Summary lecture 5, introduction to IB

Video  10:

Non-equity entry modes-exporting, licensing and franchising (contract is key)

Equity modes-greenfield, acquisition and joint venture (ownership is key)

Alliances can be both

Licensing=a form of contracting where firm A licenses to firm B in another country the right to use firm A’s technology or trademark for a certain fee.

Franchising= firm B in a host country uses the business model developed by firm A and Firm A provides assistance in making the local activity a success. The franchisee has the right to use the franchisers logo etc.,  more control compared to licensing

Greenfield=A firm expands to a foreign country to establish a new firm from scratch that is fully owns

Acquisition=A firm buys shares of a firm established in a foreign country this I called an acquisition. You have full acquisition when you buy all shares

Joint venture= Firm A from country 1 and firm B from country 2 start a new firm C in another country (can also be country 1 or 2)

Video 11:

First step in internationalization:

Establish relation with foreign distributor  (often serve as a beachhead) because they have local knowledge and know potential customers. Their FSA is location bound and helps overcome the distance that internationalizing firms have to deal with

Three ways of internationalization and level of commitment (more commitment at level 3)

1. Foreign distributor
2. Strategic alliances (challenge: learn as much as possible from this partner, while giving away a few of your own FSA’s, advantages, for example share risks an cost)
3. Merger and acquisition (pre and post integration obstacles and purchase price premiums) They still M&A because of a cognitive bias

The key is to balance the following three competing objectives:

1. To maintain strategic control over important customers
2. To benefit from the local partner’s market knowledge and access
3. To reduce risk associated with high demand uncertainty in the host market

Which factors determine optimal entry mode (optimal entry mode is a trade off):

1. Degree of control (high in greenfield and acquisition, lowest in licensing)
2. Level of resource commitment (highest in greenfield and acquisition, lowest in licensing)
3. The dissemination risk, (lowest for greenfield and full acquisition, highest for licensing)

Over time following pattern:

1. Initial success
2. Flattening sometimes declingn
3. Mne starts questioning local partner and may take control over the distribution channel or build one of their own, result stop starting to invest in each other)

Cost of alliance:

1. The own FSA’S could be appropriated by the alliance partner
2. If the MNE has to many alliances, this reduces coherence and increased management problems

6 sources of biases why managers like M&A

1. Topline obsession, focus on growth of sales, not profit
2. Stock price exploitation, in case of overvalued stockprices, managers would like to benefit from that
3. Grooved thinking, this is the way we always did it
4. Herd behavior, copy paste behavior of managers, do what the competitor does
5. Personal commitments
6. Trust in interested parties