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International BusinessEnvironments and Operations
Part 5Global 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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FactorsAffecting Operating Modesin International Business
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ForeignExpansion: 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 usedprimarily when the foreign company canmanage better than the owners.
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Turnkey Operations
Turnkey operations are:• Most commonly performed by industrial-
equipment, construction, and consulting companies
• Often performed for a governmental agency
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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
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Equity Alliances
A collaborative arrangement in which atleast one of the collaborating companiestakes 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 bothopportunities and problems as companies movesimultaneously to new countries and tocontractual arrangements with new companies.
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