Direct Investment and Collaborative Strategies

1. IAF 605 - International Business Management
Direct Investment and Collaborative Strategies
Week 11

2. Chapter 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

3. Figure 14.2: Foreign Expansion: Alternative Operating Modes (p520)

4. When Exporting May Not Be Feasible
transportation costs to
production abroad is move goods or services
cheaper than at home internationally are too
expensive
products and services
need to be altered
companies lack
substantially to gain
domestic capacity
sufficient consumer
demand abroad
governments inhibit the buyers prefer products
import of foreign originating from a
products particular country

5. Foreign Direct Investment
Control must
accompany the
investment
Three primary reasons that
spur companies to want a
controlling interest:
• internalization theory
• appropriability theory
• freedom to pursue global objectives

6. Foreign Direct Investment (FDI) approaches
• sometimes cheaper to handle
internalization operations oneself than to
contract with another company
• denying rivals access to
resources (capital, patents,
appropriability trademarks, and management
know-how)
• when a company has a wholly
owned foreign operation, it may
global strategy more easily have that operation
participate in a global strategy

7. Methods for Making FDI
The advantages of acquiring
(buying) an existing operation
include:
• adding no further capacity to the
market
• avoiding start-up problems
• easier financing
Companies may choose to build
(make greenfield investments)
if:
• no desired company is available for
acquisition
• acquisition will lead to carry-over
problems
• acquisition is harder to finance

8. Figure 14.3: Collaborative Arrangements and International Objectives (p525)

9. General Motives for Collaborative Arrangements
Spread and Reduce Costs
Specialize in
Competencies
Avoid or Counter
Competition
Secure Vertical and
Horizontal Links
Gain Knowledge

10. International Motives for Collaborative Arrangements
Gain location-
specific assets
Overcome
governmental
constraints
Diversify
geographically
Minimize
exposure in
risky
environments

11. trade-offs: control and prior foreign expansion
the more
collaboration
dependency = the
more likely to lose
decision-making
control
if prior foreign
expansion experience
– they have the know-
how (advantages of
collaboration are no
longer as important)

12. Licensing
Sources: comicbookbin.com; oneinchpunch.com

13. Franchising
Franchising includes providing
an intangible asset
(usually a trademark) and
continually infusing necessary
assets
Franchisors • the more standardization, the less acceptance
in the foreign country
face a • the more adjustment to the foreign country,
dilemma: the less the franchisor is needed
Source: fia2400.com

14. Management Contracts
Management contracts are used
primarily when the foreign
company can manage better than
the owners
Source: alcionventures.com

15. Turnkey Operations
Most commonly performed
by industrial-equipment,
construction, and
consulting companies
Often performed for a
governmental agency
Source: http://www.flickr.com/photos/voght/

16. Joint Ventures
Source: blogs.trb.com

17. Equity Alliances
A collaborative
arrangement in which at Each airline spent 12 million
least one of the dollars to buy the other's
collaborating companies shares. Asiana holds a 0.16
percent stake in ANA, while
takes an ownership the Japanese airline owns a
position 0.72 percent interest in
(almost always minority) Asiana, which is Korea's
in the other(s). second national carrier.
"The mutual holding of shares
in each other's company is a
symbol of our commitment to
work ever more closely
together," Kang Joo-An,
president - Asiana
Source: wikipedia.org

18. Figure 14.4: Collaborative Strategy and Complexity of Control (p 535)

19. Figure 14.5: How to Dissolve a Joint Venture (p536)

20. Major strains on collaborative arrangements are due to five factors
1. Relative importance
to partners
2. Divergent objectives
3. Control problems
4. Comparative
contributions and
appropriations
5. Differences in culture
Source: nbc.com

21. Managing Foreign Arrangements
The evolution to a different operating mode may:
• be the result of experience
• necessitate costly termination fees
• create organizational tensions
.Source: swarthmore.edu

22. Figure 14.7: Country Attractiveness/Company Strength Matrix (p540)

23. Negotiating Process – in technology agreements…
seller does not want buyer does not want
to give information to pay without
without assurance of evaluating
payment information

24. Performance Assessment
When collaborating with
another company, managers
must:
• continue to monitor
performance
• assess whether to take
over operations
• develop competency in
managing a portfolio of
arrangements

25. Will American Airline’ North Atlantic Joint Venture Fly?
Most of the world’s major airlines
are in or have announced they will
join an alliance whereby they Many airlines hold ownership in
combine routes, sales, airline other airlines
terminal services, and frequent-
flier programs

26. Questions
Should the proposed new venture be approved? What are the
implications, if approved, for these airlines’ solvency and for
customers?
Some airlines, such as Southwest, have survived as niche players
without extensive international connections. Can they continue this
strategy?
Why should an airline not be able to establish service anywhere in
the world simply by demonstrating that it can and will comply with
the local labour and business laws of the host country?

27. Questions
What will be the consequences if a few large airlines or networks
dominate global air service?
Many airlines have recently been no more than marginally profitable. Is
this such a vital industry that governments should intervene to guarantee
their survival? If so, how?
What methods could the three JV partners use to divide revenue and
expenses on North Atlantic routes?

28. Homework
review Chapter 14
do quiz (Blackboard)
read Chapter 15 – The Organization of
International Business
read… Infosys: The Search for the Best
and Brightest (pages 583-588)