1. During the 1990s, many North American, European, and Asian multinational
corporations (MNEs) set up operations in Mexico, tapping its location-specific
advantages such as (1) proximity to the world’s largest economy (the United
States); (2) market-opening policies associated with NAFTA membership; and (3)
abundant, low-cost, and high-quality labor. None of these has changed much.
Yet, by the 15th anniversary of NAFTA
(2009), a significant number of MNEs were starting to curtail operations in
Mexico and move to China (see Chapter 8). Use institution-based and
resource-based views to explain why this is the case.
Yes, definitely regional agreement
between three countries USA, Canada and Mexico has helped to boost up the
economy of Mexico in terms of GDP. But it has its adverse effect on the overall
development of Mexico. Because of US dumping of its agricultural products in
Mexico, farmers found themselves unable to make a living. Mexicans are living
in food poverty as around two million have been forced to leave their farms
since NAFTA. 25% of total population does not have access to basic food whereas
5% are suffering from malnutrition.
Mexico’s economy is going down by
prohibiting protective tariffs, supporting for strategic sectors and other
financial controls. This has been proved to be blockage for the overall
development of the nation. As most of the people are under poverty line there
is increase in organized crime recruitment and the breakdown of communities.
Similarly increased in border activity has facilitated smuggling arms and
illegal substances.
Therefore because of neo-liberal,
anti- development economic policies most of the MNEs had to leave Mexico for
better.
MNEs saw opportunities in one of the
emerging economy China. They saw their market opportunities and figured out the
possible returns from investing in China. Unlike Mexico, China is a communist
country. Although China may be communist country, but they have capitalist view
when it comes to economy. They believe
in development of the country through economic growth. China welcomed FDIs and
implemented industrial and development policy which helped to foster the MNEs entering
in the country.
Not only this, most of the MNEs
profited from the low labor cost and gained maximum competitive advantage over
their competitors. There was proper utilization of the available resources and
capabilities as well. They were able to create valuable, rare, inimitable
products in an organized system in China. Due to all these positive factors,
MNEs planned to set up their plant in China leaving Mexico behind.
2. Compare and contrast first-mover
and late-mover advantages and disadvantages.
First-mover advantages: Benefits that accrue
to firms that enter the market first and those late entrants do not enjoy.
i.
First
movers may gain advantage through proprietary technology. ( Apple’s ipod, ipad
and iphone)
ii.
First
movers may also make pre-emptive investments. A number of Japanese MNEs have
cherry picked leading local suppliers and distributors in Southeast Asia as new
members of the expanded keiretsu networks (alliances of Japanese businesses
with interlocking business relationships and shareholdings) and have blocked
access to the suppliers and distributors by late entrants from the West.
iii.
First
movers may erect significant entry barriers for late entrants, such as high
switching costs due to brand loyalty. Buyers of expensive equipment are likely
to stick with the same producers for components, training, and services for a
long time.
iv.
Intense
domestic competition may drive some non-dominant firms abroad to avoid clashing
with dominant firms head-on in their home market. Matsushita, Toyota, and NEC
were the market leaders in Japan, but Sony, Honda, and Epson all entered the
United States in their respective industries ahead of the leading firms.
v.
First
movers may build precious relationships with key stakeholders such as customers
and governments. For example, Citigroup, JP Morgan Chase, and Metallurgical
Corporation of China have entered Afghanistan, earning a good deal of goodwill
from the Afghan government, which is interested in wooing more FDI.
The potential advantages of first
movers may be counterbalanced by various disadvantages, which result in
late-mover advantages.
Late-mover advantages: Benefits that accrue to firms that
enter the market later and those early entrants do not enjoy.
i.
Late
movers can free-ride on first movers’ pioneering investments. In Saudi Arabia,
Cisco invested millions of dollars to rub shoulders with dignitaries, including
the king, in order to help officials grasp the promise of the Internet in
fueling economic development, only to lose out to late movers, such as
Ericsson, that offered lower-cost solutions.
ii.
First
movers face greater technological and market uncertainties. Nissan, for
example, has launched the world’s first all-electric car, the Leaf, which can
run without a single drop of gasoline. However, there are tremendous uncertainties.
After some of these uncertainties are removed, late movers such as GM and
Toyota will join the game with their own electric cars.
iii.
As
incumbents, first movers may be locked into a given set of fixed assets or
reluctant to cannibalize existing product lines in favor of new ones. Late
movers may be able to take advantage of the inflexibility of first movers by
leapfrogging them.
3. From institution-based and
resource-based views, identify the obstacles confronting MNEs from emerging
economies interested in expanding overseas. How can such firms overcome the
obstacles?
It is not easy to succeed in an unfamiliar
environment. Foreign firms have to overcome a liability of foreignness, which
is the inherent disadvantage that foreign firms experience in host countries
because of their non-native status. Such a liability is manifested in at least
two dimensions.
ü First, there are numerous differences
in formal and informal institutions governing the rules of the game in
different countries. While local firms are already well versed in these rules,
foreign firms have to invest resources to learn such rules. Some of the rules
are in favor of local firms.
ü Second, although customers in this
age of globalization supposedly no longer discriminate against foreign firms,
the reality is that foreign firms are often still discriminated against,
sometimes formally and other times informally.
Against such significant odds, how do
foreign firms crack new markets? The answer boils down to our two core
perspectives.
·
The
institution-based view suggests that firms need to take actions deemed
legitimate and appropriate by the various formal and informal institutions
governing market entries. Differences in formal institutions may lead to
regulatory risks due to differences in political, economic, and legal systems.
There may be numerous trade and investment barriers. The existence of multiple
currencies—and currency risks as a result—can be viewed as another formal
barrier. The experience of the euro shows how much more trade and investment
can take place when multiple countries remove such a barrier by adopting the
same currency.
Informally, numerous differences in cultures,
norms, and values create another source of liability of foreignness.
·
The
resource-based view argues that foreign firms need to deploy overwhelming
resources and capabilities to offset their liability of foreignness. Applying
the VRIO framework, we can suggest that some firms possess some overwhelmingly
valuable and rare capabilities in successfully penetrating foreign markets.
They can excel in the context low-cost, high-efficiency business model. For
example: Indian companies have usually that kind of advantage in the foreign
country like Africa. Their value- for-money products (such as single-use
sachets of soap and shampoo) and their ability to profit from such high-volume
and low-price products make it very hard for rivals in Africa to imitate.
Entering foreign markets, financing international acquisitions, and hiring
local workers require an enormous amount of organizational capabilities. Honed
at home, many Indian firms’ organizational capabilities have proven to be a
tremendous asset in their African forays.
Therefore by using two main core
perspectives, MNEs can overcome the obstacles which they face during expansion
in foreign countries.
4. List and evaluate the steps in the comprehensive model of foreign market
entries.
Comprehensive model helps managers
choosing the best entry method for their firms. As we know that it is very
important to choose the best entry modes for success of any business,
comprehensive model helps to manage such complexity. There are various steps of
comprehensive model of foreign market entries. They are explained below:
I)
In the first step, considerations for
small-scale versus large-scale entries usually boil down to the equity issue. Non-equity modes tend to reflect
relatively smaller commitments to overseas markets, whereas equity modes are indicative of
relatively larger, harder-to-reverse commitments. Equity modes call for the
establishment of independent organizations overseas (partially or wholly
controlled). Non-equity modes do not require such independent establishments.
Overall, these modes differ significantly in terms of cost, commitment, risk,
return, and control.
II)
During
the second step, managers consider variables within each group of non- equity
and equity modes. If the decision is to export, then the next consideration is
direct exports or indirect exports.
Direct
exports are the most basic mode of entry, capitalizing on economies of
scale in production concentrated in the home country and providing better
control over distribution. This strategy essentially treats foreign demand as
an extension of domestic demand, and the firm is geared toward designing and
producing first and foremost for the domestic market.
While direct exports may work if the
export volume is small, it is not optimal when the firm has a large number of
foreign buyers. Firms need to be closer,
both physically and psychologically, to its customers, prompting the firm to
consider more intimate overseas involvement such as FDI. In addition, direct
exports may provoke protectionism, potentially triggering antidumping actions.
Another export strategy is indirect exports—namely, exporting
through domestically based export intermediaries. This strategy not only enjoys
the economies of scale similar to direct exports but is also relatively
worry-free. A significant amount of export trade in commodities such as
textiles and meats, which compete primarily on price, is indirect through
intermediaries.
Indirect exports have some drawbacks.
For example, third parties, such as export trading companies, may not share the
same objectives as exporters. Exporters choose intermediaries primarily because
of information asymmetries concerning foreign markets. Intermediaries with
international contacts and knowledge essentially make a living by taking
advantage of such information asymmetries. They are not interested in reducing
such asymmetries. Intermediaries, for example, may repackage the products under
their own brand and insist on monopolizing the communication with overseas
customers. If the exporter is interested in knowing more about how its products
perform overseas, indirect exports would not provide such knowledge.
The next group of non-equity entry modes involves
the following types of contractual
agreement:
(1) Licensing
or franchising
(2) Turnkey projects,
(3) Research and development
contracts, and
(4) Co-marketing.
i)
Licensing/franchising agreements,
In this type of
agreements, the licensor/franchisor sells the rights to intellectual property
such as patents and know-how to the licensee/franchisee for a royalty fee. The
licensor/ franchisor, thus, does not have to bear the full costs and risks
associated with foreign expansion. On the other hand, the licensor/franchisor
does not have tight control over production and marketing. Pizza Hut, for
example, was disappointed when its franchisee in Thailand discontinued the relationship
and launched a competing pizza restaurant to eat Pizza Hut’s lunch.
ii)
Turnkey projects
In this
type of projects, clients pay contractors to design and construct new facilities
and train personnel. At project completion, contractors hand clients the proverbial
key to facilities ready for operations, hence the term “turnkey.” This mode
allows firms to earn returns from process technology (such as construction) in
countries where FDI is restricted.
The drawbacks, however, are
twofold. First, if foreign clients are competitors, turnkey projects may boost
their competitiveness. Second, turnkey projects do not allow for a long-term
presence after the key is handed to clients. To obtain a longer-term presence,
build-operate-transfer agreements are now often used, instead of the
traditional build-transfer type of turnkey projects. A build-operate-transfer
(BOT) agreement is a non-equity mode of entry used to build a longer-term
presence by building and then operating a facility for a period of time before
transferring operations to a domestic agency or firm. For example, a consortium
of German, Italian, and Iranian firms obtained a large- scale BOT
power-generation project in Iran. After completion of the construction, the
consortium will operate the project for 20 years before transferring it to the
Iranian government.
iii)
Research and development (R&D)
This contract refers to outsourcing
agreements in R&D between firms. Firm A agrees to perform certain R&D
work for Firm B. Firms thereby tap into the best locations for certain
innovations at relatively low costs, such as aerospace research in Russia.
However, three drawbacks may emerge.
First, given the uncertain and multidimensional nature of R&D, these
contracts are often difficult to negotiate and enforce. While delivery time and
costs are relatively easy to negotiate, quality is often hard to assess. Second,
such contracts may cultivate competitors. A number of Indian IT firms, nurtured
by such work, are now on a global offensive to take on their Western rivals.
Finally, firms that rely on outsiders to perform a lot of R&D may lose some
of their core R&D capabilities in the long run.
iv)
Co-marketing
It refers to efforts among a number
of firms to jointly market their products and services. Toy makers and movie
studios often collaborate in co- marketing campaigns with fast-food chains such
as McDonald’s to package toys based on movie characters in kids’ meals. Airline
alliances such as One World and Star Alliance engage in extensive co-marketing
through code sharing (multiple airlines share the code of one flight operated
by one partner firm). The advantages are the ability to reach more customers.
The drawbacks center on limited
control and coordination.
Next are equity modes, all of which entail some FDI and transform the firm
to an MNE.
i)
Joint venture (JV)
It is a corporate child, a new entity
jointly created and owned by two or more parent companies. It has three
principal forms: Minority JV (less than 50% equity), 50/50 JV (equal equity),
and majority JV (more than 50% equity). JVs, such as Shanghai Volkswagen and
Sony Ericsson, have three advantages.
·
First,
an MNE shares costs, risks, and profits with a local partner, so the MNE
possesses a certain degree of control but limits risk exposure.
·
Second,
the MNE gains access to knowledge about the host country; the local firm, in
turn, benefits from the MNE’s technology, capital, and management.
·
Third,
JVs may be politically more acceptable in host countries. In terms of
disadvantages, JVs often involve partners from different back- grounds and with
different goals, so conflicts are natural. Furthermore, effective equity and
operational control may be difficult to achieve, since everything has to be
negotiated—in some cases, fought over.
·
Finally,
the nature of the JV does not give an MNE the tight control over a foreign
subsidiary that it may need for global coordination.
Overall, all sorts of
non-equity-based contractual agreements and equity-based JVs can be broadly considered
as strategic alliances.
ii)
Wholly owned subsidiary (WOS)
It is defined
as a subsidiary located in a foreign country that is entirely owned by the
parent multinational. There are two primary means to set up a WOS. One is to
establish greenfield operations,
building new factories and offices from scratch (on a proverbial piece of
“green field” formerly used for agricultural purposes). For example, Microsoft
established a greenfield R&D center in Beijing. There are three advantages.
·
First,
a greenfield WOS gives an MNE complete equity and management control, thus
eliminating the headaches associated with JVs.
·
Second,
this undivided control leads to better protection of proprietary technology.
·
Third,
a WOS allows for centrally coordinated global actions. Sometimes, a subsidiary
will be ordered to lose money. In the semiconductor market, Texas Instruments
(TI) faced the low-price Japanese challenge in many countries, whereas rivals
such as NEC and Toshiba were able to charge high prices in Japan and use
domestic profits to cross-subsidize overseas expansion. By entering Japan via a
WOS and slashing prices there, TI retaliated by incurring a loss. However, this
forced the Japanese firms to defend their profit sanctuary at home, where they
had more to lose. Consequently, Japanese rivals had to reduce the ferocity of
their price wars outside of Japan. Local licensees/franchisees or JV partners
are unlikely to accept such a subservient role—being ordered to lose money (!).
In terms of drawbacks,
·
A
greenfield WOS tends to be expensive and risky, not only financially but also
politically. Its conspicuous foreignness may become a target for nationalistic
sentiments.
·
Another
drawback is that greenfield operations add new capacity to an industry, which
will make a competitive industry more crowd- ed. For example, think of all the
Japanese automobile plants built in the United States, which have severely
squeezed the market share of US automakers.
·
Finally,
greenfield operations suffer from a slow entry speed of at least one to several
years (relative to acquisitions).
The other way to establish a WOS is an acquisition. Indian firms’
acquisitions in Africa are cases in point. Acquisition shares all the benefits
of greenfield WOS but enjoys two additional advantages:
(1) adding no new capacity and
(2) faster entry speed.
In terms of drawbacks, acquisition shares all
of the disadvantages of greenfield WOS except adding new capacity and slow
entry speed. But acquisition has a unique disadvantage: post-acquisition
integration problems.
But
nowadays firms are not limited by any
single entry choice. For example, IKEA stores in China are JVs, and its stores
in Hong Kong and Taiwan are separate franchises. Pearl River has used a variety
of entry modes (exports, greenfields, and acquisitions) to tackle various
markets. In addition, entry modes may change over time. Starbucks, for
instance, first used franchising. It then switched to JVs and, more recently,
to acquisitions. Therefore firms are searching ways to enter in the market to
say competitive.
References:
Slides +
Book ( Global business )
Thanks for sharing
ReplyDeleteAlso visit us,
shipping to australia from usa
Shipping to Canada
us to uk shipping cost
shipping from us to mexico