© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.8–2 1.Summarize the major entry strategies used by companies, especially those from emerging-market economies, in the globalization process. 2.Explain the evolution of multinational enterprises (MNEs). 3.Explain the major strategic reasons why MNEs invest abroad. 4.Explain the pros and cons of foreign direct investment (FDI) from a host country perspective. 5.Describe what countries can do to successfully attract FDI.

Strategy Choice and Implementation: Going International Risk Profile – The potential financial loss that entrepreneurs are willing to take in a business Risk-return Trade-off – The greater the risk (loss of capital invested) entrepreneurs are willing to take, the greater the rewards (profit) they are likely to reap Sources of Risk – Ownership, operation, or asset transfer © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.8–3

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.8–4 EXHIBIT 8.1 ENTRY STRATEGIES IN GLOBAL BUSINESS

Minimizing Financial Risk Export-import Business – Penetrating foreign markets by exporting or importing merchandise for domestic consumption Licensing – Providing a foreign partner with the rights and/or technology to manufacture and sell products or services in a target country for an annual license fee Franchising – A franchisor provides specialized equipment, service and/or startup costs to a franchisee in return for an annual fee for rights to manufacture/sell its products © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.8–5

Sharing Financial Risks Strategic Alliances – An agreement between two or more firms in which the firms seek to gain revenues and maximize profits in a market through their cooperative efforts for a period of time International Joint Venture – A business jointly owned and operated by two or more firms (one local host country and one foreign) that pool their resources to penetrate the host country’s markets, share in profits and share commercial risk © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.8–6

Cross-Border Mergers and Acquisitions Acquisition – Is the purchase of established firms abroad with the goal of using existing production, marketing, and distribution networks and of having ready access to foreign markets that fit the purchasing firm’s global strategy Wholly-Owned Subsidiaries – Are newly developed (“green field”) overseas facilities requiring large foreign direct investments to tailor their operations to the specific needs of the home country firm © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.8–7

The Rise of Multinational Enterprises Multinational Enterprises (MNEs) – Are firms that are headquartered in one country, but own and control significant manufacturing, services, R&D (research and development) facilities, or other business entities in other countries – Developed largely after World War II as international trade and investment regulations were liberalized – Are now challenged by the rise of MNEs from emerging market economies © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.8–8

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.8–9 EXHIBIT 8.2 THE WORLD’S TEN LARGEST COMPANIES (YEAR END 2010) Multinational enterprises from the United States and China dominate the world business scene

Multinational Enterprises and their Global Strategic Motives Maximizing Shareholder Wealth – To maximize the net present value of future cash flows of foreign investment adjusted for exchange rate movements or to maximize profits so that shareholders could receive larger dividends and see their share prices rise over time © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.8–10

Going Global: Overseas Expansion Reasons for Expanding Overseas – Competition in a saturated home market is reducing a firm’s domestic profit margins – A firm can use its current competitive advantages in production, technology, and management to capture new business opportunities abroad – A firm can reduce or minimize its overall costs by outsourcing its operations and/or gaining access to lower-cost inputs in overseas locations © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.8–11

Strategies for Going Abroad Revenue Maximizing (Market-Entry) Strategies – High-growth markets – Stable, high-income markets – Countries with monopolistic market structures – Entering trade restricted sectors Cost Minimizing Strategies – Gaining economies of scale in overseas production – Minimizing factor input costs by relocating overseas – Reacting to exchange rate movements to take advantage of long-term appreciation of FDI assets © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.8–12

Strategies for Going Abroad (cont’d) Risk Minimizing Strategies – Diversification to minimize risk and foster stability in global corporate cash flows and earnings – Correlation of returns to identify overseas projects with performance levels that are not highly correlated to domestic cash flows or project returns over time – Diversifying to gain foreign consumption that helps maximize overall corporate profitability during the maturity stage of the life cycle of firm’s products © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.8–13

Dunning’s Eclectic Theory of Foreign Direct Investment (FDI) © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.8–14 Key Economic Advantages for Using FDI Ownership or firm-specific internal transfer advantages Location or country-specific advantages Internalization (mode of market entry) advantages

Host Country Perspective of Foreign Direct Investment Benefits of FDI Generation of significant financial inflows Creation of new jobs Access to new technologies Facilitation of the transfer of management and employee skills Increased domestic competition and choice Generates tax revenues for economic development. Costs of FDI Environmental pollution that results from exploitation of natural resources by MNEs Exploitation of the host country labor force reduces human capital development MNE’s lack of corporate social responsibility for the social consequences of their decisions Political interference by MNEs in the host country’s affairs © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.8–15

Improving Host Country’s Investment Climate Attractive Investment Climate Characteristics Proper economic reforms Transparent governance structure Rule of law Contributions of Domestic Firms And MNEs Invest profitably Create jobs Contribute to economic growth Reduce poverty © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.8–16

© 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.8–17 KEY TERMS risk profile export-import business licensing franchising strategic alliances international joint venture acquisition subsidiaries multinational enterprises (MNEs) maximizing shareholder wealth product life cycle theory governance