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GSBS6481 International Business Strategy
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Week 5: Foreign Market Entry
Reference & Readings
Liability of foreignness
Liability of origin
Born-global firms
First-mover v.s. later mover advantages
Entry mode
Internalization
Key concepts
Peng, (2021), Global Strategy, 5th ed. USA: Cengage Learning.
Chapter 5 & 6
Ghemawat, P. 2001. Distance still matter. Harvard Business Review, September, 79(8), 137-140, 142-7, 162.
Tan, H., Yang, M. 2021. The new liability of origin in global decoupling, Management and Organization Review, 17, 624-629.
Key questions around foreign market entry
Liability of foreignness and the CAGE distance framework
Why go abroad?
Where to enter?
When to enter?
How to enter?
Why go abroad
Liability of foreignness
The inherent disadvantage foreign firms experience in host countries because of their non-native status
Asset of foreignness
A contrasting view to liability of foreignness argues that under certain circumstances, being foreign can be an asset (that is, a comparative advantage)
Sources of the liability of foreignness
The CAGE Distance framework suggests that four dimensions of distance are important for firms when considering to expand into a foreign market
Cultural distance
Administrative and political distance
Geographic distance
Economic distance
See Ghemawat, P. 2001. Distance still matter. Harvard Business Review, September, 79(8), 137-40, 142-7, 162. (The supplementary reading of this week)
Cultural distance
Differences in religious beliefs, race, social norms and language etc between two countries can have a huge impact on trade
E.g. all other things being equal, trade between countries that share a language will be three times greater than between countries without a common language
Other cultural attributes e.g. social norms also have significant implications to IB (e.g. attitudes toward copyright infringement in different nations)
Cf. Ghemawat (2001)
Administrative / Political distance
Shared monetary or political association
Political hostility
Government policies
Institutional weakness
Additional question: Are companies more likely to internationalize to countries politically/culturally close or distant to their home countries?
Geographic distance
Geographic distance is a major barrier of international trade
A 10% increase in transport costs reduces trade volumes by 20%.
Bilateral trade declines about 1% for every percentage increase in the distance separating a pair of countries
Source: see Ellis (2007)
Economic distance
Differences in consumer income
Differences in resources, infrastructure and technologies
Liability of Origin
The negative perception of firms and products from a certain country
A term particularly used to describe disadvantages of emerging economy-multinational enterprises (EE-MNEs) associated with their national origins
New liability of origin due to global decoupling and geopolitical conflicts?
Why (why not) go abroad?
Industry-based considerations
Resource-based considerations
Institution-based considerations
Why Go Abroad – Industry-based considerations
Why go abroad – Industry-based considerations (cont.)
Rivalry among established competitors
E.g. retail supermarket chains
Entry barriers
E.g. Gain economy of scale by selling to foreign markets
Bargaining power of suppliers
E.g. Entry through backward vertical integration with upstream activities
Bargaining power of buyers
E.g. Entry through forward vertical integration with downstream activities
Substitute products/services
Why go abroad – Possible resource-based considerations
Capitalize on valuable, rare, difficult to imitate resources – the exploitation benefits, e.g.
Reach larger economies of scale
Spread investment risks
Increase market power over suppliers, distributors and customers
Enhance the knowledge base, capabilities, and competitiveness through experiential learning – the exploration benefits, e.g.
Natural resource seeking
Market seeking
Efficiency seeking
Innovation seeking
Why go abroad – Possible institution-based considerations
Trade barriers: Tariff/Non Tariff barriers (e.g. local content requirements, entry modes restrictions etc.)
Regulatory risks
Cultural distance
Business norms
Overcoming the liability of foreignness
How do foreign firms crack new markets?
The institution-based view suggests that firms need to take actions deemed legitimate and appropriate by the various formal and informal institutions governing market entities
The resource-based view argues that foreign firms need to deploy overwhelming resources and capabilities to offset their liability of foreignness
Where to Enter – Two approaches/ schools of thought
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.
Born-global firms
When to enter – First-mover advantages vs. late mover advantages
First-mover advantages
Late mover advantages
Also timing of internatialization in terms of the development stage of the company
Early vs. late internationalization
Early vs. Late Internationalization: The Chinese case
Source: Boisot & Meyer (2008) “Which Way through the Open Door? Reflections on the Internationalization of Chinese Firms”. Management and Organization Review 4:3 349–365
How to enter: The choice of entry modes
Source: Adapted from Y. Pan & D. Tse, 2000, The hierarchical model of market entry modes (p. 538), Journal of International Business Studies, 31: 535–554.
Often the only available choices for 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
Subject to trade barriers and protectionism
Exporting and Importing
An agreement that allows one party to use an industrial property right in exchange for payment to the other party
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
Exporting and Importing
Business arrangement under which one party (the franchisor) allows another (the franchisee) to operate an enterprise using its trademark, logo, product line, and methods of operation in return for a fee
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
Franchising
Exporting and Importing
Any type of cooperative relationship among different firms.
Global Strategic Alliance (GSA): Voluntary agreements between two or more firms from different countries who pursue exchange, sharing, or co-developing of products, technologies, or services.
As globalization increases, strategic alliances and networks have proliferated globally.
International joint venture (IJV)
An agreement under which two or more partners from different countries own or control a business
Advantages
Improvement of efficiency
Access to knowledge, Political factors
Alliances & JVs
Franchising
Exporting and Importing
Why do firms become MNEs by engaging in FDI?
OLI advantages – a firm’s quest for ownership (O) advantages, location (L) advantages, and internalization (I) advantages via FDI
Ownership – an MNE’s possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas in the context of FDI
Location – advantages enjoyed by firms operating in a certain location
Internalization – the replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating and operating in two or more countries
Key strategic consideration: Control versus Commitment
Large-Scale Entries
Benefit from a strategic commitment
Drawbacks of large-scale entries – Limited strategic flexibility and potential huge losses
Small-scale entries
Focus on accumulating experience
“Learning by doing”
Drawbacks of small-scale entries
A lack of strong strategic commitment
Difficulties in building market share
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