IBUS2101 International Business Strategy

Overview and
International Introduction
Entry Strategy I & II

Dr. Wu Zhan
The University of Sydney Business School
International Business Strategy:
A Framework

Module 1: Globalization and International Business

Module 3: International Business Strategy

Module 2: Strategy & Global Strategy

 Agenda

1. Why (not) go abroad?

2. When? Where, What, and How to go? (4W1H)
3. A holistic approach to international entry
4. Vedio case study
 Opening Case: DuPont’s Entry Strategies
into China
• Dupont has a great deal of international experience and expertise,
and have a variety of entry strategies they use.

• In china, they used a partnership with Shanghai Photomask

Precision Company, and established another with China Worldbest
Development to produce photomasks and Spandex, respectively.

• They also established joint ventures with companies like BASF to

overcome trade barriers and establish distribution.

• Finally, they also established wholly owned subsidiaries to make

products that require proprietary technologies they cannot share
with others.

• No company has only one entry strategy. Most choose entry

strategies depending upon the necessary goal requirements.
 Why go abroad – Strategic Factors

 Market development: Offer growth & efficiency

opportunities
 Resource access: Secure supply of key & low-
cost resources
 Management: Co-ordination of global activities
 Learning: Understand cutting edge technology;
Learn to compete in difficult & sophisticated
markets
Mellahi, K. 2005. Global Strategic Management. Chapter 7, pp.189-190.
Why not go abroad – Liability of Foreignness

 The inherent disadvantage foreign firms

experience in host countries because of their
non-native status.
Liability is manifested in two dimensions:
• The numerous differences in formal and informal
institutions in different countries (e.g., regulatory,
language, and cultural differences). Failure to
recognize these rules may cost foreign firms dearly.
• Customers discriminate against foreign firms,
sometimes formally and other times informally.
 Key Success Factors: Overcome liability of foreignness

Superior technologies

Superior brand & marketing capabilities

Superior logistics & organization

Superior knowledge about the cultural &

institutional intricacies
 Propensity to Internationalize
Given the same driving forces and
constraints, still not every firm is ready for
going abroad, or at least at different rates,
why?
Prematurely venturing overseas may be
detrimental to overall firm performance,
especially for smaller firms whose
margin for error is very small
Firm Size, Domestic Market Size, and
Propensity/Rate to Internationalize
 International Entry Readiness

Before you go international, do you have

- Source of sustainable competitive
advantage ?
- Understanding of the uniqueness,
complexity and challenges in IB ?
- Well-formulated and well-implemented IB
strategy for pace, direction, and stage ?
 Where to enter – location choice

Where, that is country and location within country

depends upon a number of factors. Among them
are:
• Cost/Tax Factors (transportation, wage,
availability of land and its costs, construction
cost, materials cost, financing costs, tax rates,
investment incentives, profit repatriation costs)
• Demand Factors (market size and growth,
customer presence, local competition)
 Where to enter – location choice

• Strategic Factors (Investment infrastructure,

industrial concentration, supply/distribution
linkages, workforce productivity, complementary
industries)
• Regulatory/Economic Factors (Industrial
policies, foreign direct investment policies,
availability of economic zones)
• Sociopolitical Factors (political risk and
instability, cultural barriers and openness, local
practices, government efficiency and corruption,
attitudes toward foreign business, community
characteristics, pollution control)
 Where to enter – location choice

• Not only must the above factors be considered,

but also strategic objectives, global integration,
and market orientation objectives must be met.
• Strategic objectives are related to growth and
competitive factors; integration factors are
related to access to trading blocs and integrated
economies; market orientation factors are
related to whether primary target markets are
available from the host location.
 Cultural/Institutional Distances and
Foreign Entry Locations

• Cultural Distance
– The difference between two cultures along some
identifiable dimensions (such as power distance).
• Institutional Distance
– The extent of similarity or dissimilarity between the
regulatory, normative, and cognitive institutions of two
countries.
– Firms from common-law countries are more likely to
be interested in other common-law countries
– Colony-colonizer links boost trade by 900%
 Cultural/Institutional Distances and
Foreign Entry Locations (cont’d)

• Two schools of thought have emerged:

– Stage models in which firms enter culturally similar
countries during the first stage of internationalization
and, as they gain confidence, enter culturally more
distant countries in later stages.
– Critics of stage models argue that considerations of
strategic goals such as market and efficiency are
more important than cultural/institutional
considerations as suggested by stage models
International Location Selection (Where)
Maquiladoras in the Mexico-U.S. border zone
 Location-specific Advantage

Market size & growth potential (e.g. stock vs. flow )

Source: Prahalad, C.K., & Lieberthal, K. 2003. The end of corporate imperialism. HBR.
Location-specific Advantage
– Geographical features difficult to match by others.
• - Singapore, Austria, Turkey, Miami
– Clustering of economic activities (agglomeration) –
industry related.
Knowledge spillover among closely located firms that
attempt to hire individuals from competitors.
A regional skilled labor force available to work for
different firms.
A regional pool of specialized suppliers and buyers.
Matching Strategic goals with Locations
 International Entry Timing (When)

• This relates to timing of market entry in

comparison to other enterprises.
• Timing is important because it determines
the risks and potential returns from the
investment.
• Early Mover Advantages include factors
like market power, more preemptive
opportunities, and strategic advantages
over late movers.
 International Entry Timing (When)
• Early Mover, however, face environmental and
operational risk that can come from host
governments’ experience, underdeveloped
investment laws and regulations, protectionism,
difficulty in overcoming early growth stages,
shortages of workers, underdeveloped support
services, lack of financing, uncertain foreign
exchange, consulting cost burdens, poor
infrastructure systems, and unstable market
structures.
International Entry Timing (When)
 Case Study: Automobile Industry in China
– Integrative Case 1.3: The Chinese auto industry
• First mover success / failure: Volkswagen / Peugeot
• Late mover success / failure: GM / Ford

Conclusions
 Being a first-mover holds potential for competitive
advantage in some cases but not in others
 Being a fast follower can sometimes yield as good a
result as being a first mover
 Being a late-mover may or may not be fatal--it varies
with the situation
What to internationalize
 International Entry Mode Selection (How)

• Entry Modes are specific forms or ways of

entering a target country to achieve the
strategic goals related to presence in that
country.
• These can be trade related, transfer
related, and foreign direct investment
related.
The Choice of Entry Modes:
A Hierarchical Model
International entry modes
Exporting and – Often the only available choices for
Importing small and new firms wanting to go
international
– Provide an avenue for larger firms that
want to begin their international
expansion with a minimum of
investment
– Exporting and importing can provide
easy access to overseas markets
– Strategy usually is transitional in
nature
Export

Table 6.4
Exporting and – An agreement that allows one party to
Importing use an industrial property right in
exchange for payment to the other
party
Licensing – By licensing to a firm already there, the
licensee may avoid entry costs
– Licensor usually may be a small firm
that lacks financial and managerial
resources
– Companies that spend a relatively
large share of their revenues on
research and development (R&D) are
likely to be licensors
– Companies that spend very little on
R&D are more likely to be licensees
 –Business arrangement under
Exporting and
Importing which one party (the franchisor)
allows another (the franchisee) to
Licensing
operate an enterprise using its
trademark, logo, product line, and
methods of operation in return for
a fee
Franchising
–Widely used in the fast-food and
hotel/motel industries
–With minor adjustments for the
local market, it can result in a
highly profitable international
business
Contract agreements

Table 6.4 (cont’d)

Exporting and
Importing
– International joint venture (IJV)
Licensing • An agreement under which two or
more partners from different
countries own or control a business
Franchising
• Nonequity venture
Joint • Equity joint venture
Ventures – Advantages
• Improvement of efficiency
• Access to knowledge
• Political factors
• Collusion or restriction in
competition
Exporting and
Importing – An overseas operation that is totally
owned and controlled by an MNC
Licensing – MNC’s desire for total control and
belief that managerial efficiency is
better without outside partners
Franchising
– Some host countries are concerned
Alliances & that the MNC will drive out local
JVs enterprises and others prohibit fully
owned subsidiaries
WOS – Home-country unions sometimes view
green-field foreign subsidiaries as an attempt to
“export jobs”
– Today many multinationals opt for a
merger, alliance, or joint venture rather
than a fully owned subsidiary
Exporting and
Importing
– The cross-border purchase or
Licensing exchange of equity involving two or
more companies
Franchising – The strategic plan of merged
companies often calls for each to
Alliances & contribute a series of strengths toward
JVs making the firm a highly competitive
operation
Wholly owned
subsidiary

Mergers &
Acquisitions
Requirements among Entry Modes
Joint Wholly
Exporting Licensing Venture owned
Financial
Capital Requirement Low Zero Med High
Profit Potential to Investor Med Low Med High
Financial Risk Low Low Med High
Managerial
Management Requirement Low Low Med High
Operational Decisiveness Med High Low High
Speed of Market Entry Low High High Med
Technological
Access to Customer Feedback Low Low Med High
Technological Risk Med High Med Low
Other
Ability to Cope with High Tariffs Low High High High
Ability to Exploit High
Economies of Scale High Low Med Med
 Trade-offs in Modes
Joint Wholly
Exporting Licensing Venture owned
Costs
1.Financial Investment Required 1 2 3 4
2.Managerial Investment
1 2 3 4
Required
3.Constraints on Operating 4 3 2 1
Flexibility
Benefits
1.Total Payment Received 1 2 3 4
4 3 2 1
2.Stability of Payment
3.Contribution of New 1 2 3 4
Knowledge
4.Contribution to Company 1 2 3 4
Reputation

(4 = highest, 1 = lowest)
 How to Enter?
Making Strategic Choices

• A company may have a variety of entry choices

for different countries and tasks.
– Entry strategies may change over time.
– Opening Case: Starbucks: Franchising  JV  WOS
– SIA 6.3: China’s Haier in the United States: Direct
exports  FDI (green-field projects)
– Entry strategies, even when successful, do not
guarantee international success; post-entry strategies
are also crucial.
International Entry Strategy: A Holistic Approach