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Title: International%20Business%20Strategy,%20Management%20


1
International BusinessStrategy, Management the
New RealitiesbyCavusgil, Knight Risenberger
  • Chapter 14
  • Foreign Direct Investment and Collaborative
    Ventures

2
Learning Objectives
  1. An organizing framework for foreign market entry
    strategies
  2. Motives for foreign direct investment (FDI) and
    collaborative ventures
  3. 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
  8. Foreign direct investment, collaborative
    ventures, and ethical behavior

3
FDI and Collaborative Ventures
  • Foreign direct investment (FDI) is an
    internationalization strategy in which the firm
    establishes a physical presence abroad through
    acquisition of productive assets such as capital,
    technology, labor, land, plant, and equipment.
  • International collaborative venture refers to a
    cross-border business alliance in which
    partnering firms pool their resources and share
    costs and risks of the venture.
  • Joint venture (JV) a form of collaboration
    between two or more firms to create a
    jointly-owned enterprise.

4
Recent Examples of FDI
  • Vodafone, a British firm, which 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
  • Sing Tel, a Singapore firm, acquired 49
    cross-border firms worth over 36 billion over
    eight years, including Cable and Wireless Optus
    Ltd. of Australia.

5
FDI A Complex Foreign Market Entry Strategy
  • FDI is the most advanced and complex entry
    strategy, and involves establishing manufacturing
    plants, marketing subsidiaries, or other
    facilities abroad.
  • For the firm, FDI requires substantial resource
    commitment, local presence and operations in
    target countries, and global scale efficiency.
  • FDI also entails greater risk, as compared to
    other entry modes.

6
Patterns in FDI
  • Companies from both the advanced economies and
    emerging markets are active in FDI.
  • Destination or recipient countries for such
    investments include both advanced economies and
    emerging markets.
  • Companies employ multiple strategies to enter
    foreign markets as investors, including
    acquisitions and collaborative ventures.
  • Companies from all types of industries, including
    services, are active in FDI and collaborative
    ventures.
  • Direct investment by foreign companies
    occasionally raises patriotic sentiments among
    citizens.

7
FDI may Raise Patriotic Sentiments
  • The possibility of a Haier takeover of Maytag
    Corp. in 2005 stirred anti-Chinese sentiment in
    the U.S. over East Asian companies gobbling up
    U.S. businesses.
  • That same year, a bid by China oil company CNOOC
    Ltd. to buy California-based Unocal Corp. for
    18.5 billion raised concerns over national
    security. When the public objected to the
    possibility of a Chinese state enterprise gaining
    control in a critical sector such as energy, the
    U.S. Congress banned the deal.

8
Considerations Relevant to Choice of Foreign
Market Entry Strategy
  • The degree of control it wants to maintain over
    the decisions, operations, and strategic assets
    involved in the venture
  • The degree of risk it is willing to tolerate, and
    the timeframe in which it expects returns
  • The organizational and financial resources (e.g.,
    capital, managers, technology) it will commit to
    the venture
  • The availability and capabilities of partners in
    the market
  • The value-adding activities it is willing to
    perform itself in the market, and what activities
    it will leave to partners
  • The long-term strategic importance of the market.

9
An Organizing Framework Based on Degree of
Control Available to the Focal Firm
  • Low-control strategies are exporting,
    countertrade and global sourcing. They provide
    the least control over foreign operations, since
    the focal firm delegates considerable
    responsibility to foreign distributors.
  • Moderate-control strategies are contractual
    relationships such as licensing and franchising
    and project-based collaborative ventures.
  • High-control strategies are equity joint ventures
    and FDI. The focal firm attains maximum control
    by establishing a physical presence in the
    foreign market.

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11
Trade-Offs in Foreign Market Entry Strategies
  • High-control strategies require substantial
    resource commitments by the focal firm.
  • Because the firm becomes anchored or physically
    tied to the foreign market for the long term, it
    has less flexibility to reconfigure its
    operations there, as conditions in the country
    evolve over time.
  • Longer term involvement in the market also
    implies considerable risk due to uncertainty in
    the political and customer environments.

12
Motives for FDI and Collaborative Ventures
  • Firms pursue FDI and international collaborative
    ventures for complex and overlapping reasons.
  • The ultimate goal is to enhance firm
    competitiveness in the global marketplace.
  • Motives can be classified into three categories
  • market-seeking motives,
  • resource or asset-seeking motives, and
  • efficiency-seeking motives.

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14
Market-Seeking Motives
  • Gain access to new markets or opportunities. The
    existence of a substantial market motivates many
    firms to produce offerings 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,
    which supplies the plastic that its customer
    Procter Gamble uses to manufacture disposable
    diapers. When PG built a plant in China,
    Tradegar management established production there
    as well.
  • Compete with key rivals in their own markets.

15
Resource or Asset-Seeking Motives
  • Access raw materials needed in extractive and
    agricultural industries. E.g., firms in the
    mining, oil, and crop-growing industries have
    little choice but to go where the raw materials
    are located.
  • Gain access to knowledge or other assets. E.g.,
    when Whirlpool entered Europe, it partnered with
    Philips to benefit from the latter firms
    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.

16
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 HM locate
    much of their garment production in key markets
    such as Spain and Turkey.
  • 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 U.S. (1980s).

17
Features of FDI
  • FDI is the entry strategy most associated with
    the MNE. Sony, Nestlé, Nokia, Motorola, and
    Toyota have extensive FDI-based operations around
    the world.
  • Service firms usually establish agency
    relationships and retail facilities.
  • FDI should not be confused with international or
    foreign portfolio investment. International
    portfolio investment refers to passive ownership
    of foreign securities such as stocks and bonds
    for the purpose of generating financial returns.
  • International portfolio investment is not direct
    investment which seeks control of a business
    abroad and represents a long-term commitment.

18
Key Features of FDI
  • FDI requires greater resource commitment by the
    firm.
  • FDI means the company must have local presence
    and operations.
  • FDI assumes the firm wants to achieve global
    scale efficiency.
  • FDI entails great risk and uncertainty. The firm
    sets up a permanent, physical presence in a
    foreign country, and exposes the firm to new
    risks.
  • FDI means the firm must have greater contact with
    the social and cultural factors of the host
    market.
  • MNEs need to behave in socially responsible ways
    in host countries.

19
Who Is Active in Direct Investment?
  • Direct investment is the typical foreign market
    entry strategy for large MNEs firms with
    extensive experience in international business.
  • Exhibit 14.3 shows the MNEs with the greatest
    amount of such foreign assets as subsidiaries and
    affiliates, worldwide.
  • E.g., U.K-based Vodafone is a mobile phone
    supplier with numerous sales offices in most
    major cities around the world.

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21
Service Multinationals
  • Firms must offer services, such as lodging,
    construction, and personal care, when and where
    they are consumed.
  • Service firms establish either a permanent
    presence through FDI (e.g., retailing), or a
    temporary relocation of personnel (e.g.,
    construction industry.
  • E.g., management consulting is a service that is
    usually embodied in human experts who interact
    directly with clients to dispense advice. Firms
    such as McKinsey and Cap Gemini generally
    establish offices abroad.
  • Many support services, such as advertising,
    insurance, accounting, the law, and package
    delivery, are also best provided at the
    customers location.

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23
Leading Destinations for FDI
  • Advanced economies such as Australia, Belgium,
    Britain, Canada, Germany, Japan, Netherlands, and
    the United States long have been popular
    destinations for FDI because of their strong GDP
    per capita, GDP growth rate, density of knowledge
    workers, and superior business infrastructure.
  • In recent years, emerging markets and developing
    economies have gained appeal as FDI destinations.
    According to A.T. Kearneys FDI Confidence
    Index, the top destination for foreign investment
    today is China. India is now in third place,
    having risen rapidly in Kearneys annual rankings

24
Factors Relevant to Selecting FDI Locations
  • Market attractiveness
  • Human resource factors
  • Infrastructure
  • Profit retention factors (e.g.,taxes)
  • Economic environment
  • Legal and regulatory environment
  • Political and governmental structure

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26
Types of FDI
  • Greenfield investment vs. mergers and
    acquisitions
  • The nature of ownership Wholly owned direct
    investment vs. equity joint venture
  • Level of integration Vertical vs. horizontal FDI

27
Greenfield Investment vs. MAs
  • Greenfield investment occurs when a firm invests
    to build a new manufacturing, marketing or
    administrative facility, as opposed to acquiring
    existing facilities.
  • An acquisition refers to a direct investment or
    purchase of an existing company or a facility.
  • A merger is a special type of acquisition in
    which two firms join to form a new, larger firm.

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29
Nature of Ownership
  • Equity participation Acquisition of partial
    ownership in an existing firm.
  • Wholly owned direct investment A foreign direct
    investment in which the investor fully owns the
    foreign assets
  • Equity joint ventures A type of partnership in
    which a separate firm is created through the
    investment or pooling of assets by two or more
    parent firms that gain joint ownership of the new
    legal entity.
  • Joint ventures may be the only way that a company
    can expand into a country. E.g., until recently,
    the Chinese government prohibited foreign firms
    from having more than 49 equity investment in
    local businesses.

30
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.
  • In forward vertical integration, the firm
    develops the capacity to sell its outputs by
    investing in downstream value-chain facilities,
    that is, marketing and selling operations.
  • Forward vertical integration is less common than
    backward vertical integration, in which the firm
    acquires the capacity abroad to provide inputs
    for its foreign or domestic production processes
    by investing in upstream facilities, typically
    factories, assembly plants or refining
    operations.

31
International Collaborative Ventures
  • A collaborative venture is essentially a
    partnership between two or more firms and
    includes equity joint ventures as well as
    non-equity, project-based ventures.
  • International collaborative ventures are
    sometimes referred to as international
    partnerships and international strategic
    alliances.
  • Collaboration helps firms 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.

32
Equity Joint Ventures
  • JVs ventures are normally formed when no one
    party possesses all of the assets needed to
    exploit an available opportunity.
  • Typically, the foreign partner contributes
    capital, technology, management expertise,
    training, or some type of product.
  • The local partner contributes the use of its
    factory or other real estate knowledge of the
    local language and culture market navigation
    know-how useful connections to the host country
    government or lower-cost production factors such
    as labor.
  • The partnership allows the foreign firm to access
    key market knowledge, gain immediate access to a
    distribution system and customers, and greater
    control over local operations.

33
Project-Based, Non-Equity Ventures
  • Project-based, non-equity venture is a
    collaboration in which the partners create a
    project with a relatively narrow scope and a
    well-defined timetable, without creating a new
    legal entity.
  • Combining personnel, resources, and capabilities,
    the partners collaborate until the venture bears
    fruit, or until they no longer consider it
    valuable to collaborate.
  • Typically, partners collaborate on joint
    development of new technologies, products, or
    share other expertise with each other. Such
    cooperation may help them catch up with rivals in
    technology development.

34
How Project-Based Collaborations are Different
From Equity Joint Ventures
  • No new legal entity is created partners carry on
    their activity within the guidelines of a
    contract.
  • Parent companies do not necessarily seek
    ownership of an ongoing enterprise they simply
    contribute their knowledge, expertise, personnel,
    and monetary resources in order to derive
    knowledge or access-related benefits.
  • Collaboration does not last indefinitely it
    tends to have a well-defined timetable and an end
    date partners go their separate ways once the
    objectives have been accomplished or the partners
    find no reason for continuation.
  • The nature of collaboration is narrower in scope,
    typically revolving around one or more RD
    project, new products, marketing, distribution,
    sourcing, or manufacturing.

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36
Other Examples of Collaborative Ventures
  • A consortium is a project-based, usually
    non-equity venture with multiple partners
    fulfilling a large-scale project. It is typically
    formed with a contract, which delineates the
    rights and obligations of each member.
  • A cross-licensing agreement is a type of a
    project-based, non-equity venture where partners
    agree to access licensed technology developed by
    the other, on preferential terms. The agreement
    assumes each partner has or expects to have
    something to license.

37
Management of Collaborative Ventures Understand
Potential Risks in Collaboration
  • As a firm, are we likely to grow very dependent
    on our partner?
  • By partnering, will we stifle growth and
    innovation in our own organization?
  • Will we share our competencies excessively, to
    the point where corporate interests are
    threatened? How can we safeguard our core
    competencies?
  • Will we be exposed to significant commercial,
    political, cultural, or currency risks?
  • Will we close certain growth opportunities by
    participating in this venture?
  • Will managing the venture place an excessive
    burden on corporate resources, such as
    managerial, financial, or technological resources?

38
Pursue a Systematic Process for Partnering
  • The initial decision in internationalization is
    the choice of the most appropriate target market.
  • The chosen market determines the characteristics
    needed in a business partner. If the firm is
    planning to enter an emerging market, for
    example, it may want a partner with political
    clout or "connections."
  • Exhibit 14.8 reveals that managers need to draw
    on their cross-cultural competence, legal
    expertise, and financial planning skills in this
    process.

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40
Compete and Collaborate
  • Collaborative ventures require much due
    diligence, strong negotiation skills, high levels
    of commitment by management, competence in
    managing cultural differences, clear objectives,
    and a high level of trust among partners.
  • Foreign partners are certain to have their own
    agenda and purpose for pursuing the venture. The
    focal firm must be sure to maintain and negotiate
    its agenda as well. Intel has worked to protect
    its proprietary technology by not revealing too
    much of it to Chinese partners.
  • Some U.S. SMEs have regretted forming joint
    ventures with Chinese partners Too much trust
    and not enough due diligence have often resulted
    in a critical loss of intellectual property.

41
Success Factors in Collaborative Ventures
  • Half of all global collaborative ventures fail
    within the first 5 years of operations due to
    unresolved disagreements, confusion, and
    frustration Therefore, partners should
  • Be aware of cultural differences.
  • Pursue common values and culture.
  • Pay attention to planning and management of the
    venture.
  • Protect core competencies.
  • Adjust to new environmental circumstances.

42
Retailers A Special Case of Internationalization
  • Retailers internationalize substantially through
    FDI and collaborative ventures. Retailing takes
    various forms
  • Department stores (e.g., Marks Spencer, Bay,
    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 now has roughly 100 stores and 50,000
    employees in China. It sources almost all its
    merchandise locally, providing jobs for thousands
    of Chinese.

43
The Experience of Retailers
  • Internationalization of retailers has been driven
    by saturation of home country markets,
    deregulation of other markets, and opportunities
    of lower costs abroad. Many foreign markets have
    pent-up demand, fast growth, and a growing and
    sophisticated middle-class.
  • Many international retailing ventures have
    failed, however. The French department store
    Galleries Lafayette and Britain's Marks Spencer
    failed in the United States and Canada. IKEA
    failed in Japan, and Wal-Mart left Germany
    defeated because of local competitors and
    cultural disconnects.

44
Wal-Marts Mixed Experience
  • Wal-Mart is the worlds largest retailer but
    suffered dismal results in Germany because it
    could not compete with local competitors and
    eventually exited the market.
  • In Mexico, Wal-Mart constructed massive
    U.S.-style parking lots for its new super
    centers. But most Mexicans dont have cars, and
    city bus stops were beyond the huge lots, so
    shoppers could not haul their goods home.
  • In Brazil, most families do their big shopping
    once a month, on payday. Wal-Mart built aisles
    too narrow and crowded to accommodate the rush.
    It stocked shelves with unneeded leaf blowers in
    urban Sao Paulo.
  • In Argentina, Wal-Marts red-white-and-blue
    banners, reminiscent of the U.S. flag, offended
    local tastes. Sams Club flopped in Latin
    America partly because its huge multi-pack items
    were too big for local shoppers with low incomes
    and small apartments.

45
Barriers to Retailer Success Abroad
  1. Cultural and language barriers Retailers must
    respond to local market requirements, e.g., by
    customizing the product and service portfolio,
    adapting store hours, modifying store size and
    layout, and meeting labor union demands.
  2. Consumers tend to develop strong loyalty to
    indigenous retailers. As Galleries Lafayette in
    New York and Wal-Mart in Germany discovered, the
    foreign firm competes against local competitors
    that usually enjoy much loyalty from local
    consumers.

46
Barriers to Retailer Success Abroad (cont.)
  • 3. Managers must address legal and regulatory
    barriers. Countries have idiosyncratic laws that
    affect retailing. E.g., Germany limits store
    opening hours, and retailers must close on
    Sundays. Japans Large-Scale Store Law meant
    that foreign warehouse and discount retailers
    needed permission from existing small retailers
    to enter.
  • 4. When entering a new market, retailers must
    develop local sources of supply. Local suppliers
    may be unwilling or unable to supply. E.g., when
    Toys "R" Us entered Japan, local toy
    manufacturers were reluctant to work with the
    U.S. firm. Some retailers end up importing many
    of their offerings, which requires establishing
    complex and costly international supply chains.

47
FDI or Franchising A Choice for Retailers
  • The larger, more experienced firms, such as
    Carrefour, Royal Ahold, IKEA, and Wal-Mart, tend
    to internationalize via FDI i.e., they tend to
    own their stores.
  • Smaller, less experienced international firms
    such as Borders bookstores tend to rely on
    networks of independent franchisees. In
    franchising, the retailer adopts a business
    system from, and pays an ongoing fee to, a
    franchisor.
  • Other firms may employ a dual strategy using FDI
    in some markets and franchising in others.
    Franchising provides a fast way to
    internationalize. Relative to FDI, it affords
    the firm less control over its foreign
    operations, which can be risky in countries with
    weak IP laws.
  • Starbucks, Carrefour, IKEA, Royal Ahold, and
    Wal-Mart usually internationalize through
    company-owned stores. FDI allows these firms to
    maintain direct control over their foreign
    operations and proprietary assets.

48
Success Factors for Retailers
  • Advanced research and planning is essential. In
    the run-up to launching stores in China,
    management at the giant French retailer Carrefour
    spent 12 years building up its business in
    Taiwan, developing a deep understanding of
    Chinese culture.
  • Establish efficient logistics and purchasing
    networks in each market. Scale economies in
    procurement are especially critical. Retailers
    need to organize sourcing and logistical
    operations to ensure that adequate inventory is
    always maintained.
  • Assume an entrepreneurial, creative approach to
    foreign markets. Virgin megastore expanded
    Virgin to numerous markets throughout Europe,
    North America, and Asia. Its stores are big,
    well lit, and music albums are arranged in a
    logical order.
  • Adjust business model to suit local conditions.
    Home Depot offers merchandise in Mexico that
    suits the small budgets of do-it-yourself
    builders. It has introduced payment plans for
    customers and promotes the do-it-yourself mindset
    in a country where most cannot afford to hire
    professional builders.

49
IKEA An Exceptional Success Story
  • IKEA, the worlds largest furniture retailer, has
    experienced great international success,
    launching over 200 furniture mega-stores in
    dozens of countries.
  • IKEAs success derives from strong leadership and
    skillful management of human resources.
    Management balances global integration of
    operations with responsiveness to local tastes.
  • In each store, IKEA offers as many standardized
    products as possible while maintaining sufficient
    flexibility to accommodate specific local
    conditions.
  • This is achieved in part by testing the waters
    and learning in smaller markets before entering
    big markets. For instance, IKEA perfected its
    retailing model in German-speaking Switzerland
    before entering Germany.

50
Corporate Social Responsibility (CSR)
  • CSR refers to operating a business in a manner
    that meets or exceeds the ethical, legal,
    commercial, and public expectations of
    stakeholders (customers, shareholders, employees,
    and communities).
  • It represents a set of core values that includes
    avoiding human rights abuses upholding the right
    to join or form labor unions elimination of
    compulsory and child labor avoiding workplace
    discrimination protecting the natural
    environment and guarding against corruption,
    including extortion and bribery.
  • Exhibit 14.9 illustrates the diversity of CSR
    initiatives that firms worldwide undertake.

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52
Petrobras An Example of Corporate Citizenship
CSR
  • Petrobras, the Brazilian oil company, operations
    span 21 countries, many of which have unstable
    political or social environments.
  • In Brazil, Petrobras has developed extensive
    CSR-oriented programs related to poverty
    reduction, youth education, child labor and
    abuse, and fundamental rights for people with
    physical and mental impairments.
  • In Africa and elsewhere, Petrobras has developed
    CSR initiatives in areas such as reconstruction
    projects for schools, day-care centers,
    hospitals, and in rural communities.
  • In Colombia, the firm developed a program to
    train community health agents. In Nigeria,
    Petrobras cooperates with a local
    non-governmental organization to provide HIV/AIDS
    prevention education in schools.

53
Relativism vs. Normativism in CSR
  • Some believe that it is sufficient to simply
    follow the laws and regulations in place in each
    country. However, many countries are
    characterized by weak legal and regulatory
    systems, and widespread corruption.
  • Relativism refers to the belief that ethical
    truths are relative to the groups that hold them.
    Relativism is akin to the advice When in Rome,
    do as the Romans do. Accordingly, a Japanese
    MNE that believes bribery is wrong might pay
    bribes in countries where the practice is
    customary and culturally acceptable. It is
    natural for the firm to follow the values and
    behaviors prevailing in the countries where it
    does business.
  • Normativism is a belief in universal behavioral
    standards that firms and individuals should
    uphold. According to this view, the Japanese
    multinational that believes bribery is wrong will
    enforce this standard everywhere in the world.
  • The U.N. and other CSR proponents increasingly
    encourage companies to follow a normative
    approach.
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