FAMG 1003 (BH) — Chapter 6: Crossing Borders
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Questions and Answers

What is one mode of establishing a wholly owned subsidiary in a foreign country?

  • Contract manufacturing
  • Joint venture
  • Franchising
  • Greenfield investment (correct)

Why might firms prefer acquisitions when entering foreign markets?

  • To increase production costs
  • To reduce uncertainty (correct)
  • To avoid competition
  • To limit resource allocation

What factor may lead late entrants into oligopolistic markets to prefer acquisitions?

  • To speed up their response to market leaders (correct)
  • To maintain control over resources
  • To gain exclusive rights to a product
  • To enhance their brand image

In what type of markets might large multinationals be more willing to undertake acquisitions?

<p>Static or declining markets (B)</p> Signup and view all the answers

What is a common entry mode for multinationals into foreign markets?

<p>Joint ventures (D)</p> Signup and view all the answers

What does the competitive structure of an industry influence?

<p>Entry modes in foreign markets (A)</p> Signup and view all the answers

Which of the following statements about entrepreneurial ability is true?

<p>It varies among firms. (C)</p> Signup and view all the answers

Which factor is NOT typically considered when selecting a mode of entry for multinationals?

<p>Company reputation (A)</p> Signup and view all the answers

What often triggers the shift from one mode of market entry to another?

<p>External causes and origin (A)</p> Signup and view all the answers

What is a characteristic of greenfield investments?

<p>Involves the creation of a new firm (C)</p> Signup and view all the answers

What common pattern is observed in firms entering foreign markets?

<p>Diversity in entry modes is the norm. (B)</p> Signup and view all the answers

What is one advantage of using acquisitions for entering foreign markets?

<p>Immediate market presence (C)</p> Signup and view all the answers

Which of the following is an example of an equity mode of entry?

<p>Joint ventures (A)</p> Signup and view all the answers

What is one characteristic of ‘wholly owned affiliates’?

<p>They are fully controlled by the parent company. (C)</p> Signup and view all the answers

Which mode of entry typically requires an understanding of local market capabilities?

<p>Greenfield investments (A)</p> Signup and view all the answers

What is a reason some multinationals opt for acquisition over other entry modes?

<p>Faster market penetration (C)</p> Signup and view all the answers

What was the first large-scale hostile acquisition of a German company by a foreign firm?

<p>Vodafone's acquisition of Mannesmann (D)</p> Signup and view all the answers

Which of the following is a risk associated with cross-border acquisitions?

<p>Cultural integration challenges (C)</p> Signup and view all the answers

Why might foreign acquirers struggle in retaining senior management in the United States?

<p>Cultural comfort levels with foreign firms (B)</p> Signup and view all the answers

What common issue do foreign firms face after acquiring US companies?

<p>Post-acquisition management problems (B)</p> Signup and view all the answers

What is a typical behavior of managers regarding acquisitions?

<p>Maximizing the utility for their firms (D)</p> Signup and view all the answers

How did acquisitions generally affect the shareholders of the acquired firms?

<p>They often gained added value (D)</p> Signup and view all the answers

What complicates the process of cross-border acquisitions?

<p>Dissimilar corporate cultures (A)</p> Signup and view all the answers

What is a major issue faced by foreign firms in the United States after acquiring firms?

<p>Language barriers between management (D)</p> Signup and view all the answers

What was the main purpose of acquisitions made by US manufacturing firms after World War II?

<p>To consolidate fragmented industries (D)</p> Signup and view all the answers

Which company significantly expanded its ice cream business through acquisitions in Europe and the US?

<p>Unilever (A)</p> Signup and view all the answers

Why were acquisitions less frequent in developing countries?

<p>Negotiations were complicated and political sensitivity was high (D)</p> Signup and view all the answers

What market condition is described as having many small to medium-sized companies with no dominant firm?

<p>Fragmented market (C)</p> Signup and view all the answers

In 1960, Unilever acquired its main competitor in Brazil. What was this company?

<p>Companhia Gessy Industrial (D)</p> Signup and view all the answers

What significant business phenomenon helped facilitate the use of acquisition strategies in the mid-1950s?

<p>Hostile takeover bids (B)</p> Signup and view all the answers

Which market was Unilever reported to hold 30 percent of by the 1980s?

<p>European ice cream market (A)</p> Signup and view all the answers

What challenge did Unilever face regarding acquisitions in developing countries?

<p>Difficulty in negotiating with family-owned businesses (B)</p> Signup and view all the answers

What is a potential consequence of fully absorbing an acquired foreign firm into the parent company's systems?

<p>The acquired firm will lose its distinctive attributes. (B)</p> Signup and view all the answers

What process did Unilever develop for the absorption of acquired firms?

<p>Unileverization (D)</p> Signup and view all the answers

What was the reduction in acquisition cost for Cheseborough Ponds after selling unwanted assets?

<p>$2 billion (B)</p> Signup and view all the answers

Why were joint ventures particularly prominent during the interwar years?

<p>Financial pressures and risk sharing were significant. (B)</p> Signup and view all the answers

What was one reason for forming the Kuwait Oil Company in 1934?

<p>Control over political futures by British authorities. (A)</p> Signup and view all the answers

What happened to the number of employees at Cheseborough Ponds shortly after Unilever's acquisition?

<p>It decreased significantly. (A)</p> Signup and view all the answers

What was one of Unilever's strategies to ensure smooth integration after acquisitions?

<p>Retention of good managers from acquired firms. (B)</p> Signup and view all the answers

Which industry was most associated with joint ventures during the interwar years?

<p>oil production (D)</p> Signup and view all the answers

What was the primary reason for Standard Oil of California and Texaco to form a joint venture in 1936?

<p>To explore oil in Saudi Arabia (A)</p> Signup and view all the answers

How did IG Farben manage to regain its market position post-World War I?

<p>By acquiring equity stakes in various companies (A)</p> Signup and view all the answers

What was one significant benefit of licensing agreements for the Dutch family firm Océ van der Grinten?

<p>They expanded without much financial commitment (D)</p> Signup and view all the answers

Which market approach did Océ van der Grinten primarily use to expand in the interwar years?

<p>Licensing agreements (C)</p> Signup and view all the answers

What was a common characteristic of the firms that entered licensing agreements with Océ?

<p>They were mostly small family firms (D)</p> Signup and view all the answers

What kind of market position did IG Farben aim to reacquire after World War I?

<p>A competitive edge through technology (A)</p> Signup and view all the answers

When did Océ begin to establish its own factories?

<p>In the 1960s (B)</p> Signup and view all the answers

What led firms to pursue collaborative arrangements after World War I?

<p>Due to a shortage of capital (D)</p> Signup and view all the answers

Flashcards

Multinational Market Entry

The process of a company entering and developing in a foreign market, usually starting simple and becoming more complex.

Wholly Owned Affiliate

A fully owned subsidiary in a foreign country, originally a common model for multinationals.

Equity and Non-equity Modes

Strategies used to gain a stake in a foreign market without full ownership, including joint ventures, licensing, and franchising.

Divestments

A company's decision to reduce or eliminate its involvement in a specific market, often by selling off assets or shutting down operations.

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Alliances and Constellations

Collaborations between companies to achieve shared goals in a foreign market, often combining strengths and resources.

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Subsidiaries

Subsidiaries owned entirely by the parent company, giving them complete control over operations and strategy.

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Hybrids

A hybrid approach combining elements of different entry modes, tailored to specific market needs.

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Triggers for Mode Transition

Motivations behind a company's shift from one entry mode to another, often triggered by changes in the market or government regulations.

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Greenfield Investment

Setting up a new subsidiary in a foreign market from scratch, like planting a seed in a new field. This involves building facilities, hiring staff, and establishing operations independently.

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Acquisition

Buying an existing company in a foreign market. This allows immediate access to an established infrastructure, customers, and workforce.

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Why choose Greenfield?

Companies with new technologies or limited acquisition opportunities often prefer Greenfield investment to manage the uncertainties of entering new markets.

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Why choose Acquisition (Competitive Market)?

Firms entering a competitive market dominated by established players may prefer acquisitions to quickly gain market share and catch up.

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Why choose Acquisition (Fast-Growing Market)?

Acquisitions can be a faster and more efficient way to enter growing markets, as they grant immediate access to infrastructure and customers.

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Why choose Acquisition (Static Market)?

Acquisitions can be a suitable strategy in markets that are stagnant or declining, as existing companies offer established customer bases.

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Why choose Greenfield (Large Companies)?

Established multinational companies with strong resources and capital may be more comfortable with Greenfield investments and the associated risk.

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Factors influencing entry mode choices

The choice between Greenfield investment and acquisitions depends on factors such as the firm's resources, market conditions, and the level of risk tolerance.

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Hostile Acquisition

Acquisitions where the acquiring company faces resistance from the target company's management or board of directors.

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Cross-border Acquisitions

Acquisitions involving companies from different countries.

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Post-acquisition Management Problems

Challenges that arise after an acquisition is completed, often related to integrating the acquired company's operations, culture, and employees.

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Corporate Cultures

Differences in business practices, values, and communication styles that can complicate acquisitions, especially cross-border ones.

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Risk of Acquisition

The potential for acquisitions to fail due to factors like poor due diligence, misaligned strategies, or integration challenges.

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Value Added

The value created by an acquisition that goes to the shareholders of the acquired company, often a concern in acquisitions.

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Paying Too Much

Acquisitions where the acquiring company pays a premium for the target company, often based on inflated expectations or poor assessment.

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Fragmented Market

A marketplace with numerous small to medium-sized companies competing with each other, including large enterprises. No single company holds enough power to dominate the market.

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Hostile Takeover Bid

A hostile takeover bid is an attempt to acquire a company against the wishes of its existing management and board of directors.

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Post-WWII Acquisition Trend

The increased use of acquisition strategies after World War II, driven by the desire for expansion and consolidation in various industries.

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Unilever's International Ice Cream Expansion

Unilever's strategy of acquiring small, often family-owned businesses throughout Europe, the US, Australia, and other regions to build a global ice cream presence.

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Acquisitions in Developing Countries

The use of acquisition strategies in developing countries, often involving complex negotiations with families and political sensitivity.

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Gessy Lever Merger

The merging of Unilever's existing Brazilian operations with Companhia Gessy Industrial, creating a dominant manufacturer of soap and detergents in Brazil.

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Rise of Hostile Takeovers

The 'hostile takeover' became a significant phenomenon, allowing companies to acquire others against the wishes of their leadership, particularly in Britain and the US.

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Unileverization

A systematic process utilized by companies to integrate newly acquired firms into their existing structure, including adopting corporate accounting systems, adjusting salaries and pensions, and retaining key managers.

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Total Absorption

The process of a foreign firm fully merging into the parent company's operations, which can lead to losing its unique strengths like local knowledge and contacts.

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Corporation-Wide Efficiency

The ability to transfer knowledge and best practices across a multinational corporation efficiently.

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Joint Venture

The formation of a new company by two or more entities, often for a specific project or to share risks and resources.

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Cartel Agreement

A commercial agreement signed between a number of companies to control a specific market, often involving price fixing and market share allocation.

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Financial Pressures and Risk Sharing

A common motivation for joint ventures during the interwar years, driven by the need to share financial burden and reduce risks.

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Political Risk and Capital Demands

The use of joint ventures to address political instability and unpredictable market conditions, particularly in regions with volatile political climates.

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Joint Venture Impact on Geopolitics

The creation of the Kuwait Oil Company demonstrates the role of joint ventures in influencing geopolitical strategies, sometimes motivated by national security concerns.

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Collaborative Arrangements

A business arrangement where two or more companies work together to achieve a common goal, often involving shared resources or risks.

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Licensing

A business strategy where a company grants another entity the right to use its intellectual property, such as trademarks, patents, or technology, in exchange for royalties or fees.

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Risk-Sharing

A situation where companies work together to share risks, particularly in areas like research and development or market expansion.

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Licensing as a Market Entry Strategy

A strategy employed by companies to enter foreign markets without significant financial or managerial commitment. Licensing agreements allow firms to access new markets while minimizing risk.

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Direct Investment in Foreign Markets

A company's direct involvement in a foreign market through ownership of operations, such as factories or retail stores.

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Equity Stakes

A strategy where companies acquire equity stakes in other companies, offering access to technology, markets, or other valuable assets.

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Technological Advantage As Bargaining Power

A situation where companies use their technological advantage as a bargaining tool to gain favorable arrangements or partnerships.

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Study Notes

CHAPTER 6: Crossing Borders

  • The chapter covers topics related to how multinational companies enter and operate in foreign markets.

Topic and Structure of the Lesson

  • Entering and existing markets
  • The evolution of multinationals
  • Greenfield vs. Acquisition
  • Divestments
  • Alliances and Constellations
  • Subsidiaries and Hybrids

Entering and Existing Markets

  • The traditional way of entering a market was through a wholly owned affiliate
  • This approach often co-exists with other methods such as joint ventures, cartels, licensing, franchising and long-term contracts
  • Firm-specific, industry-specific, location-specific and time-specific factors influence the mode of entry employed
  • Multinational companies often follow an incremental approach to entering a new foreign market, starting with exporting, selling through agents and then developing local production
  • The multinational's investment in resources increases as the company evolves in a foreign market.
  • Local production allows companies to develop local capabilities and market knowledge.

Greenfield vs. Acquisition

  • Greenfield investment involves setting up a new company in a foreign country.
  • Acquisitions involve buying an existing company in a foreign country.
  • Companies with new technologies might find fewer potential acquisition opportunities in new industries.

Acquisition

  • The use of acquisition strategies increased after World War II as a means of consolidating fragmented industries

  • Fragmented markets are where no one company holds significant influence

  • Acquisitions were less frequent in developing countries

  • Typically involve many years of complicated negotiations with family owners of companies and political sensitivity.

  • Acquisition of existing firms is sometimes employed for quicker market entry when markets are static or declining

Risk of Acquisition

  • Acquisitions are risky due to managerial problems such as retaining senior managers, due to the high job mobility in certain industries such as the United States
  • Managers may not be comfortable working with foreign firms due to limited career opportunities
  • Differences in corporate cultures, routines, and national management systems, lead to issues during integration
  • Cross-border issues can be further exacerbated if managers use different languages
  • Difficulty in sharing knowledge and maintaining distinctive attributes of acquired companies is a concern

Collaborative Arrangements

  • Capital shortage often drives firms into collaborative arrangements.
  • Companies might acquire equity stakes in foreign companies to re-establish a market presence without large capital expenditures.
  • This strategy enables reacquiring a strong market position without significant financial investment.

Licensing

  • Licensing was a commonly used method in the past to access foreign markets without heavy investment in managerial or financial resources
  • Small companies would take advantage of licensing agreements for quicker market entry
  • This strategy provided income for both the company and licensees.
  • It enabled companies to accumulate foreign market knowledge and expertise

Alliances and Constellations (Joint Ventures)

  • Joint ventures and other alliances were popular in managing risk during the interwar years, and were often employed in industries with high political or financial risk
  • The formation of joint ventures were in part due to political concerns surrounding the ownership of resources
  • Joint ventures were widely used in the production, refining, and marketing operations of the Middle East

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