Market entry choices

Even after an MNE decides to build up foreign presence, it retains a number of options. Many companies, especially SMEs but also larger MNEs uncomfortable with a given environment, will start with a small representative office, adding organisational learning about the location before risking resources there.

Where companies opt for full-blown FDI, the first decision is whether to build new “greenfield” facilities or acquire existing “brownfield” assets. This choice is often referred to as the “build or buy” dilemma.

Greenfield vs brownfield

The first delineation between these two modes is that greenfield FDI tends to be preferable when a company prioritises technological confidentiality, due to the fact that knowledge can be transferred internally from the MNE’s existing sites to the new location, making it easier to achieve “first-mover” advantage in the new country. A brownfield mode, on the other hand, is usually deemed more appropriate where the internationalisation is driven by commercial objectives (since it is easier and quicker to penetrate the new market when the effort is led by a unit that is already up and running).

In terms of the “build or buy” dilemma, the advantage of greenfield FDI is that it causes companies to spend much less time and money identifying and acquiring an appropriate target — assuming that one even exists. They also avoid the goodwill costs associated with purchasing an existing asset. Brownfield FDI, on the other hand, is fast since it avoids start-up problems inherent to any new venture — a prospect that is particularly attractive when the new country differs greatly from the ones to which the MNE is accustomed. Brownfield modes also offer the possibility of benefiting from the brand reputation of the company that is being acquired as well as its existing customer base. Lastly, by taking over an existing producer, the MNE is not adding to a sector’s total production capacities and thereby increasing global supply — the effect of which would be to lower market prices, undermining the company’s own interests as a producer.

International mergers and acquisitions (M&A) constitute a prime example of brownfield FDI. Consolidations of this sort tend to happen in waves, reflecting managers’ conformism to whatever sectorial paradigm happens to dominate at a certain point in time — a real-life application of anthropologist René Girard’s “mimetic theory”.

The justification for an international M&A can be a sales-side argument like a new market (“forward integration”) or a production-side motive like access to resources (“backward integration”). Within these frameworks, the underlying aspiration is to achieve synergies by uniting companies with complementary geographic, product and/or technological capabilities — an approach that seems to have translated in recent years into fewer but much bigger international “mega-deals”, amounting to $3.7 trillion in 2019. Having said that, the downside is that after the M&A finalises, managers generally face an enormous task ensuring that the new combined teams function harmoniously. The potential for discord between new colleagues coming from very different parts of the world — hence characterised by very different business cultures and ambitions — is a key factor shaping MNE thinking about the best way to internationalise.

International partnerships

Given the complication of operating in environments very different from the one(s) to which an MNE is accustomed, many managers see benefits in internationalising together with partners who both offer knowledge about the new market in question and are willing to share the entry costs and risks. The problem here is the possibility that an MNE’s international partners may ultimately act against its interests. According to American political scientist Francis Fukuyama, trust is a key differentiating factor in many international business decisions.

Depending on the length of time they have been designed to last, MNE partnerships are sometimes referred to as “strategic alliances”. This can assume various forms, ranging from permanent M&As to limited one-off co-operations where companies share a specific function (R&D, logistics). To some extent, the choice at this level is whether the partnership involves equity capital or not — a reflection once again of the level of international risk that managers are willing to take.

International joint ventures

International joint ventures (IJVs) are equity arrangements where an MNE and its partner each take a percentage stake in a new company,

Foreign market entry 71 often built on a greenfield basis. The motivation tends to be managers’ recognition that whereas FDI via wholly owned subsidiaries leaves a company with greater control and upside potential, MNEs may struggle to succeed on their own in complicated foreign environments.

MNEs will often seek host country IJV partners capable of fulfilling specific functions. This can involve staff recruitment or retention; supply chain operations; government interactions; and/or customer relationships. In turn, the incoming MNE is often expected to offer technological process and/or product expertise; access to international funding; and a recognisable brand name. The exact breakdown of partners’ roles, along with the new venture’s legal status (usually a partnership or limited liability company), depends on the counterparts’ negotiating strengths but also on whether the IJV’s aim is to sell into the host country or to use it as a manufacturing base for exports elsewhere.

Some IJVs are characterised by a 50—50 joint ownership. In others, one of the partners will have an at least 51% share, or even much higher. At times, this imbalance is voluntary and reflects one partner’s desire for overall control. On other occasions, it is mandatory and reflects the host country government’s requirement that domestic partners hold the dominant stake. This is especially true where the government deems the sector in which the IJV operates to be “strategic” to its national interest (e.g. military, banking, healthcare) or wants to maximise technology transfers. These political considerations help to explain why many partners agreeing IJV arrangements retain divergent objectives — being one reason why this market entry mode has such a high failure rate. The situation is complicated when IJV partners also compete outside of their arrangement, with neither wanting the other to benefit disproportionately.

All in all, the tensions that exist within IJVs mean that they are apt to under-perform other modes of market entry. IJVs’ high failure rates have sparked much research on how to unwind them if and when they unravel. The easiest exit is for one partner to buy the other out but this is not always feasible and can cause further problems. In those instances where IJVs are too challenging and standalone FDI is too risky and expensive, companies need to consider other, less committed modes of internationalisation.

Nori-equity arrangements

Companies that are hesitant about investing their own equity capital in a foreign venture can choose instead to share intangible assets (knowledge,

brand name) with a local partner in exchange for the payment of fees and/ or royalties. These kinds of non-equity arrangements, called licensing or franchising contracts, are a common element in many MNEs’ long-term market entry strategies. Other modes, like turnkey projects or management contracts, are more ad hoc in nature.

 
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