Investment modes of entry are the most significant in terms of investment of your resources – $, people and time and correlating to that can be your most rewarding and risky entry mode. Following on from the all-important Where to Go? Question as you plan your international business growth strategy is the “How to enter new markets?” Question. In this our third post of our How to enter new markets …, the first being Export and the second being Contractual we will explore 4 common Investment modes of entry, their objectives, advantages and disadvantages and pitfalls to be aware as you undertake potentially your most rewarding mode of new market entry.
1. Joint Venture
Collaboration between two or more known parties with mutual interest that may or may not necessarily be equal in shareholding and usually relates to a single product or market. Fundamental to building any Joint Venture will be trust and mutual interests and understanding. Often a ‘marriage of equals’ is favoured over an elephant and a flea type joint venture despite the obvious attraction for the flea to partner with an elephant for growth opportunity. Finding, getting to know and understanding your joint venture partner(s) interests is fundamental as you are literally ‘getting into bed with a foreign company in a foreign land so best you look for your ‘perfect partner’ wisely and use your head as well as your heart in the decision or match making process.
The advantages of a joint venture are that they are good for accessing manufacturing and/or distribution in markets that are hard to enter e.g. Japan or Korea. They also help to break down ‘physic distance’ or bridge cultural divides where two cultures come together that are very different as they force parties to get to know each other much more deeply than simple transactional business and take time to understand the host market for your new business. The disadvantages are they take time to a) find the right partner and b) build the relationship of trust to the point both parties are willing to invest and share resources and profit rewards. They can create competitors and if there is misunderstanding or disagreements they can end badly for the foreign company entering the new country e.g. Danone & Wahaha Joint Venture in China that turned sour or Carlsberg & Thai Beverage falling out after 12 years together in Thailand. Common interests and mutual benefits may dissolve over time and this is something each party needs to be aware of and plan for alternative dispute resolution in their JV agreements should separation become a reality down the line.
2. Strategic Alliances
Independent partners come together and develop a long term vision or strategy to cooperate rather than compete in the territories of the alliance. There typically are no equity investments or binding agreements although that may eventuate over time. The relationship is organised along horizontal lines with sharing of technology, knowledge, systems and resources. Strategic Alliances are commonly used in the Airline industry e.g. Star Alliance or Oneworld to pool planes and resources. Alliances are a great way to share the capital cost of accessing new markets. Another well documented Strategic Alliance that resulted in cross country and company equity investment that has endured in a hyper competitive industry is the Nissan Renault Strategic Alliance.
Advantages of strategic alliances are that they do not require immediate equity investments or binding agreements however that can also result in less commitment to overcome initial challenges by the parties to the alliance. Alliances can be good for product, market and distribution development. The fact there may not be a solid binding agreement locking the parties together or binding agreement means it is likely they can dissolve once the initial mutual agreed objective is met. For further tips and guidance on building great alliances you can read Kanter’s blog on 15 Steps for Successful Strategic Alliances (and Marriages).
3. Greenfield Investment
The type of investment is where companies typically build plant, infrastructure or manufacturing and sales capacity from the ground up in the foreign host market. In addition to creating new facilities the parent company will create new jobs hiring local and placing international staff in many cases to run the new subsidiary offshore. The advantages of Greenfield investment are 100% control of your own destiny on the ground overseas and there are often local host government tax incentives to invest and build infrastructure behind their trade borders. You immediately avoid costs of import/export, tariffs, and behind the border trade barriers. Questions you need to consider before such significant investment include if you are not working with local business partners, are you confident you can independently source raw materials, manage and access local government departments, understand local customer preferences and recruit, train and retain talented local staff? The risk level for Greenfield Investment increases significantly with the cross cultural differences or psychic distance and we advise extreme caution in this regard if your business home country and host country are polar opposites in terms of culture and ways of doing business. This mode of entry tends to be favoured by well-resourced large multi-national corporations or in countries neighbouring or close to home markets where cultures are not that divergent.
4. Merger & Acquisition (M&A)
Refer to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed (Investopedia, 2014). More common than uncommon these days as firms seek faster growth “let the buyer beware” is our caution here as it has been widely researched and documented the vast majority of M&A activity does not deliver a return on investment over time. Study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90% (Christensen, et al 2011).
The attraction and advantages of M&A include almost immediate access to the new host market with new capacity, people and incoming knowledge and systems to take your own goods or services to market. Other perceived advantages include a diversification of product and service offerings, an increase in plant capacity, larger market share, utilization of host market operational expertise and research and development (R&D) and a perceived reduction of financial risk compared to greenfield investment.
Time and time again however, we see the same scenario play out post M&A with culture clashes, turf wars, different processes and systems not integrating as easily as planned and dilution of a company brand (Dumon, 2014). In addition the acquirer often overestimates the synergy savings that can be extracted and in seeking to extract cost saving often dilutes the strength of the independent businesses and brands in the process.
Investment modes of entry are not for the weak of heart or mind. Be prepared to stump up more capital, invest more of your top talent time and scarce resources to make new alliances, joint ventures, Greenfield Investments or M&A activity a success. If you seek to form alliances or joint ventures be sure to use your head as well as your heart to find the perfect partner. If you seek to be in control and make your own Greenfield Investment or undertake M&A take stock of the cultural and physic differences in your host market. Audit your own company capability to integrate smoothly into the host market and your understanding of the local culture, customs, and ways of doing business and rule of law and how to interact with government in that market. Do not be afraid to ask for professional help and services and look to your networks in both your home and host market for case study examples of successful and unsuccessful Investment entry modes into the new market.
Please feel free to add your own comments and experience on investment modes of market entry below and reach out to us for a follow-up face to face discussion at no obligation on your objectives for international business expansion. Without a clear strategy of Where to Go? How to Enter? Export? Contractual? Or Investment? And lastly when to enter? You risk making mistakes and damaging your growth plans.
Dermott Dowling is Managing Director @Creatovate, International Business consultancy. Creatovate help businesses grow outside their home base from market entry strategy to route to market to go to market launch. Contact Dermott if your business needs help expanding your business internationally.
Clayton M. Christensen, Richard Alton, Curtis Rising, and Andrew Waldeck (2011) The Big Idea: The New M&A Playbook https://hbr.org/2011/03/the-big-idea-the-new-ma-playbook/ar/1 viewed on 4/12/14.
Marv Dumon (2014) Biggest Merger & Acquisition Disaster http://www.investopedia.com/articles/financial-theory/08/merger-acquisition-disasters.asp viewed on 4/12/2014.
Rosabeth Moss Kanter (2010) 15 Steps for Successful Strategic Alliances (and Marriages), June 10
https://hbr.org/2010/06/15-steps-for-successful-strate HBR Blogs retrieved on 28 Nov 2014.
http://www.investopedia.com/terms/m/mergersandacquisitions.asp viewed on 4/12/14.