Prentice Hall, 2002Chapter 3 Daniels 1 Chapter Three Forms of Operations

Prentice Hall, 2002Chapter 3 Daniels 2 Chapter Objectives  To appreciate that companies may use various operating forms to sell abroad or to gain foreign resources  To understand why trade (exporting and importing) is important for most companies operating internationally  To comprehend the reasons why companies depend on production in foreign countries  To perceive the advantages of owning foreign production, rather than contracting with another company that owns it  To grasp the reasons for and understand the different types of international collaborative arrangements  To recognize the problems of international collaborative arrangements and means of addressing the problems

Prentice Hall, 2002Chapter 3 Daniels 3 Introduction  Combinations of external and internal conditions influence managers’ selection of international operating forms  Whether a country produces in its home country or abroad is a convenient way to begin describing operating forms

Prentice Hall, 2002Chapter 3 Daniels 4 Forms of Operations

Prentice Hall, 2002Chapter 3 Daniels 5 Importing and Exporting  Exports: goods and services sold to residents of a foreign country  Imports: purchases from residents of a foreign country  Collectively, exports and imports are known as trade Merchandise trade Service exports and imports Service trade Comprised of earnings from and payments to foreign residents for other than merchandise Transportation, communication, tourism, financial services, and payments for the use of copyrights and trademarks Invisibles  Trade, especially merchandise trade, is the most important international economic activity for most countries  More companies engage in importing and exporting than in any other form of international business  Companies usually import and export before undertaking other forms of international business  Importing and exporting require specialized functions and operations

Prentice Hall, 2002Chapter 3 Daniels 6 Reasons for Foreign Production  Companies may find advantages of producing in foreign countries: Cheaper foreign production Cheaper labor costs Transportation costs Lack of domestic capacity Need to alter products and services Can require additional investment Loss of certain economies from large-scale production Trade restrictions Every country continues to place some barriers on the import of products and services from abroad Country-of-origin effects Some customers prefer to purchase locally made goods for nationalistic reasons

Prentice Hall, 2002Chapter 3 Daniels 7 Foreign Equity Arrangements  A company may or may not take ownership in the foreign facilities that provide products and services to it Direct investment: gives the investor a controlling interest in a foreign company Governments usually stipulate that ownership of a minimum of 10-25% of the voting stock in a foreign enterprise is necessary for them to consider the investment as direct The more equity held, the higher the commitment to the operation  Internalization: when a company controls a foreign operation rather than collaborating with another company One reason companies may prefer internalization is reluctance to transfer certain vital resources to another company Internalization allows companies to more easily adopt a global or transactional strategy

Prentice Hall, 2002Chapter 3 Daniels 8 Foreign Equity Arrangements

Prentice Hall, 2002Chapter 3 Daniels 9 Motives for Collaborative Arrangements  Companies collaborate internationally for the following reasons: Spread and reduce costs Specialize in competencies Resource-based view of the firm: holds that each company has a unique combination of competencies Competitive factors Secure vertical and horizontal linkages Horizontal linkages may increase a company’s product line Companies may lack the resources to go it alone Glean knowledge Gain location-specific assets Overcome legal constraints Diversify geographically Can help a firm smooth its sales and profits Minimize exposure in risky environments

Prentice Hall, 2002Chapter 3 Daniels 10

Prentice Hall, 2002Chapter 3 Daniels 11 Collaborative Forms  Joint venture: two or more companies share ownership of an FDI  Consortium: when two or more organizations participate, this is what the resulting joint venture is sometimes called  Equity alliances: involves a company’s equity position in the company with which it has a collaborative arrangement The purpose of equity ownership is to solidify a collaborating contract  Licensing: a company grants rights to intangible property to another company Cross-licensing  Franchising: a specialized form of licensing in which the franchiser not only sells an independent franchisee the use of a trademark but also assists on a continuous basis in the operation of the business  Management contracts: arrangements whereby, for a fee, one company provides personnel for another company  Turnkey operations: involve a contract for construction of operating facilities that are transferred for a fee to the owner when they are ready to commence operations

Prentice Hall, 2002Chapter 3 Daniels 12 Collaborative Forms

Prentice Hall, 2002Chapter 3 Daniels 13 Use of Different Operational Forms  The truly experienced international firm usually uses most of the operational forms available, selecting them according to specific product or foreign operating characteristics  A company may change operating forms as operations expand or contract and as it gains experience  Operating forms may be combined

Prentice Hall, 2002Chapter 3 Daniels 14 Managing Operating Forms  Problems of collaborative arrangements: Differing relative importance of the arrangements to the partners Differing objectives from the arrangement Control problems Relative contributions and appropriations Differences in organizational or national culture  Methods to make collaborative arrangements work: Seeking out a partner for its foreign operations React to a proposal from another company  Dynamics of operating forms: In early stages of international development, few companies are willing to expend a large portion of their resources on foreign operations As companies grow, they tend to self-handle more operations and locate a larger portion of resources abroad Exporting usually precedes foreign production and contracting with another company to handle foreign business generally precedes handling it internally

Prentice Hall, 2002Chapter 3 Daniels 15 Managing Operating Forms