1. Global Enterprise and Competition Ashwin Mehta, Visiting Faculty
Fall 2007
Ashwin Mehta, Visiting Faculty

2. Competitive Strategies: Modes of Entry and FDI

3. Enron India What risks did Enron face going into the Dabhol project?
Political risk: expropriation of investment
Political risk: renegotiation of contracts after investment
Contract risk: problems with local partners
Currency risk
Market risk: costs of energy and demand for electric power
Recovery of investment costs (FDI)

4. Enron India How did Enron prepare for the risks of the project?
Long term contracts: purchase agreement, Maharashtra State Electrical Board was a credible buyer
Political risk: participation of Overseas Private Investment Corp, US Export-Import Bank, International Finance Corp.
Revenues tied to US dollar
Partners GE and Bechtel
Substantial research

5. Enron India How could Enron have dealt with risk more effectively?
Enron could have relied less on FDI
Enron could have emphasized transactions, making arrangements for construction, power supply contracts, and technology transfer
More reliance on local partners to construct and operate project
Greater participation of other Indian institutions

6. Enron India Why did Enron choose ownership (FDI)?
To exercise control over assets in investment projects
To control technology due to limits on intellectual property rights
To improve operational effectiveness
To learn about market for future projects
To avoid expected contract risk

7. International Strategy
Exporting
Licensing
Franchising
Joint Ventures
Acquisitions
Green-Field Development
Production Sharing
Turnkey Operations
BOT Concept
Management Contracts
Strategy
Options

8. International Markets Entry Mode
Experimental – selected exporting
Comfort levels
Minimal cultural/political differences (little or no psychic distance)
Active Involvement – systematic approach
Identify International markets
Allocate resources
Global involvement – broad business activities
Develop Competitive advantage
Cyclical, causal process:
Market knowledge leads to Commitment decisions
Market commitments Results from Current Activities
Before, an incremental process
Now, Rapid Internationalization a more preferred approach
knowledge, tools, facilitating institutions
Managers are more prepared (outsourcing, technology transfers)
Partnering/alliances

9. Entry mode is affected by
Product related factors
Product offering range/scope
Product life cycle stage and market strategies
Need for adaptation
Foreign-based partners (advantages?, risks?)
Market based factors
Strategies for target markets
Available distribution channels
Psychic distance
Experience level
Geographical coverage (# of locations/countries)
Relative priority of each market
Organizational Factors
Communication
Control
Amount of assets/resources committed leads to type of Control
e.g. direct selling, manufacturing, R&D require high control

10. Global Market Assessment
Importance of Market research
AT&T’s missed opportunity in China
Many sources, including US and State level departments
Do not rely on a single source
Trade fairs, trade delegations, direct promotion, collaborate with suppliers and distributors
Some questions to ask:
· Which countries offer the best prospects? · In which foreign markets can company products be sold profitably? · Does the foreign market require any modification of the product? · What distribution channels and arrangements should be employed in selling to a particular country? · How sensitive is market demand to product price? · What should the landed and retail prices be? · What sales volume and margins can be expected in each market? · What performance criteria should be used to monitor company activity in each foreign market?

11. Portfolio Matrix for Plotting Products by Country
Harvest/Divest
Combine/License
Invest/Grow
Dominate/Divest
Joint Venture
Low
High
Competitive Strengths
Country Attractiveness
Selective
Strategies

12. VEHICLES FOR ENTERING FOREIGN MARKETS
100%
FDI
Exports
Alliance
Champion International’s paper exports through independent brokers
Honda’s initial entry into the U.S. market
FDI through acquisition
Bridgestone’s acquisition of U.S.-based Firestone
Ford-Mazda Genentech-Hoffman LaRoche
Alliance and exports
KFC’s franchisees in India
Degree of ownership control over activities per- formed in the foreign market 0%
100% Exports
100% Local
Exports versus local production
Source: Examples drawn from in Gupta, A., and V. Govindarajan, “Managing Global Expansion: A Conceptual Framework,” business Horizons, March/April 2002, 45-54

13. FDI FDI includes cross-border business investment and M&A.
(not portfolio investment)
World FDI inflows:
$209 billion (1990) (Cross-border M&A: $151 b.)
$1,492 billion (2000) (Cross-border M&A: $1,144 b.)
$735 billion (2001) (Cross-border M&A: $594 b.)
$651 billion (2002) (Cross-border M&A $ 370 b.)
$560 billion (2003) (Cross-border M&A $ 297 b.)
Compare with world total gross fixed capital formation: $7,294 b.
(2003)

14. FDI World FDI inward stock: $8,245 billion (2003)
Sales of foreign affiliates: $17,580 billion (2003)
(Compare with international trade of $9,228 billion (2003)
Gross product of foreign affiliates: $3,706 billion (2003)
(Compare with world GDP of $36 trillion in 2003).
Total assets of foreign affiliates: $30,362 billion (2003)
Employment of foreign affiliates: Over 54 million people (2003 estimated)
Data from United Nations World Investment Report and UNCTAD website

15. FDI 2003 $ Billions FDI inflows FDI outflows Developed countries 367
570
Developing countries
172 36
Central and Eastern Europe 21 7

16. International modes of entry and value at risk
FDI – whether M&A or company growth – puts full value at risk.
Toyota factory, Wal-Mart store
Managers of an international business choose the mode of entry based on a trade-off between risk versus control in the particular supplier or customer country
Joint ventures, not only share knowledge, but also share investment costs and value at risk
Spot or contract sales can substantially reduce value at risk

17. International modes of entry and value at risk
Choice of entry mode jointly determines degree of control and extent of risk
Degree of commitment depends on contractual duration and vertical integration
With less knowledge of other country’s market, choose lower degree of commitment
As knowledge increases over time, can increase degree of commitment to get closer to desired entry mode.
Contractual transactions may give optimal mix of control and commitment
M&A
Growth
Alliances/ Joint Ventures
Licenses
Contract
Spot
Increase in
control,
commitment
and risk

18. Choosing target countries for FDI
Costs of investment project
Estimate potential expected returns
Determine risks associated with revenues and costs in host country Best estimates of expected cash flow
Apply appropriate risk-adjusted discount rate
Manager considers trade off between risk and return

19. Why is FDI so common in international business? Advantages of FDI
Production or distribution facilities in a country can reduce costs of trade (transportation, tariff and nontariff barriers, transaction costs, and time) – Toyota in US
Production within a country takes advantage of domestic sourcing of parts, components, services
Investment and employment in host country gain political support for the international business:
“quid pro quo investment” – Cemex and Southdown

20. Why is FDI so common in international business? Advantages of FDI
Closer to customers for manufacturers
Necessary for retail and wholesale companies – Wal Mart, Carrefour, Ingram Micro
Take advantage of low-cost labor, highly-skilled labor, and proximity to resources
Reduce costs of trade from import/export

21. Advantages of vertical FDI
Coordination advantages through the value chain
Access to production facilities, sourcing networks and distribution networks
Keeping technology and intellectual property in-house
Substitution of internal transactions for market transactions

22. Advantages of Horizontal FDI
M&A acquisition of competitors for market power or cost savings
M&A to achieve economies of scale and scope (Daimler/Chrysler, VW)
M&A to purchase of technology
M&A to acquire brand names
Production avoids costs of trade relative to export
As hedge against demand and supply fluctuations -- Cemex
Market power in international purchasing (e.g. Vodaphone/Airtouch purchases wireless equipment for its many operations)

23. Disadvantages of FDI
Risk that firm many not recover investment and returns to investment in supplier country
FDI increases capital investment, reduces flexibility
FDI ties business to particular country locations for production or distribution
Vertical FDI makes the firm more vertically integrated

24. FDI Trends Shift of investment mix toward services
About half in 1990, about two thirds in 2000
Shift of investment to outsourcing abroad (offshoring + outsourcing) – reduction in vertical integration
Globalization (lower costs of trade) leading to reduction in vertical FDI
Globalization (market integration) likely to lead to increases in horizontal FDI
UNCTAD World Investment Report 2004

25. Licensing versus FDI
Why is FDI more prevalent than technology licensing?
Licensing agreements depend heavily on international enforcement of intellectual property rights
International licensing also entails costs of trade
International licensing is quite common amongst developed countries, reaching levels up to 1/3 of domestic R&D expenditures
International licensing experiencing rapid growth

26. Overview and Take-Away Points
FDI a major feature of international business – composition of FDI undergoing transformation – from vertical to horizontal
FDI offers advantages in terms of ownership and control and avoiding trade barriers
Choose target countries based on expected cash flow and costs of investment and discount using risk adjusted rate of return
Adjust level of investment to reflect expected cash flow and risk-adjusted rate of return

27. Cooperative Strategies
Collusion
Active cooperation of firms to reduce output and raise prices
Explicit
Tacit

28. Strategic Alliance:
Partnership of two or more corporations or business units to achieve strategically significant objectives that are mutually beneficial.
Agreements between firms to do business together in ways that go beyond normal firm-to-firm dealings but fall short of merger or full partnership
More effective in combating competitive disadvantage than in gaining competitive advantage!

29. Continuum of Strategic Alliances
Mutual Service
Joint Venture
Value-Chain
Consortia
Licensing Arrangement
Partnership
Weak and Distant
Strong and Close
Source: Suggested by R. M. Kanter, “Collaborative Advantage: The Art of Alliances,” Harvard Business Review (July-August 1994), pp. 96–108.

30. International Markets Entry Issues and Concerns:
R&D
Marketing
Logistics
Sourcing

31. Lower cost, access to markets, pool of skilled workers
Global R&D Network
Configure for cost and manage for value
Distribution of R&D centers:
Rising costs
Opening of markets (India, China)
Information Technology
Scarcity of scientists and engineers
US/Western Europe/Japan
Proximity to technology/research clusters, markets/customers, qualified workers
In developing countries (India, Eastern Europe)
Lower cost, access to markets, pool of skilled workers

32. The Internationalization of R&D: The R&D footprint of most companies is becoming more global, with China and India seeing significant growth
“Innovation: Is Global the Way Forward?”, Booz, Allen Hamilton & INSEAD, 2005

33. Sectors that rely more heavily on complex knowledge that is difficult to move had less dispersed innovation footprints
“Innovation: Is Global the Way Forward?”, Booz, Allen Hamilton & INSEAD, 2005

34. Multinational logistics
Logistics: flow of goods and material
multiple borders crossed (laws/regulations of each country
multiple transportation modes
Complex process and challenging management
Logistics costs – a significant portion of total costs
Multinational transportation
Infrastructure (highways, railroads, air, etc.)
Modes (ocean shipping, air shipping)
Selection (time, predictability, cost, Governmental factors)
Inventory issue (order cycle time, customer service levels, storage)
Logistics Management
Centralized
Decentralized
Outsource

35. Multinational Marketing Issues
· Multinational Marketing Strategies · Market-Related Factors · Mix-Related Factors · Company-Related Factors
4 P’s
Product (positioning, PLM, counterfeit markets, etc.)
Placement (Channels design)
Promotion (advertising, PR, etc.)
Pricing (export pricing, transfer pricing, foreign market pricing, coordination)

36. Multinational Sourcing
Purchasing, Procurement, Acquisition, sourcing/strategic sourcing
Centralized Vs Decentralized function
Worldwide sourcing has increased --- challenges to purchasing managers
culture, language, laws, etc.
Why source Worldwide
cost, access to technology, quality, more options
Barriers to WW sourcing
Paperwork (LOC, Bill of Lading, licenses, etc.)
Inertia
Logistical challenges
Security concerns (causing time delays)
Sourcing process
Establish needs/objectives/strategies
RFP’s
Evaluation and Selections
Countertrades

37. Modes of Entry and FDI Flextronics in India
© Professor Daniel F. Spulber

38. Flextronics
With fiscal year 2007 revenues of USD$18.9 billion, Flextronics helps customers design, build, ship, and service electronics products for OEMs in the automotive, computing, consumer digital, industrial, infrastructure, medical, and mobile market segments.
Flextronics has a network of facilities in over 30 countries on four continents. This global presence provides design and engineering solutions that are vertically integrated with manufacturing, logistics, and component technologies to optimize customer operations by lowering costs and reducing time to market.

40. “Flextronics Design creates innovative, market-leading products for our customers. We partner at any phase of the product development cycle from concept to production launch. Our flexible engagement models allow customers to utilize Flextronics’ global engineering team for complete, full turnkey product development or for a specific contract design service. “
“By balancing stylish product design with the realities of manufacturing in today's global economy, Flextronics helps customers rapidly move from concept to production launch while optimizing resources and reducing costs.”
Flextronics International Manufacturing operation
Bangalore

41. June, 2004: Flextronics acquires Hughes Software Systems.
August, 2004, Flextronics acquires Chennai-based Future Software Ltd that provides software solutions to telecom firms.
November 2004: Flextronics acquires Emuzed, multimedia solutions provider with R&D centres in Bangalore and Chennai.
December, 2004: Flextronics acquires Deccanet that provides software and hardware design services.

42. Choice of modes of entry
Flextronics enters India through M&A by acquiring four companies – FDI
Flextronics further expands its design capabilities by establishing facilities in India – FDI
Design is vertically integrated with Flextronics manufacturing – vertical FDI
Acquiring and protecting intellectual property are the main strategic motivations
Management control and hiring skilled labor are also outcomes of M&A