UNIT ONE (1)

Introduction to International Business

Learning Objectives

In this unit, you’ll learn about:

1. What is international business?

2. What are the key concepts in international trade & investment?

3. How does international business differ from domestic business?

4. What motivates firms to go international?

5. Market globalization: An organizing framework

6. Regional integration and economic blocs

What is International Business?

International Business includes:

• All value-adding activities—including sourcing,

manufacturing, and marketing that are

performed on an international scale

• Firms who seek foreign customers & engage in

partnerships with overseas companies

What is International Business?

• The exchange of physical & intellectual assets –

including products, services, capital,

technology, know-how, & labor

• Activity performed mainly by specific firms,

but also by countries and non-governmental

organizations & agencies

Key International Business Definitions

• International business: Performance of any trade or

investment activity by firms across national borders

• Globalization of markets: the ongoing process of

economic integration & growing interdependency of

countries worldwide

• International trade: Exchange of products & services

across national borders, typically through exporting

& importing

Key Concepts in International Trade & Investment

• Exporting: Sale of products or services to customers

abroad from a base in the home country or a third

country. Boeing and Airbus export billions of dollars in

commercial aircraft products every year

• Importing or Global Sourcing: getting products or

services from suppliers abroad to be used at home or in

a third country. Toyota imports many parts from China

when it manufactures cars in Japan

Key Concepts in International Trade & Investment

• International investment: Passive ownership of

foreign securities, such as stocks and bonds, in

order to generate financial returns

• Foreign Direct Investment: the transfer of

assets to another country, or the acquisition of assets

in that country such as capital, labor,

land, plants, and equipment

World Trade Is Growing Faster than GDP

Foreign Direct Investment (FDI)

• The ultimate stage of internationalization

• Practiced by those firms who are most active

internationally

• Encompasses the widest range of involvement in

international business

Foreign Direct Investment (FDI)

• Usually engaged in for the long term

• Firms often retain partial or complete ownership of

assets they acquire

• Huge growth of FDI into developing economies – ones

with lower incomes, less developed industry base, &

less capital than more advanced economies

Foreign Direct Investment (FDI) Inflows into World Regions

(in Billions of U.S. Dollars per yr.)

The Role of Services in International Trade

• Services are actions performed or efforts put forward

by people & firms to solve business problems

• Examples: those related to banking & finance,

consulting, hospitality-related functions (e.g.,

reservations, food provision), retail, and many others

• The service sector accounts for about ¼ of all

international trade and this percentage is rising

The Role of Services in International Trade

• Larger, more advanced economies account for the

largest portions of service trade in the world; services

often account for 2/3 of GDP in these larger

economies

How does International and Domestic Business Differ?

1. International business:

• is conducted across national borders;

• uses distinctive business methods;

• must adjust to countries that differ in culture, language, political

& legal system, economic situation, infrastructure, & other factors

2. When they venture abroad, firms encounter four major types of risk

• Cross-cultural risk

• Country risk

• Currency risk

• Commercial risk

The Four Risks of International Business

The Four Risks of International Business

The Four Risks of International Business (cont.)

The Four Risks of International Business (cont.)

Cross-Cultural Risk, Examples

• Cultural differences: Risks arise from differences in

language, lifestyle, attitudes, customs, and religion,

where a cultural miscommunication jeopardizes a

culturally valued mindset or behavior.

• Negotiation patterns: Negotiations are required in

many types of business transactions but differ in how

they are conducted (e.g., Brazilians more likely to be

aggressive; Americans don’t spend a lot of time on

social niceties;

Cross-Cultural Risk, Examples

Japanese ―sound out‖ partners via social

interactions/events.

Errors in understanding these styles can

undermine business relations

Cross-Cultural Risk (cont.)

• Decision-making styles: Managers constantly make decisions

about the operations and future direction of the firm. For

example, Japanese take considerable time to make important

decisions, whereas Canadians tend to be decisive and ―shoot from

the hip‖

• Ethical practices: Standards of right and wrong vary considerably

around the world. For example, bribery is relatively acceptable in

some countries in Africa, but is generally unacceptable in Sweden

and legally enforced by other countries (e.g., Germany, U.S.)

Country Risk (Political Risk)

• Government intervention, protectionism, and barriers to

trade and investment

• Bureaucracy, red tape, administrative delays, corruption

• Lack of legal safeguards for intellectual property rights

• Legislation unfavorable to foreign firms

• Economic failures and mismanagement

• Social and political unrest and instability

Currency Risk (Financial Risk)

• Currency exposure: General risk of unfavorable

exchange rate fluctuations

• Asset valuation: Risk that exchange rate fluctuations

will adversely affect the value of the firm’s assets and

liabilities

•

Currency Risk (Financial Risk)

•Foreign taxation: Income, sales, & other taxes vary

greatly worldwide, with implications for company

performance & profitability

• Inflation: High inflation, common in many countries,

complicates business planning & the pricing of inputs and

finished goods

Commercial Risk

Commercial risk can be reduced by improving business strategy & tactics.

The following should be avoided:

o Choice of weak partners

o Operational problems

o Poor timing of entry

o Competitive intensity

o Poor execution of strategy

Summary of IB Risk

• These risks are always present but manageable

• Managers need to understand, anticipate, and

take proactive action to reduce their effects

• Some risks are extremely challenging

Who Participates in International Business?

• Multinational enterprises (MNE): Very large companies with

extensive resources allowing them to conduct business

activities worldwide via a network of subsidiaries and affiliates

(e.g., Honda, Exxon-Mobil, Walmart, Samsung, P&G, & Disney)

• Small and medium-sized enterprises (SME): Companies with

< 500 employees & more limited resources to devote to

international activity. Yet, in most countries they constitute

about 90% of all existing firms & are increasingly engaged in IB

Who Participates in International Business?

• Born global firms: Newer, entrepreneurial SMEs

that initiate substantial international business early

after their founding

• Non-governmental organizations: Nonprofit

organizations that pursue special causes and serve as

advocates for social issues, education, politics, &

research across borders

What Motivates Firms to Go International?

• To seek opportunities for growth through market

diversification

- E.g., Harley-Davidson, Sony, Whirlpool

• To earn higher margins and profits

- Often, foreign markets are more profitable

• To gain new ideas about products, services, & business

methods

- E.g., GM refined its knowledge about small, fuel-efficient cars in

Europe

Why do Firms Participate in IB?

• To better serve key customers that have relocated abroad

- E.g., when Toyota launched its operations in Britain, many of its suppliers followed suit

• To be closer to supply sources, benefit from global sourcing advantages, or gain flexibility in the sourcing of products -E.g., Dell sources parts and components from the best suppliers worldwide

• To gain access to lower-cost or better-value factors of production

- E.g., Sony does much of its manufacturing in China

Why do Firms Participate in IB? (cont.)

• To develop economies of scale in sourcing, production, marketing, and R&D -E.g., Boeing lowers overall costs by sourcing, manufacturing, & selling aircraft worldwide

• To confront international competitors more effectively or to thwart the growth of competition in the home market -E.g., Chinese appliance maker Haier built U.S. operations partly for competitive knowledge about Whirlpool (chief U.S. rival)

• To invest in a potentially rewarding relationship with a foreign partner

- French computer firm Groupe Bull partnered with Toshiba in Japan to gain insights for developing information technology

The Drivers & Consequences of Market

Globalization

The Drivers of Market Globalization

• Worldwide reduction of barriers to trade and

investment

• Market liberalization and adoption of free markets

• Industrialization, economic development, and

modernization

• Integration of world financial markets

• Advances in technology

Five Societal Consequences of Market Globalization

• Loss of national sovereignty

• Offshoring and the flight of jobs

• Effect on the poor

• Effect on the natural environment

• Effect on national culture

Societal Consequences of Globalization

• Loss of national sovereignty

– MNE activities can interfere with governments’ ability to control their own economies & social-political systems. Some firms are bigger than the economies of many nations (e.g., Walmart, Shell)

– Others argue that global competition in the context of global free trade makes MNEs less powerful (e.g., the U.S. auto industry declined as foreign rivals from Japan and Europe entered the U.S. market)

• Offshoring and the flight of jobs

– Jobs are lost as firms shift production of goods & services abroad in order to cut costs and obtain other advantages

– Firms benefit, but communities and industries are disrupted

Societal Consequences of Globalization (cont.)

• Effect on the poor

– In poor countries, globalization usually creates jobs &

raises wages, but tends to disrupt local job markets. MNEs

may pay low wages but then seek other locations for plants

once they do (e.g., wages in China are on the rise; MNEs

are moving production facilities to cheaper locations)

– Some workers are exploited; child labor and other

conditions difficult to monitor by MNE

Societal Consequences of Globalization (cont.)

• Effect on the natural environment

– Can harm environment by promoting industrialization

& other activities that generate pollution, habitat

destruction, & other environmental harm

– But, as nations develop their economies, they tend to

pass laws that protect the environment

– This happened in Japan in the 1960/70’s & is occurring

now in Mexico, China, and India

Societal Consequences of Globalization (cont.)

• Effect on National Culture

– Globalization opens the door to foreign firms, global brands,

unfamiliar products, and new values

– Increasingly, consumers buy similar products, modeled

according to Western countries, especially the U.S

– In this way, traditional norms, values, and behaviors may

homogenize over time

– Some believe that national identity may be lost to ―global‖

culture

Regional Economic Integration

• When nations within a geographic region form an alliance

aimed at reducing barriers to trade and investment &

increasing their economic interdependence

• Over 50% of world trade today occurs under the auspices of a preferential trade agreement entered into by groups of countries

• Cooperating nations obtain: increased product choices, productivity, living standards

lower prices

more efficient resource use

• Examples: European Union (EU) and the North American Free Trade Agreement (NAFTA)

Why Do Nations Pursue Economic Integration?

1. Expand market size

2. Achieve economies of scale & greater productivity

3. Attract direct investment from outside region

4. Acquire a better defensive and political posture

Why Pursue Regional Integration? 1. Expand market size

• Increases size of market for firms inside the bloc. Belgium has only

10 million people, but EU has nearly 500 million

• Buyers can access larger selection of goods

2. Enhance productivity & economies of scale

• Bigger market facilitates economies of scale

• Internationalization inside bloc helps firms learn to compete outside

bloc

• Competition & efficient resource usage inside the bloc leads to lower

prices for bloc consumers

Why Pursue Regional Integration? (cont.)

3. Attract investment from outside the bloc

• Compared to investing in stand-alone countries, foreign

firms prefer to invest in countries belonging to bloc

• General Mills, Samsung, & Tata have invested heavily in

EU-member countries

4. Acquire stronger defensive & political posture

• Membership provides countries with a stronger defensive

posture relative to other nations and world regions

• Key motive for formation of EU

Economic Bloc

• A geographic area consisting of countries that agree to

pursue economic integration by reducing tariffs &

other barriers to cross-border flow of products,

services, capital, and labor

• Bloc countries become party to free trade agreement that

eliminates tariffs, quotas, & other trade barriers

• Examples: European Union, NAFTA, MERCOSUR,

APEC, ASEAN, & many others

•

Five Potential Levels of Regional Integration

Levels of Regional Integration

• Free trade area:

– Simplest, most common arrangement

– Member countries agree to gradually eliminate formal trade barriers

within the bloc, while each member maintains an independent

international trade policy with countries outside the bloc (e.g., GAFTA

- Greater Arab Free Trade Area)

• Customs union:

– Similar to a free trade area except the members harmonize trade

policies toward nonmember countries via common tariff and nontariff

barriers on imports from nonmember countries

– Examples exist in Asia, Africa, the Middle East & more

Levels of Regional Integration (cont.)

• Common market

– Like a customs union, except products, services, & factors of

production such as capital, labor, & technology can move freely

among the member countries

– For example, EU countries observe many common labor &

economic policies

• Economic union:

– Like a common market, but members also seek common fiscal and

monetary policies & standardized commercial regulations

– The EU illustrates this by, among other features, the use of a single

currency - the euro

The EU: A Full-Fledged Economic Union 1. Market access. Tariffs and most nontariff barriers

have been eliminated

2. Common market. Barriers to cross-border movement

of production factors—labor, capital, and technology

3. Trade rules. Cross-national customs procedures and

regulations have been eliminated, which has

streamlined transportation and logistics within Europe

4. Standards harmonization. Technical standards,

regulations, and enforcements have been harmonized

Key Features of the European Union Member Countries

EFTA – European Free Trade Association

• A free trade group comprised of 4 European countries:

Iceland, Liechtenstein, Norway, & Switzerland

• Operates parallel to but is linked with the EU

• Established in 1960 as a trade bloc alternative for

European states who were either unable to, or chose not

to, join the EU

• They have preferential trade relations with 23 states and

territories, in addition to the 27 member states of the EU

NAFTA (Canada, Mexico, the U.S.)

• Passage of NAFTA in 1994 was facilitated by the maquiladora

program, thru which U.S. firms located factories just south of

the U.S. border to access low-cost labor without significant

tariffs

• Eliminated tariffs and most nontariff barriers for products and

services

• Established trade and investment rules, uniform customs

procedures, and intellectual property rights

• Provided procedures for settling trade disputes

El Mercado Comun del Sur (MERCOSUR)

• Launched in 1991, is the leading economic bloc in South America, accounting for nearly all of the region’s GDP

• 4 full members are Argentina, Brazil, Paraguay, and Uruguay; several other associate members & partners

• Provides free movement of products & services, common external tariff & trade policy, & coordinated monetary policies

• May be integrated with NAFTA and DR-CAFTA as part of a new proposed Free Trade Area of the Americas

Other Economic Blocs

• Caribbean Community and Common Market

(CARICOM)

• Comunidad Andina de Naciones (CAN)

• Association of Southeast Asian Nations

(ASEAN)

• Asia Pacific Economic Cooperation (APEC)

• Australia and New Zealand Closer

Economic Relations Agreement (CER)

Implications of Regional Integration for the Firm

• Internationalization by firms inside the economic bloc

– Regional integration facilitates company internationalization

• Rationalization of operations

– Restructuring company operations can help managers develop

strategies tailored to region as a whole, not just individual

countries

– Goal is to cut costs & increase efficiencies via scale economies.

Firms centralize production and marketing, instead of

decentralizing them to individual countries

Implications of Regional Integration for the Firm

• Mergers and acquisitions (M&A)

– Economic blocs lead to M&A, the tendency of one firm to buy

another, or of two or more firms to merge and form a larger

firm

Implications for Integration (cont.)

• Regional products and marketing strategy

– Firms cut costs by standardizing products & services

– Case Inc. reduced its line of tractors from 17 to only a few,

following integration of the EU

• Internationalization by firms from outside the bloc

– Because external trade barriers mainly affect exporting, many

foreign firms prefer to enter a bloc through FDI

– This is how Britain became the largest recipient of FDI from the

U.S. after formation of the EU

Theories of International Trade and Investment

Learning Objectives

In this chapter, you’ll learn about:

1. The theories that explain international trade and investment

2. The reasons why nations trade

3. The ways nations can enhance their competitive advantage

4. Why and how firms internationalize

5. The ways internationalizing firms can gain and sustain competitive

advantage

Theories of International Trade and Investment

Theories of International Trade and Investment (cont.)

Theories of International Trade and Investment (cont.)

Mercantilism and Neo-mercantilism

• Mercantilism: A belief, popular in the 16th century, that national prosperity results from maximizing exports and minimizing imports

• Today, some argue for neo-mercantilism—the idea that a nation should run a trade surplus

• Supporters of neo-mercantilism include:

- Labor unions (want to protect domestic jobs)

- Farmers (want to keep crop prices high)

- Some manufacturers (rely on exports)

– But is neo-mercantilism best for all?

Free Trade

• The absence of restrictions to the flow of goods and

services among nations

•Free trade is usually best because it leads to:

- Consumers & firms can more readily buy the

products they want

- Lower prices of goods because imports are usually

cheaper than domestic ones because of the lower

cost of production

•

Free Trade

- Lower cost imports reduce firm expenses; this

raises profits which could result in higher wages

for workers

- Higher living standards for consumers (because

costs are lower)

- Greater prosperity in poor countries

Adam Smith (1723-1790)

• Scottish political economist

• Developed absolute advantage principle to

counter/criticize the Mercantilist approach

Absolute Advantage Principle

• A country should produce only those products in which

it has absolute advantage or those it can produce using

fewer resources than another country.

Comparative Advantage

• The foundation concept of international trade

• Better answers the question of how nations can achieve

and sustain economic success and prosperity than

absolute principle

• Refers to the superior features of a country that provide

it with unique benefits in global competition compared

with others

• Derived either from natural endowments or from

deliberate national policies

Comparative Advantage Principle

• It is beneficial for two countries to trade even if one has

absolute advantage in the production of all products;

what matters is not the absolute cost of production but

the relative efficiency with which it can produce the

product.

Comparative Advantage Principle (cont.)

• While Germany can make both items more cheaply

than France, it is still beneficial for Germany to trade

with France

• The key is the ratio of production costs. In the exhibit,

Germany is comparatively more efficient at producing

cloth than wheat: It can produce three times as much

cloth as France (30/10), but only two times as much

wheat (40/20)

Comparative Advantage Principle (cont.)

• Germany should specialize in producing cloth

and import all the wheat it needs from France.

France should specialize in producing wheat

and import all its cloth from Germany

• Each country benefits by specializing in the

product in which it has a comparative

advantage and importing the other product

Comparative Advantage Principle (cont.)

• The principle applies to all goods. It reveals how

countries use scarce resources more efficiently. Example

• Arguably, no country is better than Japan at making cars and cell phones. But because Japan is especially good at making cars, it concentrates its resources on making them

• Other countries, such as China and Finland, focus on making cell phones

• In this way, Japan makes maximal use of its resources, and the world gets great cars

Limitations of Early Trade Theories

• Traded goods aren’t commodities – customers have

strong brand preferences and desire unique features

• Fail to account for international transportation costs

• Government involvement in trade throws theories off

(e.g., taxes on imports, regulations imposed, &

preferential subsidies for their own industries)

Limitations of Early Trade Theories

• Services: Some cannot be traded; others can be traded

freely via the Internet or global telephony, thereby

reducing advantage

• Scale economies & superior business strategies provide

efficiencies. Early trade theories failed to account for

this (e.g., Japan lacks comparative advantages, but its

firms succeeded anyway, via superior strategies)

Factor Proportions Theory

• Also known as the Factor Endowments Theory

• Argues that each country should produce & export

products that intensively use relatively abundant

production factors, & import goods that intensively use

relatively scarce factors of production

Factor Proportions Theory (cont.)

• However, the Leontief Paradox revealed that countries

can successfully export products that use less abundant

resources

• It was found that the U.S. often exported labor-

intensive goods (a non-abundant factor; relatively

expensive) & imported capital-intensive goods (a

strength/abundant factor)

• This implies that international trade is complex & can’t

be fully explained by a single theory

International Product Life Cycle Theory

• Product and their manufacturing technologies go

through 3 stages of evolution: introduction, maturity,

and standardization

• In the introduction stage, the inventor country enjoys a

monopoly both in manufacturing and exports (the

television set in the U.S.)

International Product Life Cycle Theory (cont.)

• In the maturity stage, the product’s manufacturing

becomes relatively standardized; other countries start

producing & exporting the product

International Product Life Cycle Theory (cont.)

• In the standardization stage, manufacturing ceases in

the original innovating country, who then becomes a net

product importer. Today, due to globalization, the cycle

occurs quickly for many products (think iPad)

New Trade Theory

• These approaches argue that economies of scale are an

important factor in some industries for superior

international performance, even in the absence of

superior comparative advantages

• Some industries succeed best as their volume of

production increases

• Example

The commercial aircraft industry has very high fixed costs

that necessitate high-volume sales to achieve profitability

Comparative vs. Competitive Advantage

Critical Role of Innovation in National Economic Success

• Innovation is a key source of competitive advantage

• The firm innovates in four major ways. It can develop:

(1) A new product or improve an existing product

(2) New ways of manufacturing

(3) New ways of marketing

(4) New ways of organizing company operations

• The more innovative firms in a nation, the stronger its national competitive advantage

Critical Role of Productivity in National Economic Success

• Productivity is the value of the output produced by a unit

of labor or capital

• It is a key source of competitive advantage for firms

• The greater the productivity of the firm, the more efficiently

it uses its resources

• The greater the aggregate productivity of the firms in a

nation, the more efficiently the nation uses its resources

• Aggregate productivity is a key determinant of the nation’s

standard of living

Michael Porter’s Diamond Model: Sources of National Competitive Advantage

• Firm strategy, structure, and rivalry: The nature of

domestic rivalry & the conditions that determine how a

nation’s firms are created, organized, and managed

• Example Italy has many top firms in design industries such as textiles, furniture, lighting, & fashion. Vigorous competitive rivalry puts these firms under constant pressure to innovate. This has propelled Italy to a leading position in design.

The Diamond Model (cont.)

• Factor conditions: Quality and quantity of labor, natural

resources, capital, technology, know-how,

entrepreneurship, and other factors of production

• Example

An abundance of cost-effective & educated workers

gives China a competitive advantage in the production

of laptops

The Diamond Model (cont.)

• Demand conditions at home: The strengths and

sophistication of customer demand

• Example

• Japan is a densely populated, hot, & humid country with

very demanding consumers. These conditions led Japan

to become a leading producer of superior, compact air

conditioners.

The Diamond Model (cont.)

• Related and supporting industries: The presence of

suppliers, competitors, and complementary firms that

excel within a given industry

• Example

• Silicon Valley is a great place to launch a computer

software firm because it is home to thousands of

knowledgeable firms & workers in that industry.

Industrial Cluster

• A concentration of suppliers and supporting firms from

the same industry located within the same geographic

area; similar to Porter’s Related and Supporting Industries

• A strong cluster can serve as an export platform for the

nation

• Examples Silicon Valley; pharmaceuticals in Switzerland; footwear industry in Pusan, South Korea; IT industry in Bangalore, India; fashion cluster in northern Italy

National Industrial Policy

• A proactive economic development plan employed by the

government to nurture or support promising industry

sectors with potential for regional or global dominance

– Initiatives can include:

Tax incentives

Favorable monetary and fiscal policies

Rigorous educational system

Investment in national infrastructure

Strong legal and regulatory systems

How do Companies Internationalize?

• Early theories believed a firm would progress in incremental stages over a long period of time (from a solely domestic firm to one that’s eventually international)

• More recently researchers have shown that the slow and gradual assumption is not always accurate

• For example, there seem to be born global firms who become international on or shortly after start-up

• This has led to the study of international entrepreneurship – the development of business on the international stage

How Firms Gain and Sustain International Competitive Advantage

• Because the MNE was traditionally the major player in

international business, scholars have offered numerous

explanations of what makes these firms pursue, and succeed

in, internationalization

• Because FDI has been MNEs’ main strategy in international

expansion, theoretical explanations have tended to emphasize

it FDI Stock refers to the total value of assets that MNEs own

abroad via their investments

FDI-Based Explanations: Monopolistic Advantage Theory

• Argues that MNEs prefer FDI because it provides the firm

with control over resources and capabilities in the foreign

market and a degree of monopoly power relative to foreign

competitors

• Key sources of monopolistic advantage include proprietary

knowledge, patents, unique know-how, and sole ownership

of other assets

• Example

Novartis earns substantial profits by marketing various patent

medications through its subsidiaries worldwide.

FDI-Based Explanations: Internalization Theory

• Explains how the MNE chooses to acquire and retain

one or more value-chain activities inside itself

• Such ―internalization‖ provides the MNE with greater

control over its foreign operations

• Internalization avoids the drawbacks of dealing with

external partners, such as reduced quality control and

the risk of losing proprietary assets to outsiders

Example

• In China, Intel owns much of its value chain, which ensures that Intel knowledge, patents, and other assets are not misused or illicitly obtained by potential rivals.

FDI-Based Explanations: Dunning’s Eclectic Paradigm

• Three conditions determine whether or not a company will

• enter a given foreign country via FDI:

1. Ownership-specific advantages: Knowledge, skills,

capabilities, relationships, or physical assets that the

firm owns and that are the basis of its competitive

advantages

FDI-Based Explanations: Dunning’s Eclectic Paradigm

2. Location-specific advantages: Similar to comparative

advantages; specific advantages that exist in the

country that the MNE has entered, or is seeking to

enter, such as natural resources, low-cost labor, or

skilled labor

3. Internalization advantages: Control derived from

internalizing foreign-based manufacturing,

distribution, or other value-chain activities

Non-FDI-Based Explanations: International Collaborative Ventures

• A form of cooperation between two or more firms.

Partners pool resources and capabilities to create

synergies and share the risk of joint efforts

• Starting in the 1980s, firms increasingly began using

collaborative ventures to expand abroad

• Collaboration provides access to foreign partners’ know-

how, capital, distribution channels, and marketing assets.

It also helps overcome government-imposed obstacles

Two Types of International Collaborative Ventures

• Equity-based joint ventures result in the formation of a

new legal entity. In contrast to the wholly owned FDI,

the firm collaborates with local partner(s) to reduce risk

and commitment of capital

Two Types of International Collaborative Ventures

• Strategic alliances don’t require equity commitment

from partners; both are willing to cooperate in R&D,

manufacturing, or other value-adding activity. Because

alliances have a narrowly defined scope & timeline, they

provide greater flexibility than equity-based ventures