Modes Of Entry For Foreign Automotive Market – Joint Ventures, Motivations, And Eclectic Paradigm Theory

Joint Ventures as an Entry Mode Strategy in Chinese Automobile Sector

Question one

Joint refers to the establishment of a business that is jointly owned by two or more partners. It involves two or more business parties coming together to share resources, skills, and profits in order to undertake a specific project (Hill, 2008). There are several features of joint ventures as an entry mode strategy. One of these features is that joint ventures involve a temporary partnership between the parties and comes to an end after particular goals and objectives are met. Secondly, the joint venture aims at making profits and distribute equally among the parties involves. Also, in the joint venture, no firm name is utilized singly it is a single venture (Hill, 2008). Furthermore, the profit and loss of the joint venture are calculated and shared after the completion of the venture.

Some of the argument in favor of creating joint ventures especially in the Chinese automobile sector includes; The costs and business risks of starting a foreign market are shared equally to all partners that are involved (Hill, 2008). Secondly, joint ventures play a crucial role in helping businesses to avoid any risk of nationalization or any other government policies that can lead to business interference. Also, joint ventures are important in Chinese automobile sector as a business can benefit from local partner’s knowledge of the Chinese automobile sector and its competitive conditions, language, culture, business systems, and its political systems.

There are also arguments that are against creating joint ventures in the Chinese automobile sector. One of these arguments is that, in joint ventures, a business may risk giving its technology control to its partner or partners. Secondly, the business may not have the complete control over subsidiaries that it may require to realize its location economies or its experience curve (Hill, 2008). Furthermore, creating joint ventures in the Chinese automobile industry will be disadvantaged in that, shared ownership can result in battles or business conflicts for management especially if the goals and objectives of the parties differ. Joint ventures are important in Chinese automobile sector as a business can benefit from local partner’s knowledge of the Chinese automobile sector and its competitive conditions, language, culture, business systems, and its political systems.

Question two

Some of the motivations of foreign firms linked to entering the Chinese automobile market include market seeking motives, resource or asset seeking motives and efficiency seeking motives.

A foreign firm may be motivated to enter to Chinese automobile market as a result of the market seeking motives. This may involve a company wishing to gain access to new markets or opportunities in China (Hill, 2008). China has a large market for automobile sales and services that can generate more sales.

 Also, the company can be motivated to enter into China’s automobile business in order to follow its key customers. For example, when P and G Company built its plant in China, Tredegar Business Company went ahead and established there too. A company may also enter into the Chinese market in order to compete directly with the key rivals in the Chinese automobile market. The main aim is to weaken and make the rivals to expend resources depending on China’s market.

Motivations for Foreign Firms Entering the Chinese Automobile Market

A company may be also motivated by resource or asset. For an instant, the firm may enter into China’s automobile market in order to access raw materials such as petroleum or enter in order to gain access to knowledge of other assets (Hill, 2008). The availability of technological and managerial know-how of automobile industry in China may also motive the firm to enter into the Chinese market.

One of the efficiency-seeking motives that can make a firm enter into China’s automobile market is to reduce the sourcing and production costs by accessing cheap inputs such as inexpensive labor needed in the production process. A company also wished to locate production to near to its customers who are located in China. Furthermore, a firm may encourage taking merits of China government incentives such as tax concessions and offering of subsidies to foreign companies. A company may also be motivated to enter into China’s automobile market in order to avoid trade barriers and enjoy the same merits that are enjoyed by automobile companies found in China. The majority of the Chinese companies are considering internationalization because of extraordinary rivalry.

Question three

The international business theory that can better explain the entry of a firm into the Chinese automobile sector is Dunning’s Eclectic Paradigm theory. According to this theory, there are three factors that determine whether a firm will enter into a given foreign nation through Foreign Direct Investment or not (Hill, 2008). The three factors include ownership specific merits, location-specific merits, and internalization merits. In reference to this theory, ownership specific merits involve skills, knowledge, relationships, capabilities or any physical property that the company owns which are all based on competitive merits.

Besides, location-specific advantages are specific merits that exist in the country such as the availability of skilled labor, low cost labor and the availability of natural resources (Hill, 2008). Also, internalization merits include controls that are derived from internalizing foreign-based distribution, manufacturing among other valuable chain operations.

There are different characterizes of Eclectic Paradigm theory that can better explain the entry of a firm into the Chinese automobile industry. First, the theory is considered to be simple, it compares Foreign Direct Investment and the exporting and it does not take into account human and cultural factors. Besides, the theory applies to only industrial companies and does not apply to service businesses. Also, the theory applies to the recent modes of entry into the foreign market such as licensing and franchising.

Question four

There are different mode strategies that a firm can enter into a foreign market. They include licensing, franchising, whole owned subsidiaries, joint ventures, turnkey projects and exporting.  The two entry mode strategies that I will talk about are licensing and turnkey projects. Licensing mode of entry strategy involves the arrangement where a licensor grants the rights to intangible assets to another entity (Hill, 2008). These grants of rights are for a specific period of time and by the end, the licensor is supposed to receive a royalty fee from the licensee. In this case, the intangible assets include formulas, designs, copyrights, inventions, trademark, and processes.

The benefits of licensing are that the organization does not need to hold up under the expenses and risks such as development costs which are connected to opening foreign market. Besides, the firm maintains a strategic distance from hindrances to investments. Furthermore, licensing allows the company with an intangible asset that might have business applications but which does not want to develop those processes it in order to capitalize on the market opportunities.

Some of the demerits of licensing as a method of entry strategy are that the company lacks the rights of complete control, marketing, and manufacturing. Furthermore, the firm lacks necessary strategies to realize the location economies and the experience. Besides, the capacity of the organization to facilitate strategic plans across nations by using profits earned from one country to support competitions experienced from other firms is compromised.

Turnkey projects as an entry mode strategy involve a contractor that agrees to handle details of the project for the foreign client. The details may include the training of operating personnel at the completion of the contract. In this kind of mode of entry strategy, the foreign client is given the key to a factory that is ready for operation.

Some of the benefits that a firm can enjoy by adopting turnkey projects as a means of entry strategy are that the entry strategy allows the business to earn great economy returns from know –how. These economy returns are required by the firm in order to assemble and run technologically complex applications (Hill, 2008). Besides, this type of market entry is less risky in nations with the economic and political environment. Turnkey projects are disadvantaged in that when technology processes are the source of a firm’s competitive advantage.

If I were the CEO of a foreign firm wishing to exploit the opportunities in the Chinese automobile, I can choose turnkey projects as the mode of entry strategy (Hill, 2008). This mode of entry strategy will be important as my company can earn great economy returns from know-how. The economy returns acquired will be crucial for my company as it will help in assembling and running of my company’s complex processes (Hill, 2008). Furthermore, I will prefer this type of mode of entry strategy as it has many merits than its demerits.

Question five

The main strategic players in the Chinese automobile market include the Chinese automobile industry such as Toyota, Volkswagen and General Motors, Daimler, Fiat-Chrysler, Ford, and Dongfeng. These main players have set their business operations in china in order to enjoy vaporable automobile market conditions experience in the country. The likely influence of their strategies on the mode of entry into the Chinese market includes market seeking motives, resource or asset seeking motives and efficiency seeking motives (Hill, 2008).

References

Hill, C. (2008). International business: Competing in the global market place. Strategic Direction, 24(9).