1. Part 5 Global Strategy, Structure, and Implementation 14-1 Copyright © 2011 Pearson Education

2. 14-2 Chapter 14 Direct Investment and Collaborative Strategies

3. 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 international arrangements with other companies To grasp why collaborative arrangements succeed or fail To see how companies can manage diverse collaborative arrangements 14-3 Copyright © 2011 Pearson Education

4. 14-4

5. Taking Control: Foreign Direct Investment Internalization : Internalization is control through self-handling of operations. This concept comes from transactions cost theory, which holds that companies should seek the lower cost between handling something internally and contracting another party to handle it for them. Appropriability: The idea of denying rivals access to resources is called the appropriability theory. Companies are reluctant to transfer vital resources—capital, patents, trademarks, and management know-how—to another organization. The organization receiving these resources may be able to use them to undermine the competitive position of the foreign company transferring them. 14-5 Copyright © 2011 Pearson Education

6. How to make FDI Buying : Direct investment by acquisition The advantages of acquiring an existing operation include: Adding no further capacity to the market Avoiding start-up problems Easier financing at times Greenfield Investments : Companies may choose to build if: No desired company is available for acquisition Acquisition will lead to carryover problems Acquisition is harder to finance 14-6 Copyright © 2011 Pearson Education

7. To Spread and Reduce Costs To Specialize in Competencies To Avoid/Counter Competition To Secure Vertical and Horizontal Links To Gain Knowledge 14-7 Copyright © 2011 Pearson Education

8. To Gain Location Specific Assets To Overcome Governmental Constraints To Diversify Geographically To Minimize Exposure to Risky Environments 14-8 Copyright © 2011 Pearson Education

9. Factors Influencing Choice of Arrangement Type: Control : The more a company depends on collaboration, the more likely it is to lose decision-making control, such as on quality, new-product directions, and how much to expand. Thus, loss of control over flexibility, revenues, and competition is an important consideration guiding a company’s selection of forms of foreign operation. Prior Expansion : When a company already has operations (especially wholly owned ones) in place in a foreign country, some of the advantages of collaboration are no longer as important. The company knows how to operate within the foreign country and may have excess plant or human resource capacity it can use for new production or sales. 14-9 Copyright © 2011 Pearson Education

10. Licensing agreements may be: Exclusive or nonexclusive Used for patents, copyrights, trademarks, and other intangible property 14-10 Copyright © 2011 Pearson Education

11. A specialized form of licensing includes providing an intangible asset and continually infusing necessary assets Franchise Organization Operational Modifications Success generally depends on three factors: product and service standardization, high identification through promotion, and effective cost controls. A dilemma when operating abroad is that the first of these may be difficult to transfer. For example, standardization is important for food franchising so that consumers know what to expect. But when a company enters a foreign country, the taste preferences may be different. In fact, even regionally within large countries, tastes may differ. 14-11 Copyright © 2011 Pearson Education

12. Foreign management contracts are used primarily when the foreign company can manage better than the owners. In a foreign management contract, a company transfers management personnel and administrative know-how abroad to assist a company for a fee. Contracts usually cover three to five years, and fixed fees or fees based on volume rather than profits are most common. An organization may pay for managerial assistance when it believes another company can manage its operation more efficiently than it can. The ability to manage more efficiently is most apt to occur because of industry-specific capabilities. With management contracts, the owners and host country get the assistance they want without foreign companies’ control of the operations. In turn, the management company receives income without having to make a capital outlay. 14-12 Copyright © 2011 Pearson Education

13. Turnkey operations are: Most commonly performed by industrial- equipment, construction, and consulting companies Often performed for a governmental agency 14-13 Copyright © 2011 Pearson Education

14. More than one organization owns a company Consortium: more than two organizations participate May have various combinations of ownership 14-14 Copyright © 2011 Pearson Education

15. Relative Importance : One partner may give more management attention to a collaborative arrangement than the other does. If things go wrong, the active partner blames the less active partner for its lack of attention, and the less active partner blames the more active partner for making poor decisions. Divergent Objectives : One partner may want to reinvest earnings for growth and the other may want to receive dividends. One partner may want to expand the product line and sales territory, and the other may see this as competition with its wholly owned operations. Questions of Control : When companies license their logos and trademarks for use on products they themselves do not produce, they may lack the ability to discern and control quality. Yet poor quality may affect sales of all products using the brand name and logo. 14-15 Copyright © 2011 Pearson Education

16. Comparative Contributions and Appropriations : Partners’ relative capabilities of contributing technology, capital, or some other asset may change over time. In addition, one partner may suspect that the other is taking more from the operation (particularly knowledge-based assets) than it is, which would enable it to become a competitor. In the face of such suspicions, information may be withheld, which, in time, weakens the operation. Culture Clashes : Managers and the companies for which they work are affected by their national cultures, such as in how they evaluate the success of their operations. For example, U.S. companies tend to evaluate performance on the basis of profit, market share, and specific financial benefits. Japanese companies tend to evaluate primarily on how operations help build their strategic positions, particularly by improving their skills. Differences in Corporate Cultures: Entrepreneurial or Risk Averse. 14-16 Copyright © 2011 Pearson Education

17. Dynamics of Collaborative Arrangements Finding Compatible Partners Negotiating the Arrangement Drawing Up the Contract Improving Performance 14-17 Copyright © 2011 Pearson Education