1. International Business Environments & Operations
Daniels ● Radebaugh ● Sullivan
International Business Environments and Operations 14e by Daniels, Radebaugh, and Sullivan
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2. Direct Investment and Collaborative Strategies
Chapter 14
Direct Investment and Collaborative Strategies
Chapter 14: Direct Investment and Collaborative Strategies
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3. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Learning Objectives
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
The Learning Objectives for this chapter are
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
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Introduction
Companies choose an international operating mode to achieve their objectives
When exporting and importing is not possible, firms must explore other options
Firms that depend on foreign production may own it outright or in part, develop or acquire it, and/or use some type of collaborative arrangement with another company.
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5. Introduction
Factors Affecting Operating Modes in International Business
This Figure shows the factors that affect a company’s choice of operating mode.
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6. Introduction Foreign Expansion: Alternative Operating Modes
This Figure shows alternative operating modes. Experienced global companies like Coca-Cola tend to use all of the different options.
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7. Why Exporting May Not Be Feasible
Learning Objective 1:
To clarify why companies may need to use modes other than exporting to operate effectively in international business
Learning Objective 1: To clarify why companies may need to use modes other than exporting to operate effectively in international business.
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8. Why Exporting May Not Be Feasible
Production abroad is cheaper than at home
Transportation costs to move goods or services internationally are too expensive
Companies lack domestic capacity
Products and services need to be altered substantially to gain sufficient consumer demand abroad
Governments inhibit the import of foreign products
Buyers prefer products originating from a particular country
In some cases, it can be more advantageous to produce in foreign countries that to export to them.
In particular, exporting is not attractive when production abroad is cheaper than at home, transportation costs to move goods or services internationally are too expensive, companies lack domestic capacity, products and services need to be altered substantially to gain sufficient consumer demand abroad, governments inhibit the import of foreign products, or buyers prefer products originating from a particular country.
production abroad is cheaper than at home, when transportation costs to move goods or services internationally are too expensive, when companies lack domestic capacity, when products and services need to be altered substantially to gain sufficient consumer demand abroad, when governments inhibit the import of foreign products, and when buyers prefer products originating from a particular country.
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9. Non-Collaborative Foreign Equity Arrangements
Learning Objective 2:
To comprehend why and how companies make foreign direct investments
Learning Objective 2: To comprehend why and how companies make foreign direct investments.
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10. Non-Collaborative Foreign Equity Arrangements
Why do firms want control?
Internalization
choose the lower cost between conducting operations internally and contracting to another party
it may be cheaper to handle operations internally
Appropriability
do not transfer vital resources to another company to avoid having competitive position undermined
Freedom to pursue a global strategy
In general, the more ownership a company has, the more control over decisions the firm has.
Three main theories that explain why companies want control are internalization theory, appropriability theory, and freedom to pursue global objectives.
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11. Non-Collaborative Foreign Equity Arrangements
There are two ways to invest in a foreign country
Acquisition of existing facilities
Building new facilities – known as greenfield investment
When investing in a foreign country, companies can either acquire an existing facility, or build a new one. The latter option is known as a greenfield investment.
The advantages of acquiring an existing operation include:
• Adding no further capacity to the market
• Avoiding start-up problems
• Easier financing at times
Companies may choose to build if:
• No desired company is available for acquisition
• Acquisition will lead to carryover problems
• Acquisition is harder to finance
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12. Why Companies Collaborate
Learning Objective 3:
To understand the major motives that guide managers when choosing a collaborative arrangement for international business
Learning Objective 3: To understand the major motives that guide managers when choosing a collaborative arrangement for international business.
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13. Why Companies Collaborate
Collaborative Arrangements and International Objectives
Companies collaborate or form strategic alliances for many reasons. This Figure shows both the general and the internationally specific reasons for collaboration.
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14. Types of Collaborative Arrangements
Learning Objective 4:
To define the major types of collaborative arrangements
Learning Objective 4: To define the major types of collaborative arrangements.
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15. Types of Collaborative Arrangements
Learning Objective 5:
To describe what companies should consider when entering into international arrangements with other companies
Learning Objective 5: To describe what companies should consider when entering into international arrangements with other companies.
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16. Types of Collaborative Arrangements
Two key factors influence the type of collaborative arrangement
Control
Prior expansion
Choosing between the different types of collaborative arrangements involves tradeoffs. The more a company depends on collaboration, the more likely it is to lose decision making control. How much control a company is willing to give up will influence its choice of collaborative arrangement. Similarly, companies with prior international experience in a country are less likely to benefit from a partner’s knowledge of the market.
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17. Types of Collaborative Arrangements
Licensing
a company grants intangible property rights to another company to use in a specified geographic area for a specified period in exchange for royalties
Can be
exclusive or nonexclusive
used for patents, copyrights, trademarks, and other intangible property
Companies often engage in licensing agreements for economic reasons such as a faster start-up, lower costs, or to gain access to additional resources.
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18. Types of Collaborative Arrangements
Franchising
a specialized form of licensing
includes providing an intangible asset and continually infusing necessary assets
Franchise organization
Master franchise
Operational modifications
Franchising is often associated with U.S. fast food companies, but in fact many international franchisors are from other countries and sectors.
Companies can expand in foreign markets using individual franchises, or by setting up a master franchisor which then establishes sub-franchisees.
Because the success of a franchise depends on product and service standardization, high identification through promotion, and effective cost controls, companies need to be sure that operational modifications don’t compromise what the company has to offer.
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19. Types of Collaborative Arrangements
Management contract
a company is paid a fee to transfer management personnel and administrative know-how abroad to assist a company
Foreign management contracts are used primarily when the foreign company can manage better than the owners
A company may pay for managerial assistance when it believes another company can better manage its operation.
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20. Types of Collaborative Arrangements
Turnkey operation
one company contracts with another to build complete, ready-to-operate facilities
Most commonly performed by industrial-equipment, construction, and consulting companies
Often performed for a governmental agency
Turnkey operations are often very large, running into the hundreds of millions and even billions of dollars. For example, a current turnkey project run by Spain’s Sacyr Vallehermoso involves building a wider Panama Canal.
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21. Types of Collaborative Arrangements
Joint ventures
involve more than two companies, one of which may own more than 50 percent
may have various combinations of ownership
A consortium involves more than two organizations
Possible joint venture combinations include
• Two companies from the same country joining together in a foreign market
• A foreign company joining with a local company
• Companies from two or more countries establishing a joint venture in a third country
• A private company and a local government forming a joint venture
• A private company joining a government-owned company in a third country
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22. Types of Collaborative Arrangements
Equity alliances
an arrangement in which at least one of the companies takes an ownership position in the other
The purpose of the equity ownership is to solidify a collaborating contract, such as a supplier-buyer contract, so that it is more difficult to break—particularly if the ownership is large enough to secure a board membership for the investing company.
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23. Types of Collaborative Arrangements
Collaborative Strategy and Complexity of Control
This Figure shows that as a company increases the number of partners and decreases the amount of equity it owns in a foreign operation, its ability to control that operation decreases.
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24. Problems with Collaborative Arrangements
Learning Objective 6:
To grasp why collaborative arrangements succeed or fail
Learning Objective 6: To grasp why collaborative arrangements succeed or fail.
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25. Problems with Collaborative Arrangements
Problems with collaborative arrangements include
Relative importance
Divergent objectives
Questions of control
Comparative contributions and appropriations
Culture clashes
Differences in corporate cultures
Collaborative arrangements don’t always work out. The most common challenges involve the relative importance of the project to each company, divergent objectives, control issues, contribution issues, culture clashes, and different corporate cultures.
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26. Problems with Collaborative Arrangements
How to Dissolve a Joint Venture
This Figure shows that the end of a joint venture can be friendly or unfriendly, planned or unplanned, and mutual or non-mutual.
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27. Managing International Collaboration
Learning Objective 7:
To see how companies can manage diverse collaborative arrangements
Learning Objective 7: To see how companies can manage diverse collaborative arrangements.
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28. Managing International Collaboration
Collaborative arrangements are dynamic
The motivation for collaboration can change over time because of changes in
the company’s capabilities
the external environment
Companies need to continually reassess the fit between collaboration and strategy to determine if it still makes sense. Keep in mind that moving to a different operating mode can be the result of experience, may necessitate costly termination fees, and can create organizational tension.
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29. Managing International Collaboration
Country Attractiveness/Company Strength Matrix
This Figure relates country attractiveness with operating forms.
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30. Managing International Collaboration
Potential collaborative partners should be evaluated in terms of
the resources they will supply
their motivation
compatibility
Trust is essential in collaborative arrangements. Companies without proven track records may have to negotiate harder and make more concessions.
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31. Managing International Collaboration
Contracts should address
Whether the contract will be terminated if the parties do not adhere to the directives
What methods will be used to test for quality
What geographic limitations should be placed on an asset’s use
Which company will manage which parts of the operation
What each company’s future commitments will be
How each company will buy from, sell to, or otherwise use intangible assets that result from the arrangement
Contracts should spell out mutual goals and expectations.
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32. Managing International Collaboration
When collaborating with another company, managers must
Continue to monitor performance
Assess whether to change the form of operations
Develop competency in managing a portfolio of arrangements
Finally, keep in mind that finding a capable and compatible partner is not enough. Managers must also look for ways to improve performance.
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33. Why Innovation Breeds Collaboration
Collaborative arrangements will bring both opportunities and problems as companies move simultaneously to new countries and to contractual arrangements with new companies
Collaborative arrangement must overcome differences in a number of areas
• Country cultures that may cause partners to obtain and evaluate information differently
• National differences in governmental policies, institutions, and industry structures that constrain companies from operating as they would prefer
• Corporate cultures that influence ideologies and values underlying company practices that strain relationships among companies
• Different strategic directions resulting from partners’ interests that cause companies to disagree on objectives and contributions
• Different management styles and organizational structures that cause partners to interact ineffectively
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