Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 14-1 Part Two Global, Strategy, Structure, and Implementation Chapter Fourteen Direct Investment and Collaborative Strategies

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 14-2 Chapter Objectives To clarify why companies may need to use modes other than exporting to operate effectively in international business 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

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 14-3 Factors Affecting Operating Modes in International Business

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 14-4 Foreign Expansion: Alternative Operating Modes

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 14-5 Why Exporting May Not Be Feasible 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 capacity 4.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

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 14-6 Foreign Direct Investment Control accompanies investment Three primary reasons that spur companies to want a controlling interest:  internalization theory  appropriability theory  freedom to pursue global objectives

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 14-7 Foreign Direct Investment (FDI) approaches 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.

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 14-8 Methods for Making FDI The advantages of acquiring an existing operation include:  adding no further capacity to the market  avoiding start-up problems  easier financing Companies may choose to build if:  no desired company is available for acquisition  acquisition will lead to carry-over problems  acquisition is harder to finance

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall 14-9 Collaborative Arrangements and International Objectives

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall General Motives for Collaborative Arrangements To Spread and Reduce Costs To Specialize in Competencies To Avoid or Counter Competition To Secure Vertical and Horizontal Links To Gain Knowledge Click for Video

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall International Motives for Collaborative Arrangements Gain location-specific assets Overcome legal constraints Diversify geographically Minimize exposure in risky environments

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Types of 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

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Licensing 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

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Franchising 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

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Management Contracts Management contracts are used primarily when the foreign company can manage better than the owners

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Turnkey Operations Turnkey operations are:  Most commonly performed by construction companies  Often performed for a governmental agency

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Joint Ventures 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

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Equity Alliances 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

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Collaborative Strategy and Complexity of Control

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall How to Dissolve a Joint Venture

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Problems of Collaborative Arrangements 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

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Managing Foreign Arrangements The evolution to a different operating mode may:  be the result of experience  necessitate costly termination fees  create organizational tensions

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Country Attractiveness/Company Strength Matrix

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Negotiating Process In technology agreements:  seller does not want to give information without assurance of payment  buyer does not want to pay without evaluating information

Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Performance Assessment When collaborating with another company, managers must:  continue to monitor performance  assess whether to take over operations