International Business. Chapter Fourteen Direct Investment and Collaborative Strategies

Transcription

1 International Business Chapter Fourteen Direct Investment and Collaborative Strategies

2 2 Alternative Types of Foreign Operations Foreign-owned operations (FDI) may be established either as start-ups (greenfield ventures) or via acquisition. Foreign-owned operations (FDI) may take the form of wholly-owned subsidiaries or joint ventures. Non-equity (collaborative) types of foreign operations include licensing and other contractual forms of business ventures. The resource-based view of the firm holds that each company has a unique combination of competencies and can maximize its performance by concentrating on those activities that best fit its competencies.

3 3 Wholly owned subsidiaries Advantages: Reduces risk of losing control over technological competence Control over strategic coordination in different countries When cost pressures increase it helps the firm to configure its value chain in such a way that the value added at each stage is maximized Access to profits earned in host country

4 4 Acquisitions: pros Quickly build presence in target foreign market Daimler-Benz acquired Chrysler to form DaimlerChrysler To preempt competitors in markets that are rapidly globalizing, such as telecommunications, where a combination of deregulation within nations and liberalization of regulations governing cross border FDI has made it easier for enterprises to enter foreign markets through acquisitions Vodafone UK acquired AirTouch USA Communications Acquisition of tangible and intangible assets factories, logistics systems, brand name, customer

5 5 Cons Overpaying for assets of acquired firm Culture clash between two firms Inability to integrate operations of the two firms Inadequate pre-acquisition screening

6 6 Reasons Why Foreign Production May Be Preferable to Exporting Production costs are cheaper abroad than at home. Transportation costs to move products internationally are relatively high. Domestic capacity is insufficient. Products must be substantially altered in order to capture sufficient foreign demand. Governments restrict or prevent the import of foreign products. Customers prefer products originating from a particular foreign country.

7 7 Foreign Direct Investment: Comparative Advantages Acquisitions and start-ups offer largely opposite benefits to a firm. The advantages of an acquisition may include: existing facilities, an existing labor force, knowledgeable local management, existing organizational structure existing goodwill, brand identification and access to distribution an immediate cash flow access to local financing the avoidance of excess capacity

8 8 Disadvantages of buying Turning around a poorly performing operation difficult Difference in management styles and organizational cultures lead to poor productivity Building facilities and creating new employment makes it easier to acquire funds

9 9 The advantages of a start-up, i.e., a Greenfield venture, may include: the existence of first-mover advantages due to a lack of viable competitors and available acquisitions the opportunity to establish new (more efficient) facilities, to escape punitive labor contracts, to hire and train fresh labor forces, and to implement compatible managerial styles and practices, i.e., the avoidance of carry-over problems the existence of government incentives the availability of development capital the creation of additional capacity

10 10 Collaborative Arrangements: General Motives To spread and reduce costs [potential volume is relatively low; excess capacity exists] To specialize in core competencies [licensing may yield returns on products that lie outside of a firm s strategic priority] To avoid or counter competition [markets are too small to support many competitors; firms combine to challenge a market leader] To secure vertical and horizontal links [savings and supply assurances exist across the value chain; horizontal economies of scope exist in distribution] To gain knowledge [learn about a partner s technology, operating methods, and/or home markets]

11 11 Collaborative Arrangements: International Motives To gain location-specific assets [desire to overcome cultural, political/legal, competitive, and/or economic barriers] To overcome legal constraints [prohibition of foreign ownership in particular sectors; regulations affecting operations and profitability; Northrop Grumman from US with Rolls Royce of UK to supply marine engines for US and UK navies] To diversify geographically [greater and faster spread of assets across countries; smoothing of sales and earnings cycles] To minimize exposure in risky environments [secure the safety of foreign assets and earnings; smooth risk across countries]

12 12 Relationship of Strategic Alliances to Companies International Objectives

13 13 Collaborative Arrangements: Basic Types Licensing: a licensor grants a licensee rights to intangible property to use in a specified area for a specified period of time in exchange for a fee Intangible property may be classified as: patents, inventions, formulas, processes, designs, or patterns copyrights for literary, musical, or artistic compositions trademarks, trade names, or brand names franchises, licenses, or contracts Methods, programs, procedures, or systems Joint venture between Xerox and Fuji photo Xerox licensed its xerographic know-how to Fuji Xerox royalty fee of 5 percent of the net sales revenue that Fuji Xerox earned was paid to Xerox 10 years limited the JV direct sales to Asian Pacific region

14 14 Licensing The licensor need not bear development cost and risks associated with opening a foreign market Mode of entry when a firm is prohibited from operating in a market due to barriers of trade Use of intangible property that might have business applications, but the firm does not want to develop those applications itself AT&T invented transistor circuit but licensed it to TI

15 15 Disadvantages It does not give the firm control over manufacturing, marketing and strategy that is required for realizing experience curve and location economies Impossible to coordinate strategic moves across geographical locations May result in losing competitive advantage RCA Corp licensed its color TV technology to Japanese firms including Matsushita and Sony. These firms assimilated technology, improved on it and used it to enter US market, RCA lost its market share in US

16 16 Franchising: a specialized form of licensing in which the franchisor grants an independent franchisee the use of essential intangible property and operationally assists the business (sales promotion and training) on a continuing basis The franchisor may also insist that the franchisee agree to abide by strict rules as to how it does business Franchise success is derived from three factors: product standardization effective cost control high recognition The two partners act like a vertically integrated firm because (i) they are interdependent and (ii) each produces a part of the product that ultimately reaches the customer. A franchisor may deal directly with its foreign franchisees or set up a master franchise with the right to open outlets and/or develop sub-franchises on its own. [continued]

17 17 Advantages : The franchisor is relieved of many of the costs and risk of opening a foreign market on its own. Disadvantages: May inhibit the form s ability to take profits out of one country to support competitive attacks in another Quality control if foreign franchisees are not concerned, geographical distance may make it difficult to detect

18 18 Management contract: an arrangement in which a company provides management personnel and administrative know-how to perform general or specialized functions to a client for a fee BAA has contracts to mange airports in Naples, Indianapolis and Melbourne On the one hand, host countries and clients get needed assistance without foreign ownership or control of operations; on the other, the management firm is able to generate revenues without making a capital investment.

19 19 Turnkey operation an arrangement in which one firm contracts with another to build complete, ready-to-operate facilities The contractor agrees to handle every single aspect of the project for a foreign client Usually, suppliers of turnkey facilities and operations are industrial-equipment manufacturers and construction companies; projects may cost billions of dollars; customers are most often governments or large MNEs. Bechtel (US) built a semi-conductor plant for Motorola in china

20 20 Advantages: Earning economic benefits from know-how required to assemble and run a technologically complex process Disadvantages: No long term interest in the foreign country setback if there is market for process output Creates a competitor Process technology is completive advantage sold to competitors

21 21 Joint venture a direct investment in which two or more independent firms share ownership Forms of joint ventures include: consortiums, i.e., the joining together of several entities to combine resources and perhaps pursue a major undertaking two firms from the same country joining together in a foreign market firms from two or more countries establishing an operation in a third country a private firm and a local government a private firm joining a government-owned firm in a third country Examples are Fuji Xerox and GM-SAIC venture in China

22 22 Advantages A foreign firm benefits from the local partner s marketing expertise and knowledge of local market Sharing development costs and risks with a local partner Political considerations make joint ventures the only possible mode of entry

23 23 Disadvantages Risk of giving control of technology to partners It does not give the firm tight control over subsidiaries that it might need to realize experience curve or location economies The shared ownership arrangement can lead to conflicts and battles for control between the investing firms, if their goals and objectives change or if they take different views on strategy

24 24 Implications/Conclusions Motivations for collaborative arrangements specific to international operations are to gain location-specific assets, to overcome legal constraints, to diversify across countries, and to minimize exposure in risky environments. Although the type of collaborative arrangement a firm chooses should match its strategic objectives, the choice will often mean a trade off amongst objectives. Each partner to a collaborative arrangement has a say in critical decisions, but the global performance of each partner may be improved in different ways.

25 25 The forms of foreign operations differ in terms of how many resources a firm commits and the proportion of resources committed at home rather than abroad. A firm may use more than one mode of operation within the same country, as well as in different countries or for different products. A common motive for jointly owned operations is to take advantage of complementary resources that firms have at their disposal. The dissolution of collaborative ventures can be planned or unplanned, friendly or unfriendly, mutual or non-mutual.