International Business Environments and Operations

Part 5 Global Strategy, Structure, and Implementation

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Chapter 14 Direct Investment and Collaborative Strategies

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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
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Exporting May Not Be Feasible

When 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 When buyers prefer products originating from a particular country
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Factors Affecting Operating Modes in International Business

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Foreign Expansion: Alternative Operating Modes

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Non-collaborative Foreign Equity Arrangements

Taking Control: Foreign Direct Investment Internalization Appropriability Freedom to Pursue a Global Strategy How to make FDI Buying Greenfield Investments
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Motives for Collaborative Arrangements

To Spread and Reduce Costs To Specialize in Competencies To Avoid/Counter Competition To Secure Vertical and Horizontal Links To Gain Knowledge

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International Motives for Collaborative Arrangements

To Gain Location Specific Assets To Overcome Governmental Constraints To Diversify Geographically To Minimize Exposure to Risky Environments

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Types of Collaborative Arrangements

Factors Influencing Choice of Arrangement Type: Control Prior Expansion

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Licensing
Licensing agreements may be: Exclusive or nonexclusive Used for patents, copyrights, trademarks, and other intangible property

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Franchising
A specialized form of licensing
includes providing an intangible asset and continually infusing necessary assets Franchise Organization Operational Modifications

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Management Contracts
Foreign management contracts are used primarily when the foreign company can manage better than the owners.
- Company transfer management personnel & administrative know-how abroad to assist another company for a fee. (3-5 years contract) - A company believes other company can manage its operation more efficiently than it can. 14-13
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Turnkey Operations
Turnkey operations are: Most commonly performed by industrialequipment, construction, and consulting companies Often performed for a governmental agency - One company contracts with another to build complete, ready-to-operate facilities.

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Turnkey Operations
Contracting to Scale Making Contacts Marshaling Resources Arranging Payment

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Joint Ventures
More than one organization owns a company Consortium: more than two organizations participate May have various combinations of ownership
Possible Combinations: 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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Equity Alliances
A collaborative arrangement in which at least one of the collaborating companies takes an ownership position

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Problems with Collaborative Arrangements

Relative Importance Divergent Objectives Questions of Control Comparative Contributions and Appropriations Culture Clashes Differences in Corporate Cultures
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Managing International Collaborations

Dynamics of Collaborative Arrangements Finding Compatible Partners Negotiating the Arrangement Drawing Up the Contract Improving Performance

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Future: 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.

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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

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