Copyright © 2014 Pearson Education FM : FM : Anis Gunawan, MBA,MM,SP 9. Foreign Direct Investment and Collaborative venture

International Business: Strategy, Management, and the New Realities I.Foundation concepts of International business II.The environment of International Business III.Strategy and opportunity assessment IV. Entering and operating in International Markets. V. Functional Area excellence International business 9. Foreign Direct Investment and Collaborative venture

International Business: The New Realities, Global Edition, 3 rd Edition by Cavusgil, Knight, and Riesenberger Chapter 15 Copyright © 2014 Pearson Education

FDI and Collaborative Ventures 1. 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. 2. International collaborative venture : A cross-border business alliance in which partnering firms pool their resources and share costs and risks of a venture. 3. Joint venture (JV) : A form of collaboration between two or more firms to create a jointly-owned enterprise. Copyright © 2014 Pearson Education DC

Examples of FDI 1.Vodafone, a British firm, acquired the Czech telecom Oskar Mobil. 2.eBay, a U.S. firm, acquired Luxembourg’s Skype Technologies, a prepackaged software company. 3.Japan Tobacco Inc. acquired the British cigarette maker Gallaher Group PLC for almost $15 billion. 4.Dubai International Capital Group acquired the British theme park operator Tussauds Group for $1.5 billion. Copyright © 2014 Pearson Education Voda

Name the location of each brand BrandCountry where brand is based 7-ElevenJapan KitKat chocolate barsSwitzerland Miller beerSouth Africa Budweiser beerBelgium Motel 6France Thinkpad laptopsChina Blackberry cell phonesCanada DHL express deliveryGermany Captain Morgan RumBritain Absolut VodkaSweden Godiva chocolateTurkey Copyright © 2014 Pearson Education 7

Nature of Foreign Direct Investment 1.The most advanced, expensive, complex, and riskiest entry strategy, involving the establishment of manufacturing plants, marketing subsidiaries, or other facilities abroad. 2.Undertaken by firms from both advanced economies and emerging markets. 3.Target countries are both advanced economies and emerging markets. 4.Occasionally raises patriotic sentiments among citizens (e.g., Haier and Maytag; Dubai Ports). Copyright © 2014 Pearson Education D

Motives for Foreign Direct Investment 1.Market- seeking motives 1. Gain access to new markets or opportunities 2. Follow key customers 3. Compete with key rivals in their own markets 2.Resource- or asset- seeking motives 1. Access raw materials 2. Gain access to knowledge or 3. other assets 4. Access technological and managerial know- how available in a key market 3.Efficiency- seeking motives 1. Reduce sourcing and production costs 2. Locate production near customers 3. Take advantage of government incentives 4. Avoid trade barriers Copyright © 2014 Pearson Education

1.Market-Seeking Motives 1. 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. 2. 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 th ere too. Copyright © 2014 Pearson Education P&G B

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 and hamper Komatsu’s ability to expand its activities in the USA. Copyright © 2014 Pearson Education

2.Resource or Asset-Seeking Motives 1. 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. 2. 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. 3. 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. Copyright © 2014 Pearson Education RB

Resource Seeking Motives Firms in the petroleum industry internationalize to access raw materials; in this case, oil reserves in areas with appropriate natural resources such as the Middle East. Pictured is an oil refinery in Saudi Arabia. Copyright © 2014 Pearson Education

3.Efficiency Seeking Motives 1. 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. 2. 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&M Copyright © 2014 Pearson Education

Efficiency Seeking Motives (cont’d) 1. 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. 2. 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). Copyright © 2014 Pearson Education Toyota

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.Entails substantial risk and uncertainty 5.Direct investors deal more intensively with specific social and cultural variables in the host market. Copyright © 2014 Pearson Education

Service Multinationals 1.Firms that offer services – such as lodging, construction, and personal care – must offer them when and where they are consumed. 2.Service firms establish either a permanent presence via FDI (e.g., retailing), or a temporary relocation of personnel (e.g., construction industry).industry 3.Many support services – such as advertising, insurance, accounting, and package delivery – are best provided at the customer’s location. Copyright © 2014 Pearson Education

Leading Destinations for FDI 1.Advanced economies in Europe (especially Britain), Japan, and North America are popular FDI destinations, mainly as attractive markets. 2.In recent years, emerging markets and developing economies have gained appeal as FDI destinations. E xamples: E xamples:  Firms target China, Mexico, and Eastern Europe for low- cost manufacturing and to easily access huge adjoining regional markets. Firms target China, Mexico, and Eastern Europe for low- cost manufacturing and to easily access huge adjoining regional markets. Copyright © 2014 Pearson Education

Factors Relevant to Selecting Locations for FDI Copyright © 2014 Pearson Education