Chapter 15

Copyright 2014 Pearson
Education
Chapter 15
International Business: The New Realities, Global Edition, 3rd Edition

by
Cavusgil, Knight, and Riesenberger
Education
Learning Objectives
1. International investment and collaboration
2. Motives for FDI and collaborative ventures
3. Characteristics of foreign direct investment
4. Types of foreign direct investment
5. International collaborative ventures
6. Managing collaborative ventures
7. The experience of retailers in foreign markets
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FDI and Collaborative Ventures

Foreign direct investment (FDI): Strategy in which
the firm establishes a physical presence abroad by
acquiring productive assets such as capital,
technology, labor, land, plant, and equipment.
International collaborative venture: A cross-border
business alliance in which partnering firms pool their
resources and share costs and risks of a venture.
Joint venture (JV): A form of collaboration between
two or more firms to create a jointly-owned
enterprise.
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Examples of FDI
Vodafone, a British firm, acquired the Czech telecom
Oskar Mobil.
eBay, a U.S. firm, acquired Luxembourgs Skype
Technologies, a prepackaged software company.
Japan Tobacco Inc. acquired the British cigarette
maker Gallaher Group PLC for almost $15 billion.
Dubai International Capital Group acquired the
British theme park operator Tussauds Group for $1.5
billion.
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Name the location of each brand

Brand
Country where brand is based
7-Eleven

Education

Brand
7-Eleven
Japan
KitKat chocolate bars

Education

Brand
7-Eleven
Japan
Switzerland
Miller beer

Education

Brand
7-Eleven
Japan
Switzerland
Miller beer
South Africa
Budweiser beer

Education

Brand
7-Eleven
Japan
Switzerland
Miller beer
South Africa
Budweiser beer
Belgium
Motel 6

Education

Brand
7-Eleven
Japan
Switzerland
Miller beer
South Africa
Budweiser beer
Belgium
Motel 6
France
Thinkpad laptops

Education

Brand
7-Eleven
Japan
Switzerland
Miller beer
South Africa
Budweiser beer
Belgium
Motel 6
France
Thinkpad laptops
China
Blackberry cell phones

Education

Brand
7-Eleven
Japan
Switzerland
Miller beer
South Africa
Budweiser beer
Belgium
Motel 6
France
Thinkpad laptops
China
Canada
DHL express delivery

Education

Brand
7-Eleven
Japan
Switzerland
Miller beer
South Africa
Budweiser beer
Belgium
Motel 6
France
Thinkpad laptops
China
Canada
Germany
Captain Morgan Rum

Education

Brand
7-Eleven
Japan
Switzerland
Miller beer
South Africa
Budweiser beer
Belgium
Motel 6
France
Thinkpad laptops
China
Canada
Germany
Captain Morgan Rum
Britain
Absolut Vodka

Education

Brand
7-Eleven
Japan
Switzerland
Miller beer
South Africa
Budweiser beer
Belgium
Motel 6
France
Thinkpad laptops
China
Canada
Germany
Captain Morgan Rum
Britain
Absolut Vodka
Sweden
Godiva chocolate
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Brand
Country where brand is

based
7-Eleven
Japan
Switzerland
Miller beer
South Africa
Budweiser beer
Belgium
Motel 6
France
Thinkpad laptops
China
Canada
Germany
Captain Morgan Rum
Britain
Absolut Vodka
Sweden
Godiva chocolate
Turkey
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Nature of Foreign Direct Investment

The most advanced, expensive, complex, and
riskiest entry strategy, involving the establishment of
manufacturing plants, marketing subsidiaries, or
other facilities abroad.
Undertaken by firms from both advanced economies
and emerging markets.
Target countries are both advanced economies and
emerging markets.
Occasionally raises patriotic sentiments among
citizens (e.g., Haier and Maytag; Dubai Ports).
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Motives for Foreign Direct Investment

Marketseeking
motives
Gain access to
new markets
or opportunities
Follow key
customers
Compete with
key rivals in their
own markets
Resourceor assetseeking motives

Access raw
materials
Gain access to
knowledge or
other assets
Access
technological and
managerial knowhow available in a
key market
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Efficiencyseeking
motives
Reduce sourcing
and production
costs
Locate production
near customers
Take advantage of
government
incentives
Avoid trade
barriers
Market-Seeking Motives
Gain access to new markets or opportunities.
The existence of a large market motivates many
firms to produce goods at or near customer locations.
Boeing, Coca-Cola, IBM, McDonald's, and Toyota all
generate more sales abroad than they do at home.
Follow key customers. Firms often follow their key
customers abroad to preempt other vendors from
servicing them. E.g., Tradegar Industries supplies
the plastic that its customer Procter & Gamble uses
to make disposable diapers. When P&G built a plant
in China, Tradegar established production there too.
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Market-Seeking Motives (contd)

Compete with key rivals in their own markets.
Some MNEs choose to compete with competitors
directly in their home markets. The purpose is to
weaken and force the rival to expend resources
defending its own market. E.g., Caterpillar entered
Japan to tie up arch-rival Komatsu and hamper
Komatsus ability to expand its activities in the USA.

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Resource or Asset-Seeking Motives

Access raw materials needed in extractive and
agricultural industries. E.g., firms in the mining and oil
industries must go where the raw materials are located.
Gain access to knowledge or other assets. When
Whirlpool entered Europe, it partnered with Philips to
access a well-known brand name and distribution
network.
Access technological and managerial know-how
available in a key market. The firm may benefit by
establishing a presence in a key industrial cluster, such
as the robotics industry in Japan, chemicals in
Germany, fashion in Italy, and software in the U.S.
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Resource Seeking Motives
Firms in the petroleum industry internationalize to access raw materials; in

this case, oil reserves in areas with appropriate natural resources such as
2014 Pearson
the Middle East. Pictured is Copyright
an oil Education
refinery
in Saudi Arabia.
Efficiency Seeking Motives

Reduce sourcing and production costs by
accessing inexpensive labor and other cheap inputs
to the production process. This motive accounts for
the massive development of manufacturing facilities
in China, Mexico, Eastern Europe, and India.
Locate production near customers. In the fashion
industry, Spains Zara and Swedens H&M locate
much of their garment
production in key
markets such as
Spain and Turkey.
H&M

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Efficiency Seeking Motives (contd)

Take advantage of government incentives. In
addition to restricting imports, governments may
offer subsidies and tax concessions to foreign firms
to encourage them to invest locally.
Avoid trade barriers. By establishing a physical
presence within a country, the investor obtains the
same advantages as local firms. The desire to avoid
trade barriers helps explain why Japanese
automakers set up factories in the United States
(1980s).
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Economies of Scale Long-run Average Cost

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Key Features of Foreign Direct Investment

1. Represents substantial resource commitment
2. Implies local presence and operations
3. Firms invest in countries that provide specific
comparative advantages.
4. Entails substantial risk and uncertainty
5. Direct investors deal more intensively with specific
social and cultural variables in the host market.
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Worlds Most International Non-Financial

MNEs

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Service Multinationals
Firms that offer services such as lodging,
construction, and personal care must offer them
when and where they are consumed.
Service firms establish either a
permanent presence via FDI
(e.g., retailing), or a temporary
relocation of personnel (e.g.,
construction industry).
Many support services such
as advertising, insurance,
accounting, and package
delivery are best provided
at the customers location.
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Large International Financial MNEs

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Leading Destinations for FDI

Advanced economies in Europe (especially Britain),
Japan, and North America are popular FDI
destinations, mainly as attractive markets.
In recent years, emerging markets and developing
economies have gained appeal as FDI destinations.
Examples:
Firms target China, Mexico, and Eastern
Europe for low-cost manufacturing and to
easily access huge adjoining regional
markets.
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Inward FDI Performance Index, Advanced

and Developing Economies, 20072010
Source: UNCTAD, World Investment Report 2011 (New York: United Nations, 2011) Permission item
Note: The exhibit shows the ratio of a countrys share in global FDI inflows to its share of global GDP.
A value greater than 1 indicates the country receives more FDI than its relative economic size, a value
below 1 shows the country receives less.
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A. T. Kearney
Global Services Location Index

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Ethical Connections
FDI offers numerous benefits to recipient countries.
FDI may produce side effects that harm the natural
environment, especially in countries with weak
environmental laws. Pollution and ecological destruction
may emerge alongside rapid economic growth.
One MNE, a manufacturer of food additives, allowed
untreated wastewater to flow into the ThiVai river in
Vietnam. Resulting pollution nearly destroyed the
livelihood of thousands of downstream farmers.
MNEs must behave responsibly in their international
dealings. Governments must not allow development
goals to compromise citizen well-being.
Source: H. Nguyen and H. Pham, The Dark Side of Development in Vietnam, Journal of Macromarketing, 32, no. 1 (2012): 74-86.

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Factors Relevant to Selecting Locations for FDI

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Types of FDI
Greenfield investment vs. mergers and
acquisitions
Nature of ownership:
Wholly owned direct
investment vs.
equity joint venture
Level of integration:
Vertical vs.
horizontal FDI
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Greenfield Investment vs. M&As

Greenfield investment: The firm invests to build a
new manufacturing, marketing, or administrative
facility, as opposed to acquiring existing facilities.
Merger: special type of acquisition in which two
firms join to form a new, larger company.
and
Acquisition: direct investment or purchase of an

existing company or facility.
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Mergers & Acquisitions
The Chinese computer maker Lenovo, whose Beijing factory is shown here,
purchased IBMs personal computer business for $1.25 billion and now earns
Copyright
2014
more than two-thirds of its revenue
from
thisPearson
ambitious acquisition.
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Toyotas Factories in the United States

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The Nature of Ownership

Equity participation: Acquisition of partial
ownership in an existing firm.
Wholly owned direct investment: Investor fully
owns the foreign assets.
Equity joint ventures:
Partnership in which a separate
firm is created through the
investment of assets by two or
more parent firms that gain
joint ownership of a new legal
entity.
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Level of Integration
Vertical integration: The firm owns, or seeks to
own, multiple stages of a value chain for producing,
selling, and delivering a product. E.g., Toyota owns
some Toyota car dealerships around the world. Ford
once owned steel mills that produced steel used to
make Ford cars.
Horizontal integration: Arrangement whereby the
firm owns, or seeks to own, the activities involved in
a single stage of its value chain. E.g., Microsoft
acquired a Montreal-based firm that makes software
used to create movie animation.
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International Collaborative Venture

A partnership between two or more firms
Includes equity joint ventures and non-equity,
project-based ventures
Sometimes called partnerships or strategic alliances
Collaboration helps overcome the often substantial
risk and high costs of international business. It
makes possible the achievement of projects that
exceed the capabilities of the individual firm.
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Equity vs. Project-Based Joint Ventures

Equity Joint Ventures are normally formed when no
one party has all the assets needed to exploit an
opportunity. Typically, the local partner contributes a
factory, market navigation know-how, connections, or
low-cost labor.
A project-based joint venture has a narrow scope
and limited timetable. No new legal entity is created.
Typically, partners collaborate on joint development
of new technologies, products, or share other
expertise with each other. Such cooperation helps
them catch up with rivals in technology development.
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Other Types of Collaborative Ventures

Consortium: project-based, usually non-equity
venture with multiple partners fulfilling a large-scale
project. E.g., commercial aircraft manufacturing
(Boeing and Airbus).
Cross-licensing agreement: type of
a project-based, non-equity venture
where partners agree to access
licensed technology developed by
the other on preferential terms.
E.g., telecommunications industry
for inventing new technologies.
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Advantages and Disadvantages

of Collaborative Ventures

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Managing Collaborative Ventures: Key Questions

How dependent will we be on our partner?
How will responsibilities and competencies be shared
with the partner?
Are our assets at risk? How can we protect them?
What other risks do we face by partnering?
Will we close growth opportunities due to this
venture?
How will the venture be managed? What burdens will
be created on managerial, financial, or other
resources?
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A Systematic Process to
International Business Partnering

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Success Factors in Collaborative Ventures

Half of all global collaborative ventures fail in the
first 5 years of operations due to unresolved
disagreements, confusion, and frustration. Thus,
partners should:
Be aware of cultural differences;
Pursue common goals;
Pay attention to planning and management of the
venture;
Safeguard core competencies;
Adjust to shifting environmental circumstances.
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Retailers: A Special Case of Internationalization

Retailers typically internationalize via FDI and
collaborative ventures. Retailing takes various forms:
Department stores (e.g., Marks & Spencer, Macy's);
Specialty retailers (Body Shop, Gap, Disney Store);
Supermarkets (Sainsbury, Safeway, Sparr);
Convenience stores (Circle K, 7-Eleven, Tom Thumb);
discount stores (Zellers, Tati, Target);
Big box stores (Home Depot, IKEA, Toys "R" Us).
Wal-Mart has over 100 stores and 50,000 employees in
China, sourcing almost all its merchandise locally and
providing thousands of local jobs.
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Barriers to Retailer Success Abroad

1. Culture and language barriers. E.g., differing
product and service portfolios, store hours, store
layouts, relations between management and labor.
2. Consumers tend to develop strong loyalty to
indigenous retailers. E.g., both Galleries Lafayette in
New York and Wal-Mart in Germany failed.
3. Legal and regulatory barriers. Countries have
idiosyncratic laws that affect retailing. E.g., Germany
limits store hours and requires recycling.
4. Retailers often must develop local sources of
supply. E.g., McDonalds in Russia; KFC in China.
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Wal-Marts Mixed Experience

Germany: Failing to understand the market, Wal-Mart
could not compete with local firms and left the market.
Mexico: Built huge U.S.-style parking lots. But most
Mexicans lack cars, and city bus stops were far away,
so shoppers could not haul their purchases home.
Brazil: Families do their big shopping on payday.
Aisles were too narrow
to accommodate the rush.
Argentina: Wal-Mart's red,
white, and blue banners,
reminiscent of the U.S.
flag, offended local tastes.
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Success Factors for Retailers

1. Advance research and planning. French retailer
Carrefour spent 12 years building its business in
Taiwan to better understand Chinese culture.
2. Establish logistics and purchasing networks
in each market. Well-organized sourcing and
logistics ensure inventory is always maintained.
3. Assume an entrepreneurial, creative approach.
Virgin megastore expanded to Asia, Europe, and
North America using creative approaches.
4. Adjust business model to suit local conditions. In
Mexico, Home Depot packages merchandise to suit
smaller budgets and offers flexible payment plans.
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Copyright 2014 Pearson

International Business: The New Realities, Global Edition, 3rd Edition

FDI and Collaborative Ventures

Name the location of each brand

Country where brand is based

Copyright 2014 Pearson

Name the location of each brand

Country where brand is based

KitKat chocolate bars

Copyright 2014 Pearson

Name the location of each brand

Country where brand is based

KitKat chocolate bars

Copyright 2014 Pearson

Name the location of each brand

Country where brand is based

KitKat chocolate bars

Copyright 2014 Pearson

Name the location of each brand

Country where brand is based

KitKat chocolate bars

Copyright 2014 Pearson

Name the location of each brand

Country where brand is based

KitKat chocolate bars

Copyright 2014 Pearson

Name the location of each brand

Country where brand is based

KitKat chocolate bars

Blackberry cell phones

Copyright 2014 Pearson

Name the location of each brand

Country where brand is based

KitKat chocolate bars

Blackberry cell phones

DHL express delivery

Copyright 2014 Pearson

Name the location of each brand

Country where brand is based

KitKat chocolate bars

Blackberry cell phones

DHL express delivery

Captain Morgan Rum

Copyright 2014 Pearson

Name the location of each brand

Country where brand is based

KitKat chocolate bars

Blackberry cell phones

DHL express delivery

Captain Morgan Rum

Copyright 2014 Pearson

Name the location of each brand

Country where brand is based

KitKat chocolate bars

Blackberry cell phones

DHL express delivery

Captain Morgan Rum

Name the location of each brand

Country where brand is

KitKat chocolate bars

Blackberry cell phones

DHL express delivery

Captain Morgan Rum

Nature of Foreign Direct Investment