IAF 605 - International Business Management Week 11 Direct Investment and Collaborative Strategies
May 27, 2015
IAF 605 - International Business Management
Week 11
Direct Investment and Collaborative Strategies
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
Figure 14.2: Foreign Expansion: Alternative Operating Modes (p520)
When Exporting May Not Be Feasible
production abroad is cheaper than at home
transportation costs to move goods or services internationally are too
expensive
companies lack domestic capacity
products and services need to be altered
substantially to gain sufficient consumer
demand abroad
governments inhibit the import of foreign
products
buyers prefer products originating from a particular country
Foreign Direct Investment
Control must accompany the investment
Three primary reasons that spur companies to want a controlling interest:
• internalization theory
• appropriability theory
• freedom to pursue global objectives
Foreign Direct Investment (FDI) approaches
• sometimes cheaper to handle operations oneself than to contract with another company
internalization
• denying rivals access to resources (capital, patents, trademarks, and management know-how)
appropriability
• when a company has a wholly owned foreign operation, it may more easily have that operation participate in a global strategy
global strategy
Methods for Making FDI
The advantages of acquiring (buying) an existing operation include:
• adding no further capacity to the market
• avoiding start-up problems
• easier financing
Companies may choose to build (make greenfield investments) if:
• no desired company is available for acquisition
• acquisition will lead to carry-over problems
• acquisition is harder to finance
Figure 14.3: Collaborative Arrangements and International Objectives (p525)
General Motives for Collaborative Arrangements
Spread and Reduce Costs
Specialize in Competencies
Avoid or Counter Competition
Secure Vertical and Horizontal Links
Gain Knowledge
International Motives for Collaborative Arrangements
Gain location-specific assets
Overcome governmental
constraints
Diversify geographically
Minimize exposure in
risky environments
trade-offs: control and prior foreign expansion
the more collaboration
dependency = the more likely to lose decision-making
control
if prior foreign expansion experience – they have the know-
how (advantages of collaboration are no longer as important)
Licensing
Sources: comicbookbin.com; oneinchpunch.com
Franchising
Franchising includes providing an intangible asset (usually a trademark) and continually infusing necessary assets
Source: fia2400.com
• the more standardization, the less acceptance in the foreign country
• the more adjustment to the foreign country, the less the franchisor is needed
Franchisors face a
dilemma:
Management Contracts
Management contracts are used primarily when the foreign company can manage better than the owners
Source: alcionventures.com
Turnkey Operations
Most commonly performed by industrial-equipment, construction, and consulting companies
Often performed for a governmental agency
Source: http://www.flickr.com/photos/voght/
Joint Ventures
Source: blogs.trb.com
Equity Alliances
A collaborative arrangement in which at least one of the collaborating companies takes an ownership position (almost always minority) in the other(s).
Each airline spent 12 million
dollars to buy the other's
shares. Asiana holds a 0.16
percent stake in ANA, while
the Japanese airline owns a
0.72 percent interest in
Asiana, which is Korea's
second national carrier.
"The mutual holding of shares
in each other's company is a
symbol of our commitment to
work ever more closely
together," Kang Joo-An,
president - Asiana
Source: wikipedia.org
Figure 14.4: Collaborative Strategy and Complexity of Control (p 535)
Figure 14.5: How to Dissolve a Joint Venture (p536)
Major strains on collaborative arrangements are due to five factors
1. Relative importance to partners
2. Divergent objectives
3. Control problems
4. Comparative contributions and appropriations
5. Differences in culture
Source: nbc.com
Managing Foreign Arrangements
The evolution to a different operating mode may:
• be the result of experience
• necessitate costly termination fees
• create organizational tensions
.Source: swarthmore.edu
Figure 14.7: Country Attractiveness/Company Strength Matrix (p540)
Negotiating Process – in technology agreements…
seller does not want to give information
without assurance of payment
buyer does not want to pay without
evaluating information
Performance Assessment
When collaborating with another company, managers must:
• continue to monitor performance
• assess whether to take over operations
• develop competency in managing a portfolio of arrangements
Will American Airline’ North Atlantic Joint Venture Fly?
Most of the world’s major airlines are in or have announced they will
join an alliance whereby they combine routes, sales, airline
terminal services, and frequent-flier programs
Many airlines hold ownership in other airlines
Questions
Should the proposed new venture be approved? What are the implications, if approved, for these airlines’ solvency and for customers?
Some airlines, such as Southwest, have survived as niche players without extensive international connections. Can they continue this strategy?
Why should an airline not be able to establish service anywhere in the world simply by demonstrating that it can and will comply with the local labour and business laws of the host country?
Questions
What will be the consequences if a few large airlines or networks dominate global air service?
Many airlines have recently been no more than marginally profitable. Is this such a vital industry that governments should intervene to guarantee their survival? If so, how?
What methods could the three JV partners use to divide revenue and expenses on North Atlantic routes?
Homework
review Chapter 14
do quiz (Blackboard)
read Chapter 15 – The Organization of International Business
read… Infosys: The Search for the Best and Brightest (pages 583-588)