Modes of Entry
What is the difference between equity and non-equity modes?
Equity modes: A mode of entry that involves taking (full or partial) equity ownership in a local firm.
Non-equity modes: A mode of entry that does not involve owning equity in a local firm.
What is an advatage of a Greenfield investment?
- allows investors to create a new operation from scratch according to their own designs and thus to match it with their global organization.
- gives an MNE complete equity and management control.
- may be designed to be small initially and to grow with the market development (especially for sales units), thereby limiting the up-front capital commitment
What is a Joined Venture (3 forms)?
A new entity jointly owned by two or more parent companies.
It has three principal forms: minority JV (the focal firm holds less than 50% equity), 50/50 JV, and majority JV (more than 50% equity)
What is (the purpose of) a Brownfield acquisition?
Acquisition where subsequent investment overlays the acquired organization.
Explain the 4 entry modes
hint: on which 2 criteria are they based?
degree of equity control / resourse growth
Wholly owned greenfield, Newly created joined venture, Full acquisition, Partial acquisition
Explain the make-or-buy decision when choosing a FDI entry model
Foreign entrants usually need some local resources to complement their own resources, and so they face a make-or-buy decision: should they develop and deploy their own resources, or should they buy local resources?
Give one advantage and one disadvatage of a Joined Venture
Advantages: Sharing costs, risks and profits; Access to partners’ knowledge and assets; Politically acceptable
Disadvatages: Divergent goals and interests of partners; Limited equity and operational control; Difficult to coordinate globally
What is a risk of a staged acquisition?
● Integration process with initially limited control
● Uncertainty over long-term ownership structure
What is a WOS?
Hholly owned subsidiary (WOS): A subsidiary located in a foreign country that is entirely owned by the parent multinational.
can be established in two ways: (1) as a greenfield project or (2) as a full acquisition.
What are the 2 advantages of an acquisition compared to a greenfield WOS?
- they enable faster speed of entry
- they do not intensify competition – the number of firms in the market stays the same.
What are the 3 conditions that need to be met in order for a JV to be appropriate?
1) the new business unit depends on resource contributions from two or more firms, (2) high transaction costs inhibit the markets for these resources or for the expected outputs and (3) it is not feasible for the entire parent firm to be integrated into one firm, for instance because they are big relative to the envisaged project, or one of them is a state-owned enterprise.
What is the scale-of-entry and also explain the term 'platform investment'.
Scale of entry: the amount of resources committed to foreign market entry
Platform investment: An investment that provides a small foothold in a market or location.