Foreign Direct Investment and Collaborative Strategies

To comprehend why and how companies make foreign direct investments

To understand the major motives that guide managers when choosing a collaborative arrangement for international business

To define the major types of collaborative arrangements

To describe what companies should consider when entering into arrangements with other companies

To grasp what makes collaborative arrangements succeed or fail

To see how companies can manage diverse collaborative arrangements

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Chapter Objectives

1. When production abroad is cheaper than at home

2. When transportation costs to move goods or services internationally are too expensive

3. When companies lack domestic capacity4. When products and services need to be altered

substantially to gain sufficient consumer demand abroad

5. When governments inhibit the import of foreign products

6. When buyers prefer products originating from a particular country

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Why Exporting May Not Be Feasible

Production Ownership Production Location

EquityArrangements

Home Country Foreign country

a. Exporting a. Wholly owned operations

b. Partially owned operations

c. Joint Ventures

d. Equity Alliances

Non Equity Arrangements

a. Licensing

b. Franchising

c. Management Contracts

d. Turnkey Operations

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Foreign Expansion: Alternative Operating Modes

Non collaborative: Wholly and partially owned operations

Control/holding accompanies investment

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Foreign Direct Investment

◦ internalization theory◦ appropriability theory◦ freedom to pursue global objectives

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Three primary reasons that spur companies to want a controlling interest:

Internalization theory holds that it is sometimes cheaper to handle operations oneself than to contract with another company

The idea of denying rivals access to resources (capital, patents, trademarks, and management know-how) is called the appropriability theory

When a company has a wholly owned foreign operation, it may more easily have that operation participate in a global strategy

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Foreign Direct Investment (FDI) approaches

The advantages of acquiring an existing operation include:◦ adding no further capacity to the market: in

case of saturated market◦ avoiding start-up problems◦ easier financing

Companies may choose to build or have Greenfield Investments if:◦ no desired company is available for acquisition◦ acquisition will lead to carry-over problems◦ acquisition is harder to finance

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Methods for Making FDI

To Spread and Reduce Costs: Let specialist do the job..

To Specialize in Competencies: beverage and bottling..

To Avoid or Counter Competition: collusion.. To Secure Vertical and Horizontal Links To Gain Knowledge

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General Motives for Collaborative Arrangements

Gain location-specific assets Overcome legal constraints Diversify geographically Minimize exposure in risky environments

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International Motives for Collaborative Arrangements

Companies have a wider choice of operating form when there is less likelihood of competition

Internal handling of foreign operations usually means more control and no sharing of profits

MNEs want returns from their intangible assets

Types of Collaborative Arrangements

Their desire for control over foreign operations

Their companies’ prior foreign expansion..

Factors influencing manager’s choice of collaborative arrangements..

Licensing agreements may be:◦ exclusive or nonexclusive◦ used for patents, copyrights, trademarks, and

other intangible property Licensing often has an economic motive,

such as the desire for faster start-up, lower costs, or access to additional resources

Licensing of brand name..

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Licensing

Franchising includes providing an intangible asset (usually a trademark) and continually infusing necessary assets

Many types of products and many countries participate in franchising

Franchisors face a dilemma:◦ the more standardization, the less acceptance in

the foreign country◦ the more adjustment to the foreign country, the

less the franchisor is needed Form of vertical integration..

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Franchising

Management contracts are used primarily when the foreign company can manage better than the owners

Through Management contracts a company may transfer a part of its’ personnel to assist foreign company for a specified period for fee..

Software companies..

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Management Contracts

Are a type of collaborative arrangement in which one company contracts with another to build, complete, ready-to-operate facilities..

Turnkey operations are:◦ Most commonly performed by construction

companies, industrial equipment manufacturers..◦ Often performed for a governmental agency

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Turnkey Operations

Joint ventures may have various combinations of ownership

The type of legal organization may be a partnership, a corporation, or some other form permitted in the country of operation

When more than two organizations participate, the joint venture is sometimes called a consortium

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Joint Ventures

An equity alliance is a collaborative arrangement in which at least one of the collaborating companies takes an ownership position (almost always minority) in the other(s).

Equity alliances help solidify collaboration

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Equity Alliances

The major strains on collaborative arrangements are due to five factors:◦ Relative importance to partners◦ Divergent objectives◦ Control problems◦ Comparative contributions and appropriations◦ Differences in culture

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Problems of Collaborative Arrangements

The evolution to a different operating mode may:◦ be the result of experience◦ necessitate costly termination fees◦ create organizational tensions

Steps:1. Finding compatible partners2. negotiating the arrangements3. Drawing up the contract4. Assessing performance

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Managing Foreign Arrangements