International Business Environments and Operations 15e by Daniels, Radebaugh, and Sullivan
Chapter 15: Direct Investment and Collaborative Strategies
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
To appreciate how growth in project size and complexity will require more future collaboration
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.
This Figure shows the factors that affect a company’s choice of operating mode.
This Figure shows alternative operating modes. Experienced global companies like Coca-Cola tend to use all of the different options.
Learning Objective : To clarify why companies may need to use modes other than exporting to operate effectively in international business.
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.
Exporting may not be feasible:
When products and services need to be altered substantially to gain sufficient consumer demand abroad
When governments inhibit the import of foreign products
When buyers prefer products originating from a particular country
Learning Objective : To comprehend why and how companies make foreign direct investments.
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.
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
Learning Objective : To understand the major motives that guide managers when choosing a collaborative arrangement for international business.
Companies collaborate or form strategic alliances for many reasons. This Figure shows both the general and the internationally specific reasons for collaboration.
Learning Objective : To describe what companies should consider when entering into international arrangements with other companies.
The general motives for collaborative arrangements are:
To spread and reduce costs
To specialize in competencies – the resource-based view
To avoid or counter competition
To secure Vertical and Horizontal Links
To gain knowledge
Further motives are:
To gain location-specific assets
To overcome governmental constraints
Protecting assets
To diversify geographically
To minimize risk exposure
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.
Companies often engage in licensing agreements for economic reasons such as a faster start-up, lower costs, or to gain access to additional resources.
Licensing applies to many different aspects of business, such as:
Patents, inventions, formulas, processes, designs, patterns
Copyrights for literary, musical or artistic compositions
Trademarks, trade names, brand names
Franchises, licenses, contracts
Methods, programs, procedures, systems
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.
A company may pay for managerial assistance when it believes another company can better manage its operation.
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.
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
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.
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.
Learning Objective : To grasp why collaborative arrangements succeed or fail.
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.
This Figure shows that the end of a joint venture can be friendly or unfriendly, planned or unplanned, and mutual or non-mutual.
Learning Objective : To see how companies can manage diverse collaborative arrangements.
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.
This Figure relates country attractiveness with operating forms.
Trust is essential in collaborative arrangements. Companies without proven track records may have to negotiate harder and make more concessions.
Contracts should spell out mutual goals and expectations.
Finally, keep in mind that finding a capable and compatible partner is not enough. Managers must also look for ways to improve performance.
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