Class 2 July 8

1. Wealth in 2015 DouglasReid dreid@business.queensu.ca @douglasreid Internationalization and Global Strategy #mbus902

2. Population in 2015 Source: Worldmapper.org

4. Administrivia Breaks at 345, 515 PM (Kingston time) Slides at slideshare.com (search for MBUS902) and on portal – after class Twitter hashtag #mbus902 Agenda Quick recap Internationalization - process Rationale Attractiveness Mode Course stuff

5. The Value Chain

6. Customer willingness to pay Strategy Cost of delivering what the customer buys

7. Four types of distance matter in IB Attributes Creating Distance Source: Ghemawat, 2001

8. Distance Difference  Cost  Risk

9. Liability of foreignness

10. Firm-specific advantage

12. Internationalization Process Why Where What Locational attractiveness How

13. Why go abroad? Globalization rests on the multinational’s ability to exploit know-how and expertise gained in one market elsewhere at lower cost. Michael Porter, Competition in Global Industries: A Conceptual Framework

14. ADDING Helps Answer “Why?” Adding volume (growth) Decreasing costs Differentiating (increasing WTP) Improving industry attractiveness (bargaining power) Normalizing (optimizing) risk Generating knowledge (and other resources, capabilities) Source: Ghemawat

15. Resource seekers Source: Dunning

16. Market seekers Source: Dunning

17. Efficiency seekers Source: Dunning

18. Strategic Asset Seekers Geely FC-1(Source: www.leblogauto.com) Volvo XC90 (Source: www.autospectator.com) Source: Dunning

19. Does the company have the right attributes and skills?

20. Available alternatives Global forest inventory, 2000 worldmapper.org

21. Deciding to internationalize Value ADDING possible Reason / motive / need Skills available Lack of better home country alternatives

22. Increasing attention given to defining attractiveness

23. What makes a location attractive?

24. Relate to the Motivation for Internationalizing Resources (inputs) Markets Efficiency Strategic assets Others?

25. What’s attractive here?

26. Diamond of National Competitive Advantage

27. Clusters

28. The new geography of prosperity

29. Government and social advantages Natural advantages Available alternatives Entrant characteristics, preferences and choices

31. Many patterns of trade are centuries old

32. Source: New Scientist, 2007

33. Government, social and economic advantages

35. A good place to start a business…

36. Entrant characteristics, preferences, and adaptations

37. Characteristics (1)

38. Characteristics (2)

39. Preferences Addressable Market: 510M Subscribers: 93M

40. Choices: Aggregation (scale)

41. Choices: Adaptation (go local) Artist: Liu Bolin

42. Choices: Arbitrage (exploit difference)

44. What effect can time… …exert upon attractiveness?

45. What? Can VC be fragmented? Can fragmented VC be controlled? Cost of re-location? Competitive risks? FSA leverage with new location? Effect on WTP / cost?

46. What Activities? Moderately attractive Most attractive Low Required degree of local adaptation Moderately attractive Least attractive High High Low Expected payoff from going international Source: Gupta and Govindarajan

47. The Value Chain Control – mechanism and cost Capital required Experience in country, nearby

48. Assuming compliance with local rules… …and a cost-benefit calculation… What are the big drivers of mode choice?

49. Mode Escalating commitment Wholly-owned subsidiary Level of Control over Foreign Activities Joint venture Franchising Licensing Export through agent Occasional export Resources Committed to Foreign Market Source: Bartlett and Ghoshal

50. Mode: Closest, First Attributes Creating Distance Source: Ghemawat, 2001

51. Export

52. Export Why Low cost means of internationalization Existence of market entry barriers prevents direct investment Low sales potential in host market May be high political risk How Usually, first order is unsolicited (“e” raises likelihood) May be supported by host country sales agent or rep Pros Cost effective, especially for small firms Cons Low returns Vulnerable to host country domestic competitors Relatively little useful learning about host market potential

53. Licensing

54. Licensing Why Insufficient capital to enter direct Codifiable IP (a valuable intangible asset) Great geographical distance to host country market Some adaptation required for host country consumption How Through partner who has manufacturing / sales capabilities Royalty and licensing fee negotiated Pros Return on IP (new revenue stream) Cons IP dissipation (create competitor) Governance and monitoring costs reduce profits Relatively little useful learning about host market potential

55. Joint venture

56. Joint Venture Why May be only way to enter market Attractive locational advantages -- high sales potential, low political risk, culturally proximate, partner with valuable IP How “Parents” A and B form “child” C, a host-country incorporated entity with own assets, management Pros Tremendous opportunity to learn about market potential Greater returns, usually, than export or licensing Cons Cost of expatriate management ($$$ and career path) Shared control IP dissipation, risk of creating powerful competitor Exit venture may mean exiting market

57. Wholly-owned subsidiary - Greenfield

58. WOS – Greenfield Why Unsatisfied demand in host market (growing market) Sufficient knowledge about host market to enter confidently Low political risk Lots of resources Market leader, or strongly advantaged in some key way Ability to customize for host market exists (or isn’t needed) How Transfer money, resources, management to new operation Integrate into global production system Pros Keep all returns Relatively low IP dissipation Possibly, lower risk of retaliation by incumbents Cons New facility is “sunk cost” – changes negotiating power with host country government Cost of expatriates ($$$ and career path) Need to hire host country nationals (employment risk) Need to set up systems to comply with host country laws

59. Wholly-owned subsidiary – Acquisition

60. WOS – Acquisition Why Attractive candidate facility, or can be upgraded at reasonable cost Host country demand slowing or flat Low investment controls Low political risk More favourable cost / benefit than greenfield entry Window of opportunity How M&A with local advisors (legal, accounting, GR) Pros Acquire going concern (lower set-up risk) Existing relationships, systems, employees, revenues Few approvals (usually) beyond acquisition May block competitor from buying target Faster time-to-value Cons Administrative heritage is inertial force that may resist change Cost of expatriates ($$$ and career path) Loss of key host country staff if career path blocked Overpayment “Skeletons in the closet”

61. In full…

62. Let’s sum up

63. Assignments 3 and 4 3. 10-15 minute presentation and worked example of decision making tool (class 6) 4: Final version of decision making tool, plus descriptive write up, user instructions

64. What is a decision making tool in our context? Decision Foci Whether to internationalize Part of value chain to internationalize Where How Tool forms Conceptual model (e.g. 5 forces) Questionnaire (e.g. Suutari) Decision tree Foci * forms = 12 combinations…

66. Key Evaluative Criteria Reflects underlying ideas and theory correctly Usefulness to a non-expert Ability of a non-expert to use it Breadth (i.e., beyond a single industry setting) Hooked to other ideas (what precedes/follows you?)

68. Assignment 5 Reflective memo

69. What is working well? What can be improved? Steps: Discuss in team, pick top 3 for each Email me by Friday, July 15 I’ll collate / redistribute to class (no edits) Comment and commit

70. Virtual office hours Sunday, July 10 12:00 – 2:00 PM http://queensbusiness.adobeconnect.com/douglasreid/ Backup will be Skype: dreid150