UNIT 3.

COLLABORATICE STRATEGIES

One a firm decides to enter into a foreign market, the question is “Which is the best mode of

entry?” Firms use basically six different modes to enter foreign markets.

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. These can range from wholly owned operations to partially owned

subsidiaries, joint ventures, equity alliances, licensing, franchising, etc.

1. WHY EXPORTING MAY BE OR NOT BE FEASIBLE

1.1. ADVANTAGES OF EXPORTING

Advantage 1. It avoids the often-substantial costs of establishing manufacturing operations in

the host country. By manufacturing the product in a centralized location and exporting it to other

national markets, the firm may realize substantial scale economies from its global sales volume.

Advantage 2. Exporting may help a firm achieve experience curve and location economies.

1.2. DRAWBACKS OF EXPORTING

Drawback 1. Exporting from the firm’s home base may not be appropriate if there are lower-cost

locations for manufacturing the product abroad. In other words, it may be preferable to

manufacture where the mix of factor conditions is most favorable from a value creation

perspective and to export to the rest of the world from that location.

Drawback 2. High transport costs can make exporting uneconomical, particularly for bulk

products. One way of getting around this is to manufacture bulk products regionally.

Drawback 3. Tariff barriers can make exporting uneconomical. Similarly, the threat of tariff

barriers by the host-country government can make it very risky.

1.3. WHY EXPORTING MAY BE OR NOT BE FEASIBLE?

Hence, we must take into account:

I. Cheaper to produce abroad. Competition requires companies to control their costs and

to choose production locations with this factor in mind.

II. Transportation costs. Some products and services become impractical to export after

the cost of transportation is added to production costs. In general, the farther the target

market is from the home country, the higher transportation costs are relative to

production costs, the more difficult it is to be competitive through exporting.

III. Lack of domestic capacity. When demand exceeds capacity, however, new facilities

are needed and are often located nearer to the end consumers in other countries.

IV. Need to alter products and services. The more that products must be altered for

foreign markets, the more likely production will shift to those foreign markets.

V. Trade restrictions. Although import barriers have been on the decline, some significant

tariffs continue to exist. Avoiding barriers through production in the target country must

be weighed against other considerations such as the market size of the country and the

scale of technology used in production.

VI. Country of origin effects. Consumers may prefer goods produced in their own country

over imports because of nationalistic feelings. Other considerations like the availability of

service and replacement parts for imported products, or adoption of just-in-time

manufacturing systems may influence production locations.

2. NON-COLLABORATIVE FOREIGN-EQUITY AGREEMENT

Two forms of FDI that do not involve collaboration are wholly owned operations and partially

owned operations with the remainder widely held.

2.1. FOREIGN DIRECT INVESTMENT AND CONTROL

To qualify as a FDI, the investor must have control. This can be established with a small

percentage of the holdings if ownership is widely dispersed. The more ownership a company

has, the greater its control over the management decisions of the operation.

There are three main reasons for companies to want a controlling interest:

2
 I. Internalization. Transactions cost theory holds that companies should organize

operations internally when the costs of doing so are lower than contracting with another

party to handle it for them.

II. Appropriability. Appropriability theory is the idea that companies want to deny rivals and

potential rivals access to resources such as capital, patents, trademarks and know-how.

III. Pursuit of Global Strategies. When a company has a wholly owned foreign operation, it

may more easily have that operation participate in a global or transnational strategy.

2.2. METHODS FOR MAKING FOREIGN DIRECT INVESTMENT

FDI usually involves international capital movement but could also involve the transfer of other

assets such as managers, cost control systems. Companies can either acquire an interest in an

existing company or construct new facilities, known as a greenfield investment.

I. Reasons for buying. Companies may acquire existing operations in order to avoid

adding further capacity to the market, to avoid start-up problems, obtain easier financing,

and get an immediate cash flow rather than tying up funds during construction. A

company may also save time, reduce costs, and reduce risky by buying an existing

company.

II. Reasons for greenfield. Companies may choose to build if no suitable company is

available for acquisition. If the acquisition is likely to lead to carry-over problems, and if

the acquisition is harder to finance. In addition, local governments may prevent

acquisitions because they want more competitors in the market and fear foreign

domination.

3. WHY DO COMPANIES COLLABORATE?

Strategic alliances refer to cooperative agreements between potential or actual competitors.

Here, we are concerned specifically with strategic alliances between firms from different

countries. Strategic alliances run the range from:

 Formal joint ventures, in which two or more firms have equity stakes.

 To short-term contractual agreements, in which two companies agree to cooperate on a

particular task (such as developing a new product).

3
Companies collaborate with other firms in either their domestic or foreign operations in order

to:

I. Spread and reduce costs. When the volume of business is small, or one partner has

excess capacity, it may be less expensive to collaborate with another firm.

II. Specialize in competences. The resource-based view the firm holds that each firm has

a unique combination of competencies. Thus, a firm can maximize its performance by

concentrating on those activities that best fit its competencies.

III. Avoid or counter competition. When markets are not large enough for numerous

competitors, or when firms need to confront a market leader, they may band together.

IV. Secure vertical and horizontal links. If a firm lacks the competence and/or resources to

own and manage all of the activities of the value chain, an arrangement may yield greater

vertical access and control. At the horizontal level, economies of scope in distribution and

earning and access to bigger projects is key.

V. Grain knowledge. Many firms pursue arrangements in order to learn about their

partners’ technology, operating methods, or home markets and broaden competitiveness.

Companies collaborate with other firms in their foreign operations in order to:

I. Gain location-specific assets. Cultural, political, competitive, and economic differences

among countries create challenges for companies that operate abroad. To overcome

such barriers and gain access to location-specific assets, firms may pursue

arrangements.

II. Overcome governmental constraints. Countries may prohibit or limit the participation

of foreign firms in certain industries, or discriminate against foreign firms via tax rates and

profit repatriation. Firms may be able to overcome such barriers via collaboration with a

local partner.

III. Diversify geographically. By operating in a variety of countries, a firm can smooth its

sales and earnings; arrangements may also offer a faster initial means of entering

multiple markets or establishing multiple sources of supply.

IV. Minimize exposure in risky environments. The higher the risk managers perceive with

respect to a foreign operation, the greater their desire to form a arrangements.

4
4. TYPES OF COLLABORATIVE ARRANGEMENTS

4.1. LICENSING AGREEMENT

A licensing agreement is an arrangement whereby a licensor grants the rights to intangible

property to another entity (the licensee) for a specified period, and in return, the licensor receives

a royalty free from the licensee. Intangible property includes patents, inventions, formulas,

processes, designs, copyrights, and trademarks.

In the typical international licensing deal, the licensee puts up most of the capital necessary to

get the overseas operation going.

I. Thus, an advantage of licensing is that the firm does not have to bear the

development costs and risks associated with opening a foreign market.

II. Licensing is also often used when a firm wishes to participate in a foreign market but

is prohibited from doing so by barriers to investment.

III. Finally, licensing is frequently used when a firm possesses some intangible property,

that might have business applications, but it does not want to develop those

applications itself.

4.2. FRANCHISING

In many respects, franchising is similar to licensing, although franchising tends to involve longer-

term commitments than licensing.

Franchising is basically a specialized form of licensing in which the franchiser not only sells

intangible property to the franchisee (normally a trademark), but also insists that the franchisee

agree to abide by strict rules as to how it does business.

The franchiser will also often assist the franchisee to run the business on an ongoing basis. As

with licensing, the franchiser typically receives a royalty payment. Whereas licensing is pursued

primarily by manufacturing firms, franchising is employed primarily by service firms.

5
The disadvantages are less pronounced that in the case of licensing. Since franchising is often

used by service companies, there is no reason to consider the need for coordination of

manufacturing to achieve experience curve and location economies.

A more significant disadvantage of franchising is quality control. The foundation of franchising

arrangements is that the firm’s brand name conveys a message to consumers about the quality

of the firm’s product. This presents a problem in that foreign franchises may not be as concerned

about quality as they are supposed to be, and the result of poor quality can extend beyond lost

sales in a particular foreign market to a decline in the firm’s worldwide reputation.

4.3. JOINT VENTURE

A joint venture entails establishing a firm that is jointly owned by two or more otherwise

independent firms. Establishing a joint venture with a foreign firm has long been a popular mode

for entering a new market. The typical joint venture is a 50/50 venture, in which each party hold a

50% ownership and contributes a team of managers to share operating control. However, some

firms only go for joint ventures in which they have more than 50%.

Advantages:

I. A firm benefit from a local partner’s knowledge of the host country’s competitive

conditions, culture, language, political systems, and business systems.

II. When the development costs and/or risks of opening a foreign market are high, a firm

might gain by sharing these costs and/or risks with a local partner.

III. On top of it in many countries, political considerations make joint ventures the only

feasible entry mode.

Disadvantages:

I. As with licensing, a firm that enters into a joint venture risk giving control of its

technology to its partner.

II. A joint venture does not give a firm the tight control over subsidiaries that it might

need to realize experience curve or location economies.

6
 III. The shared ownership arrangement can lead to conflicts and battles for control

between the investing firms if their goals and objectives change or if they take

different views about strategy.