LEARNING OBJECTIVES After reading this chapter, you should be able to: Discuss the effect of Foreign Direct investment on entry modes Explain Merger

LEARNING OBJECTIVESAfter reading this chapter, you should be able to:Discuss the effect of Foreign Direct investment onentry modesExplain Merger and Acquisition (M&A)Discuss the different types of Joint Venture (JV) orGlobal Strategic Alliance (GSA)Explain Umbrella Holding Company

CHAPTER 10CHAPTER 10FDI Related Entry Mode FDI Related Entry Mode StrategyStrategy

FDI RELATED ENTRY MODE STRATEGYFDI RELATED ENTRY MODE STRATEGY

1. Foreign direct investment or FDI is a direct investment made by a company or entity based in one country, into a company or entity based in another country.

2. Foreign direct investment, in its classic definition, is defined as a company from one country making a physical investment into building a factory in another country.

3. The direct investment in buildings, machinery and equipment is in contrast with making a portfolio investment, which is considered an indirect investment.

4. FDI has come to play a major role in the internationalization of firms. Factors that induce firms that adopt FDI are changes in technology, growing liberalization of the national regulatory framework governing investment in enterprises, and changes in global capital markets.

5. The majority of foreign direct investment is made in the form of direct investment, fixtures, machinery, equipment and buildings and it can also be done through mergers & acquisitions as well.


1. There has been a dramatic increase in the number of technology startups and this, together with the rise in prominence of Internet usage, has fostered increasing changes in foreign investment patterns.

2. Many of these high tech startups are very small companies that have grown out of research & development projects often affiliated with major universities and with some government sponsorship especially in the area of software development and licensing.


Licensing and Technology Transfer1.Licensing and technology transfer have been important in promoting cooperation between the academic and business communities. 2.Since the policy allowed universities to hold title to research and development done in their labs, licensing agreements have helped turned raw technology into finished products that are viable in competitive marketplaces. 3.Licensing agreements allow companies to take full advantage of new and exciting technologies while limiting their overall risk to royalty payments until a particular technology is fully developed.


Reciprocal distribution agreements1.Usually occurs between two companies, within the same or affiliated industries, both agreed to act as a national distributor for each other’s products e.g. a U.S. based manufacturer of tables signs a mutual distribution agreement with a Spanish based manufacturer of chairs. Both companies gain direct access to each other distribution network without having to pay distributor support payments and other related expenses found within the distribution channel and neither company can hurt the other’s market for its products.

2.Without such an agreement in place, the Spanish manufacturer might very well have to invest in a national sales office to coordinate its distributor network, manage warehousing, inventory and shipping as well as to handle administrative tasks such as accounting, public relations and advertising.


Joint Venture and other Hybrid Strategic Alliances1.Joint venture involves two firms who are within the same industry who are partnering for some strategic advantage. Reasons for the partnering might include the need to access the proprietary technology, the desire to gain access to intellectual, to access to channels of distribution in key regions of the world. 2.Joint ventures involving three or more parties are usually called syndicates and are most often formed for specific projects such as large construction or public works projects that might involve a wide variety of expertise and resources for successful completion.


Basic requirements for embarking using FDIThe four basic requirements are the level of competitiveness, new market analysis, market expectations and assessment of internal resources.1)Level of Competitiveness

FDI may be considered as an attractive and a feasible option depending on the industry sector and type of business. From the competitive view, it is important to be aware of competitors who are expanding into a foreign market and how they are doing it. At the same time, it also becomes imperative to monitor how globalization is affecting domestic clients on their products/services needs.


Basic requirements for embarking using FDI

2)New Market AnalysisFirms must have realistic

assessment in aspect such as resource utilization, local industry and foreign investment regulations, government incentives,

profit retention, financing, distribution, and other factors before entering the market.


Basic requirements for embarking using FDI3)Market Expectations

Foreign production or location begins to look more cost effective when product or service reaches a critical mass of amount and cost. Any decision on investing must carefully consider factors such as the feasibility to operate in a large capacity that will lead the firms to acquire economies of scale in manufacturing to meet demand in a large market. Another factor that should be taken into consideration is that firms must have access to supply chain channel members and logistic transportation in order to produce and distribute products to international market.


Basic requirements for embarking using FDI4)Internal Resources

The last factor that the firms have to consider is internal resources e.g. does the firm have support from all its stakeholder for the foreign investment? Does the firm have the capabilities and strong knowledge to go abroad? These questions need to be taken seriously by the management of the firm before deciding to embark in a foreign land using FDI to minimize risks.


Merger and Acquisition (M&A)1.A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed.2.Merged companies typically will operate on a cooperative basis, while an acquisition involves absorbing part or all of another company.

FDI RELATED ENTRY MODE STRATEGYFDI RELATED ENTRY MODE STRATEGYJoint Venture (JVS) or Global Strategic Alliances(GSAS) 1.JV is the cooperation of two or more businesses in which each agrees to share revenues, expenses and assets including profit, loss and control in a specific enterprise.

2.There are also other types of companies such as JV limited by guarantee, and JV limited by guarantee with partners holding shares.

3.When two or more individuals come together to form a temporary partnership for the purpose of carrying out a particular project, such partnership can also be called a joint venture where the parties are “co-venturers”. The venture can be for one specific project only and sometimes also is being referred to a consortium or a continuing business relationship.

4.The consortium JV (also known as a cooperative agreement) is formed where one party seeks technological expertise or technical service arrangements, franchise and brand use agreements, management contracts, rental agreements, for one-time contracts.

FDI RELATED ENTRY MODE STRATEGYFDI RELATED ENTRY MODE STRATEGYJoint Venture (JVS) or Global Strategic Alliances(GSAS)

A global strategic alliance is usually established when a company wishes to enter into a related business or new geographic market – particularly one where the government prohibits imports in order to protect domestic industry. Typically, alliances are formed between two or more corporations, each based in their home country, for a specified period of time. Their purpose is to share in ownership of a newly formed venture and maximize competitive advantages in their combined territories.

FDI RELATED ENTRY MODE STRATEGYFDI RELATED ENTRY MODE STRATEGYJoint Venture (JVS) or Global Strategic Alliances(GSAS) In general there are six types of global strategic alliance. There are joint exploration, research and development consortium, co-production or co-service agreement, co-marketing arrangements, long term supply management and co-management arrangement. 1) Joint ExplorationJoint exploration is a type of joint venture that specifically involves with companies that are extracting minerals, oil and gas exploration. The act of exploring, penetrating, or ranging over for purposes of discovery, especially of geographical discovery; examination; as, the exploration of unknown countries are jointly together by few companies e.g. Shell & Petronas signed a contract for joint exploration in search for gas & oil in offshore Sarawak.

FDI RELATED ENTRY MODE STRATEGYFDI RELATED ENTRY MODE STRATEGYJoint Venture (JVS) or Global Strategic Alliances(GSAS) 2) Research & Development ConsortiumResearch and development (R&D) consortia are formed by manufacturing companies, for the purpose of conducting shared research on new technologies for the benefit of the consortium’s member companies, often with the support of government. In Japan, government-supported R&D consortia (kumaia) have been in existence since1960s. R&D consortia is most frequently formed in the electronics, semiconductor, and pharmaceutical industries. For example, SEMATECH, a Texas-based consortia of major semiconductor manufacturers founded in 1987, has had dramatic success in helping its member companies regain dominant market shares in the international semiconductor equipment and silicon-chip markets.

FDI RELATED ENTRY MODE STRATEGYFDI RELATED ENTRY MODE STRATEGYJoint Venture (JVS) or Global Strategic Alliances(GSAS) 3) Co-Production and Co-Service Agreement

i.An international co-production is a production where two or more different production companies are working together to in a specific project e.g. a co-production agreements enable Canadian and foreign producers to pool their creative, artistic, technical and financial resources to coproduce projects that enjoy the status of national productions in the countries involved. ii.Co-service agreement is an agreement entered between a consultant or independent contractor and firms to provide management, consulting or other services for a fee.

FDI RELATED ENTRY MODE STRATEGYFDI RELATED ENTRY MODE STRATEGYJoint Venture (JVS) or Global Strategic Alliances(GSAS) 4) Co-Marketing ArrangementsCo-branding is also known as brand partnership. Brand partnership happens when two companies form an alliance to work together in marketing aspects, creating marketing synergy. co-branding could be considered to include sponsorships, for example, Marlboro lends it name to Ferrari or accountants Ernst and Young support the Monet exhibition. The typical co-branding agreement involves two or more companies acting in cooperation to associate any of various logos, color schemes, or brand identifiers to a specific product that is contractually designated for this purpose.

FDI RELATED ENTRY MODE STRATEGYFDI RELATED ENTRY MODE STRATEGYJoint Venture (JVS) or Global Strategic Alliances(GSAS) 5) Long term Supply Managementi.The concept of “Just-In-Time”, “Lean Manufacturing” and “Agile Manufacturing Practices” help furthering the implementation strategy of the long term supply management among global firms.

ii.Other factors that make long term supply change management feasible is due to technological changes, particularly the dramatic fall in information communication costs, which is important part of transaction costs, have led to changes in coordination among the members of the supply chain network in the long run.

iii.As firms strive to focus on core competencies and becoming more flexible, they may reduce their ownership of raw materials, resources and distribution channels. These functions are increasingly being outsourced to other firms that can perform the activities better or more cost effectively e.g. Dell inshoring its PC delivery services to FedEx and UPS on its facilities.


Joint Venture (JVS) or Global Strategic Alliances(GSAS) 6) Co-Management ArrangementThe World Bank has defined co-management as ‘the sharing of responsibilities, rights and duties between the primary stakeholders, in particular, local communities and the nation state; a decentralized approach to decision-making that involves the local users in the decision-making process as equals with the nation-state’. The definition regarded co-management as some kind of partnership between public and private actors. There are six facet of co-management arrangement.


Co-Management Arrangement1)Co-management as power sharing Resource management falls under the

jurisdiction of the central or state government, but there may be arrangements for sharing power and responsibility with business users.2) Co-management as institution building

In order to create co-management as an institution building, government must create a favorable policy environment to assists the emergence of functional co-management arrangements by giving feedback, between government policy and local institutions.


Co-Management Arrangement3) Co-management as trust and social capital

Direct user involvement in joint management boards did not increase the likelihood of co-operation but the frequent presence of

government bodies really increased the trust between parties.4) Co-management as process

Co-management must agreed on a process for sharing management rights and responsibilities.5) Co-management as problem solving

Management decision-making means parties have to make choices between different alternatives. But adaptive management requires collaborative processes to establish consensus among the parties before feedback-based problem solving can proceed.


Co-Management Arrangement6) Co-management as governance

Co-management as governance often involves a diversity of players including public and private actors. The polycentric approach recognizes that effective governance often requires multiple links across levels and domains, and seeks overlapping centers of authority. Such a decision-making structure contributes to the creation of an institutional dynamic appropriate for adaptive co-management and more broadly, for adaptive governance.


Umbrella Holding CompanyUmbrella holding company as a company that owns multiplechains of majority- and minority-owned operating subsidiaries. Umbrella holding company is a type of business organization that allows a firm (called parent) and its directors to control or influence other firms (called subsidiaries) e.g. TNB have many subsidiaries including TSG, TCI, MTM, etc.

Benefit and drawback:One of the advantages of umbrella holding company is getting discounted insurance and benefits. Since most of this type of company is big, it has to deal with many insurance policies, payroll companies, and staffing agencies. One of the risks of an umbrella corporation is they can often grow so large that they eventually become inefficient.

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LEARNING OBJECTIVES After reading this chapter, you should be able to: Discuss the effect of Foreign Direct investment on entry modes Explain Merger