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COURSE: GLOBAL BUSINESS MANAGEMENT
MGT610
DR. DIMITRIS STAVROULAKIS
PROFESSOR OF HUMAN RESOURCE MANAGEMENT
DEPT OF ACCOUNTING
TEI OF PIRAEUS
Unit 7: Entry Modes & Foreign Direct Investment
Training Material:
-“FDI”, entry from: Wankel, C. (ed.) (2009): Encyclopedia of
Business in Today’s World. London: Sage, 695-697.
-Chapter12 from: Hill, C.W.L., (2008): Global Business Today.
Irwin, McGraw-Hill (5th Edition).
Entry Modes
 Entry Mode: A critical strategic decision that involves
the way through which a MNC is going to establish its
presence in a new country
 It affects future decisions and operations of the MNC in
the new market.
 Includes exporting, licensing, franchising, contract
manufacturing, turnkey projects, and joint venturing.
Exporting
Entails physical transfer of merchandise to a foreign market (with
or without the mediation of an agent) for financial gain.
 A safe activity, however confronted with shortcomings such as
high transportation costs, and tariffs/barriers. Obstacles to trade
include:
 High transportation costs (heavy & bulky products)
 Tariffs
 Quotas are restrictions on quantities of certain products that are
allowed to be imported in certain countries.
 Discriminatory government procurements favor certain
companies, thus establishing informal monopolies. Governments
may also issue restrictive technical regulations and specifications,
which exclude the mainstream of competitors.
 Customs procedures may be lengthy, costly, and complicated,
therefore favoring bribery.
Exporting (cont)
 Piggyback is the practice through which a
manufacturer uses the sales & distribution network of
another company in order to expand market or export
products.
 E.g. in the 80’s the French government encouraged
Rhone-Poulenc (chemicals) to dispose its networks to
numerous SME.
 Pillsbury invited other firms to utilize its network after
its flour sales declined. It accepted also packaged food
and farm machinery.
 Netflix movies are streamed through Amazon servers
Licensing
The licensor grants the rights to use brand name or any kind of
intellectual property (IP) to another company (the licensee), for a
specific period, in return for a royalty fee. Godiva, Coca Cola,
PepsiCo.
 The product is marketed locally by the licensee.
 Legal issues: Exclusive or non-exclusive contract, sub-license,
conditions of termination, intellectual property infringement.
Advantages:
 The licensor avoids barriers to trade and exploits best the local
market through the infrastructure of the licensee.
 In countries where there are barriers to investment, licensing
allows a foreign firm to exploit its know-how (intangible property).
 It is appropriate mostly to newborn MNC that lack capabilities for
international expansion.
Licensing (cont)
Disadvantages:
 Unrestricted dissemination of know-how and experience is likely
to lead to imitation practices and to the transformation of
licensees to potential competitors, particularly in countries where
patent protection is weak.
 Passive presence in foreign countries implies limited
opportunities for market learning.
 Investigating compliance of the licensee to the terms of agreement
in certain countries might be costly, complicated, or even
impossible. Control is looser than other entry forms (contract
manufacturing, franchise).
 In case that the product performs better than expected, there are
limited opportunities for the licensor to bargain for better terms.
Franchise
Similar to license, but usually restricted to services. Also control
is tighter and the franchisee has to comply with strict rules on
how to conduct business. Extensive training of franchisees is
required in order to ensure quality of services. Allows rapid
expansion of MNC networks and fast cash through royalties.
Disadvantages:
 In specific sectors (food), cultural patterns may dissuade
consumers from adhering to foreign brand names.
 Unfavorable developments regarding a MNC in one country may
affect its whole franchise chain in others (e.g. horse meatballs in
IKEA stores in Czech republic – 25/2/ 2013).
 The process should be incremental. However, some MNCs are
eager to pocket cash without questioning viability of franchisees,
a fact resulting in the creation of a fragile infrastructure. A
massive close-down of franchisees would be fatal.
 Infrequent inspections and inadequate control procedures lead to
degradation of quality standards, eventually eroding the brand
name.
Differences between License and Franchise
 License is assigned normally to one only company per country,
while franchise is expanded over numerous small shops.
 The product is marketed locally by the licensee. The franchisee
may contribute a small fee for advertisement, but the franchisor is
the one who undertakes the marketing strategy.
 Licensing does not require any particular knowledge of the
licensee's country. On the other hand, co-ordination of the
franchise structure is carried out locally and its effectiveness
depends on knowledge of the local market.
 Control of licensee’s activities by the licensor is often weak, while
the philosophy of franchise entails tight control of franchisees.
 Licensing may be recommended (among others) to weak MNC that
lack know-how on foreign markets entry. On the contrary,
franchise is appropriate mostly to experienced companies that
have already established a strong presence in foreign markets.
 The licensee normally possesses higher bargaining power than the
franchisee. The licensor may not be in the position to modify
contract terms in case that his product performs better than
expected.
Contract Manufacturing
Many MNCs (IKEA, Nike etc) subcontract local manufacturers to produce
items under the umbrella of their own brand name, according to the
same technical standards as their subs. The contract is restricted solely
to manufacturing. Products bear the MNC brand name, while marketing
& sales are undertaken exclusively by the MNC. This entry mode may be
selected either because MNCs wish to exploit local resources, or to
avoid heavy taxation, or to minimize transportation costs, or to
overcome tariffs, quotas and other entry barriers, or because this is
explicitly required by the host country government (China).
 Foxconn, Pegatron: Contract manufacturers for Apple iseries hardware.
Disadvantages:
 Difficulties in performing frequent inspections in local firms may result in
the violation of the agreed technical standards.
 Relocation of production may cause labor unrest and trade union action
due to the loss of employment positions in subs & HQ.
 Illicit labor practices of contractors (child labor, unsafe work conditions,
environmental issues) will backfire on the MNC brand.
 Emergence of contractors to potential competitors is likely, due to their
familiarization with the MNC practices and specifications. More safe is to
assign parts, not the whole product.
Turnkey Projects
The MNC agrees to deliver to the foreign client the whole project
(design, construction, quality control, testing), ready to operate.
The package includes all issues, from maintenance to personnel
training.
 Are applicable in heavy industries which require advanced know-
how (hydro-electric plants, oil refineries, steel factories) –
Varangis PLC.
 Abound in oil-rich Middle East countries.
Advantages:
 Important economic returns.
 Less tricky than FDI, since long-term engagement is avoided in
high-risk countries.
Disadvantages:
 Emergence of potential competitors, since the local recipients
may eventually acquire the know-how
 Limited presence in strategic local markets. This problem may be
compensated through the acquisition of a minority equity interest
by the MNC.
Joint Venture
A firm that has been created by two or more independent
companies which pool resources in order to exploit assets of the
host country. The foreign partners benefit from the local partner’s
network and knowledge of the business environment. Often JVs
are temporary, formed in order to exploit specific assets (e.g.
mines, oil deposits). Development costs & risks are shared.
 In certain countries, a joint venture is the only feasible mode of
entry (e.g. auto makers in China – VW & GM with Shanghai
Automotive). First entrants (VW, GM & Peugeot) were favored in
the Chinese market. Motorola had managed to establish a
temporary monopoly in the 80s and 90s.
 Most common in Greek supermarkets and retail chains worldwide
(Tesco in Hungary, Malaysia, China, Thailand).
 Chrysler, Mitsubishi & Hyundai formed Global Engine
Manufacturing Alliance in order to research and develop
aluminum engines.
Joint Venture (cont)
Advantages:
 High rates of return
 Direct control over operations
 Contact with the market agents & government
Drawbacks: Due to these, about 40%-60% JV fail.
 Disputes may arise concerning allocation of resources and
ownership of patents & brand names.
 Caution is recommended with regard to the selection of partners
and terms of agreement.
 Haste to present results to shareholders has proved detrimental.
 Emergence of conflict pertaining to cultural distance. Dissonance
of attitudes toward risk needs to be treated from the outset.
 Lack of total control over the JV incurs less profits for individual
participants.
Modes of entry
Exporting
Contract
Agreement
Joint
Venture
Acquisition
Greenfield
Invest
Risk
Low
Low
Moderate
High
High
Return
Low
Low
Moderate
High
High
Control
Moderate
Low
Moderate
High
High
Integration
Negligible
Negligible
Low
Moderate
High
FDI: Working Definitions
 “A category of international investment that indicates an intention
to acquire a lasting interest in an enterprise operating in another
economy. It covers all financial transactions between the investing
enterprise and its subsidiaries abroad”. (European Commission)
 “An investment involving a long-term relationship and reflecting a
lasting interest and control of a resident entity in one economy in
an enterprise resident in an economy other than that of the
investor”. (UN)
 In short: Establishment of an important function of the company
(production, assembly, customer service, R&D etc) in a foreign
country
 Inflows & Outflows of country FDI.
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What is not FDI
 Portfolio investment: Investment that involves the
exchange of equity with the aim of attaining a return
on the invested capital, rather than achieve some
form of control.
 Non-equity investment (company bonds, state
bonds, property, cash etc)
 Licensing production or technology rights to another
company abroad.
 Strategic alliances.
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Terminology – contrast:
 Greenfield investment
 Brownfield investment
A brand new project that lacks
any constraints set by previous
work. The metaphor concerns
the greenfield land, where there
is no need to reform an existing
structure.
Refers to undertaking initiatives
in places where a “dirty
business” (steel mill, oil refinery)
previously operated. The term
appeared first at the USA
Senate in 1992.
A greenfield investment concerns
the creation of infrastructures in
regions where no previous
facilities exist. In addition to
creating new facilities, MNCs
also offer long-lasting jobs. It is
usually referred in contrast to
other business forms (M&A,
Franchise, Joint Ventures).
Purpose of the new business
may be either:
 To clean up the area in order to
make it appropriate for
commercial use or for residence.
 To modify previous operation in
order to initiate a new activity,
that might be irrelevant to
environmental concerns.
Regional trends – Greenfield projects 2008-2009
4.000
• Decline in FDI most markets
• Biggest decline in Rest of Europe - by 40%
3.500
3.000
2008 Q1-Q3
2009 Q1-Q3
2.500
2.000
1.500
1.000
500
0
Asia-Pacific
Western
Europe
Rest of
Europe
Source: fDi Markets database from fDi Intelligence, Financial Times Ltd
North
America
Latin America Middle East
& Caribbean
Africa
EC study: FDI attracted in regions that have:
 Access to a populous national market (national





market size effect).
Borders with the home country and/or language in
common with home country (proximity and culture
effect)
A high level of business English language
proficiency (internationalization effect)
Low corporate taxes and business incentives (fiscal
incentive effect)
Many advanced consumers with high purchasing
power (national GDP per capita)
Low unemployment level (proxy for few rigidities on
the labor market)
FDI attracted in regions that have (cont):
 A large share of other foreign investors (signal effect).
 Good infrastructure and accessibility (access effect).
 A highly educated regional workforce (skill effect).
 A high level of spending on R&D (innovation effect).
 Penetration of information & communication
technologies (ICT effect).
 A large presence of competitors, clients and suppliers
within the firm’s industry (agglomeration & clustering
effect).
 Fame as prominent social milieus and commercial
centers (fame effect).
 Low labor costs (labor effect).
FDI: Επενδύσεις ή ξεπούλημα?
(ναυπηγεία, χρυσός, κρατικά λαχεία, ΟΠΑΠ, νησιά)
Περίπτωση ΕΛΛΗΝΙΚΟΥ 2012
Εμίρης Κατάρ: 5,5 δις. Υποστηρίζει ότι δεν γνώριζε:
 Περιβαλλοντικούς όρους
 Όρους δόμησης & περιβαλλοντικό σχέδιο
 Απαλλοτριώσεις (ποιες και αν θα γίνουν)
 Χαρτογράφηση & ιδιοκτησιακό καθεστώς:
o Καταπατήσεις κατοίκων
o Τοπικές πρωτοβουλίες: «Να μετατραπεί το Ελληνικό σε πάρκο
βιολογικών καλλιεργειών»
Joint Ventures
Types of foreign direct investment
 BY INVESTMENT STRATEGY
 Greenfield & Brownfield investment: Market entry by
establishing a new plant, or adapting an existing one
 Mergers and acquisitions: Market entry by acquiring an
existing plant. E.g. Fourlis by Dixons, Violex by Bic, Athens
Brewery by Amstel, Tasty Foods by PepsiCo, Misco by Barilla
etc.
Divestment due to economic crisis – in periods of crisis MNC
leave the country.
 Business Alliances: Include Joint Ventures, capital
investments, sales agreements either on particular geographic
areas or on complementary products, common procurement of
raw materials etc.
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Types of foreign direct investment
 BY ACTIVITY
 Horizontal FDI
 Similar plants at the same stage of the production process
located in different national markets
 “Market-seeking investment”
 Vertical FDI
 Plants operate at adjacent stages of a vertically related set of
production processes. Ford River Rouge Complex- Michigan,
1928: Steel mills, electricity plants, rainwater reclamation
systems, glass plants etc – one car produced per 30 seconds.
Carnegie Steel Company: Owns ore mines, coal mines, ships,
trains, furnaces, etc.
 “Natural resource-seeking investment”. Oil MNC: Locating
deposits, drilling, extracting, transporting, refining.
 Diversified FDI
 Plants’ outputs are not related to each other
 Risk diversification
VERTICAL FDI
Foreign Acquisition
HOME COUNTRY
HOST COUNTRY
Investment
MNC
Local Firm
Profit
Foreign Acquisition
Advantages
 Access to target’s local
knowledge
 Control over foreign
operations
 Control over target’s
technology



Disadvantages
 Uncertainty about target’s value
 Difficulty in “absorbing” acquired
assets
 Risky if corporate governance is
underdeveloped in the foreign
country. The MNC may be entangled
in complicated legal issues and to
unfair competition
When Is Acquisition Appropriate?
Developed market for corporate governance & control
Acquirer has high “absorptive” capacity
High synergy between the two firms
Acquisitions:
Problems
Too large
Acquisitions
Too much
diversification
Integration
difficulties
Inadequate
evaluation of target
Managers overly
focused on
acquisitions
Large or
extraordinary debt
Inability to
achieve synergy
Indicative Value Chain of a MNC
Company Infrastructure
R&D
Innovative
Capabilities
Production
Marketing
and Sales
Advanced
Technology
& KnowHow
IndustrySpecific
Marketing
Expertise
Organization, Coordination & HRM


What additional resources may the MNC need to enter a
foreign market?
Local expertise: marketing, government relations, etc.
Indicative Value Chain of a Local Firm
Company Infrastructure
R&D
Imitative
Capabilities
Production
Marketing
and Sales
Older
Technology
and KnowHow
CountrySpecific
Marketing
Expertise
Organization, Coordination & HRM
What may the MNC desire from a local firm?
 Complementary resources – minerals, oil, market share
 Not necessarily strength in every area
Complementarity of Resources
MNE’s Resources
Local Firm’s Resources
 Innovative capabilities
 Imitating capabilities
 Advanced technology
 Older technology and
and know-how
 Industry-specific
marketing expertise
 Organization structure
and systems
know-how
 Country-specific
marketing expertise
 Country specific
organization skills
Greenfield Entry
HOME COUNTRY
HOST COUNTRY
MNC
Profit
Investment
New Subsidiary
Company
Greenfield Entry
Advantages
Disadvantages
 Avoids risk of overpayment
 Slower startup
 Avoids problem of
 Requires knowledge of foreign
management
 High risk and high commitment
 Complexity of government
regulations
 Need to hire and train local
workforce
When Is “Green Field” Entry Appropriate?
Lack of proper acquisition target
In-house local expertise
Embedded competitive advantage
Strong corporate culture
integration
 Retains full control



