CHAPTER 8
Entry Strategies in Global Business
Chapter Outline
• Introduction
• Strategy Choice and Implementation: Going International
o Export-Import Business
o Licensing
o Franchising
o Strategic Alliances
o International Joint Ventures
o Cross-Border Mergers and Acquisitions
o Wholly-Owned Subsidiaries
• Multinational Enterprises (MNEs)
• MNEs and Their Global Strategic Motives
o Revenue Maximizing Strategies
o Entering High-Growth Markets
o Entering Stable, High-Income Markets
o Entering Countries with Monopolistic Market Structures
o Entering Trade Restricted Sectors
o Cost Minimizing Strategies
o Economies of Scale in Production
o Minimizing Factor Input Cost
o Reacting to Exchange Rate Movements
o Risk Minimizing Strategies
o Diversification
o Correlation of Returns
o Product Life Cycle Theory
o Dunning’s Eclectic Theory of Foreign Direct Investment
• Host Country Perspective of Foreign Direct Investment
o Benefits of Foreign Direct Investment
o Costs of Foreign Direct Investment
• Improving Host Country’s Investment Climate
Teaching Objectives
After covering this chapter, the student should be able to:
• Summarize the major entry strategies used by companies, especially those from emerging
economies, in the globalization process.
• Explain the evolution of multinational enterprises (MNEs).
• Explain the major strategic reasons why MNEs invest abroad.
• Explain the pros and cons of foreign direct investment (FDI) from a host country
perspective.
• Describe what countries can do to successfully attract FDI.
COMPREHENSIVE LECTURE OUTLINE
I. Introduction. We will explore the reasons why firms engage in international business,
particularly focusing on foreign direct investment (FDI)—including ownership, management,
and control of foreign assets.
II. Strategy Choice and Implementation: Going International. There are several ways
that domestic businesses can participate in and profit from international operations. Much
depends on the amount of risk that entrepreneurs are willing to take. A fundamental decision that
must be acted upon in business is the risk-return trade-off: The greater the risk entrepreneurs are
willing to take, the greater the rewards they are likely to reap. Exhibit 8.1 • Entry Strategies in
Global Business.
1. Export-Import Business
• The export-import business is a relatively low-risk operation given the fact that
capital is not tied up and it is relatively easy to enter or exit this business. The
techniques for financing international trade are well established and are aimed at
facilitating export-import business and minimizing financial risk. Banks play an
important role in facilitating and financing international trade.
• With the rise of the Internet, conducting international trade has become easier.
Because it is relatively easy to participate in the export-import business,
competition is generally keen and the profit margins may not be high.
2. Licensing
• The company that is providing the license (i.e., the licensor) must properly
evaluate the overseas partner, because relationships such as this generally last for
years.
• Licensing involves slightly more risk to the licensor than those in the pure
international trade business. In licensing, a company or individual provides the
foreign partner with the necessary means to manufacture and sell its products
using the licensor’s brand name in the target country for an annual license.
• If the market for a particular product in a target country is huge, it may make
sense for a licensor to manufacture the product in that target country to take
advantage of lower transportation costs, labor, and raw materials.
• Because the major point of concern of the licensor is the need to trust the licensee,
a common approach to protect the licensor is to incorporate penalty clauses in the
contract.
3. Franchising
• In franchising, the parent firm assumes relatively more risk than with licensing.
• Franchising obligates the parent firm to provide specialized equipment and/or
services to the franchisee and at times fund some startup costs. In return, the
franchisee pays an annual fee, which is generally based upon sales generated and
seed money provided for the venture.
• Franchising typically leads to the penetration of international markets without
significant capital investment abroad by the parent company. In return for the
franchise fee, the franchisee receives technical assistance starting with the
location and layout of the outlet, maintenance and use of equipment, training, and
advertising.
4. Strategic Alliances
• Strategic alliances are marriages of convenience between two or more firms that
stand to gain revenues through cooperation with each other for specific reasons
and for a given period of time.
• Strategic alliances are cooperative ventures. Although similar to joint ventures,
they differ from joint ventures in that they involve non-equity arrangements.
• There are numerous ways in which firms from different countries can cooperate
(i.e., marketing alliance, when each alliance partner has a niche market;
production alliance, where each partner manufactures a specialized component
and swaps components with other partners, etc.)
• Choosing the right alliance partner is the key to the success of strategic alliances.
5. International Joint Ventures
• International joint ventures aim to share the risk as well as return among partners.
• The ultimate objective of joint ventures is to use joint production and sales
distribution networks to generate increased revenue and profits.
• An international joint venture refers to a business that is jointly owned and
operated by two or more firms that pool their resources to penetrate foreign
markets, generate and split profits, and share the commercial risk.
• A local partner is essential to an international joint venture, because he/she will be
most knowledgeable about the domestic economic, cultural, and political
environments. He or she will be able to help efficiently overcome country-specific
logistics and bureaucracy.
6. Cross-Border Mergers and Acquisitions
• Domestic companies with clearly identified core competencies or competitive
advantages may enter foreign markets by merging with or acquiring well-
established firms overseas.
• By merging the strengths of the home company with those of the host country
firm, the new firm will become more competitive internationally.
• In acquisitions, the home country firm will purchase the host country firm and
implement its own international business strategy.
• Well thought-out cross-border mergers and acquisitions will enable the new firm
to have instant access to foreign markets that fit its global strategy.
• The company being acquired should be well established and have a good
reputation in the local market.
• As compared with other types of foreign market entry, mergers and acquisitions
are relatively risky because a significant amount of capital may be needed to
acquire and upgrade foreign facilities. Corporate cultural differences may inhibit
smooth integration of the two organizations of different nationality, customs, and
values.
ECONOMIC PERSPECTIVES: Medical Tourism. Use the Economic Perspectives case as an
opportunity to discuss medical tourism and its effects on costs and quality of health care in the
U.S. and Asia.
Suggestion: You could ask students to do this case as individuals or in teams as a class activity.
Have the students read the case presented in the text and answer the questions at the end of the
case.
Questions:
1. How has the health care crisis in the United States affected the globalization of health
care? Explain what you think can be done to reduce health care costs in the United
2. It appears that Asia will be a net exporter of health care services to the West, especially
the United States. Are there opportunities for U.S. firms to venture into this field? How?
7. Wholly-Owned Subsidiaries
• As an alternative to foreign acquisitions, a domestic firm may decide to build and
operate its own new facilities overseas.
• Wholly-owned subsidiaries generally require large capital investment. The risks
and rewards in such ventures are high.
• The new subsidiaries will most likely be modern, efficient, environmentally
sound, and designed to contemporary international standards, which will enable
them to handle the latest in supply chain management.
• Subsidiaries will require major marketing efforts to penetrate the international
market because of cultural differences and because the entrant is new and
relatively unknown.
DISCUSSION STARTER: REALITY CHECK 1.
Identify the types of international business activities that are being conducted in the city or
region where you live. Which type is most popular and why?
III. Multinational Enterprises (MNEs). Multinational enterprises (MNEs) are firms that are
headquartered in one country, but own and control manufacturing, services, R&D facilities, or
other business entities on foreign soil.
• MNEs are large corporations with significant amounts of resources. They are
willing and able to take on the huge risks that are needed to operate globally.
A recent strategic development is the rise of emerging-market MNEs. Exhibit 8.2 • The
World’s Ten Largest Companies (Year End 2013).
DISCUSSION STARTER: REALITY CHECK 2.
Identify an emerging-market MNE that has operating facilities in your neighborhood or state.
Determine the national origin of that company and its motive for choosing your state.
IV. MNEs and Their Global Strategic Motives. This section provides information on what
motivates MNEs to go international. All MNEs would like to use their competitive advantages
and core competencies to achieve specific national or global corporate objectives. The overriding
objective in a free enterprise system is to maximize shareholder wealth. It is achieved by the
following three strategic motives: increasing revenues, cutting costs, and/or minimizing risks.
▪ Revenue Maximizing Strategies. MNEs go abroad to maximize revenue for two major
reasons: competition in the home market, associated with decreasing profit margins and
market saturation; and new business opportunities abroad.
o Entering High-Growth Markets. Countries with high economic-growth
potential will witness rising per-capita income and a growing middle class with
rising demand for goods and services.
o Entering Stable, High-Income Markets. Growth rates in stable, high-income
economies may be low compared to emerging-market economies, but their high
per-capita income levels translate to high consumption that could prove to be a
stable source of revenue and profits.
o Entering Countries with Monopolistic Market Structures. In industries that
reflect monopolistic market structures profit margins are generally high because
there are few competitors.
o Entering Trade Restricted Sectors. Countries often impose various types of
trade barriers to protect certain high-profile industries from global competition.
The only profitable way for foreign firms to enter these trade-restricted markets is
through FDI rather than through exports.
▪ Cost Minimizing Strategies. Another reason why MNEs go abroad is to minimize
costs. When the cost of domestic factors of production increases, MNEs feel the pressure
to seek lower factor costs abroad to maintain or increase corporate profit margins. There
are several important strategic ways of minimizing costs on a global scale.
o Economies of Scale in Production. As a firm continues to increase output, the
average cost per unit will decrease until it reaches an optimum level because the
firm will be using its fixed assets most efficiently.
o Minimizing Factor Input Cost. The unit cost of factors of production varies
from country to country because of factor endowments and productivity.
o Reacting to Exchange Rate Movements. When the currency of a particular
country is expected to strengthen over time, FDI may flow into the country to buy
assets at current, relatively inexpensive prices. When profits are generated in
future years, the MNEs that made the initial investment will receive higher
income when those profits are converted into home currency.
▪ Risk Minimizing Strategies. Another way for MNEs to maximize profits is to minimize
risk.
o Diversification. MNEs establish operations abroad to diversify and minimize
risk so that global corporate cash flows and earnings will be relatively stable,
since all countries do not grow at the same rate, nor do they follow the same
business cycle.
o Correlation of Returns. A relatively simple approach to diversification is to
identify overseas projects that have performance levels that are not highly
correlated to domestic cash flows or project returns over time.
o Product Life Cycle Theory. All manufactured products go through a life cycle.
The product life cycle theory explains what happens to a product at the different
stages: introduction, growth, maturity, and decline. MNEs facing competition at
home during the third phase of the product life cycle will be forced to become
efficient and diversify through investment abroad.
▪ Dunning’s Eclectic Theory of Foreign Direct Investment. British economist John
Dunning arrived at his eclectic theory of FDI in 1980. The bedrock of the eclectic theory
is the structure and core competency of firms that seek to locate production abroad.
Dunning identified the three key economic advantages that firms should have for FDI to
occur:
o Ownership advantages can be transferred at a very low cost within a MNE.
These advantages must exceed those of competitors located in the foreign
countries for the MNE to maximize revenues or minimize cost.
o Location advantages relate to the economic, political, and social systems of a
particular country.
o Internalization advantages refer to the mode of entry abroad. When the cost of
negotiating with and monitoring a foreign partner is high, FDI will be preferred.
DISCUSSION STARTER: REALITY CHECK 3.
Identify a foreign MNE that is operating in the state or region where you live. Determine
which of the three strategies discussed above is the principal motive of the foreign investor for
choosing to do business in your state.
V. Host Country Perspective of Foreign Direct Investment. Host countries generally
consider FDI to be a complement or substitute for domestic investments. Because all investments
need not be financed through domestic savings alone, some countries have created a favorable
investment climate to proactively attract FDI as an important alternative source of funding
domestic growth.
• Benefits of FDI. FDI creates new jobs, allows access to new technologies, and
facilitates transfer of important management skills. It increases domestic
competition and choice. FDI generates tax revenues needed for government
services, reduces poverty, and accelerates economic development.
• Costs of FDI. MNEs may sacrifice the environmental quality, health, and social
fabric of host countries. MNEs are accused of exploiting the labor force,
preventing human capital development, and tarnishing the image of the countries
concerned. Another concern is the lack of corporate social responsibility on the
part of MNEs. Finally, host countries have also been concerned about political
interference by MNEs in their country’s affairs.
DISCUSSION STARTER: REALITY CHECK 4.
Identify a foreign MNE, big or small, that is operating in your area. Of the concerns outlined
in this section, what is your biggest concern about that MNE’s operation?
V. Improving Host Country’s Investment Climate. Countries that have been successful
in attracting FDI generally have been those that have improved their investment climate through
proper economic reforms, transparent governance structure, and rule of law. A good investment
climate is one in which government policies enable firms to invest profitably, create jobs,
contribute to economic growth, and reduce poverty. Governance has an impact on the provision
of social service investment such as education and health, which in turn will have an effect on
labor productivity, the cost of doing business, and the investment climate in a country.
DISCUSSION STARTER: REALITY CHECK 5.
Visit the Economic Development board or similar organization in your country or city and
find out what actions are being taken to make the local investment climate attractive to foreign
businesses.
ETHICAL PERSPECTIVES: Chaebols: Too big to fail? Use the Ethical Perspectives case as
an opportunity to discuss the lack of transparency and good governance practices in Korea’s
chaebols.
Questions:
1. Are the chaebols too big to fail? Should they be exempt from corporate social
responsibility? Answer: South Korea’s chaebols are huge, diversified business
2. Discuss what could be done to make the chaebols more competitive and ethical. Answer:
Assignments
End-of-Chapter Discussion Questions
1. It is anticipated that emerging-market multinationals will play a greater role
in international business during this century. What mode of international
business operations do you think they would choose? Why? Answer: MNEs
2. What is a recent development in the evolution of multinational enterprises
and how does that development affect globalization? Answer: A recent
3. MNEs try to maximize profits. How could MNEs maximize profits and
minimize profit volatility at the same time? Answer: Profit volatility can be
4. Quite often, host countries have a love-hate relationship with MNEs. Why?
5. To partially overcome its current account deficit, the United States needs to
attract FDI that could spur economic growth. What policy measures should
the United States take to keep attracting FDI into the country? Answer: The
Mini-Case Synopsis and Questions
ArcelorMittal is the world’s largest steel company. It had 232,250 employees
working in 60 countries in 2013. Its registered headquarters is located in
Luxembourg, its operational and financial headquarters are in London, and
marketing and distribution centers are worldwide.
Questions:
1. Is ArcelorMittal a “stateless” corporation or a MNE? Where is its home
2. What is Mittal Steel’s core competency, and what was its strategic motive
for global business? The key to the company’s success is its proven
Point/Counterpoint, Interpreting Global Business News, and Portfolio Projects
Students’ answers to these assignments will vary widely. Their writing should
reflect an understanding of the chapter’s basic concept, thorough research, and
logic and critical thinking skills.