2.  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 14 -2

3. 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 14 -3

4. Production Ownership Production Location Equity Arrangements Home CountryForeign country a.Exportinga. Wholly owned operations b. Partially owned operations c. Joint Ventures d. Equity Alliances Non Equity Arrangements a.Licensing b. Franchising c. Management Contracts d. Turnkey Operations 14 -4

5.  Non collaborative: Wholly and partially owned operations  Control/holding accompanies investment 14 -5

6. ◦ internalization theory ◦ appropriability theory ◦ freedom to pursue global objectives 14 -6

7.  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 14 -7

8.  The advantages of acquiring an existing operation include: ◦ adding no further capacity to the market: in case of saturated market ◦ avoiding start-up problems ◦ easier financing  Companies may choose to build or have Greenfield Investments if: ◦ no desired company is available for acquisition ◦ acquisition will lead to carry-over problems ◦ acquisition is harder to finance 14 -8

9.  To Spread and Reduce Costs: Let specialist do the job..  To Specialize in Competencies: beverage and bottling..  To Avoid or Counter Competition: collusion..  To Secure Vertical and Horizontal Links  To Gain Knowledge 14 -9

10.  Gain location-specific assets  Overcome legal constraints  Diversify geographically  Minimize exposure in risky environments 14 - 10

11.  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

12.  Their desire for control over foreign operations  Their companies’ prior foreign expansion..

13.  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  Licensing of brand name.. 14 - 13

14.  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  Form of vertical integration.. 14 - 14

15.  Management contracts are used primarily when the foreign company can manage better than the owners  Through Management contracts a company may transfer a part of its’ personnel to assist foreign company for a specified period for fee..  Software companies.. 14 - 15

16.  Are a type of collaborative arrangement in which one company contracts with another to build, complete, ready-to-operate facilities..  Turnkey operations are: ◦ Most commonly performed by construction companies, industrial equipment manufacturers.. ◦ Often performed for a governmental agency 14 - 16

17.  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 14 - 17

18.  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 14 - 18

19.  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 14 - 19

20.  The evolution to a different operating mode may: ◦ be the result of experience ◦ necessitate costly termination fees ◦ create organizational tensions  Steps: 1. Finding compatible partners 2. negotiating the arrangements 3. Drawing up the contract 4. Assessing performance 14 - 20