• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Selecting international modes of entry and expansion

Extracts from this document...

Introduction

Selecting international modes of entry and expansion The rapid globalization of business in the last two decades has prompted an increasing number of firms to develop strategies to enter and expand into markets outside their home locations. Dynamic, emerging markets in Asia and Latin America, as well as large, stable markets in North America, Europe, and Japan now attract both small and large companies from around the world. But once a firm has decided to enter or expand in a foreign market, it must determine the structural nature of its operations in that nation. Recognizing the huge potential market size, a US firm in the pharmaceutical industry recently decided to make a major new thrust into China. A manager from the company stated: We wanted to export several lines of pharmaceuticals into China. However, their government wanted us to manufacture within the country in some kind of cooperative arrangement with a local firm ... Technology transfer for market share is the name of the game. So we decided to set up a joint venture with a local firm. Selecting an institutional arrangement - a mode for entering or expanding in a foreign market - is one of the most crucial strategic decisions that an international firm has to make (Root, 1994). A well-chosen mode can enable a firm to gain competitive advantage. However, inappropriate modal decisions are difficult to change when long-term contracts and/or large resource commitments are made. Poor modal choices can lead to "sinking the boat" or "missing the boat" (Dickson and Giglierano, 1986). For example, a firm's core technology can be unwillingly lost to competitors in certain "cooperative" modes. At the same time, some contractual modes of entry can prevent a company from taking full advantage of large market growth. Careful assessment of these trade-offs is essential in today's global economy. The USA and Japan are the two largest national players in international business. In many markets, such as the European Union, companies from these two nations are primary competitors. ...read more.

Middle

Japanese companies also use exporting in highly competitive markets, but for different reasons than Americans. Company strategy plays a major role. Japanese managers in our study stated that an important factor in the choice of exporting is that this mode is the quickest means to enter a new market. For strategic reasons, Japanese firms use exporting to prevent competitors from gaining first-mover advantages in new markets and to not be left behind. Previous studies have also shown that the Japanese have a preoccupation with competition, especially with other Japanese firms (Anand and Delios, 1996; Genestre et al., 1995). Many Japanese managers prefer exporting as a mode of entry. When the host government does not require locally-produced content in goods sold in the nation, or make other restrictions on exporting, Japanese executives noted that this condition is an important factor in their choice of exporting. Licensing US companies often use licensing reluctantly. The three important factors in US managers' use of licensing all involve pressures from the host government. One factor associated with the use of licensing is that the host government can easily find alternative companies to do business with. When many foreign competitors attempt to enter a market, the host government has more bargaining power than an individual MNC. Thus, when the host government expects new businesses to be managed by nationals and when the government prefers the use of cooperative arrangements, an MNC who wants to enter the foreign market must comply with the government's modal preferences. A manager from a large US chemical company doing business in China explained his experience: We really wanted to develop a manufacturing facility in China. But [a government ministry official] told us that that would take too long. They wanted us to do a licensing agreement with a manufacturer in Beijing. But we're not good at licensing. We did not want to do it. But we went along with them in order to create better relationships with the government. It definitely wasn't to make profit. ...read more.

Conclusion

This study reveals an important insight that joint ventures, rather than WOS, may be more appropriate for internationally-experienced US firms than for novice companies. Because of the difficulty in selecting appropriate partners and managing complex JV relationships, new firms should be cautious about selecting JVs as a mode of entry. Firms that know the local situation, and that have experience from elsewhere in managing JVs, may be best suited to use this cooperative arrangement. Another factor important in Americans' use of joint ventures is technology. When it is not crucial to protect technology, JVs are more likely to be used. However, with core technologies, wholly-owned subsidiaries are a superior mode of entry, due to the high control offered by this mode. Other strategic factors uniquely important to Americans include situations when synergies are important among global operations, and when the firm would be at a competitive disadvantage if it did not set up a venture in a foreign nation. Managers from both nations are attuned to their competitors and to the relative bargaining power that results when negotiating modal choices in foreign markets. Both sets also recognize that the role of governments is a major factor in international business decisions. Even in so-called "open markets," governments provide incentives or encouragement for foreign corporations to use certain modes. In every nation where they want to do business, MNCs must know the "local rules" regarding local content requirements, market access requirements, etc., and play according to those rules. Wholly-owned subsidiaries are used by both the Japanese and Americans when the regulations do not prevent full foreign ownership of corporations. Furthermore, when a firm can acquire capital and local market knowledge on its own, firms from both nations prefer wholly-owned subsidiaries over joint ventures. Although modal decisions are complex, this article provides guidance to international managers and researchers, enabling managers from around the world to learn from US and Japanese companies that are involved in today's dynamic global business environment. Managers may also improve their ability to predict which modes of entry their competitors may select. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. What are the important elements of International Trade

    The next topic being covered is Invisible Trade. Invisible trade is the trading of services between countries. The factors that make up invisible trade are; Travel, which is all about tourism, holidays and people bringing in money; Shipping, which is travelling between countries via sea; Civil Aviation, which is flying in an aircraft between countries transporting goods; Other Services, which is about royalty, e.g.

  2. Labour is one of the four factors of production along with land, capital and ...

    Primary Market: The new-issue market where companies are first floated and stockbrokers on behalf of the company sell shares. Prospectus: A document provided by a company before a new share issue so that investors may make an informed decision. Public listed company: A company, which has agreed to abide by,

  1. The Japanese Occupation - Concept of Great East Asia Co-Prosperity Sphere

    British influence and interests in Asia were to be eliminated, to which end Japan would support anti-British demonstrations, propaganda campaigns and independence movements in Britain's possessions in Asia. The creation of the Co-Prosperity Sphere as an economically self-sufficient area under Japanese political hegemony was an undisputed aim of Japanese policy.

  2. An Empirical Investigation into the Causes and Effects of Liquidity in Emerging

    reasonable size, over an extended period without undue disruptions or difficulties in establishing fair value. In general Lybek et al. (2002), propose that liquid markets exhibit five main characteristics: (i) Tightness; implies low transaction costs so that pricing information in the market is efficient.

  1. How does Coase account for existence of firms and what factors does he suggest ...

    He focused on the practices of entrepreneurs and observed how they would determine the direction of factors or production and to control and direct employees working within the firm. By doing so, certain marketing costs are saved. Once the directions of resources are dependent to the buyers now, firms' relationship

  2. Onset Ventures.

    * Spotlight deals were out of scope for ONSET. These segments were chased by many competitors who were ready to take irrational decisions and contribute extra funds above the value of these deals. However, we think this is not the case as the tougher the market for a certain business, the more potential and profitable it must be.

  1. What do you Consider the Key Elements of "New Classical" Macroeconomics? What are the ...

    He claims that both, workers and firms suffer from information barriers that restrict them from making accurate deductions about prices and production of other firms, especially those in other industries.

  2. Split Votes: A Nation Divided on the Marijuana/Drug Legalization Debate

    of Justice instead discredits the neoclassical argument for legalization. They present unsubstantiated facts and figures that show that the amount they spend to fight drugs is a fraction of the damages to society drugs are responsible for. They also claim legalization would only make the problem worse, while giving little in return.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work