Acquisitions
•If conflict in a strategic alliance or joint venture is not manageable, an acquisition may be a better option.
•Acquisitions are better in situations with less need for strategic flexibility and when the transaction is used to maintain economies of scale or scope.
•International acquisitions carry some of the disadvantages of domestic acquisitions.
•In addition, they can be expensive and also often require debt financing, which carries an extra cost.
•International negotiations for acquisitions can be exceedingly complex and are generally more complicated than domestic acquisitions.
Acquisitions (cont.)
•The problems of merging the new firm into the acquiring firm often are more complex than in domestic acquisitions.
•The acquiring firm must deal not only with different corporate cultures, but also with potentially different social cultures and practices.
•These differences make the integration of the two firms after the acquisition more challenging; it is difficult to capture the potential synergy when integration is slowed or stymied because of cultural differences.
•Therefore, while international acquisitions have been popular because of the rapid access to new markets they provide, they also carry with them important costs and multiple risks.
New Wholly Owned Subsidiary
•The establishment of a new wholly owned subsidiary is referred to as a greenfield venture.
•The process of creating such ventures is often complex and potentially costly, but it affords maximum control to the firm and has the most potential to provide above-average returns.
•This potential is especially true of firms with strong intangible capabilities that might be leveraged through a greenfield venture.
•A firm maintains full control of its operations with a greenfield venture. More control is especially advantageous if the firm has proprietary technology.
New Wholly Owned Subsidiary (cont.)
•Research also suggests that “wholly owned subsidiaries and expatriate staff are preferred” in service industries where “close contacts with end customers” and “high levels of professional skills, specialized know-how, and customization” are required.
•Other research suggests that greenfield investments are more prominent where physical capital-intensive plants are planned and;
•That acquisitions are more likely preferred when a firm is human capital intensive—that is, where a strong local degree of unionization and high cultural distance would cause difficulty in transferring knowledge to a host nation through a greenfield approach.
New Wholly Owned Subsidiary (cont.)
•The risks are also high, however, because of the costs of establishing a new business operation in a new country.
•The firm may have to acquire the knowledge and expertise of the existing market by hiring either host-country nationals, possibly from competitors, or consultants, which can be costly.
•Research also suggests that when the country risk is high, firms prefer to enter with joint ventures instead of greenfield investments in order to manage the risk.
Activity
•In groups, read information about the investment in Laos.
•Each group will be assigned randomly to invest in specific industry e.g. (or other services if you offer)
–Construction
–Third party logistics provider
–Airline (Bangkok-Vientiane)
–Hotel
–Bank
–Insurance
–Direct sell
•Answer the question:
–How do you start business in Laos?
•In pair of group, first group give a presentation while another group criticizes.
•Pass the answer sheet to the lecturer at the end of the class.
Dynamics of Mode of Entry
•A firm’s choice of mode of entry into international markets is affected by a number of factors.
•Initially, market entry is often achieved through export, which requires no foreign manufacturing expertise and investment only in distribution.
•Licensing can facilitate the product improvements necessary to enter foreign markets.
•Strategic alliances have been popular because they allow a firm to connect with an experienced partner already in the targeted market.
•Therefore, all three modes—export, licensing, and strategic alliance— are good tactics for early market development.
Dynamics of Mode of Entry
•To secure a stronger presence in international markets, acquisitions or greenfield ventures may be required.
•Both acquisitions and greenfield ventures are likely to come at later stages in the development of an international strategy.
•In addition, both strategies tend to be more successful when the firm making the investment possesses valuable core competencies.
•To enter a global market, a firm selects the entry mode that is best suited to the situation at hand.
International Diversification and Returns
•International diversification is a strategy through which a firm expands the sales of its goods or services across the borders of global regions and countries into different geographic locations or markets.
•Research has shown that, as international diversification increases, firms’ returns decrease initially but then increase quickly as firms learn to manage international expansion.
•Many factors contribute to the positive effects of international diversification, such as potential economies of scale and experience, location advantages, increased market size, and the opportunity to stabilize returns.
International Diversification and Innovation
•The development of new technology is at the heart of strategic competitiveness.
•Therefore, the only way to sustain a competitive advantage is to upgrade it continually.
•International diversification provides the potential for firms to achieve greater returns on their innovations and reduces the often substantial risks of R&D investments.
•Therefore, international diversification provides incentives for firms to innovate.
Complexity of Managing Multinational Firms
•Although firms can realize many benefits by implementing an international strategy, doing so is complex and can produce greater uncertainty.
•For example, multiple risks are involved when a firm operates in several different countries. Firms can grow only so large and diverse before becoming unmanageable, or before the costs of managing them exceed their benefits.
•Managers are constrained by the complexity and sometimes by the culture and institutional systems within which they must operate.
•The complexities involved in managing diverse international operations are shown in the problems experienced by even high-performing firms.
Political Risks
•Political risks are risks related to instability in national governments and to war, both civil and international.
•Instability in a national government creates numerous problems, including economic risks and uncertainty created by government regulation; the existence of many, possibly conflicting, legal authorities or corruption; and the potential nationalization of private assets.
•Foreign firms that invest in another country may have concerns about the stability of the national government and the effects of unrest and government instability on their investments or assets.
Risks in an International Environment
Economic Risks
•Economic risks are interdependent with political risks.
•If firms cannot protect their intellectual property, they are highly unlikely to make foreign direct investments.
•Countries therefore need to create and sustain strong intellectual property rights and enforce them in order to attract desired foreign direct investment.
•Another economic risk is the security risk posed by terrorists.
•Foremost among the economic risks of international diversification are the differences and fluctuations in the value of different currencies.
Risks in an International Environment
Limits to International Expansion: Management Problems
•First, greater geographic dispersion across country borders increases the costs of coordination between units and the distribution of products.
•Second, trade barriers, logistical costs, cultural diversity, and other differences by country (e.g., access to raw materials and different employee skill levels) greatly complicate the implementation of an international diversification strategy.
•Institutional and cultural factors can present strong barriers to the transfer of a firm’s competitive advantages from one country to another.
•The amount of international diversification that can be managed varies from firm to firm and according to the abilities of each firm’s managers.
Assignment
•In groups, answer the review questions in the main text, page 236.
•Answer in 3-4 page of A4.
•Pass the answer sheet to the lecturer at the beginning of the next class.
Acquisitions
•If conflict in a strategic alliance or joint venture is not manageable, an acquisition may be a better option.
•Acquisitions are better in situations with less need for strategic flexibility and when the transaction is used to maintain economies of scale or scope.
•International acquisitions carry some of the disadvantages of domestic acquisitions.
•In addition, they can be expensive and also often require debt financing, which carries an extra cost.
•International negotiations for acquisitions can be exceedingly complex and are generally more complicated than domestic acquisitions.
Acquisitions (cont.)
•The problems of merging the new firm into the acquiring firm often are more complex than in domestic acquisitions.
•The acquiring firm must deal not only with different corporate cultures, but also with potentially different social cultures and practices.
•These differences make the integration of the two firms after the acquisition more challenging; it is difficult to capture the potential synergy when integration is slowed or stymied because of cultural differences.
•Therefore, while international acquisitions have been popular because of the rapid access to new markets they provide, they also carry with them important costs and multiple risks.
New Wholly Owned Subsidiary
•The establishment of a new wholly owned subsidiary is referred to as a greenfield venture.
•The process of creating such ventures is often complex and potentially costly, but it affords maximum control to the firm and has the most potential to provide above-average returns.
•This potential is especially true of firms with strong intangible capabilities that might be leveraged through a greenfield venture.
•A firm maintains full control of its operations with a greenfield venture. More control is especially advantageous if the firm has proprietary technology.
New Wholly Owned Subsidiary (cont.)
•Research also suggests that “wholly owned subsidiaries and expatriate staff are preferred” in service industries where “close contacts with end customers” and “high levels of professional skills, specialized know-how, and customization” are required.
•Other research suggests that greenfield investments are more prominent where physical capital-intensive plants are planned and;
•That acquisitions are more likely preferred when a firm is human capital intensive—that is, where a strong local degree of unionization and high cultural distance would cause difficulty in transferring knowledge to a host nation through a greenfield approach.
New Wholly Owned Subsidiary (cont.)
•The risks are also high, however, because of the costs of establishing a new business operation in a new country.
•The firm may have to acquire the knowledge and expertise of the existing market by hiring either host-country nationals, possibly from competitors, or consultants, which can be costly.
•Research also suggests that when the country risk is high, firms prefer to enter with joint ventures instead of greenfield investments in order to manage the risk.
Activity
•In groups, read information about the investment in Laos.
•Each group will be assigned randomly to invest in specific industry e.g. (or other services if you offer)
–Construction
–Third party logistics provider
–Airline (Bangkok-Vientiane)
–Hotel
–Bank
–Insurance
–Direct sell
•Answer the question:
–How do you start business in Laos?
•In pair of group, first group give a presentation while another group criticizes.
•Pass the answer sheet to the lecturer at the end of the class.
Dynamics of Mode of Entry
•A firm’s choice of mode of entry into international markets is affected by a number of factors.
•Initially, market entry is often achieved through export, which requires no foreign manufacturing expertise and investment only in distribution.
•Licensing can facilitate the product improvements necessary to enter foreign markets.
•Strategic alliances have been popular because they allow a firm to connect with an experienced partner already in the targeted market.
•Therefore, all three modes—export, licensing, and strategic alliance— are good tactics for early market development.
Dynamics of Mode of Entry
•To secure a stronger presence in international markets, acquisitions or greenfield ventures may be required.
•Both acquisitions and greenfield ventures are likely to come at later stages in the development of an international strategy.
•In addition, both strategies tend to be more successful when the firm making the investment possesses valuable core competencies.
•To enter a global market, a firm selects the entry mode that is best suited to the situation at hand.
International Diversification and Returns
•International diversification is a strategy through which a firm expands the sales of its goods or services across the borders of global regions and countries into different geographic locations or markets.
•Research has shown that, as international diversification increases, firms’ returns decrease initially but then increase quickly as firms learn to manage international expansion.
•Many factors contribute to the positive effects of international diversification, such as potential economies of scale and experience, location advantages, increased market size, and the opportunity to stabilize returns.
International Diversification and Innovation
•The development of new technology is at the heart of strategic competitiveness.
•Therefore, the only way to sustain a competitive advantage is to upgrade it continually.
•International diversification provides the potential for firms to achieve greater returns on their innovations and reduces the often substantial risks of R&D investments.
•Therefore, international diversification provides incentives for firms to innovate.
Complexity of Managing Multinational Firms
•Although firms can realize many benefits by implementing an international strategy, doing so is complex and can produce greater uncertainty.
•For example, multiple risks are involved when a firm operates in several different countries. Firms can grow only so large and diverse before becoming unmanageable, or before the costs of managing them exceed their benefits.
•Managers are constrained by the complexity and sometimes by the culture and institutional systems within which they must operate.
•The complexities involved in managing diverse international operations are shown in the problems experienced by even high-performing firms.
Political Risks
•Political risks are risks related to instability in national governments and to war, both civil and international.
•Instability in a national government creates numerous problems, including economic risks and uncertainty created by government regulation; the existence of many, possibly conflicting, legal authorities or corruption; and the potential nationalization of private assets.
•Foreign firms that invest in another country may have concerns about the stability of the national government and the effects of unrest and government instability on their investments or assets.
Risks in an International Environment
Economic Risks
•Economic risks are interdependent with political risks.
•If firms cannot protect their intellectual property, they are highly unlikely to make foreign direct investments.
•Countries therefore need to create and sustain strong intellectual property rights and enforce them in order to attract desired foreign direct investment.
•Another economic risk is the security risk posed by terrorists.
•Foremost among the economic risks of international diversification are the differences and fluctuations in the value of different currencies.
Risks in an International Environment
Limits to International Expansion: Management Problems
•First, greater geographic dispersion across country borders increases the costs of coordination between units and the distribution of products.
•Second, trade barriers, logistical costs, cultural diversity, and other differences by country (e.g., access to raw materials and different employee skill levels) greatly complicate the implementation of an international diversification strategy.
•Institutional and cultural factors can present strong barriers to the transfer of a firm’s competitive advantages from one country to another.
•The amount of international diversification that can be managed varies from firm to firm and according to the abilities of each firm’s managers.
Assignment
•In groups, answer the review questions in the main text, page 236.
•Answer in 3-4 page of A4.
•Pass the answer sheet to the lecturer at the beginning of the next class.
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