MGMT1101 Lecture 2: MGMT1101 Week 2

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Week 2: Multinational firms in a globalised world
1. Outline the advantages and disadvantages of the different modes that firms use to enter
foreign markets
Advantages and disadvantages are determined by:
Transport costs and trade barriers
Political and economic risks
Business risks
Costs
Firm strategy
Thus, the optimal entry mode for a firm varies by situation, depending on these factors.
Exporting:
Governments encourage exports results in additional jobs and a positive trade balance +
multiplier effect (i.e. increase in spending causes an increase in income and consumption
that is greater than initial injection of funds)
Large firs = proatie aout eport opportuities hoeer SME’s = reatie/do ot
consider exporting until their domestic market is saturated as they are unfamiliar with
foreign opportunities
Common pitfalls when trying to do business overseas:
o poor market analysis + understanding of competitive conditions
o do not customise product offering to foreign customer
o ineffective distribution program +poorly executed marketing
o problems securing financing
Exporting
Indirect: using an agent
(minimises risk)
Direct: Directly with
overseas customer (better
for experienced firms)
Avoids cost of establishing
manufacturing ops in the
host country
May help a firm achieve
experience curve and
location economies
Lower-cost manufacturing
locations abroad
High transport costs = $$
Tariff barriers = $$
Agents may not act in
eporter’s est iterests
Importing
Every export is an import
in recipient country
Many industries rely on imports as input for their production
Many companies shift production overseas and export/import
products back home
Licensing
A licensor grants rights to
intangible property (i.e.
patents, designs,
inventions, formulas) to
licensee for a specified
time period, and the
licensor will receive a
royalty fee.
No development costs and
risks with opening a
foreign market
Avoids barriers to
investment
Allows firm to capitalise
on market opportunities
without developing it
themselves
Lack of control over
manufacturing, marketing +
strategy needed for realising
experience curve and location
economies
Liits fir’s ailit to
coordinate strategic moves
across countries
Potential for loss of IP (cross-
licencing can reduce this risk)
Franchising
Specialised form of
licensing where franchisor
not only sells IP but also
insists that franchisee
Avoids costs and risks of
opening up a foreign
market
Faster pace of
international expansion
Many service companies use
franchising (no reason to
coordinate manufacturing to
achieve experience
curve/location economies)
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Document Summary

Week 2: multinational firms in a globalised world: outline the advantages and disadvantages of the different modes that firms use to enter foreign markets. Advantages and disadvantages are determined by: transport costs and trade barriers, political and economic risks, business risks, costs, firm strategy. Thus, the optimal entry mode for a firm varies by situation, depending on these factors. Exporting: governments encourage exports results in additional jobs and a positive trade balance + multiplier effect (i. e. increase in spending causes an increase in income and consumption that is greater than initial injection of funds) Direct: directly with overseas customer (better for experienced firms) Every export is an import in recipient country. A licensor grants rights to intangible property (i. e. patents, designs, inventions, formulas) to licensee for a specified time period, and the licensor will receive a royalty fee. Establishing a firm that is jointly owned by 2+ independent firms. A subsidiary where the firm holds 100% of the shares.

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