Under what conditions would one use Exporting, Alliances, and Foreign Direct Investment?
Exporting as a vehicle to entry is commonly used by smaller firms due to the costs being minimal. Although exporting gives very little control to the exporting firm, it is still popular because of the minimal hassle of this route rather than actually learning about the new foreign market. Exporting uses intermediaries to perform most foreign-market functions while the exporting firm only really has to worry about transporting the goods and ensuring the packaging and ingredient requirements uphold the standards of the foreign country (Carpenter & Sanders, 2008).
Aside from the less-costly vehicle of entry of exporting, is forming an alliance. Carpenter and Sanders (2008) deem that alliances are chosen as a vehicle of entry for 3 reasons: government regulations, being used as an international strategy vehicle due to management’s lack of familiarity with local culture or institutions, or the complexity of operating internationally (p.217). Shin, Park, and Ingram (2012) suggest that “supplying product information and market conditions to alliance partners leads to a more accurate business environment and reciprocal satisfaction (p. 1608). Furthermore, Das and Teng (2000) state, an efficient use of market orientation and communication methods is very important for strengthening business relations over the long-term (As cited by Shin et al., 2012, p. 1608). Alliances can be beneficial in that it helps firms to establish themselves through local firms while building strong relationships in the long-term.
Foreign-Direct Investment (FDI) is considered a costlier entry vehicle. Through acquisitions and alliances, Alliances often call for equity investments which can lead to greenfield investment. According to Carpenter and Sanders (2008), greenfield investment is a form of FDI where a firm starts a new business in the foreign country, from the ground up (p. 217). FDI can be a rapid entry to foreign market by way of acquiring existing businesses and operations (Carpenter & Sanders, 2008). Firms with money to spare in investments, alliances and global expansion, may often consider FDI. In the long-term, FDI seems to make sense. It seems as though FDI would be a luxury of larger firms, while exporting is a common option for small firms.
Examine Importing, Outsourcing, and Off-Shoring as forms of internationalization.
In contrast to exporting, importing operates in bringing in goods, services, or capital from a foreign country. Importing firms consider customs requirements, marketing, trade finance and insurance, foreign trade zones, entry of goods, invoices, and compliance with customs regulations to name a few. I think many firms import because the production costs in the foreign country are lower than would be domestically, therefore, the cost price of the goods or service are low. Firms are then able to increase the sale price of these imports due to the value and inimitability of products, thus creating profits.
Outsourcing and off-shoring are other ways in which internationalization takes shape, as well as cost-savings recognized. Outsourcing can save firms money by producing the goods in foreign country for less than domestic rates. In addition, offshoring is similar in that it takes advantage of lower-cost labor in another country, however, it is different because offshore processes can be handled by either third-party vendors or in-house (Carpenter & Sanders, 2008). Cronin, Catchpowle, and Hall (2004) argue that offshoring firms encounter a much greater range of difficulties than outsourcing or in-housing firms, with government relations, contract negotiation and intellectual property rights being most problematic (p. 21).
When venturing into foreign markets, it is beneficial to consider the different vehicles of entry into foreign market, while also considering the risks and costs of these options. Thankfully, we don’t have to worry about these types of investments in StratSim, however, I can’t imagine the difficulty we’d have to actually research foreign markets and develop an entry plan. It’s a lot of work managing this game domestically as there are several facets to consider. Going global would increase this significantly, yet, the rewards could also be a significant payoff to consider as well.
Carpenter, M.A. & Sanders, Wm., G. (2008). Strategic management: A dynamic perspective. Upper Saddle River, NJ: Pearson Prentice Hall.
Cronin, B., Catchpowle, L., & Hall, D. (2004). Outsourcing and offshoring. CESifo Forum, 5(2), 17-21. Retrieved from https://search-proquest-com.library2.csumb.edu:224…
Shin, J-K., Park, M-K., & Ingram, R. (2012). Market orientation and communication methods in international strategic alliances. Journal of Business Research 65, 1606-1611. Retrieved from https://ac-els-cdn-com.library2.csumb.edu:2248/S01…