UNIT 07: GLOBAL COMPANIES STRATEGIES

UNIT OVERVIEW: Although most companies would prefer exporting to other market entry
modes, there are circumstances in which exporting may not be possible. In these cases,
companies may engage in direct investment in other countries, or enter markets through
various collaborative strategies such as joint ventures and alliances. Collaborative strategies
allow firms to spread both assets and risk across countries by entering into contractual
agreements with a variety of potential partners.
There are various types of possible arrangements, including foreign direct investment,
licensing, franchising, joint ventures, and equity alliances. Also, the unit explores the
various problems that may arise in FDI and collaborative ventures and concludes with a
discussion of the various methods for managing these evolving arrangements.

WHY EXPORT & IMPORT MAY NOT BE ENOUGH

Companies might find more advantages to local production in other countries than exporting
to them. Big companies that have the financial resources it's better to move production to the
destination country where they want to sell their products instead of exporting their products.

>Advantages to locate production in another country as opposed to

exporting
1) When production abroad is cheaper than at home. When it is more
expensive to produce in our country than to produce in another country, we might
decide to move production to another country. Example: China. Labour in China is
cheaper, so many companies shifted prod to china. Competition between companies
requires them to control their cost and to choose the production locations with the
cheapest options. That's one reason why we might change location of our production
1) Transportation costs: sometimes they are too high for moving stuff
internationally. Some products become impractical to export because the cost of
transportation is too high 4 those products. In general, the farther the market, the
higher the transportation costs.
2) Production capacity: companies may lack domestic capacity. Company
producing and selling products nationally and internationally. If it wants to enter
another market it needs to produce more. Now, the company does not have more
production capacity, u need more workers, a bigger factory, company has to expand,
it can do it locally or in the country where the target market is. When demand
exceeds capacity companies need to build another factory, sometimes building a
factory near to the consumers is more convenient. Companies can decide to produce
in the country that wants to sell their products, to be closer to the consumers, so they
don't have to pay transportation costs. Example: building a factory in China to sell
products in the Chinese market.
3) Sometimes products need to be altered to gain consumers in
other countries: when a company wants to sell a product to another country, but
in the other country you cannot just produce more and send the same product, the
company needs to change it and alter the products. Products that need to be
changed substantially to be bought by the consumers in the other country. The more
a product must be altered for foreign markets, the more likely some production will
shift abroad. Sometimes it's better to move production to that region. Example:

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 European car companies build factories in Europe to produce cars for European
consumers, since car models are different in every region of the world. U produce in
the market and u sell in the market.
4) Customs: some governments inhibit the import of some foreign products.
Nowadays, there are still high economic taxes when importing. So when taxes are so
high, companies might find that the only possibility is to produce locally. Despite
worldwide reduction in overall import barriers, there are still many import restrictions.
As a result, companies may find that they must produce in a foreign country if they
are to sell there. This has been the case with many auto companies, which
manufacture, or at least assemble, in India because it charges a high duty on fully
built imported cars.
5) Sometimes buyer prefer products originated from a particular
country: but sometimes customers might choose to buy products produced in their
own counrty (because of a nationalistic feeling).

ALTERNATIVES TO FOREIGN EXPANSION

➢ Companies must choose an international operating mode to fulfill their objectives and
carry out their strategies. Companies have to expand logically, continue w the same strategy,
mission & vision that started when the company was created.
➢ When forming objectives and implementing strategies in a variety of country
environments, firms must either handle international business operations on their own or
collaborate with other companies.
➢ Although exporting is usually the preferred alternative since it allows firms to produce in
their home countries, participating in some markets may require using a variety of other
equity and nonequity arrangements. (Preferred method is exporting, but when necessary
companies may have to do collaborative arrangements with other companies, there are
more alternatives tham just exporting or relocating production)
➢ These can range from wholly owned operations to partially owned subsidiaries, joint
ventures, equity alliances, licensing, franchising, management contracts, and turnkey
operations.

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WHY WHOLLY-OWNED F.D.I.:
FDI: Internalization strategy, a way to internationalize the company by transferring funds to
other countries, by owning another company partially or completely. Companies can buy the
whole company and be the owner or buy a part of the company, u have to do the other
operations w the other company.

WHOLLY OWNED FDI: When a company buys 100% of a company in another country, u are
the owner. Generally, the more ownership a company has, the greater its control over
decisions. However, if equity shares are widely held, a company may be able to effectively
control with even a minority interest. Nevertheless, governments often protect minority
owners so that majority owners do not act against their interests; thus, companies may opt
for 100 percent ownership if they want control. There are four primary explanations for
companies to make a wholly owned FDI: market failure, internalization theory, appropriability
theory, and freedom to pursue global objectives.

There are four primary explanations for companies to make a wholly owned FDI:
➢ MARKET FAILURE: u bought a whole company in another country, one reason for it
is that collaboration w the other managers did not work. It's difficult to have a
company partially owned. Collaboration works only if the management can find
another company in the foreign company who has the know-how and is willing to
share it. When that doesn hapen, the company might decide to enter te foreign
country with a 100% investment, a wholly owned fdi.
LIBRO: Collaboration is appealing as an entry strategy because it is a means
whereby a firm may reduce its liability of foreignness. But this works only if
management can find an associate knowledgeable about the host country at
acceptable terms, which may be impossible since such companies may be
inadequately equipped to deal efficiently with the entry company’s technology.11 Or,
they may know too little about the entering company to entice them to consign
sufficient resources to a collaboration. In these instances, companies must control
foreign activities within their own management structures (internal hierarchies) rather
than depending on the external market to do it for them.12 Of course, the failure of

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 the market to connect firms as collaborators will entice a company to enter with
wholly owned operations only if it perceives having operating advantages to
overcome its liability of foreignness.
➢ INTERNALIZATION THEORY: Having control over operations. When u control the
operations because its your company its easier, because u control everything. This
theory says that companies decide to buy another company completely because
when u are the only manager you have complete control over the operations.
Internalization is control through self-handling of operations.The concept comes from
transactions cost theory, which holds that companies should seek the lower cost
between self-handling of operations and contracting another party to do so for them.
They do this instead of finding a collaborative arrangement.
➢ APPROPRIABILITY THEORY: The idea of denying rivals access to resources. This
happens similar to the 1st point. Local companies might not want to transfer
resources to u. When u buy a company 50-50 u have to put money and the other part
has to put the trademarks, their know-how, their money, etc, all these are resources.
Some local managers might not want to transfer vital resources to put together in the
company.
➢ FREEDOM TO PURSUE GLOBAL OBJECTIVES: 100% owning or owned foreing
operation allows a company to easily participate in global strategy. When u are the
only owner u can decide to reach other countries to sell ur products.A wholly owned
foreign operation permits a company to more easily participate in a global strategy,
the company can do whatever it wants.

ACQUISITION VERSUS GREENFIELD

FDI usually involves international capital movement, but could also involve the
transfer of other assets, such as managers or cost control systems. Companies can
either acquire an interest in an existing company or construct new facilities, known as
a greenfield investment.

Acquisition: One reason for a company to invest abroad via acquisition is to obtain
some vital resource that may otherwise be slow or difficult to secure. Let’s say a
company acquires knowledgeable personnel that it cannot easily hire at a good price
on its own—or perhaps it could hire them, but lacks experience in managing them
effectively. Acquisitions allow a company to get not only labor and management, but
also an existing organization with experience in coordinating functions such as
product development and the subsequent marketing of the developed products. You
acquire a resource for your business by buying it from another company.

Making Greenfield Investments: Foreign companies may face local roadblocks to

acquisitions. When u invest to build a new facility (a new warehouse, assembly plant,
etc). Maybe because the government doesn't want u to join another company, they
want to have competition. For example, local governments may want more
competitors in the market because of fearing market dominance. In addition, a
foreign company may find that development banks prefer to finance new operations
because they create new jobs. U cannot acquire the resources of another company,
u have to build a new factory, a new distribution center, etc. because for example the
rules of the country say that there can not be a monopoly.

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Leasing: u dont have to invest but u lease the warehouse for example. Its not
necessary to buy a new facility, u have to lease it, rent it for a determinate amount of
time. This mode is much like an acquisition, but one that forgoes the need to invest

WHY COLLABORATE IN INTERNATIONAL MARKETS

>specialize in competencies: specialize in some ability

>secure vertical and horizontal links: because the company can't do every single
thing to be successful at intl business, so you choose to collaborate with other
companies.
Horizontal collaboration means that u collaborate with similar companies that do the
same thing u do, even wif they are ur competitors. Horizontal links may provide
economies of scope in distribution, such as by offering a full line of products, thereby
increasing the sales per fixed cost of customer visits
Vertical links u collaborate w ur suppliers.

FACTORS TO CONSIDER IN COLLABORATIVE ARRANGEMENTS

1) Trade offs and Limitations: when u participate in a collaborative arrangement u
limit your risk. EXAMPLE: A decision, let’s say, to take no ownership abroad, such
as by licensing another company to handle foreign production, may reduce exposure
to political risk.
2) Alliance types:
A. Scale alliances: aim to increase efficiency by combining similar operations, such
as airlines. Airlines have used these alliances, since they all work at airports, so if
Delta and American airlines use the same check-in system they can check
themselves and ease the process of checking in clients.
B. Link alliance: firms use their partners complementary resources to expand to new
business. For example nokia entered into a link alliance w a company that produces

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phones, and now nokia also sells cellphones. Nokia used their partners
complementary resources to sell cellular phones.
C. Vertical alliance: concerts firms in different links of the value chain. Alliance w
companies that do different things, their business are different but they collaborate.
For example, a food supplier can work with a restaurant. Collaboration w suppliers.
D. Horizontal alliance : An example of this is a joint venture, it enables each parter to
offer more products, or to enter international markets.
3) Prior company expansion: if a company already has operations in a country, it
might not be interested in collaborating in that market. 4 example: you are arcor, u
are working in France and another company asks u to collaborate with them, u might
not want to, because u already have the advantages of working in that
market.Sometimes companies do not accept collaborative arrangements because
they have already done that.
4) Compensation: collaboration not only implies agreeing but also sharing the profits.
When companies negotiate collaborative arrangements they have to check if the
other company is willing to work together but also they have to negotiate sharing the
profits.

TYPES OF ARRANGEMENTS
Licensing: Is allowing other companies to use your intangible property. The rights for
use of intangible property may be for an exclusive license (the licensor can give
rights to no other company for the specified geographic area for a specified period of
time) or a nonexclusive one

Franchising: more complete form of licensing. It includes not only intangible

property but also other things, such as using the same suppliers (for example).
Examples: Mcondalds, Cafe Martinez, Laverap,etc.

Management Contracts: A company may pay for management assistance under a

contract. Maybe u want to expand to export in France, but u dont know how to do it,
but u know a company that does know and has experience in this. An organization
may pay for managerial assistance under a management contract when it believes
another can manage its operation more efficiently than it can, usually because the
contractor has industry-specific capabilities

Turnkey operations: done by construction companies. Company asks a

construction company to build a warehouse, when this warehouse is finished, they
give me “the key” and u have the key to use the warehouse.

Join ventures: 50%-50% companies. There might be more than 2 companies in a

JV. Companies that join business and decide to do business together. When more
than two organizations participate, the venture is sometimes called a consortium.

Why do collaborative arrangements fail? REASONS FOR

COLLABORATIVE FAILURES
1) Relative importance to partners: Partners may give uneven management attention
to a collaborative arrangement. If things go wrong, the more active partner blames

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the less active partner for its lack of attention, while the latter blames the former for
making poor decisions.
2) Divergent objectives: maybe i want to export now and my partner says not to.
When companies want different things. Partners’ initial complementary objectives
may evolve differently as a result of competitive forces and product dynamics.
3) Control problems: when no single party has control over the arrangement.
Companies are 50-50 but nobody has real control of the agreement, these
businesses lack direction. Sharing assets with another company may generate
confusion over control.
4) Comparative contributions and appropriations: Partners’ relative capabilities may
change, thus one partner may no longer contribute as much as the other or as much
as was expected initially.
5) Differences in culture.(Culture Clashes) Both national and company cultural
differences can affect the relationship between partners.

CONSIDERATIONS FOR SUCCESS:Things to consider for

Collaborative Success
1) Fitting modes to country differences: companies should put more to tehri
resources to the markets they find more attractive and that best fit their strategy.
Thus, choosing the best operating form for each country helps companies succeed.

2) Finding and evaluating partners: Contracting with a satisfactory partner is

significant for success in collaborative agreements, this has to be done before
entering the partnership.

3) Negotiating agreements: The question of secrecy: before accepting money from

an investor u have to think that u will have to share your knowledge and know-how w
this people. Numerous collaborative arrangements involve technology transfers.
Because the value of many technologies would diminish if they were widely used or
understood, technology owners have historically insisted on including contract
provisions whereby recipients will not divulge such information

4) Controlling through contracts and trust.

5) Evaluating continually: An agreement, once operational, must be run effectively.

Management should estimate potential sales and costs, determine whether the
arrangement is meeting quality standards, and assess servicing requirements to
check whether goals are being met and whether one’s partners are doing an
adequate job.

6) Adjusting the internal organization: talk to ur human resources, explain that u are
entering a collaborative arrangement and that they have to adjust to that
arrangement. As companies enter into and grow their international collaborative
arrangements, they gain competencies. As they change operating modes, they
encounter pressures necessitating organizational adjustments.