Prentice Hall, 2002Chapter 3 Daniels 1 Chapter Three Forms of Operations.

1Prentice Hall, 2002 Chapter 3Daniels

Chapter Three Forms of Operations


Chapter ObjectivesTo appreciate that companies may use various operating

forms to sell abroad or to gain foreign resourcesTo understand why trade (exporting and importing) is

important for most companies operating internationallyTo comprehend the reasons why companies depend on

production in foreign countriesTo perceive the advantages of owning foreign production,

rather than contracting with another company that owns itTo grasp the reasons for and understand the different

types of international collaborative arrangementsTo recognize the problems of international collaborative

arrangements and means of addressing the problems


Introduction

Combinations of external and internal conditions influence managers’ selection of international operating forms

Whether a country produces in its home country or abroad is a convenient way to begin describing operating forms


Forms of Operations


Importing and Exporting Exports: goods and services sold to residents of a foreign country Imports: purchases from residents of a foreign country Collectively, exports and imports are known as trade

• Merchandise trade• Service exports and imports• Service trade

Comprised of earnings from and payments to foreign residents for other than merchandise

Transportation, communication, tourism, financial services, and payments for the use of copyrights and trademarks

• Invisibles Trade, especially merchandise trade, is the most important

international economic activity for most countries More companies engage in importing and exporting than in any other

form of international business Companies usually import and export before undertaking other forms

of international business Importing and exporting require specialized functions and operations


Reasons for Foreign Production Companies may find advantages of producing in foreign

countries:• Cheaper foreign production

Cheaper labor costs• Transportation costs• Lack of domestic capacity• Need to alter products and services

Can require additional investmentLoss of certain economies from large-scale production

• Trade restrictionsEvery country continues to place some barriers on the

import of products and services from abroad• Country-of-origin effects

Some customers prefer to purchase locally made goods for nationalistic reasons


Foreign Equity Arrangements A company may or may not take ownership in the foreign facilities

that provide products and services to it

• Direct investment: gives the investor a controlling interest in a foreign company

• Governments usually stipulate that ownership of a minimum of 10-25% of the voting stock in a foreign enterprise is necessary for them to consider the investment as direct

• The more equity held, the higher the commitment to the operation

Internalization: when a company controls a foreign operation rather than collaborating with another company

• One reason companies may prefer internalization is reluctance to transfer certain vital resources to another company

• Internalization allows companies to more easily adopt a global or transactional strategy


Foreign Equity Arrangements


Motives for Collaborative Arrangements

Companies collaborate internationally for the following reasons:

• Spread and reduce costs

• Specialize in competenciesResource-based view of the firm: holds that each company has a

unique combination of competencies

• Competitive factors

• Secure vertical and horizontal linkagesHorizontal linkages may increase a company’s product lineCompanies may lack the resources to go it alone

• Glean knowledge

• Gain location-specific assets

• Overcome legal constraints

• Diversify geographicallyCan help a firm smooth its sales and profits

• Minimize exposure in risky environments



Collaborative Forms Joint venture: two or more companies share ownership of an FDI Consortium: when two or more organizations participate, this is

what the resulting joint venture is sometimes called Equity alliances: involves a company’s equity position in the

company with which it has a collaborative arrangement• The purpose of equity ownership is to solidify a collaborating

contract Licensing: a company grants rights to intangible property to

another company• Cross-licensing

Franchising: a specialized form of licensing in which the franchiser not only sells an independent franchisee the use of a trademark but also assists on a continuous basis in the operation of the business

Management contracts: arrangements whereby, for a fee, one company provides personnel for another company

Turnkey operations: involve a contract for construction of operating facilities that are transferred for a fee to the owner when they are ready to commence operations


Collaborative Forms


Use of Different Operational Forms

The truly experienced international firm usually uses most of the operational forms available, selecting them according to specific product or foreign operating characteristics

A company may change operating forms as operations expand or contract and as it gains experience

Operating forms may be combined


Managing Operating Forms Problems of collaborative arrangements:

• Differing relative importance of the arrangements to the partners

• Differing objectives from the arrangement

• Control problems

• Relative contributions and appropriations

• Differences in organizational or national culture

Methods to make collaborative arrangements work:• Seeking out a partner for its foreign operations

• React to a proposal from another company

Dynamics of operating forms:• In early stages of international development, few companies are willing

to expend a large portion of their resources on foreign operations

• As companies grow, they tend to self-handle more operations and locate a larger portion of resources abroad

• Exporting usually precedes foreign production and contracting with another company to handle foreign business generally precedes handling it internally


Managing Operating Forms

Prentice Hall, 2002Chapter 3 Daniels 1 Chapter Three Forms of Operations.

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foreign countries

foreign residents

foreign production companies

foreign operation

foreign country imports

foreign enterprise

foreign facilities

foreign resources