7/29/2017debis.deu.edu.tr/userweb/ozge.ozgen/ckr_ib4_inppt_14_ppt (1).pdf · 7/29/2017 3 Name the location of each brand Brand Country where brand is based 7-Eleven Japan KitKat chocolate

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Copyright © 2017 Pearson Education, Inc.

International Business: The New Realities, 4th Edition

by

Cavusgil, Knight, and Riesenberger

Foreign Direct Investment and

Collaborative Ventures

Learning Objectives

14.1 Understand international investment and

collaboration.

14.2 Describe the characteristics of foreign direct

investment.

14.3 Explain the motives for FDI and collaborative

ventures.

14.4 Identify the types of foreign direct investment.

14.5 Understand international collaborative ventures.

14.6 Discuss the experience of retailers in foreign

markets.14-2Copyright © 2017 Pearson Education, Inc.

FDI and Collaborative Ventures

• Foreign direct investment (FDI): Strategy in which

the firm establishes a physical presence abroad by

acquiring productive assets such as capital,

technology, labor, land, plant, and equipment.

• International collaborative venture: A cross-border

business alliance in which partnering firms pool their

resources and share costs and risks of a venture.

• Joint venture (JV): A form of collaboration between

two or more firms to create a jointly-owned

enterprise. 14-3Copyright © 2017 Pearson Education, Inc.

Examples of FDI

• Volkswagen spent $1 billion to build a factory in Poland

to manufacture delivery vans.

• The British pharmaceutical firm GlaxoSmithKline

purchased the global Vaccines division of

Switzerland’s Novartis for $5.25 billion.

• Denmark’s Lego Group spent more than 100 million

euros to build a toy factory in China.

• Japan’s Toshiba formed a joint venture with the U.S.

firm United Technologies to establish R&D centers in

Europe and India to support joint innovation in the

heating and air conditioning industry.14-4Copyright © 2017 Pearson Education, Inc.

Name the location of each brand

Brand Country where brand is based

7-Eleven

14-5Copyright © 2017 Pearson Education, Inc.



7-Eleven Japan

KitKat chocolate bars


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7-Eleven Japan

KitKat chocolate bars Switzerland

Miller beer




7-Eleven Japan


Miller beer South Africa

Budweiser beer




7-Eleven Japan



Budweiser beer Belgium

Motel 6




7-Eleven Japan




Motel 6 France

Thinkpad laptops




7-Eleven Japan




Motel 6 France

Thinkpad laptops China

Blackberry cell phones




7-Eleven Japan




Motel 6 France


Blackberry cell phones Canada

DHL express delivery


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7-Eleven Japan




Motel 6 France



DHL express delivery Germany

Captain Morgan Rum




7-Eleven Japan




Motel 6 France




Captain Morgan Rum Britain

Absolut Vodka




7-Eleven Japan




Motel 6 France





Absolut Vodka Sweden

Godiva chocolate




7-Eleven Japan




Motel 6 France





Absolut Vodka Sweden

Godiva chocolate Turkey


World’s Most International Non-Financial MNEs

Sources: Based on Hoovers company database at www.hoovers.com, 2015; UNCTAD, “Annex table 28. The World’s Top 100

Non-Financial TNCs, Ranked by Foreign Assets,” in World Investment Report 2014 (New York: United Nations, 2015),

accessed June 8, 2015, at www.unctad.org.

Copyright © 2017 Pearson Education, Inc. 14-17

Service Multinationals

• Firms that offer services – Such as lodging, construction, and personal care – must offer them when and where they are consumed.

• Service firms establish either a permanent presence via FDI (e.g., retailing), or a temporary relocation of personnel (e.g., construction industry).

• Many support services – Such as advertising, insurance, accounting, and package delivery – are best provided at the customer’s location.


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Large International Financial MNEs

Sources: Based on Hoovers company database at www.hoovers.com, 2015, and annual reports at websites of the listed

companies.Copyright © 2017 Pearson Education, Inc. 14-19

Leading Destinations for FDI

• Advanced economies in Europe (especially Britain),

Japan, and North America, are popular FDI

destinations, mainly as attractive markets.

• In recent years, emerging markets and developing

economies have gained appeal as FDI destinations.

• Examples:

➢ Firms target China, Mexico, and Eastern

Europe to do low-cost manufacturing and to

easily access huge adjoining regional

markets.14-20Copyright © 2017 Pearson Education, Inc.

Factors Relevant to Selecting Locations for FDI


Sources: John H. Dunning, Explaining International Production (New York: Routledge, 2015); Daniel Hoi Ki Ho and Peter Tze Yiu Lau,

“Perspectives on Foreign Direct Investment Location Decisions: What Do We Know and Where Do We Go from Here?,” International Tax

Journal, 33 No. 3 (2007), pp. 39–48; Robert Green and William Cunningham, “The Determinants of US Foreign Investment: An Empirical

Examination,” Management International Review, 15 No. 2-3 (1975), pp.,113-20; Franklin Root, Entry Strategies for International Markets,

(Hoboken, NJ: John Wiley & Sons, 1994).14-21

Nature of Foreign Direct Investment

• The most advanced, expensive, complex, and

riskiest entry strategy, involving the establishment of

manufacturing plants, marketing subsidiaries, or

other facilities abroad.

• Undertaken by firms from both the advanced

economies and emerging markets.

• Target countries are both advanced economies and

emerging markets.

• Occasionally raises patriotic sentiments among

citizens (e.g., Haier and Maytag; Dubai Ports). 14-22Copyright © 2017 Pearson Education, Inc.

Key Features of Foreign Direct Investment

1. Represents substantial resource commitment.

2. Implies local presence and operations.

3. Firms invest in countries that provide specific

comparative advantages.

4. Substantial risk and uncertainty.

5. Direct investors deal more intensively with specific

social and cultural variables in the host market.


Motives for Foreign Direct Investment

Market-

seeking

motives

• Gain access to

new markets

or opportunities

• Follow key

customers

• Compete with

key rivals in their

own markets

Resource-

or asset-

seeking motives

• Access raw

materials

• Gain access to

knowledge or

other assets

• Access

technological and

managerial know-

how available in a

key market

Efficiency-

seeking

motives

• Reduce sourcing

and production

costs

• Locate production

near customers

• Take advantage of

government

incentives

• Avoid trade

barriers


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Market-Seeking Motives

• Gain access to new markets or opportunities.

The existence of a large market motivates many

firms to produce goods at or near customer locations.

Boeing, Coca-Cola, IBM, McDonald's, and Toyota all

generate more sales abroad than they do at home.

• Follow key customers. Firms often follow their key

customers abroad to preempt other vendors from

servicing them. E.g., Tradegar Industries supplies

the plastic that its customer Procter & Gamble uses

to make disposable diapers. When P&G built a plant

in China, Tradegar established production there too.


Market-Seeking Motives (cont’d)

• Compete with key rivals in their own markets.

Some MNEs choose to compete with competitors

directly in their home markets. The purpose is to

weaken and force the rival to expend resources

defending its own market. E.g., Caterpillar entered

Japan to tie up arch-rival Komatsu, to hamper

Komatsu’s ability to expand its activities in the USA.


Resource or Asset-Seeking Motives

• Access raw materials needed in extractive and

agricultural industries. E.g., firms in the mining and oil

industries must go where the raw materials are located.

• Gain access to knowledge or other assets. When

Whirlpool entered Europe, it partnered with Philips to

access a well-known brand name and distribution

network.

• Access technological and managerial know-how

available in a key market. The firm may benefit by

establishing a presence in a key industrial cluster, such

as the robotics industry in Japan, chemicals in Germany,

fashion in Italy, and software in the U.S.


Efficiency Seeking Motives

• Reduce sourcing and production costs by

accessing inexpensive labor and other cheap inputs

to the production process. This motive accounts for

the massive development of manufacturing facilities

in China, Mexico, Eastern Europe, and India.

• Locate production near customers. In the

fashion industry, Spain’s Zara and Sweden’s H&M

locate much of their garment

production in key

markets such as

Spain and Turkey. H&M14-28


Efficiency Seeking Motives (cont’d)

• Take advantage of government incentives. In

addition to restricting imports, governments may

offer subsidies and tax concessions to foreign firms

to encourage them to invest locally.

• Avoid trade barriers. By establishing a physical

presence within a country, the investor obtains the

same advantages as local firms. The desire to avoid

trade barriers helps explain why Japanese

automakers set up factories in the United States

(1980s).


FDI Provides Economies of Scale

• Falling fixed costs. Many industries and productive

tasks have high per-unit fixed costs that decline the

more the task is performed. FDI helps concentrate

production and/or results in high sales volumes.

• Managerial resource efficiencies. Highly international

firms employ a relatively fixed number of headquarters

staff across more subsidiaries and affiliates.

• Specialization of labor. FDI facilitates hiring more

specialized workers, which increases efficiencies.

• Financial economies. Large firms with extensive

international operations usually can access capital at

lower cost. 14-30Copyright © 2017 Pearson Education, Inc.

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Types of FDI

• Greenfield investment vs. mergers and

acquisitions

• Nature of ownership:

Wholly owned direct

investment vs.

equity joint venture

• Level of integration:

Vertical vs.

horizontal FDI


Greenfield Investment vs. M&As

• Greenfield investment: The firm invests to build a

new manufacturing, marketing or administrative

facility, as opposed to acquiring existing facilities.

• Merger: Special type of acquisition in which two

firms join to form a new, larger company.

• Acquisition: Direct investment or purchase an

existing company or facility.


Toyota’s Factories in the United States


14-33

Sources: Based on Alex Taylor, “America’s Best Car Company,”Fortune, March 19, 2007, pp. 98–101; Toyota Operations 2015,

www.toyota.com; Toyota, “Fast Facts,”2015, www.toyota.com.

The Nature of Ownership

• Equity participation: Acquisition of partial ownership in an existing firm.

• Wholly owned direct investment: Investor fully owns the foreign assets

• Equity joint ventures:Partnership in which a separate firm is created through the investment of assets by two or more parent firms that gain joint ownership of a new legal entity.


Level of Integration

• Vertical integration: The firm owns, or seeks to own, multiple stages of a value chain for producing, selling, and delivering a product. E.g., Toyota owns some Toyota car dealerships around the world. Ford once owned steel mills that produced steel used to make Ford cars.

• Horizontal integration: Arrangement whereby the firm owns, or seeks to own, the activities involved in a single stage of its value chain. E.g., Microsoft acquired a Montreal-based firm that makes software used to create movie animation.


Ethical Connections

• FDI offers numerous benefits to recipient countries.

• However, FDI side effects can harm the natural

environment, especially in countries with weak

environmental laws. Pollution and ecological destruction

may emerge alongside rapid economic growth.

• One MNE, a manufacturer of food additives, allowed

untreated wastewater to flow into the ThiVai river in

Vietnam. Resulting pollution nearly destroyed the

livelihood of thousands of downstream farmers.

• MNEs must behave responsibly in their international

dealings. Governments must not allow development

goals to compromise citizen well-being.14-36Copyright © 2017 Pearson Education, Inc.

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You Can Do It: Jennifer Knippen

• In college, Jennifer majored in Economics and

International Business.

• She was inspired to pursue an international career

following a study-abroad program in Valencia, Spain.

After graduation, she returned to Spain for five months

of intensive training in Spanish and travel.

• Jennifer next took a sales position with the U.S. subsidiary KONE, Inc., a leading manufacturer of elevators and escalators based in Helsinki, Finland.


You Can Do It: Jennifer Knippen (cont’d)

• After experiencing the challenges and benefits of

working for the local subsidiary of a large,

multinational firm, Jennifer returned to school and

obtained a Masters degree in Global Management

from Thunderbird, a graduate school specialized in

international business.

• International travel, study abroad, and learning

Spanish enhanced her credentials to pursue a

career in global management.

• Jennifer set career goals and worked hard to

achieve them.

1-3814-38

International Collaborative Venture

• A partnership between two or more firms.

• Includes equity joint ventures and non-equity,

project-based ventures.

• Sometimes called partnerships or strategic

alliances.

• Collaboration helps overcome the often substantial

risk and high costs of international business. It

makes possible the achievement of projects that

exceed the capabilities of the individual firm.

14-39


Equity vs. Project-Based Joint Ventures

• Equity joint ventures are normally formed when no

one party has all the assets needed to exploit an

opportunity. Typically, the local partner contributes a

factory, market navigation know-how, connections,

or low-cost labor.

• A project-based joint venture has a narrow scope

and limited timetable. No new legal entity is created.

Typically, partners collaborate on joint development

of new technologies, products, or share other

expertise with each other. Such cooperation helps

them catch up with rivals in technology development.


Other Types of Collaborative Ventures

• Consortium: Project-based, usually non-equity venture with multiple partners fulfilling a large-scale project. E.g., Commercial aircraft manufacturing (Boeing and Airbus).

• Cross-licensing agreement: Type of a project-based, non-equity venture where partners agree to access licensed technology developed by the other, on preferential terms. E.g., Telecommunications industry for inventing new technologies.


Advantages and Disadvantages

of Collaborative Ventures


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Managing Collaborative Ventures: Key Questions

• How dependent will we be on our partner?

• How will responsibilities and competencies be shared

with the partner?

• Are our assets at risk? How can we protect them?

• What other risks do we face by partnering?

• Will we close growth opportunities due to this

venture?

• How will the venture be managed? What burdens will

be created on managerial, financial, or other

resources?


A Systematic Process to

International Business Partnering


Success Factors in Collaborative Ventures

• Half of all global collaborative ventures fail in the

first 5 years of operations due to unresolved

disagreements, confusion, and frustration. Thus,

partners should:

▪ Be aware of cultural differences;

▪ Pursue common goals;

▪ Pay attention to planning and management of the

venture;

▪ Safeguard core competencies; and

▪ Adjust to shifting environmental circumstances.


Retailers: A Special Case of Internationalization

Retailers typically internationalize via FDI and

collaborative ventures. Retailing takes various forms:

• Department stores (e.g., Marks & Spencer, Macy's);

• Specialty retailers (Body Shop, Gap, Disney Store);

• Supermarkets (Sainsbury, Safeway, Sparr);

• Convenience stores (Circle K, 7-Eleven, Tom Thumb); discount stores (Zellers, Tati, Target);

• “Big box stores” (Home Depot, IKEA, Toys "R" Us).

• Wal-Mart has over 100 stores and 50,000 employees in China, sourcing almost all its merchandise locally and providing thousands of local jobs.


Barriers to Retailer Success Abroad

1. Culture and language barriers. E.g., Differing

product and service portfolio, store hours, store

layout, relations between management and labor.

2. Consumers tend to develop strong loyalty to

indigenous retailers. E.g., Both Galleries Lafayette

in New York, and Wal-Mart in Germany failed.

3. Legal and regulatory barriers. Countries have

idiosyncratic laws that affect retailing. E.g., Germany

limits store hours and requires recycling.

4. Retailers often must develop local sources of

supply. E.g., McDonald’s in Russia; KFC in China.


Walmart’s Mixed Experience

• Germany: Failing to understand the market, Walmart

could not compete with local firms, and left the market.

• Mexico: Built huge U.S.-style parking lots. But most

Mexicans lack cars, and city bus stops were far away,

so shoppers could not haul their purchases home.

• Brazil: Families do their big shopping on payday.

Aisles were too narrow

to accommodate the rush.

• Argentina: Walmart’s red-

white-and-blue banners,

reminiscent of the U.S.

flag, offended local tastes. Copyright © 2017 Pearson Education, Inc. 14-48

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Success Factors for Retailers

1. Advance research and planning. French retailer

Carrefour spent 12 years building its business in Taiwan,

to better understand Chinese culture.

2. Establish logistics and purchasing networks

in each market. Well-organized sourcing and logistics

ensure inventory is always maintained.

3. Assume entrepreneurial, creative approach. Virgin

megastore expanded to Asia, Europe, and North

America, using creative approaches.

4. Adjust business model to suit local conditions. In

Mexico, Home Depot packages merchandise to suit

smaller budgets and offers flexible payment plans.

14-49Copyright © 2017 Pearson Education, Inc. Copyright © 2017 Pearson Education, Inc.

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Documents

7/29/2017debis.deu.edu.tr/userweb/ozge.ozgen/ckr_ib4_inppt_14_ppt (1).pdf · 7/29/2017 3 Name the location of each brand Brand Country where brand is based 7-Eleven Japan KitKat chocolate