs and risks associated with opening a foreign market As a result, licensing is a very attractive option for firms that lack the capital to open overseas markets Licensing is also an attractive option when a firm is interested in pursuing a foreign market but does not want to commit substantial resources to an unfamiliar or potentially volatile foreign market Licensing is also used when a firm wishes to participate in a foreign market, but is prohibited from doing so by barriers to investment Finally, licensing is used when a firm possesses some intangible property but does not want to pursue a potential application itself AACSB: Analytic Blooms: Remember Difficulty: Medium Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 90 Why should a firm be cautious about entering a licensing agreement? In a licensing agreement, the licensor grants the rights to intangible property to the licensee for a specified period in exchange for royalty payments Firms considering this type of arrangement should be cautious on three fronts First, if a firm licenses any of its proprietary know-how (such as its production processes) to another company, it risks losing control over this knowledge by permitting access to it by another firm Second, licensing is not an effective way of realizing experience curve and location economies by manufacturing a product in a centralized location If these attributes are important to a firm, licensing may be a poor choice Finally, competing in a global market may require a firm to coordinate strategic moves across countries by using profits from one country to support competitive attacks in another Licensing severely limits a firm's ability to this A licensee is unlikely to allow a multinational firm to use its profits (beyond the royalty payments) to support a different licensee operating in another country AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 15-135 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 91 What is intangible property? How can intangible property be protected in a licensing agreement? Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks A licensor can reduce the risk of losing intangible property, or proprietary knowhow, to a foreign partner by entering into a cross-licensing agreement Under a cross-license agreement, a firm licenses some valuable intangible property (such as a production process) to a foreign partner, but in addition to royalty payments, the firm also requires the foreign partner to license some of its valuable know-how to the firm Cross-licensing agreements enable firms to hold each other "hostage," thereby reducing the risk they will behave in an opportunistic manner toward each other AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 92 Compare and contrast licensing agreements and franchising agreements A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity for a specified period in exchange for royalties In contrast, franchising is basically a specialized form of licensing in which the franchiser not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business Franchising tends to involve longer-term commitments than licensing AACSB: Reflective Thinking Blooms: Evaluate Difficulty: Hard Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 93 Briefly explain the advantages and disadvantages of franchising agreements There are several advantages of franchising as an entry mode In particular, the firm is relieved of many of the costs and risks of opening a foreign market on its own This creates a good incentive for the franchisee to build a profitable operation as quickly as possible However, franchising may inhibit the firm's ability to take profits out of one country to support competitive attacks in another Furthermore, quality control may become an issue if a franchisee does not maintain an appropriate quality level AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium 15-136 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 94 What is a joint venture? What type of joint venture is most common? Provide an example of a joint venture A joint venture involves establishing a firm that is jointly owned by two or more otherwise independent firms The most typical joint venture is a 50/50 venture, in which there are two parties, each of which holds a 50 percent ownership stake and contributes a team of managers to share operating control Fuji-Xerox is an example of a joint venture that was established between Fuji Photo and Xerox AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 95 Discuss the advantages of using a joint venture to enter foreign markets There are several advantages to expanding into foreign markets via a joint venture First, firms benefit from a local partner's knowledge of the host market Second, a firm can share the costs and/or risks of operating in a foreign market Third, in many countries, political considerations make joint ventures the only feasible entry mode AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 96 Imagine that you are meeting with your superiors to discuss entering a foreign market Your boss has asked you to analyze a joint venture prospect Why might you tell your boss that the joint venture is not a good idea? There are major disadvantages with joint ventures A firm that enters into a joint venture risks giving control of its technology to its partner In addition, a joint venture does not give the firm the tight control over subsidiaries that it might need in order to realize experience curve or location economies Finally, a joint venture might not be a good strategy because the shared ownership structure can lead to conflicts and battles for control between the investing firms if their goals and objectives change or if they not share a common vision for the venture AACSB: Reflective Thinking Blooms: Apply 15-137 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Difficulty: Hard Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 97 How can a firm protect its proprietary information in a joint venture arrangement? There are several things a firm can to protect proprietary information in a joint venture arrangement One option is to hold majority ownership in the venture so that the firm has greater control over the technology A second option is to "wall off" from a partner technology that is central to the core competence of the firm, while sharing other technology AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 98 What are the two methods of entering foreign marketing using a wholly owned subsidiary? Firms entering a foreign market via a wholly owned subsidiary, where the firm owns 100 percent of the stock, can either make the investment in a greenfield operation or in an acquisition A greenfield operation involves the establishment of a new operation, whereas an acquisition involves buying an established firm in the host country and using that firm to promote the company's products AACSB: Analytic Blooms: Remember Difficulty: Easy Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 15-138 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 99 Consider why a firm should enter a market via a wholly owned subsidiary What are the advantages and disadvantages of this type of strategy? In a wholly owned subsidiary, the firm owns 100 percent of the stock Wholly owned subsidiaries can take two forms, a greenfield investment which involves the establishment of a new company, or an acquisition Establishing a wholly owned subsidiary as an entry strategy into a foreign market is appropriate when a firm's competitive advantage is based on technological competence By establishing a wholly owned subsidiary, a firm reduces the risk of losing control over that competence In addition, expanding via a wholly owned subsidiary gives a firm tight control over its operations in various countries This strategy maximizes a firm's potential to engage in global strategic coordination Furthermore, a wholly owned subsidiary strategy may be required if a firm is trying to realize location and experience curve economies However, establishing a wholly owned subsidiary is generally the most costly method of serving a foreign market, and since the firm owns 100 percent of the operation, the risks are also the highest AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 15-02 Compare and contrast the different modes that firms use to enter foreign markets Topic: Entry Modes 100 Draw a distinction between firms based on their core competency The optimal choice of entry mode depends on the firm's strategy When technological know-how constitutes a firm's core competence, wholly owned subsidiaries are preferred, since they best control technology When management know-how constitutes a firm's core competence, foreign franchises controlled by joint ventures seem to be optimal When the firm is pursuing a global standardization or transnational strategy, the need for tight control over operations to realize location and experience curve economies suggests wholly owned subsidiaries are the best entry mode AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 15-03 Identify the factors that influence a firm's choice of entry mode Topic: Selecting an Entry Mode 15-139 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 101 For a company whose core competency is management know-how, explain which entry mode would be optimal The competitive advantage of many service firms is based on management knowhow (e.g., McDonald's, Starbucks) For such firms, the risk of losing control over management skills to franchisees or joint-venture partners is not that great These firms' valuable asset is their brand name, and brand names are generally well protected by international laws pertaining to trademarks Many service firms favor a combination of franchising and master subsidiaries to control the franchises within particular countries or regions The master subsidiaries may be wholly owned or joint ventures, but most service firms have found that joint ventures with local partners work best for the master controlling subsidiaries A joint venture is often politically more acceptable and brings a degree of local knowledge to the subsidiary AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 15-03 Identify the factors that influence a firm's choice of entry mode Topic: Selecting an Entry Mode 102 Discuss the three advantages of acquiring an enterprise in a target market Acquisitions have three major points in their favor First, they are quick to execute By acquiring an established enterprise, a firm can rapidly build its presence in the target foreign market Second, in many cases, firms make acquisitions to preempt their competitors Third, managers may believe acquisitions to be less risky than greenfield ventures—ventures that are wholly owned subsidiaries and are built from the ground up When a firm makes an acquisition, it buys a set of assets that are producing a known revenue and profit stream AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 15-04 Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy Topic: Greenfield Venture or Acquisition? 15-140 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 103 Why acquisitions fail? Acquisitions fail for several reasons First, the acquiring firm often overpays for the assets of the acquired firm Second, many acquisitions fail because there is a clash between the cultures of the acquired and the acquiring firms Third, many acquisitions fail because attempts to realize synergies by integrating the operations of the acquired and acquiring entities often run into roadblocks and take much longer than forecast Finally, many acquisitions fail due to inadequate preacquisition screening AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 15-04 Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy Topic: Greenfield Venture or Acquisition? 104 Discuss the advantage of establishing a greenfield venture in a foreign country The big advantage of establishing a greenfield venture in a foreign country is that it gives the firm a much greater ability to build the kind of subsidiary company that it wants For example, it is much easier to build an organization culture from scratch than it is to change the culture of an acquired unit Similarly, it is much easier to establish a set of operating routines in a new subsidiary than it is to convert the operating routines of an acquired unit This is a very important advantage for many international businesses, where transferring products, competencies, skills, and know-how from the established operations of the firm to the new subsidiary are principal ways of creating value AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 15-04 Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy Topic: Greenfield Venture or Acquisition? 105 Discuss some of the disadvantages of establishing greenfield venture in a foreign country Some of the disadvantages of establishing a greenfield include (1) they are slower to establish; (2) they are riskier than acquiring an existing company in a foreign market; (3) an inherent degree of uncertainty is associated with such a venture because of future revenue and profit prospects; and (4) the possibility of being preempted by more aggressive global competitors who enter via acquisitions and build a big market presence that limits the market potential for the greenfield venture AACSB: Reflective Thinking 15-141 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Blooms: Understand Difficulty: Medium Learning Objective: 15-04 Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy Topic: Greenfield Venture or Acquisition? 106 Discuss strategic alliances How successful are they? Why firms form strategic alliances? The term strategic alliance refers to cooperative agreements between potential or actual competitors Strategic alliances run the range from formal joint ventures, in which two or more firms have equity stakes, to short-term contractual arrangements, in which two companies agree to cooperate on a particular task Firms enter into strategic alliances for four main reasons First, strategic alliances may facilitate entry into a foreign market Second, strategic alliances allow firms to share the fixed costs of developing new products or processes Third, strategic alliances allow firms to bring together complementary skills and assets that neither company could easily develop on its own Fourth, strategic alliances can help firms establish technological standards for an industry AACSB: Reflective Thinking Blooms: Understand Difficulty: Hard Learning Objective: 15-05 Evaluate the pros and cons of entering into strategic alliances Topic: Strategic Alliances 107 Discuss the three primary characteristics of a good ally A good ally, or partner, has three characteristics First, a good partner helps the firm achieve its strategic goals, whether they are market access, sharing the costs and risks of product development, or gaining access to critical core competencies The partner must have capabilities that the firm lacks and that it values Second, a good partner shares the firm's vision for the purpose of the alliance If two firms approach an alliance with radically different agendas, the chances are great that the relationship will not be harmonious, will not flourish, and will end in divorce Third, a good partner is unlikely to try to opportunistically exploit the alliance for its own ends, that is, to expropriate the firm's technological know-how while giving away little in return In this respect, firms with reputations for "fair play" to maintain probably make the best allies AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 15-05 Evaluate the pros and cons of entering into strategic alliances Topic: Strategic Alliances 15-142 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 108 How can a firm increase the probability of selecting a good partner? To increase the probability of selecting a good partner, the firm should: Collect as much pertinent, publicly available information on potential allies as possible Gather data from informed third parties These include firms that have had alliances with the potential partners, investment bankers that have had dealings with them, and former employees Get to know the potential partner as well as possible before committing to an alliance This should include face-to-face meetings between senior managers (and perhaps middle-level managers) to ensure that the chemistry is right AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 15-05 Evaluate the pros and cons of entering into strategic alliances Topic: Strategic Alliances 109 Explain the term relational capital and the importance this concept plays in managing an effective business alliance Once a partner has been selected and an appropriate alliance structure has been agreed upon, the task facing the firm is to maximize its benefits from this business alliance Managing an alliance successfully requires building interpersonal relationships between the firms' managers, or what is sometimes referred to as relational capital The belief is that the resulting friendships between the two firms' managers help build trust and facilitate harmonious relations between the two firms Personal relationships also foster an informal management network between the firms This network can then be used to help solve problems arising in more formal contexts (such as in joint committee meetings between personnel from the two firms) AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 15-05 Evaluate the pros and cons of entering into strategic alliances Topic: Strategic Alliances 15-143 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education ... value an international business creates in a foreign market depends on the suitability of its product offering to that market and the nature of indigenous competition TRUE The value an international. .. Modes 25 Brand names are generally well-protected by international laws pertaining to trademarks TRUE Brand names are generally well-protected by international laws pertaining to trademarks AACSB:... 15-05 Evaluate the pros and cons of entering into strategic alliances Topic: Strategic Alliances Multiple Choice Questions 15-13 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction