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?

Static or declining markets Signup and view all the answers

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

Joint ventures Signup and view all the answers

What does the competitive structure of an industry influence?

Entry modes in foreign markets Signup and view all the answers

Which of the following statements about entrepreneurial ability is true?

It varies among firms. Signup and view all the answers

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

Company reputation Signup and view all the answers

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

External causes and origin Signup and view all the answers

What is a characteristic of greenfield investments?

Involves the creation of a new firm Signup and view all the answers

What common pattern is observed in firms entering foreign markets?

Diversity in entry modes is the norm. Signup and view all the answers

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

Immediate market presence Signup and view all the answers

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

Joint ventures Signup and view all the answers

What is one characteristic of ‘wholly owned affiliates’?

They are fully controlled by the parent company. Signup and view all the answers

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

Greenfield investments Signup and view all the answers

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

Faster market penetration Signup and view all the answers

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

Vodafone's acquisition of Mannesmann Signup and view all the answers

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

Cultural integration challenges Signup and view all the answers

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

Cultural comfort levels with foreign firms Signup and view all the answers

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

Post-acquisition management problems Signup and view all the answers

What is a typical behavior of managers regarding acquisitions?

Maximizing the utility for their firms Signup and view all the answers

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

They often gained added value Signup and view all the answers

What complicates the process of cross-border acquisitions?

Dissimilar corporate cultures Signup and view all the answers

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

Language barriers between management Signup and view all the answers

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

To consolidate fragmented industries Signup and view all the answers

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

Unilever Signup and view all the answers

Why were acquisitions less frequent in developing countries?

Negotiations were complicated and political sensitivity was high Signup and view all the answers

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

Fragmented market Signup and view all the answers

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

Companhia Gessy Industrial Signup and view all the answers

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

Hostile takeover bids Signup and view all the answers

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

European ice cream market Signup and view all the answers

What challenge did Unilever face regarding acquisitions in developing countries?

Difficulty in negotiating with family-owned businesses Signup and view all the answers

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

The acquired firm will lose its distinctive attributes. Signup and view all the answers

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

Unileverization Signup and view all the answers

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

$2 billion Signup and view all the answers

Why were joint ventures particularly prominent during the interwar years?

Financial pressures and risk sharing were significant. Signup and view all the answers

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

Control over political futures by British authorities. Signup and view all the answers

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

It decreased significantly. Signup and view all the answers

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

Retention of good managers from acquired firms. Signup and view all the answers

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

oil production 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?

To explore oil in Saudi Arabia Signup and view all the answers

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

By acquiring equity stakes in various companies Signup and view all the answers

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

They expanded without much financial commitment Signup and view all the answers

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

Licensing agreements Signup and view all the answers

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

They were mostly small family firms Signup and view all the answers

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

A competitive edge through technology Signup and view all the answers

When did Océ begin to establish its own factories?

In the 1960s Signup and view all the answers

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

Due to a shortage of capital Signup and view all the answers

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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