Under what conditions would one use exporting, alliances, and foreign direct investment?
Once a firm decides to enter the global market, they have to decide which method they will use, a non-equity mode, which includes exports and contractual agreements, or equity (foreign direct investment) modes, which include alliances and joint ventures, and wholly owned subsidiaries (Carpenter, & Sanders, 2008).
Exporting should be used when a firm wants to utilize a non-equity mode since the cost of entry, through exporting, is low. Alliances are an equity mode, which indicates that a firm may choose this route because of regulations, market complexity, or operational complexity (Carpenter, & Sanders, 2008). Direct investment is expensive and should be used when a firm when they have the available capital, resources, and time needed for a proper FDI (Carpenter, & Sanders, 2008). FDI can be implemented through acquisitions or greenfield investments (Carpenter, & Sanders, 2008).
The choice between an acquisition and a greenfield investment has many factors. One factor is the firm’s competitors in the market they are wishing to enter. If there are well-established incumbents and strong global competitors then a firm will be better served with a costly acquisition (Wang, 2009). An acquisition provides a firm with the market knowledge and resources it will need to compete in a timelier manner. As previously stated, it is rather expensive but the benefits may outweigh the cost. On the other hand, if a firm is entering a market with no incumbent competition to acquire, they may opt for a more cost-effective, but slower, method of a greenfield investment, which entails that a firm build their own facilities and incorporate their own organizational skills and culture into the foreign market (Wang, 2009). A firm must conduct their due diligence to determine which method serves them best.
Examine importing, outsourcing, and off-shoring as forms of internationalization.
Importing occurs when a firm chooses to bring in a good, service, or capital from a foreign country (Carpenter, & Sanders). This is a form of internationalization in that importing firms base their production and service on inputs from outside their home country (Carpenter, & Sanders). I can see how importing is a form of internationalization in that the home country is being introduced to product from another country. It may not only be a manufacturing product, it can also be a food product or service that demonstrates a cultural practice from another country.
Outsourcing and off-shoring is considered internationalization in that a firm is utilizing foreign resources to build their product or service. As previously mentioned, I have been a part of outsourcing manufacturing to other countries. This was several years ago and we outsourced a part of our manufacturing process to the maquiladoras in Tijuana, Mexico. The process was labor intensive so we were able to achieve significant cost reductions because of the lower labor cost at the maquiladoras.
Carpenter, M.A., & Sanders, W.G., (2008). Strategic Management: A Dynamic Perspective –
Integrated Stratsim Simulation Experience. Upper Saddle River, NJ: Pearson Prentice Hall.
Wang, A., (2009). The choice of market entry mode: Cross-Border M&A or Greenfield
Investment. International Journal of Business and Management. 4(5), pp. 239-245. Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.688.2156&rep=rep1&type=pdf
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