RSM490 Global Business Final Exam Notes.docx

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University of Toronto St. George
Rotman Commerce
Prof.Jan Klakurka

9. Growing and Internationalizing the Entrepreneurial Firm 10/30/2012 2:55:00 PM Small and Medium Sized Enterprises (SME): firms with fewer than 500 employees in the US and with fewer than 250 employees in the EU Entrepreneurship: the identification and exploitation of previously unexplored opportunities Entrepreneurs: founders and owners of new businesses or managers of existing firms International Entrepreneurship: a combination of innovative, proactive and risk-seeking behaviour that crosses national borders and is intended to create wealth in organizations An entrepreneurial firm must take the VRIO framework (value, rarity, imitability and organizational) Growing the entrepreneurial firm Growth Innovation Financing o Microfinancing: a practice to provide micro loans ($50-300) used to start small businesses with the intention of ultimately lifting the entrepreneurs out of poverty Internationalization Internationalization Born global: start-up companies that attempt to do business abroad from inception Compared to domestic, transaction costs are higher for internationalization International Strategies for entering foreign markets o Direct exports The sale of products made by firms in their home country to customers in other countries Letter of credit (L/C): a financial contract that states that the importers bank will pay a specific sum of money to the exporter upon delivery of the merchandise Transactions are facilitated by banks on both sides and reduce transaction costs o Franchising/licensing Licensing: Firm As agreement to give Firm B the rights to use As proprietary technology or trademark for a royalty fee paid to A by B. This is typically done in manufacturing industries Franchising: firm As firm As agreement to give firm B the rights to use As proprietary assets for a royalty fee paid to A by B. This is typically done in service industries o Foreign direct investment (FDI) Stage model: model of internationalization that portrays the slow step by step process an SME must go through to internationalize its business International strategies for staying in domestic markets o Export indirectly: a way to reach overseas customers by exporting through domestic-based export intermediaries Export intermediaries: a firm that performs an important middleman function by linking domestic sellers and foreign buyers that otherwise would not have been connected o Become suppliers for foreign firms o Become licensees or franchisees of foreign brands o Become alliance partners of foreign direct investors o Harvest and exit through sell offs 10. Entering Foreign Markets 10/30/2012 2:55:00 PM Liability of foreignness Numerous differences in formal and informal institutions govern the rules of the game in different countries Discrimination against foreign firms Where to Enter? Two set of considerations drive the location of foreign entries o Strategic goals o Cultural and institutional distances Location-Specific Advantages and Strategic Goals o Location specific advantages: benefits a firm reaps from the features specific to a place o Natural resources seeking: possession of natural resources and related transport and communication infrastructure o Market seeking: abundance of strong market demand and customers willing to pay o Efficiency seeking: economies of scale and abundance of low cost factors o Innovation seeking: abundance of innovative individuals, firms and universities Cultural/Institutional Distances and Foreign Entry Locations o Cultural distance: the difference between two cultures along identifiable dimensions such as individualism o Institutional distance: the extent of similarity or dissimilarity between the regulatory, normative and cognitive institutions of two countries When to Enter? First mover advantages: benefits that accrue to firms that enter the market first and that late entrants do not enjoy o Proprietary technology o Preemptive investments o Erect significant entry barriers for late entrants o Avoidance of clash with dominant firms at home o Relationships with key stakeholders such as customers and governments Late mover advantages: benefits that accrue to firms that enter the market later and that early entrants do not enjoy o Opportunity to free ride on first mover investments o Resolution of technological and market uncertainty o First movers difficulty to adapt to market changes How to Enter? Scale of Entry: the amount of resources committed to entering a foreign market Drawbacks of huge commitment? o Limited strategic flexibility elsewhere o Huge losses if these large scale bets turn out to be wrong Small commitment difficulties in building market share and capturing first mover advantages Modes of Entry: The First Step on Equity VS Nonequity Modes o Mode of entry: method used to enter a foreign market o Nonequity modes: a mode of entry (exports and contractual agreements) that tends to reflect relatively smaller commitments to overseas markets o Equity mode: a mode of entry (JV and WOS) that indicates a relatively larger, harder to reverse commitment Modes of Entry: the second step on making actual selections o Non Equity Modes Exports Direct exports Indirect exports Exporting through domestically based export intermediaries Others Contractual agreements Licensing/franchising Turnkey projects: a project in which clients pay contractors to design and construct new facilities and train personnel Drawbacks o If foreign clients are competitors, selling them state of the art technology through turnkey projects may boost their competitiveness
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