978-1473758438 Chapter 12

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Instructor Manual

Chapter 12: Foreign Entry Strategies

(Prepared by Klaus E. Meyer, March 2019)

Introduction to the Topic

Learning Objectives

1. Explain why MNEs establish subsidiaries abroad (why to enter)

2. Identify relevant location-specific advantages that attract foreign investors (where to enter)

3. Compare and contrast first- and late-mover advantages (when to enter)

4. Compare and contrast alternative modes of entry (how to enter)

5. Explain the interdependence of operations and entry strategies

6. Apply the institution-based view to explain constraints on foreign entry strategies

7. Participate in leading debates on foreign entry strategies

8. Draw implications for action

General Teaching Suggestions

This chapter deals with the popular topic of entry strategy, that is ‘how do companies set up

their operations when they first enter a new location or market?’ The chapter approaches the

topic the topic from a decision makers’ perspective and thus differs from many other

textbooks that approach it theoretically and limit the discussion to the choice of entry mode.

While entry mode is an important element of an entry strategy, it is not identical to entry

strategy. Our framework (Fig 12.1) thus emphasizes the independence of entry mode

decisions with in particular location and timing decisions – as well as operational decisions

such as marketing, logics and HR.

To motivate the topic, you as instructor may ask how do businesses set up subsidiaries in

[country of your choice]? What do they have to consider before committing their money?

Opening Case Discussion Guide

The opening case outlines the strategies of entry by a Chinese upstart that has established

itself successfully in the US market and is eying European markets as well. It established a

greenfield in the US but made an acquisition in Europe. Yet, note what they were looking for

in the acquisition: only the brand name! They acquired other resources in different way, for

example by hiring key individuals: a sale manager in the US, a technician in Germany. I

discussed this aspect of the case in a blog that you can combine with the material in this

chapter: http://www.forbes.com/sites/ceibs/2016/01/25/is-a-chinese-takeover-good-or-bad-

for-your-job/#116eff367ccb. In January 2016 Pearl River Piano acquired Schimmel Piano,

the largest piano manufacturer in Germany (by units), and thus moved up further on the value

chain from ‘designed in Germany made in China’ to ‘designed and made in Germany’.

To motivate a discussion, you may ask ‘do you think a Chinese made, Chinese-branded piano

maker could become world leader in a very traditional industry such as piano-making? What

are the barriers they are likely to encounter? How do you think they may build their market

position in Europe and the US?

Chapter Outline, Section by Section

Section 1: Strategic Objectives of Establishing Foreign Subsidiaries

Key Ideas

The section emphasizes that before designing any foreign operations, a decision maker needs

to be clear about the objectives of this investment. Any investment proposal needs to be

assessed against its objectives. The section introduces the common categorization of FDI

motives originally proposed by John Dunning.

Key Concepts

foreign subsidiaries

operations abroad set up by foreign direct investment

entry strategy

a plan that specifies the objectives of an entry and how to achieve them

natural resource seeking

Investors’ quest to pursue natural resources in certain locations.

market seeking FDI

Investors’ quest to go after countries that offer strong demand for their products and services.

efficiency-enhancing FDI

Investors’ quest to single out the most efficient locations featuring a combination of scale economies

and low-cost factors.

capability-enhancing FDI

Investors’ quest for new ideas and technologies that to upgrade their own technological and managerial

capabilities.

Section 2: Where to Enter?

Key Ideas

The discussion of location choice is introduced by outlining how different investment

motives, introduced in the previous section, lead to investment in different types of location.

This section builds on the discussion of ‘locational advantages’ within the OLI framework

introduced in Chapter 6. Instructors may want to review parts Chapter 6 at this stage.

Key Concepts

location-specific advantages

advantages that can be exploited by those present at a location

Section 3: When to Enter?

Key Ideas

This section discusses the timing of entry with focus on market-seeking types of investors.

While first-mover advantages are widely talked about, for many first late mover advantages

may actually induce them to wait before committing to a new market (Table 12.2).

Key Concepts

first-mover advantages

Advantages that first movers obtain and that later movers do not enjoy.

late-mover advantages

Advantages that late movers obtain and that first movers do not enjoy.

Section 4: How to Enter?

Key Ideas

This section introduces entry modes, which many consider the central element of an entry

strategy. We cover here both the acquisition-versus-greenfield and the equity stake aspects of

entry modes, discussing advantages, disadvantages (costs) and risks of each mode in turn. In

focus of Walmart in Europe when investors use acquisitions or greenfield entry, and their

pitfalls.

In the discussion of entry modes, note that we get away from the simplistic discussion of

advantages and disadvantages of alternative modes, but emphasizing the different sorts of

risks that different modes are exposed to (Table 12.3). In particular, the simplistic view that

‘JVs are lower risk than WOS’, which I hear even amongst serious scholars, should not be

allowed to stand. (JVs are only lower risk in that the initial financial commitment is lower).

Key Concepts

modes of entry

the format of foreign market entry

non-equity mode

(exports and contractual agreements) that tends to reflect relatively smaller commitments to overseas

markets.

equity mode

A mode of entry (JVs and wholly owned subsidiaries) that is indicative of relatively larger, harder to

reverse commitments.

wholly owned subsidiaries (WOS)

A subsidiary located in a foreign country that is entirely owned by the parent multinational.

greenfield operation

Building factories and offices from scratch (on a proverbial piece of “green field” formerly used for

agricultural purposes).

acquisition

takeover of another business

joint venture (JV)

A new corporate entity given birth and jointly owned by two or more parent companies

partial acquisition

acquisition of an equity stake in another firm

strategic alliances

collaboration between independent firms using equity modes, non-equity contractual agreements, or

both.

Section 5: How to Organize Your Operations?

Key Ideas

This section explains the interdependencies of the aspects of entry modes discussed so far

with operational aspects of the running of the new subsidiary. It thus links this chapter with

the operations chapters later in the book.

Key Concepts

No new concepts

Section 6: Institutions and Foreign Entry Strategies

Key Ideas

This section explores a variety of different constraints created by host country institutions

that affect foreign investors’ design of their entry strategy, notably entry mode and location.

The approach here is to explore different mechanisms by which institutional constraints affect

business strategies.

Key Concepts

No new concepts

Section 7: Debates and Extensions

Key Ideas

The first debate concerns the question when foreign investors should go in with a large up-

front investment, and when they should do slow.

The second debate draws on my own research that differentiates types of acquisition entry

strategies that vary considerably in their implications (Table 12.5).

Key Concepts

scale of entry

the amount if resources committed to foreign market entry

platform investment

An investment that provides a small foothold in a market or location

brownfield acquisition

acquisition where subsequent investment overlays the acquired organization

multiple acquisition

a strategy based on acquiring and integrating multiple businesses

staged acquisition

acquisition where ownership transfer takes places over stages

Section 8: Implications for Practice

Key Ideas

This concluding section emphasizes to conduct thorough strategic analysis before committing

to a new market: analyse the institutions, analyse your own resources, and match the

operation to be established with our strategic objectives.

Key Concepts

No new concepts.

Review Questions

Review questions are provided to students on the website accompanying the book. They

directly ask to summarize the material provided in the text. Instructors may also use the

questions to structure their lectures or review sessions.

Review Questions

(as provided to students on the website)

Material in the Book

1. What are the main objectives that foreign investors

pursue when establishing subsidiaries abroad?

2. How do companies choose where to set up

subsidiaries?

3. How do emerging economy firms acquire

capabilities abroad?

4. What are advantages and disadvantages of being a

first-mover in a country?

5. How can second movers overtake first movers?

6. What are the basic (equity) entry modes?

7. What are the advantages and disadvantages of

establishing a greenfield operation?

acquiring a local firm to enter a foreign country?

9. When would firms choose to enter by joint venture

rather than with a wholly owned subsidiary?

10. What are the risks associated with different modes

of foreign entry?

11. What are the managerial challenges arising in joint

ventures?

Page 336-337

Page 338-339

In Focus 12.1

Page 340-342

Page 341-342

Page 342-345

Page 344

Page 345, In Focus 12.1

Page 345-347, In Focus 12.2

Table 12.3, page 344-348

Page 345-347

12. What are partial acquisitions, and when are they

used?

13. How can investors vary their acquisition strategies

to make the best of opportunities in difficult local

business environment?

14. How do host country institutions influence foreign

entry strategies?

15. How do operational questions affect decisions over

location, mode and timing of foreign entry?

16. How should companies prepare a strategic decision

over a foreign entry?

Page 348

Page 351-353

Page 349-350

Page 348-349

Page 353

Critical Discussion Questions

At the end the chapter, we provide discussion questions that aim to stimulate students

thinking beyond memorizing the material learned in the chapter. They are designed to be

used at a basis for in-class discussions, group work, or individual assignments. Below,

provide some indicative answers of issues that may be raised in response to these questions.

Discussion Questions

(as provided in the book)

Indicative Responses

1. Since joining the EU, countries

like Poland and Hungary have

seen an increase of foreign direct

investment. Yet, some foreign

investors move their operations

from these countries to locations

1. On the resource side, the key concept to

use is unit labour costs (wages have been

raising faster than productivity in countries

like Poland). On the institutional side, both

Poland and Ukraine (for example) have

experienced improvements of institutions

2. From institution- and resource-

based views, identify the obstacles

confronting MNEs from emerging

economies interested in expanding

overseas. How can such firms

overcome them?

3. In what situations should

companies consider sharing

control over an operation with a

local firm that is directly or

indirectly owned by the host

country’s government?

4. In what situations should branded

consumer goods manufacturers

consider foregoing potential first-

mover advantages and delay their

entry until after a competitor has

2. On the resource side, answers may stress

the need for latest technology, brand

names and distribution channels. From an

institutional perspective, responses may

emphasize informal barriers such as a

negative country of origin image as formal

barriers to FDI do not specifically

disadvantage MNE from these countries.

3. The TC answers are most straight forward:

only if both partners contribute some form

of assets for which no efficient markets

exist, and a takeover of one firm by the

other is not feasible.

4. Here a variety of answers are possible.

Table 12.2 provides the key arguments.

However, students should demonstrate

their strategic thinking in developing their

The closing case provides further opportunities to apply ideas and concepts learned in this

chapter in a real world setting. The Closing Case for this Chapter is “Danone and Wahaha” and

focuses on issues that may lead to conflicts in joint ventures, and the challenges of dissolving

joint ventures. Below are some indicative responses to the case discussion questions.

the key resources and capabilities that

have enabled Thai Union to

successfully enter markets in Europe

to demonstrate their ability to think and

argue strategically. This includes in

particular recognition that objectives and

EMEA 2019

and North America?

2. From an institutional perspective,

what factors in the institutional

environment at home and abroad

have enabled or hindered Thai

Union’s global expansion?

3. How would you design Thai Union’s

strategy for the China market? Who

would be appropriate partners, and

what organization form would you

chose?

bargaining positions change over time,

and companies need to think ahead to

consider possible scenarios, and

contractually agree major contingencies

up front. Students should also recognize

that the importance of regulatory

institutions, including competition policy,

in home and host countries.

Further Learning Activities

In addition to the cases and discussion questions provided in the book, instructors may want

to use any of the following activities to further engage students with the material.

1. The Opening Case (Pearl River Piano) in combination with In Focus 11.1 (Tata &

Geely) and the Closing Case (Thai Union) make a nice comparative assignment for

students to explore the motivations, resources and strategies of emerging economy

multinationals from China, India and Thailand. This assignment will also help

clarifying the basic constructs introduced in this chapter (and different types of

ownership advantages, as discussed in Chapter 6)

prepared to discuss the different strategies and motivations that drive FDI (Chapter 6),

and how they are grounded in the firm’s own evolving resources and capabilities

local firm or entrepreneur. The case illustrates many good practices regarding

adaptation, perhaps surprising given McDonald’s image of a global brand. However,

it also highlights problems McDonald’s experienced in the relationship with one of its

local joint venture partners, a conflict that is still ongoing, and among other highlights

challenges of contract enforcement in a ‘weak’ institutional context. The case

discussion thus requires integrating learning from entry strategy (Chapters 11 and 12)

with operational strategy in logistics and marketing (Chapter 17).

4. The Integrative Case ‘Beko Washes Clothes Across Europe’ discusses the

international growth strategy of the Turkish washing machine brand Beko. It covers

initial entry strategies (Chapter 12), development of the brands and its distribution

channels (Chapter 17), mergers and acquisitions (Chapter 14) and eventually

coordination of dispersed units across Europe (Chapter 15).

5. The most important element of your company’s success in its domestic market thus far has

been its electronic readiness and competitiveness. This has allowed the organization to

develop very stringent internal processes and controls that are the envy of the industry. As

such, entering a foreign market requires a sufficient level of technological prowess among

possible target locations. An evaluation of the “e–readiness” of specific locations can provide

considerable insight for your company’s anticipated internationalization in Asia. Gather

information and provide an overview of the five most technologically ready Asian locations.

Exercise 1 Answers

One resource which can be used is “EIU: E–readiness Rankings 2009”. This website can be

found by entering the search term “e–readiness” at the globalEDGE™ Resource Desk search

box located at http://globaledge.msu.edu/resourceDesk/. Once at the website, follow the link

to download the briefing paper (found at the bottom). Then, scroll to page 5 of the report

where Singapore, Hong Kong, Taiwan, South Korea, and Japan are found to have the highest

e-readiness among Asian locations. On page 4 of the report, it is discovered that consumer

and business adoption is the most important element of this ranking while legal environment

is the category with the lowest importance.

Search Term: “e–readiness”

Resource Name: EIU: E-readiness Rankings 2009

Website: http://www.eiu.com/site_info.asp?info_name=ereadiness&page=noads&rf=0

2. Global competition is determined in part by both efficiency and innovation. To develop a

foreign market entry strategy for your company, a colleague informed you of a competitiveness

report that is published periodically to evaluate the standing of each specific economy worldwide.

Locate this report for assessment. Which countries rank highest on both measures of efficiency

and innovation? Which regions of the world appear to rank well for each category? What

conclusions may be drawn from this information?

Exercise 2 Answers

One resource which can be used is “World Economic Forum: Global Competitiveness

Report”. This website can be found by entering the search term “competitiveness report” at

the globalEDGE™ Resource Desk search box located at

http://globaledge.msu.edu/resourceDesk/. Once at the World Economic Forum: Global

Competitiveness Report website, click on the “Download the Full Report” link (located in the

middle). After accessing the data available, the top 5 most efficient countries are: the U.S.,

Singapore, Switzerland, Canada, and Hong Kong. In addition, the top 5 most innovative

countries are: the U.S., Japan, Switzerland, Sweden, and Germany. For efficiency, a more

equal global distribution appears to be present (2 North American, 2 Asian, and 1 European

entity) than with innovation (3 European, 1 North American, and 1 Asian entity). While

student answers may vary, the notion of efficiency could be related to implementation

capabilities while innovation could be linked to creative capabilities in each national entity.

Search Term: “competitiveness report”

Resource Name: World Economic Forum: Global Competitiveness Report

Website:

http://www.weforum.org/en/initiatives/gcp/Global%20Competitiveness%20Report/index.htm

globalEDGE™ Tag: Country Level