When should a firm produce products locally
When,
- Shipping and tariff costs associated with exporting is too high.
- Need for local customization of product design is high.
- No means of protecting own inventions abroad.
- Local content requirements are strong.
Alliance partner is good when
- Psychical and cultural distance between the home and host countries is high.
- The subsidiary would have low operational integration with the rest of the multinational operations.
- The risk of asymmetric learning by the partner is low.
- The company is short on capital.
- Government regulations require local equity participation.
Exporting
- Accessing foreign markets through local distributors.
- Accessible to small businesses that usually compete in a very narrow category.
Advantages: Low risk, no long-term assets, easy market entry and exit.
Disadvantages: Choice of distributors is difficult, tariffs, quotas, transportation costs, synchronization of shipments.
Licensing
- Getting exclusive license for patent, technology or trademark use in a specific geographic territory
- Suitable for firms with many diverse product lines.
Advantages: No asset ownership, fast market access, avoid regulations, tariffs and quotas.
Disadvantages: Quality and trustworthiness of licensee – track – record, could licensee develop competence and become direct competitor? Host country royalty limits, secure protection of intellectual property.
Agency theory
Used to explain and resolve issues in the relationship between business principals and their agents.
Contract manufacturing/Outsourcing
- Contracting for the production of finished goods or component parts.
Service-sector outsourcing
- Outsourcing value-adding part of value chain, convenient outsourcing of research for SME’s.
Offshoring
- Moving own factories abroad, producing parts abroad, but still putting them together at home.
- Possibility to split the production, often accompanied with clustering – multiple suppliers in one concentrated area.
Reshoring/nearshoring
- Trend of bringing production back home or at least closer to home in order to cut down the time/distance to market, the complexity of multi-stage-production.
o Risks: Pressure of social responsibility and bringing jobs back home.
The rising price of labor abroad, the risks associated with foreign production.
Quality control and logistics.
Non-equity strategic alliances
- Contractual agreement between parties
- Could be for marketing purposes
- Alliances with supplier, distributors, manufacturers
Advantages: Realization of all revenues and control, protection of technology and skill base, global economies of scale.
Disadvantage: Prohibiting locals in emerging markets to compete. Home countries sees foreign WHS (Work, Health and Safety) as export of jobs.
Equity Modes
Greenfield vs Brownfield
- Greenfield describes a completely new project that has to be executed from scratch, (Greenfield: Build your own subsidiary from scratch) while a brownfield project is one that has been worked on by others and is now being handed off to someone else for completion.
Y: Market growth rate
Y: Uniqueness of corporate culture
High-low-low-high.
Joint Venture
- A joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity.
Advantage: Insider access to markets, curtailing trade barriers, shared costs and risks, leverage partners’ skills base, technology and network.
Disadvantage: Must have strategic fit, difficulties to culturally adapt to the partner, asymmetric knowledge-leaking know how.
Types of Mergers and Acquisitions
- Overcapacity M&A
- Geographic roll-up M&A
- Product or market extension M&A
- The M&A as substitutes for R&D
- The industry convergence M&A
- Overcapacity M&A
Merger of two equals with strategic goal to achieve economies of scale by improving efficiency and use the excess capacity to gain market share.
- Geographic roll-up M&A (Larger company)
“industry giant in making” overtakes smaller companies in new geographical locations to penetrate the market, keeps the local staff.
- Product or market extension M&A
Involves two companies that are functionally related but sell products that do not directly compete or sell in two different markets, their success is usually determined by the comparative size of the partners.
- The M&A as substitutes for R&D
Usually larger company acquiring innovative one, retaining HR is very important. (Used in high-tech companies to build market position quickly)
- The Industry convergence M&A
The merging partners are entering a new industry and come from industries with ending borders.
Strategy and Equity modes?
4 quadrants:
- Predisposition: Gocentric - Strategy: Transnational
- Predisposition: Ethnocentric - Strategy: Global
- Predisposition: Polycentric/regiocentric - Strategy: Multidomestic
- Predisposition: Ethnocentric - Strategy: International
Internal isomorphism
Pressure on SDs from parent company
Global strategy is a sign of stronger internal isomorphism, SDs are mirror image of the HQs, including procedures, norms, policies – therefore it is easier to produce with greenfield investment.
External isomorphism
Pressure on SDs from the host country environment
Multidomestic strategy is a sign of stronger external isomorphism, SDs are resembling other local organizations and are incorporated into the local network – therefor it is easier to acquire existing companies.
