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New Wholly Owned Subsidiary
Firms that choose to establish new, wholly owned subsidiaries are said to be undertaking a
greenfield venture. This is the most costly and complex of all international market entry
alternatives.
The advantages of establishing a new wholly owned subsidiary include:
Dynamics of Mode of Entry
The choice of a market entry strategy is determined by a number of factors. However, initial
market development strategies generally are selected to establish a firm’s products in the new
market.
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However, the entry strategy should be matched to the particular situation. In some cases, a
firm may pursue entry strategies in sequential order—beginning with exporting and ending
with greenfield ventures. The entry mode decision should be based on the following
conditions:
7
Discuss the two major risks of using international strategies.
RISKS IN AN INTERNATIONAL ENVIRONMENT
Political and economic risks complicate the management of international diversification. One
reason is that these risks result in competitive conditions that may differ significantly from
what was expected.
Examples of political and economic risks related to international diversification are listed in
Figure 8.6.
Figure Note
Be sure to note any developments in the international risk situations noted in Figure
8.6 as well as the emergence of significant new issues.
FIGURE 8.6
Risks in the International Environment
Political Risks
Teaching Note
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For a useful way of identifying the political risk associated with different countries,
see the map on page 105 of Small Business Management: An Entrepreneurial
Emphasis, by Longenecker, Moore, Petty, and Palich (2006, SWCP).
Teaching Note
STRATEGIC FOCUS
The Global Soccer Industry and the Effect of the FIFA Scandal
The Fédération Internationale de Football Association (FIFA) is an international sports
organization founded in the Europe in the early 1900s. The organization, known for its World
Cup competition, has grown into an international force the last several decades. However,
because of the weak institutional infrastructure in many countries where the game of soccer
is played around the world, there is ripe opportunity for corruption. Apparently, many
Teaching Note
FIFA, the international soccer federation, which sponsors World Cup soccer matches
along with its regional and country affiliates, have come under heavy scrutiny for possible
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institutions in which soccer is popular, especially in less developed countries. Bribes were
alleged to have been paid for Africa to receive the World Cup, and the recent decisions by
FIFA to host the games in Russian and Qatar in 2018 and 2022 have come under question.
Many of the countries, for example Brazil and Paraguay, are seeking to overhaul their
country soccer regulating bodies because of the scandal.
Economic Risks
Economic risks are interdependent with political risks; however, some economic risks are
specific to international diversification. For example, differences and fluctuations in the
8
Discuss the strategic competitiveness outcomes associated with
international strategies particularly with an international
diversification strategy.
STRATEGIC COMPETITIVENESS OUTCOMES
International Diversification and Returns
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There are several reasons for the positive relationship between international diversification
and performance.
• Potential advantages from economies of scale and experience
• Location advantages
• Increased market size
• The potential to stabilize returns
Enhanced Innovation
A complex relationship exists among international diversification, innovation, and
performance. This leads, in fact, to the following circular relationship:
• Some level of performance is necessary to provide the resources required to diversify
internationally.
Cultural diversity may enable a firm to compete more effectively in international markets.
• Culturally diverse top management teams often have a greater knowledge of international
markets.
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9
Explain two important issues firms should have knowledge about
when using international strategies
THE CHALLENGE OF INTERNATIONAL STRATEGIES
Complexity of Managing International Strategies
Managers of internationally diversified firms face a number of complex challenges.
Limits to International Expansion
As mentioned before, firms generally earn positive returns by diversifying internationally.
However, there are limits to the advantages of international diversification.
Chapter 8: International Strategy
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publicly accessible website, in whole or in part.
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• Robert Shapiro, CEO of Monsanto, assumed that Europe was similar to the US,
but the firm’s genetically engineered seeds have been strongly rejected in Europe.
• Walmart made mistakes in some Latin American markets, for example, when it
learned that giant parking lots do not draw huge numbers of car-less customers.
And the lots were far from the bus stops used by many Mexicans, so potential
customers could not easily transport their goods home.
• Home Depot’s expansion into China fell flat due to the fact that, unlike in the U.S.,
the Do-It-Yourself market is very small. Customers in China are considered to be
Do–It-For-Me buyers and Home Depot’s value proposition is not important to
them.
MINI-CASE
An International Strategy Powers ABB’s Future
ABB is a large global competitor in the power and automation technologies industries. It has
built its success using geographic diversification around the world. However, ABB’s recent
troubles (due to poor performance in some countries), underscore some of the difficulties
encountered by firms with international operations. In response, ABB is closing, or limiting,
operations in some of these countries. As a result of these moves, and strong performance of
its North American businesses, performance is trending in a positive direction. Most of
ABB’s recent growth has come from acquisitions, but it has entered into a joint venture
recently with a Chinese firm to design and manufacture high voltage instrument
transformers.
1. How can the resource-based view of the firm (see Chapters 1 and 3) help us
understand why firms develop and use cooperative strategies such as
strategic alliances and joint ventures?
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2. What are the three basic benefits firms can achieve by successfully using an
international strategy?
3. What four factors are determinants of national advantage and serve as a basis for
international business-level strategies?
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4. What are the three international corporate-level strategies? What are the
advantages and disadvantages associated with these individual strategies?
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5. What are some global environmental trends affecting the choice of international
strategies, particularly international corporate-level strategies?
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6. What five entry modes do firms consider as paths to use to enter international
markets? What is the typical sequence in which firms use these entry modes?
7. What are political risks and what are economic risks? How should firms
approach dealing with these risks?
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8. What are the strategic competitiveness outcomes firms can reach through
international strategies, and particularly through an international diversification
strategy?
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1. As firms attempt to internationalize, they may be tempted to locate their facilities where
product liability laws are lax in testing new products. What are some examples in which
this motivation is the driving force behind international expansion?
2. Regulation and laws regarding the sale and distribution of tobacco products are stringent
in the US market. Use the Internet to investigate selected US tobacco firms to identify if
sales are increasing in foreign markets compared to domestic markets. In what countries
are sales increasing and why? What is your assessment of this practice?
3. Some firms outsource production to foreign countries. Although the presumed rationale
for such outsourcing is to reduce labor costs, examine the labor laws (for instance, the
strictness of child labor laws) and laws on environmental protection in another country.
What does your examination suggest from an ethical perspective?
4. Are there markets that the US government protects through subsidies and tariffs? If so,
which ones and why? How will the continuing development of e-commerce potentially
affect these efforts?
5. Should the United States seek to impose trade sanctions on other countries, such as China,
because of human rights violations?
6. Latin America has been experiencing significant changes in both political orientation and
economic development. Describe these changes. What strategies should foreign
international businesses implement, if any, to influence government policy in these
countries? Is there a chance that the political changes will reverse?
INSTRUCTOR’S NOTES FOR MINDTAP
INSTRUCTOR’S NOTES FOR BRANCHING
EXERCISE
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Lululemon Athletica
lululemon athletica, is a yoga-inspired athletic apparel company, which produces a
clothing line and runs international clothing stores from its company based in Vancouver,
British Columbia, Canada.
The ideal path that earns a perfect score is the following:
INSTRUCTOR’S NOTES FOR EXPERIENTIAL
EXERCISES
International Expansion: Is It for Everyone?
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consultant to a multi-national fast food restaurant company that is trying to increase its
international exposure in the near future.
This exercise also can be assigned to individuals.
INSTRUCTOR’S NOTES FOR VIDEO
EXERCISES
1. What are some of the benefits of the strategic alliance between Tomberlin
Automotive and the Chinese manufacturing plant?
2. What benefits does Tomberlin Automotive receive from its international
strategy by manufacturing in China?
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