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)