“The risk of missing out on China is greater than the risk of doing business in this country” (Heinrich von Pierer, former Siemens CEO and chairman of the supervisory board).
The primary objective of every financial, industrial or commercial business enterprise on the globe is to strive for profit maximisation. To realise this particular goal, corporations have to extend their operations across international borders. After the death of Mao Zedong and since the enforcement of an “open door” policy in 1978, the People’s Republic of China has developed into an attractive investment destination with an enormous economic potential. Since the economic liberalisation of the country, and the transition from a centrally planned economy into a market economy, China has become a popular business partner for national and international business enterprises.
Those companies which decided at an early stage to diversify trade and investments into emerging markets such as China have benefited from generating high sales volumes and impressive profit rates on a long-term scale. The uniqueness of the People’s Republic of China lies in the combination of economic growth, the size of the country, a thirst for knowledge and the maintenance of its political stability. Many western corporations are aware of the strategic opportunities that open up when doing business in China, the Middle Kingdom. However, a large number of national and internationally operating companies from different industrial sectors are facing major challenges, when it comes to making foreign investments in China.
Outline
I. Abstract
II. List of figures
III. List of tables
IV. List of abbreviations
1 Introduction
1.1 Research problem
1.2 Course of investigation
2 Internationalisation strategies
2.1 Motives for business enterprises when operating abroad
2.2 The process of internationalisation
2.2.1 Time of market entry
2.2.2 Market area selection
2.2.3 Market entry modes
3 German multinational corporations in modern China
3.1 German enterprises in the global economy
3.2 The economic development of China
3.2.1 China country profile
3.2.2 Historical background
3.2.3 Economic framework data
3.3 Chances and risks for German companies in China
3.3.1 German business in China
3.3.2 Chances
3.3.3 Risks and challenges
4 Industry analysis of the healthcare sector in China
4.1 Global key drivers of the healthcare branch
4.2 Development and modernisation of the Chinese healthcare sector
5 Empirical study: German enterprises in the healthcare sector operating in the People’s Republic of China
5.1 Design and implementation of the survey
5.1.1 Objective of the study
5.1.2 Structure of the questionnaire
5.1.3 Execution of the survey
5.2 Evaluation and interpretation of the results
5.2.1 General response to the online survey
5.2.2 Analysis of first section
5.2.3 Analysis of second section
5.2.4 Analysis of third section
6 Conclusion
6.1 Summary
6.2 Critical acclaim
6.3 Outlook
V. List of references
VI. Declaration of originality
VII. Appendix
I. Abstract
“The risk of missing out on China is greater than the risk of doing business in this country” (Heinrich von Pierer, former Siemens CEO and chairman of the supervisory board).
The primary objective of every financial, industrial or commercial business enterprise on the globe is to strive for profit maximisation. To realise this particular goal, corporations have to extend their operations across international borders. After the death of Mao Zedong and since the enforcement of an “open door” policy in 1978, the People’s Republic of China has developed into an attractive investment destination with an enormous economic potential. Since the economic liberalisation of the country, and the transition from a centrally planned economy into a market economy, China has become a popular business partner for national and international business enterprises.
Those companies which decided at an early stage to diversify trade and investments into emerging markets such as China have benefited from generating high sales volumes and impressive profit rates on a long-term scale. The uniqueness of the People’s Republic of China lies in the combination of economic growth, the size of the country, a thirst for knowledge and the maintenance of its political stability. Many western corporations are aware of the strategic opportunities that open up when doing business in China, the Middle Kingdom. However, a large number of national and internationally operating companies from different industrial sectors are facing major challenges, when it comes to making foreign investments in China. In this connection, especially cultural and legal risks should not be ignored and could, in a worst case scenario, endanger the going-concern principle of the corporation. Thus, in the context of a China engagement, companies from the fields of industry and commerce have to carefully weigh up the opportunities and risks associated with a market launch in order to ensure long-term successful business activities.
II. List of figures
Figure 1: Structure of the thesis
Figure 2: Strategic internationalisation process
Figure 3: Types of market entry and market cultivation strategies
Figure 4: Differentiation joint venture and strategic alliance
Figure 5: Germany: exports of goods and services
Figure 6: Growth of the real gross domestic product in China from 2004 to 2013
Figure 7: Leading economic powers in the world in 2005
Figure 8: Leading economic powers in the world in 2013
Figure 9: China`s contribution to global GDP from 2005 to 2014
Figure 10: Economic sectors share in the Gross Domestic Product in China in 2013
Figure 11: Number of gainfully employed Chinese people in relation to economic sectors - 2013
Figure 12: Development of the total number of hospitals in China
Figure 13: Survey - Question 1: Role at the company
Figure 14: Survey - Question 2: Legal status of the firm
Figure 15: Survey - Question 3: Area of healthcare industry
Figure 16: Survey - Question 4: Year of foundation
Figure 17: Survey - Question 5: Size of the company
Figure 18: Survey - Question 6a: Number of employees in Germany
Figure 19: Survey - Question 6b: Number of employees in China
Figure 20: Survey - Question 6c: Number of employees in the rest of the world
Figure 21: Survey - Question 7: Total company turnover in 2013
Figure 22: Survey - Question 8: Current business activities in China
Figure 23: Survey - Question 9: Number of subsidiaries in China
Figure 24: Survey - Question 10: Motives for expanding business activities to China
Figure 25: Survey - Question 12b: Risks associated with a market entry to China
Figure 26: Survey - Question 14b: Growth perspective for German enterprises in the healthcare sector in China
III. List of tables
Table 1: Internationalisation motives, proactive & reactive approaches
Table 2: Pros and cons of the pioneer strategy
Table 3: Market area selection: Influencing factors for the first decision level
Table 4: Market area selection: Influencing factors for the second decision level
Table 5: China`s foreign exchange reserves from 2009 to 2013
Table 6: China- Inflation rate from 2008 to 2013 in per cent
Table 7: Characteristics of western individualism and Chinese collectivism
Table 8: Survey - Question 11: Market entry strategies for China
Table 9: Survey - Question 12a: Risks associated with a market entry in China
Table 10: Survey - Question 13: Reasons for economic failure in China
Table 11: Survey - Question 14a: Growth perspective for German enterprises in the healthcare sector in China
IV. List of abbreviations
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1 Introduction
1.1 Research problem
Internationalisation strategies describe the planned, as well as the unplanned, company measures for a long-term attainment of objectives in a multinational environment. In the context of internationalisation strategies, the creation of competitive advantages due to the management of international value chains, affects the environment as well as the company’s domestic and foreign resources and competences (Kutschker & Schmid, 2002, p. 790). Within the scope of internationalisation strategies, special emphasis is placed on the respective time of the market launch, the selection of appropriate market areas and the decision on how to realise business value activities in markets in foreign countries (Kutschker & Schmid, 2002, p. 1031). Since the economic liberalisation of China started at the end of the 1970s, the expansion of international engagements, in order to achieve long- term business success, has been taking place (Bode, 2009, p. 24).
Multinational enterprises or transnational enterprises are mainly characterised by strong integration in world trade through foreign direct investments (Dunning & Lundan, 2008, p. 3). Multinational enterprises pursue the goal of transferring and controlling the business value activities of the corporation in at least two or more countries (Krugman et al., 2012, p. 170). German multinational enterprises differ from other competitive internationally operating enterprises, due to their high product quality and safety standards and it is not only large corporations but also small and medium-sized enterprises which are increasingly engaging in international businesses (Bode, 2009, p. 123). As a result, Germany generates about 40 per cent of its annual gross domestic product through exports (Statistisches Bundesamt, 2013).
The healthcare sector encompasses all persons, enterprises, organisations and industries providing “...services aiming at the preservation or improvement of the health of individuals, or the treatment or care of individuals who are injured sick or disabled” (Kirch, 2008, p. 527). Thus, the commitment of the healthcare system is not only to prevent diseases, but rather to ensure physical, mental and social well-being. The key desire to preserving health, as well as the growing world population and demographic change, are leading to a growing need for medical solutions around the globe (Drägerwerk AG & Co. KGaA, 2014, p. 67).
The aim of this bachelor thesis is to convey a general impression, regarding the situation of German multinational corporations operating in the People’s Republic of China. In this context, special emphasis lies on the perspective of the German business enterprises active in the healthcare sector. Moreover, in the course of the empirical study, the objective will be to identify whether the healthcare industry in China demonstrates a significant key market for future German business activities, taking into account the assessment of chances and risks.
1.2 Course of investigation
Based upon the research question that was postulated in chapter 1.1, a description of internationalisation strategies will be provided in chapter 2. The focus of this chapter is to stress the significance of internationalisation strategies, especially for enterprises which are planning to transfer corporate resources to markets in foreign countries. In the first section of this chapter different objectives and motives for corporations to operate beyond the home market will be presented. In the further course of the chapter, special importance will be attached to the fundamental background concept of internationalisation as represented by the general process chain of internationalisation, whereby particular emphasis is placed on the timing of penetration in the host market and the choice of a suitable foreign market region and different forms of market launches.
Thereafter, business activities of German multinational enterprises will be addressed in chapter 3. At the beginning of this section, the behaviour of German multinational enterprises in the world economy will be characterised and later summarised. Subsequently, this chapter will provide an overview regarding China’s historical and economical background. Furthermore, the major chances and risks for German corporations, associated with a long-term China engagement will be introduced.
Apart from various opportunities and problems associated with a market expansion to China, the subject of chapter 4 deals with a brief branch analysis of the healthcare sector in China. This chapter describes how the healthcare industry has become the most important future industrial branch of societies all over the world. In this context relevant aspects as to why the healthcare sector is permanently growing will be presented. Moreover, the section highlights the general framework of the complex modernisation process of the healthcare system in China. In addition to the illustration of the core areas of this particular healthcare reform, special attention will be paid as to whether the reform has already proved to be successful.
Within the framework of the empirical survey, chapter 5 concentrates on a primary data collection pertaining to German enterprises from the healthcare sector who are already operating in the People’s Republic of China, in order to obtain information about experience in the Chinese market place.
In the conclusion in chapter 6 a summary of the findings, a critical acclaim and an outlook will be given. Furthermore, a description of the detailed results of the investigation will be presented. In addition, an answer to the research question raised above will be provided.
FIGURE 1: STRUCTURE OF THE THESIS Source: Own diagram
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2 Internationalisation strategies
The basic notion of every business enterprise on the globe is to strive for profit maximisation. To realise this particular goal, saturated domestic markets force companies to operate across international borders. In particular, the opening of emerging markets, such as the People’s Republic of China, offer sustainable economic growth opportunities.
The objective of this chapter is to put special emphasis on the importance of internationalisation strategies for corporations which are planning to relocate their business activities to a foreign country. In the first part, different motives and objectives for commercial companies to operate abroad will be presented. Accordingly, no differentiation between large corporations and small and medium- sized enterprises will be made. Furthermore, in this context different modern, as well as traditional approaches will be pointed out. Finally, the process of internationalisation will be outlined through the following process stages: (1) Time of market entry (When?), (2) Market selection (Where?) and (3) Market entry modes (How?).
2.1 Motives for business enterprises when operating abroad
For actively operating companies which have decided to operate across international borders for the first time, or those which are already active abroad and want to internationalise to one specific host country, the approach of internationalisation and thus the transfer of business value activities plays an essential role (Bode, 2009, p. 19). When considering the different motives and objectives relating to a business involvement in a foreign country, a variety of various approaches can be considered. It is evident, however, that at the end it is about ensuring long-term competitiveness by the creation of a specific advantage over other companies which are operating in the same industry (Bode, 2009, p. 20). This is followed by the defence of those particular advantages.
In general, one single factor rarely determines the decision to extend business operations abroad. In reality, a combination of different motives and objectives is decisive for taking steps in the right direction (Hollensen, 2007, p. 42). Moreover, a variety of different factors influences the decision of whether to expand abroad. The entirety of motives and objectives can be classified into the following categories. However, individual motives can be found in different divisions (Tri, 2009, p. 17), (Hollensen, 2007, p. 42):
i. Economic vs. non-economic motives
ii. Reactive vs. proactive motives
iii. Procurement-orientated, sales-orientated, efficiency-orientated and strategy-
orientated goals
Economic motives and objectives are the primary source for cross-border business activities and mainly explain the striving for profit maximisation. In this respect, those companies which have managed to be engaged in a market other than the home country, have the opportunity to avoid the issue of declining demand in the internal market and, therefore, can explore and develop foreign markets (Berndt & Altobelli, 2010, p. 8). In order to generate new sales volumes due to saturated home markets, intensive efforts and high expenses might be involved, while with the same amount of financial resources higher profit potential can be attained in host markets (Backes- Gellner & Huhn, 2000, p. 184). In addition, non-economic motives for the decision to internationalise may be found in the individual objectives of stakeholders, such as greed and the need for power as well as image and reputation motives (Bode, 2009, p. 21).
The conventional theories of internationalisation motives by Svend Hollensen are often not considered in respective literature dealing with this subject. In his monograph about global international marketing S. Hollensen characterises the two basic approaches reactive and proactive: “Proactive motives...are based on the firm’s interest in exploiting unique competences or market possibilities. Reactive motives indicate that the firm reacts to pressure or threat in its home market or foreign markets...” (Hollensen, 2007, p. 42). Therefore, it can be said that by considering proactive motives, the respective corporation itself takes the decision whether to internationalise its business activities. M. Czinkota and I. Ronkainen summarised it as the following:”...proactive firms go international because they want to, while reactive ones go international because they have to” (Czinkota & Ronkainen, 2006, p. 282). This approach implies that companies on the one hand possess competitive advantages, for instance due to the usage of technological competence or improved product quality (Berndt & Altobelli, 2010, p. 7). On the other hand, major proactive motivations are economies of scale. Due to the size of international host markets, an enterprise could be in a position to increase its total output, therefore, making use of efficiency potentials through scale effects (Czinkota & Ronkainen, 2006, p. 283).
When looking at reactive motives, it can be seen that business enterprises are forced to internationalise on foreign markets as the result of the impact of external and internal factors. It is thus evident that, reactive motives exist when an engagement in the host country is required to stabilise a vulnerable economic situation on the home market. Another typical characteristic of this notion is the situation where an enterprise has to follow the lead of others, since competitors are already based in host markets (Berndt & Altobelli, 2010, p. 8). The table below provides an overview of the major internationalisation motives classified according to proactive and reactive approaches:
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TABLE 1: INTERNATIONALISATION MOTIVES, PROACTIVE & REACTIVE APPROACHES Source: Own table, referring to (Hollensen, 2007, p. 42 et seq.)
Within the context of global change competitive pressure forces nationally, as well as internationally operating business enterprises, to offer product solutions for relatively low prices. An example of this are procurement-orientated motives (resource- orientated motives) when international business activities foster the long-term accessibility and the low-cost supply of specific resources for the company (Berndt & Altobelli, 2010, p. 8).
For the majority of corporations operating across borders, sales-orientated motives (market-orientated motives) and objectives are the focus for business expansions (Bode, 2009, p. 23). This approach implies the opportunity of value creation through the sale of products, to a large extent in foreign markets. The primary goal of this motive can be explained as the establishment and development of one’s own market position in the host country (Berndt & Altobelli, 2010, p. 8). Furthermore, in an integrated market area of a larger size, an effective use of scale effects results in increased production on international markets and helps to decrease average production costs. Consequently, the average product price for the domestic market declines, whereby a rise in demand results (Krugman et al., 2012, p. 195).
“Efficiency-seeking investments are motivated by maximizing benefits and lowering costs through allocating operations within the value chain in the most efficient or most cost-effective locations” (Cavusgil et al., 2013, p. 205). Efficiency-orientated motives in particular play a crucial part in emerging countries. In this context, decreasing international competitiveness triggered by a strong increase of unit labour costs, has prompted companies to extend their production facilities to cheap labour host countries (Bode, 2009, p. 23). As a consequence, attractive markets will not only be used for sales, but also for outsourcing labour-intensive, standardised business units (Backes-Gellner & Huhn, 2000, p. 184). Finally, there are strategy-orientated motives and objectives (strategic-asset-orientated motives), which may help to establish and enlarge a significant, international, strategic position. In this connection, it should be noted that the so-called “cross-investment” approach relates to strategically orientated actions. This term implies a situation where competitive pressure on the domestic market is created by the market penetration of a foreign company, operating in the same industry. In order to compensate for this, and to maintain one’s own market share, an internationally, strategic investment is made in the competitor’s country of origin (Ivers, 2014, p. 29). However, in terms of the above mentioned motives, only in rare cases would one single motive determine the decision of whether to relocate value activities to another marketplace.
2.2 The process of internationalisation
The internationalisation of business value activities is, from an economical perspective, a dynamic process which follows a “constitutive decision” and is, therefore, in most cases difficult to revise (Bode, 2009, p. 24). The process of internationalisation, especially the timing of entry into a host market, the selection of suitable foreign markets as well as the decision on how a firm wants to enter new markets is considered as being particularly important. The figure below provides an overview of strategic decisions, which a firm needs to make in connection with a typical internationalisation process. It should be mentioned that within the scope of this section the focus is on the importance of the first three decisions:
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FIGURE 2: STRATEGIC INTERNATIONALISATION PROCESS Source: Own diagram, referring to (Tri, 2009, p. 18)
2.2.1 Time of market entry
Within the framework of the internationalisation process, as regards the selection of the appropriate timing of the market entry, one can differentiate between two significant approaches: a pioneer- or a follower strategy (Welge & Holtbrügge, 2006, p. 135). Thus, it can be stated that the pioneer aspect, considers the notion of a “...company, which is first to enter a foreign market with its products and services. The aim of a pioneer strategy is to develop a market according to one’s own...” whereby first mover advantages can be realised (Neubert, 2013, p. 50). In contrast, the follower strategy emphasises the idea of late entry into the host country with the objective of focussing on the advantages of following up (Tri, 2009, p. 18).
First-mover or leader advantages resulting from penetrating a foreign market at an early stage, offer the opportunity of generating high corporate profits in the form of pioneer gains. In addition to that, this approach enables firms to build up comprehensive market entry barriers for potential competitors who might follow (Welge & Holtbrügge, 2006, p. 135). For those firms, which are characterised by demonstrating a pioneer behaviour, it is much easier to enforce product standards, create customer preferences for specific goods and services, as well as establish and extend existing customer and supplier relationships (Kutschker & Schmid, 2002, p. 951). Furthermore, this approach describes an early bonding of suppliers and marketing intermediaries on the foreign market. Another substantial benefit of the pioneer strategy is the guarantee of tax incentives for early-mover companies, to encourage long-term investments on the domestic market (Holtbrügge & Puck, 2008, p. 126). These advantages of the first-mover approach are, furthermore, confirmed by statistical facts resulting from comprehensive empirical investigation. A study conducted by Y. Luo about “Timing of Investment and International Expansion Performance in China”, showed that the earlier the time of foreign market entry, the greater the opportunity to secure competitive advantages on a long-term scale. Consequently, this results in a “...significantly superior to late entrants in terms of local market expansion” (Luo, 1998, p. 401) and, therefore, to a sustainably greater success in the performance of the company.
However, when considering the pioneer-strategy concept some drawbacks must be taken into account. In particular, high costs for opening up new markets, for instance by establishing appropriate business contacts are classified as central disadvantages for the first-mover-strategy. In addition to this, it is relevant to note that an increased risk of failure has to be considered; failure resulting from the non-existence of the past experiences of other companies and because of an overestimation of the demand in the host market (Kutschker & Schmid, 2002, p. 952).
The following table provides a summary of the advantages and disadvantages of the pioneer strategy:
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TABLE 2: PROS AND CONS OF THE PIONEER STRATEGY
Source: Own table, referring to (Welge & Holtbrügge, 2006, p. 136), (Kutschker & Schmid, 2002, pp. 951-952)
In this context, relevant examples for an effective implementation of the pioneer strategy are, for example McDonalds in Russia or Volkswagen in the People’s Republic of China. These companies executed a successful foreign market expansion and, therefore, ensured a long-term economic success in those regions (Neubert, 2013, p. 51).
The follower-strategy is based on the notion that a corporation decides to enter a respective foreign market, which has already been adopted by competitive companies. Thus, the enterprise entering the market is slower than its international competitors (Kutschker & Schmid, 2002, p. 952). The advantages of late market penetration (follower advantages) result from host markets with high levels of uncertainty combined with fast-changing consumer preferences. In particular emerging countries like China, which not long ago decided to become active on international markets are still in an economic growth stage and are characterised both by high levels of dynamism and also by discontinuity (Holtbrügge & Puck, 2008, p. 126). As a result, the general political and economic environment demonstrate a situation of fragility and still have a long learning process ahead. As a consequence, many changes of direction will take place before an appropriate level of stability can be ensured. Therefore, an early host market launch requires a permanent need for adaption, whereas those entering the market at a later stage can benefit under a more stable environment (Welge & Holtbrügge, 2006, p. 136). Furthermore, late entries are privileged in being able to access reliable and transparent information about the host market where they are planning to operate, e.g. information about the customers’ purchasing power. In addition to this, follower companies can make use of the so-called “free-rider-effect” and thus have the opportunity to learn from the experience and mistakes that early entrants made in the past (Meffert & Pues, 2002, p. 411 et seq.).
However, one central disadvantage of the pioneer strategy is to overcome market entry barriers that have been built up by companies following the pioneer strategy. Existing business relations have to be disbanded with the intention of forming and maintaining trust in potential customers and employees (Kutschker & Schmid, 2002, p. 952). Only through a successful involvement in existing networks, will late launches have the chance to catch up with pioneers and lay a foundation for a sustainable economic engagement.
Due to the above-mentioned dynamism, uncertainties and risks relating to prospective country developments and the choice of the right timing strategy for a market entry will depend, in particular, on the size of the respective corporation. According to M. Welge and D. Holtbrügge, small and medium-sized enterprises, demonstrating a high flexibility, often tend to follow a pioneer strategy in order to generate early penetration gains. However, this should be done before competition intensity increases through the admittance of other foreign companies (Welge & Holtbrügge, 2006, pp. 137-138). In contrast, larger enterprises with greater financial endowments delay the process of a launch on the market, with the objective of acquiring a substantial market share as the result of an acquisition of an existing company on the foreign market (Welge & Holtbrügge, 2006, pp. 137-138).
Which timing strategy for such a market launch is the most effective and suitable for a company strongly depends on the industry itself, the size of the enterprise, the competitors and the market where the corporation intends to operate.
Within the framework of a successful China engagement the choice of a suitable timing strategy for the market launch represents a major challenge. On the one hand, China demonstrate a rapid and dynamic economic development, but on the other hand, the country also shows great diversity in the purchasing power and individual needs due to a high heterogeneity in the respective provinces. Therefore, it can be stated that, while some products have already reached a high degree of saturation in some regions, certain provinces still show a high demand potential (Höhner, 2007, p. 67). B. Höhner points out, that particularly small companies which are planning to operate in China cannot afford to make any mistakes.
In summing up, it must be emphasised that in the course of selecting an appropriate timing strategy for a China activity, it is indispensable to carry out a comprehensive country analysis beforehand, in order to obtain a better understanding for the respective marketplace. T. Cavusgil considers this approach in his monograph about ‘Doing Business in Emerging Markets’ and notes that: “In addition to internal capabilities and objectives, firms must perform a thorough analysis of the locations and markets they are planning to enter” (Cavusgil et al., 2013, p. 253).
2.2.2 Market area selection
Once the respective internationalisation objectives and motives have been determined, under consideration of one’s own potential, and once the appropriate timing strategy for a market launch has been selected, the next step is the definition of a particular target market and the location where the company intends to operate. This takes place by bearing in mind different environmental conditions (Dülfer & Jöstingmeier, 2008, p. 136). This means that, the objective is to identify those countries and regions, which promise the greatest economical success for the entrepreneurial activities (Schneider, 1998, p. 335). Hence, from an economical perspective, it is of fundamental importance to the company in which market maximum benefits can be achieved with the allocation of limited resources (Welge & Holtbrügge, 2006, p. 95). Once the strategic decision to internationalise and to concentrate on one specific target market has been taken, high expenses and a situation that is difficult to reverse will be incurred.
Within the context of assessing potential foreign regions, receiving transparent and reliable market information constitutes a major problem. The first step is to access appropriate sources of information so that in the next step the evaluation and interpretation process can take place (Welge & Holtbrügge, 2006, p. 95). It is thus clear, that the assessment of unknown foreign markets poses a far greater challenge than that of the domestic market. In principle, when it comes down to strategically defining a suitable target market for long-term international business activities, the decision process is not completed only with the selection of potentially eligible countries. In point of fact, in the subsequent process potential regions which might be taken into consideration should gradually be filtered down by taking into account essential natural and culture-specific environmental conditions (Schneider, 1998, p. 336).
Significant environmental criteria, which play an important role in the selection of a suitable target market, should not only reflect the macro-economic perspective but rather concentrate on micro-economic aspects (Zinzius, 2006, p. 77). B. Zinzius emphasises that the achievement of general strategic objectives as well as the attainment of operational targets strongly depends on the location for the investment. Thus, in order to prevent a situation of economic failure, due to the inappropriate choice of target market, the collecting, assessing and weighting of many different criteria is of fundamental importance (Zinzius, 2006, p. 78).
In general, the market area selection, within the scope of internationalisation strategies, can be split into two parts. On the one hand, it is about the strategic global decision, which country should be approached to ensure a sustainable business development and on the other hand, it is the concrete location within the country which has to be determined. It is important to point out, that for both decision levels a variety of significant criteria exist (Hünerberg, 1994, p. 328). The following tables provide important influencing factors which play a central role for both decision levels.
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TABLE 3: MARKET AREA SELECTION: INFLUENCING FACTORS FOR THE FIRST DECISION LEVEL Source: Own table, referring to (Hünerberg, 1994, p. 329); (Zinzius, 2006, p. 78)
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TABLE 4: MARKET AREA SELECTION: INFLUENCING FACTORS FOR THE SECOND DECISION LEVEL Source: Own table, referring to (Hünerberg, 1994, p. 329); (Zinzius, 2006, p. 78)
In addition to this, possible investors should always take care to compile lists with many different potentially countries and regional locations that might appear appropriate under consideration of the above-mentioned factors (Zinzius, 2006, p. 79). By taking into account these influencing factors, significant information can be collected which will serve as the basis for further investigation. Apart from screening countries that are worth considering for a potential expansion of business activities, an analysis of the internal, corporate-related environment for strengths and weaknesses is also strongly recommended (Wheelen & Hunger, 2006, p. 73). In terms of selecting a global market area, T. Wheelen and D.Hunger emphasise in their book “Strategic Management and Business Policy”, the approach that a country’s attractiveness is determined by a set of macro-environmental criteria called PEST (Wheelen & Hunger, 2006, p. 73 et seq.). According to this, “... external environmental scanning to identify possible opportunities and threats...” takes place under consideration of political/ legal-, economic-, socio- cultural- and technological forces (Wheelen & Hunger, 2006, p. 73).
2.2.3 Market entry modes
After intensively working on an appropriate time for a launch on the market and the selection of a suitable market area, this section deals with different strategies and forms of market entries. With reference to this, it is important to mention that in the following text the term ‘market entry’ is to be understood as the admittance into foreign target markets and is not intended to mean the penetration of the home market. Once an enterprise has decided to operate actively on an international foreign market, it has to select from a wide range of market entry modes (Berndt & Altobelli, 2010, p. 143). The most important host market entry modes are: Operating exports, granting licenses, building up franchising systems, entering into joint ventures and establishing one’s own subsidiaries (Sitkin & Bowen, 2010, p. 190).
In the course of selecting a fitting market launch and a market cultivation strategy for a respective corporation, different forms can be effectively systematised. In this connection, Kutschker and Schmid provide an overview regarding the classification of different market entry strategies according to various criteria (Kutschker & Schmid, 2002, pp. 817-818). Within the scope of this section, the systematisation will be presented, in particular, by taking into consideration two significant criteria introduced by Meissner and Gerber which are as follows: (Meissner & Stephan, 1980, p. 224): (1) Capital and management activities in the home country and (2) Capital and management activities in the host country. The following figure, illustrates Meissner’s and Gerber’s proposal.
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FIGURE 3: TYPES OF MARKET ENTRY AND MARKET CULTIVATION STRATEGIES
Source: Own diagram, referring to (Meissner & Stephan, 1980, p. 224); (Kutschker & Schmid, 2002, pp. 814-816).
The market entry form of exporting describes the kind of internationalisation, where an enterprise stays on the domestic home market and sells its products and services to foreign customers (Sitkin & Bowen, 2010, p. 190). By following this strategy, the introduction of foreign business activities is associated only with a marginal change in the products offered and in the corporate organisation (Berndt & Altobelli, 2010, p. 143). As outlined in figure 3, capital investments and management activities remain in the home country. Only a small share of capital investments and management activities are carried out in the foreign host nation. However, this approach ensures the corporation a direct increase in revenue (Berndt & Altobelli, 2010, p. 143). In general a company has the possibility to select from two basic forms of exports:
Direct- and indirect export (Hollensen, 2007, pp. 310-311). Within the framework of operating direct export activities, the firm itself has the responsibility to conduct the transaction with the respective counterpart. This will happen in the absence of any external agent. The exporter and the foreign business partner will meet together in a direct contractual relationship agreement (Kutschker & Schmid, 2002, pp. 822-823). In this context, the central advantage for the local firm is a high degree of control. However, by initiating and executing the whole export transaction particularly high risks for the local exporter will be involved (Berndt & Altobelli, 2010, pp. 145-147). On the other hand, indirect exporting is associated with the existence of an intermediary in the form of an ETC in the home market of the seller. Accordingly, by following this strategy the exporter is not directly involved in the sales transaction (Hünerberg, 1994, p. 123). Apart from reduced transaction risks for the producer, domestic “...firms need to consider the opportunity-costs because the intermediary has control over final pricing, a loss of profits may result...” (Cavusgil et al., 2013, pp. 209-210).
The market entry strategy of licensing describes contractual agreements between licensors and licensees, regarding the transfer for the commercial utilisation of intangible assets (Kutschker & Schmid, 2002, p. 830). To be more precise, these usage rights, such as brand labels, patents, utility models, know-how in terms of knowledge and experiences, trademarks and registered designs can be granted by the licensor to the licensee for a specific region and period of time. In return, the licensee is committed to paying a certain fee (royalties) to the license supplier (Berndt & Altobelli, 2010, p. 147 et seq.).
Substantial advantages, relating to this strategy of internationalisation, include a reduced risk of bad economic performance due to the fact that except for know-how and other intangible assets, no tangible property holdings are transferred to foreign markets (Berekoven, 1985, p. 43). However, disadvantages include a loss of control as the result of a situation where the foreign licensee becomes a potential competitor to the licensor (Berndt & Altobelli, 2010, p. 151). In addition, the transmission of sensitive know-how to foreign markets, where compliance with intellectual property rights only exist in a rudimentary form (especially in the Asian continent) poses a major problem (Kutschker & Schmid, 2002, p. 837).
[...]
- Citation du texte
- Till Schaumann (Auteur), 2015, Internationalisation to China. Chances and risks for German multinational corporations, operating in the healthcare sector, Munich, GRIN Verlag, https://www.grin.com/document/296247
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