Corporate Activities in Foreign Countries - Essay Example

Possible entry modes strategies into china for australian beer product - Key strategic issues that need to be considered I. Literature review on corporate activities in foreign countries Much of the early literature on foreign market entry concerned ‘the choice between exporting and FDI; The cost-based view of this decision suggested that the firm must possess a "compensating advantage" in order to overcome the "costs of foreignness"; This led to the identification of technological and marketing skills as the key elements in successful foreign entry; Sequential modes of internationalization were introduced by Vernons "Product Cycle Hypothesis" (1966), in which firms go through an exporting phase before switching first to market-seeking FDI, and then to cost-orientated FDI; Technology and marketing factors combine to explain standardization, which drives location decisions’ (Buckley et al., 1998, 539) The decision of a firm to entry a foreign market is depended on a series of factors. According to Gaba et al. (2002, 39) ‘firms face three interlocking questions with regard to international expansion: what market to enter (entry location), how to enter (mode of entry), and when to enter (timing of entry)’. On the other hand, it has been considered by Zacharakis (1997, 23) that international expansion involves ‘risks, including political instability in the target market, expropriation, social unrest, fluctuating exchange rates, poor infrastructures, host government regulations, differing language, norms, religion, and legal systems’. The presentation of the above factors however does not exclude the possible existence of other elements that can influence the company’s decision to enter a foreign market. In accordance with the views stated in the literature, a firm’s decision to enter a foreign market could be possibly analyzed using certain theoretical models. One of these models (Agarwal et al., 1992, 2), the normative decision theory suggests that ‘the choice of a foreign market entry mode should be based on trade-offs between risks and returns; A firm is expected to choose the entry mode that offers the highest risk-adjusted return on investment’. On the other hand, behavioral evidence indicates that a firms choices may also be determined by resource availability and need for control; Resource availability refers to the financial and managerial capacity of a firm for serving a particular foreign market while control refers to a firms need to influence systems, methods, and decisions in that foreign market’ (Agarwal et al., 1992, 2). II. Entrance in a foreign market – the case of China IIa. Entrance in a foreign market as a corporate strategic option – description and modes Entry mode has been characterized as ‘the cornerstone of a firms market entry strategy’ (Au et al., 1997, 780). Moreover, in accordance with the above researchers regarding specifically the investing firms, ‘different entry modes represent varying levels of control, commitment, and risk; These factors are of particular significance to firms entering new or unstable markets; The typical modes include export, licensing arrangement, joint venture and wholly owned subsidiary’. Specifically for China, the above researchers consider that the most appropriate entry mode is that of joint venture mostly because the relevant governmental rules have imposed this type of entrance for foreign companies. On the other hand, the application of this mode of entrance in practice has proved that this particular mode is the most appropriate for the specific country. According to Agarwal et al. (1992, 1) a firm seeking to enter a foreign market must ‘make an important strategic decision on which entry mode to use for that market. The four most common modes of foreign market entry are exporting, licensing, joint venture, and sole venture; Because all of these modes involve resource commitments (albeit at varying levels), firms initial choices of a particular mode are difficult to change without considerable loss of time and money; Entry mode selection is therefore considered as a very important, if not a critical, strategic decision’. It should be noticed however that the decision on the appropriate entry mode regarding the entrance in a foreign market has been traditionally a difficult decision and for this reason there are a lot of models that have been suggested (like the hierarchical model of Pan et al., 2000) in accordance with the needs and the demands of each specific case. On the other hand, according to Lincoln (1991, 64) ‘the level of protectionism encountered may be influenced by a firms choice of entry strategies; the entry strategies of direct and indirect exporting usually face more barriers than other strategies such as joint ventures, foreign licensing, or direct investment; since exporting countries or firms gain more benefits (profits, wages, employment, etc.) than importing countries or firms (lower prices, increased variety), many countries may discriminate against imports; therefore, the selection of an entry strategy should be directly related to the level and nature of protectionism likely to be encountered’. The assumptions presented by the above researcher can be possibly related with the ones of Brouthers (2002) who considered the costs involved in each corporate activity as a significant indicator for its success if applied in practice. IIb. Entrance in the Chinese market – risks and gains The entrance of the product in the Chinese market has to be considered thoroughly. At a first level, the choice of China as a potential market can be characterized as a positive strategic movement. However, there are issues that need to be examined before proceeding in such a decision. According to Zacharakis (1997, 23) ‘since entrepreneurial firms are typically resource constrained they must leverage their resources in order to successfully enter an international market; utilizing a partner with some knowledge of the target market, or what Oviatt and McDougall (1994) call hybrid entry strategies (e.g., export agent, licensing, joint ventures, strategic alliances, etc.), can help leverage the entrepreneurs resources’. The views of the above researcher refer mostly to the specific type of cooperation with the local entrepreneurs in which a foreign company will have to proceed in order for its entrance to the foreign market to be successful. In other words, for Zacharakis a foreign company that wants to entry a specific market has to choose among certain types of corporate format which have to include some kind of cooperation with the local firms. The above view is in accordance with the one of Au et al. (1997, 779) who stated that ‘the formation of alliances is a crucial one because a firm can enter a foreign market by itself or by forming an alliance with another firm to reduce investment risks and enhance its competitive advantage’. One of the most appropriate modes of entrance in the Chinese market specifically wit reference to the particular product seems to be the use of export agent. In this context, Zacharakis (1997, 23) has stated that ‘unlike direct sales to foreign customers (which requires identifying who those customers are), or licensing, joint ventures, etc. (which requires greater integration and risk), foreign export agents can leverage the entrepreneurs resources with relatively lower up-front costs’. Moreover, the use of transaction cost economics as a strategy of cost evaluation will help the export agent to estimate the local market more effectively and accurately. As Zacharakis has accepted (1997, 23) ‘transaction cost economics (TCE) is an ideal lens for evaluating the export agent strategy because it suggests a cost effective structure for conducting international operations while it also provides a basis for exploring why the parties might join together and what problems and issues each party might encounter in dealing with the other’. III. Cases of foreign brewery companies in the Chinese market Even two decades after economic reforms began in 1978 China still had about 800 breweries, most set up by local governments. According to an article published by Times –Asia titled ‘Why are the worlds largest beer brewers fighting over a company in northeast China?’ by Forney M. (17 May 2004) the commercial and the administrative environment is rather hostile for the foreign brewery companies that want to operate in the Chinese market. Only one, Tsingtao, has built a national name. The vast majority, with brands like Celestial Peach and Country Man, stay local and sell their brews for about 25Ά per bottle. In the past, high-profile foreign attempts to get a piece of this action have ended in failure. Early flops included Fosters (the company pulled out of a joint venture in 1999, with a loss of more than $125 million) and Becks (the company left China soon after). Those that stayed have shifted strategies. SABMiller doesnt produce its top brands, Miller Lite and Miller Genuine Draft, in China. Instead, it buys into Chinese breweries and helps them upgrade. A-B produces Budweiser in central China and has turned it into one of the countrys best-known foreign beers; it also has a 10% stake in Tsingtao; and its now negotiating for stakes in smaller Chinese breweries. Despites the above, there are also exceptions like the Kirin beer which has been a characteristic case of foreign brewery company that has attempted to operate in the Chinese market and whose effort was led to success. The first Kirin beer factory was established in Tsurumi-ku, Yokohama in 1907 with help from Thomas Glover, the Scottish trader. It is still there today. The brewery had originally been founded as Spring Valley Brewery in 1870, by the Norwegian-American William Copeland, but he went bankrupt. Today the company operates globally offering a variety of products and services. Specifically for China, the operations of the company are controlled by a locally established company, the Zhuhai Kirin President Brewery Co., Ltd. IV. Factors that influence the choice of mode of entrance in the Chinese market Market entry decisions are ‘among the most critical made by a firm relative to international markets and for this reason the choice of which country to enter commits a firm to operating on a given terrain and lays the foundation for its future international expansion; it signals the firms intent to key competitors and determines the basis for future battles’ (Ellis, 2000, 443) In order to choose the strategy which should be more appropriate for the entrance of Skinny-Oz beer in the Chinese market, the following issues have to be considered (Gaba et al., 2002, 42): a) the timing of entry has to be decided in accordance with the resources and the competencies of the firm; b) the company has to assess market signals and opportunities and c) the attractiveness of China and the level of risk have also to be examined carefully before proceeding in any decision. On the other hand, according to Gaba et al. (2002, 39) the choice of China offers ‘two advantages: a) China has become the largest recipient of foreign direct investment among developing countries, b) China has been characterized as particularly distinctive in terms of its institutions and form of capitalism’. Because of the existence of the above elements the mode of the firm’s entrance in the Chinese market has to be designed very carefully as it can influence the whole firm’s performance. In this context it has been found by Pan et al. (1999) that the entry mode used by a company can influence the firm’s profitability and market share. The firm’s decision to enter the Chinese market has to be based on the assumptions made regarding a series of issues. In this context the following aspects have to be thoroughly examined before exporting the specific beverage in the specific market: a) the culture of the local society regarding the specific product or generally regarding products that belong to the same or a similar category, b) the general industrial environment, i.e. the level at which the specific product could be competitive comparing similar products that are already available in the Chinese market (e.g. Chinese beers, other types of beverages of similar taste and content), c) general administrative and other governmental issues that could possibly affect the entrance of the product in the specific market and the general commercial activation of the firm in China (bureaucratic procedures, assistance to the firm regarding its entrance and operation in the local market etc.), d) the stability and the strength of the Chinese market as referred to the financial and other issues that could cause temporary or long-lasting turbulences and e) the costs related with the whole effort as comparing with the revenues expected from the specific commercial attempt. Regarding the above issues, the firm’s initiative to enter the Chinese market could be predicted to be a rather profitable one. This assumption can be supported by the following arguments: a) China is a country that has been proved to be a successful choice for corporate activity if taking into account the performance of companies of all industrial sectors that already activate in the area, b) the consumption of beer in China has been increased the last years (in accordance with the research made by the firm when examining the specific market) and for this reason the acceptance of the specific product can be considered to be positive, c) the content of this product is in accordance with the country’s standards for the food and beverages consumed by the citizens (related with the protection of health), d) the country has been for a long period in a phase of financial and general industrial development, a fact that minimizes the risks for the companies activate in this area and e) the costs related with the whole effort can be expected to be rather low comparing with other countries that could be possibly proved suitable for a similar corporate activity. A decisive factor towards the above assumption can be considered to be the positive performance of the firms that already operate in the area. Regarding the choice of mode of entrance in the Chinese market this has be based on the above presented views of the literature combined with the firm’s needs and prospects. In this context, the mode of export agent (as already proposed above) could be considered to be the most appropriate one regarding the specific attempt. This view can be based to the fact that the company is interested to activate in China only partially, i.e. only regarding the offer of a specific product and not to establish a permanent basis of activities in the country, a decision that would be followed from significant expenses and other costs in order to be completed. For this reason the use of an export agent could offer to the firm the ability to activate in the Chinese market without having to spend a significant amount of money as operational costs. The above form of corporate activity, which can be characterized as an ‘indirect’ one, can enhance the performance of the company (through the revenues generated from the sale of the product) while its expenses could remain unchanged (or at least only partially increased). References Agarwal, S., Ramaswami, S. N. (1992). Choice of Foreign Market Entry Mode: Impact of Ownership, Location and Internalization Factors. Journal of International Business Studies, 23(1): 1-17 Au, K. Y., Pan, Y., Tse, D. K. (1997). How MNCs Choose Entry Modes and Form Alliances: The China Experience. Journal of International Business Studies, 28(4): 779-794 Avala, J., Lai, R. (1996). Chinas Consumer Market: A Huge Opportunity to Fail?. The McKinsey Quarterly, 3: 56-64 Brouthers, K. D. (2002). Institutional, Cultural and Transaction Cost Influences on Entry Mode Choice and Performance. Journal of International Business Studies, 33(2): 203-218 Buckley, P. J., Casson, M. C. (1998). 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Entrepreneurship: Theory and Practice, 21(3): 23-38 Read More