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NATIONAL COLLEGE OF BUSINESS AND ARTS CUBAO CAMPUS

DIRECT INVESTMENT AND COLLABORATIVE STRATEGIES SESSION 10: GLOBAL/INTERNATIONAL BUSINESS

In Partial Fulfillment of the Requirements for the Global/International Business Course

Submitted by: Charisse Dianne V. Leonardo MBA

Submitted to: Doc. Mateo The Learning Objectives for this session are:  To clarify why companies may need to use modes other than exporting to operate effectively in international business.

SESSION 10: DIRECT INVESTMENT AND COLLABORATIVE STRATEGIES  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.  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. Introduction Companies must choose an international operating mode to fulfill their objectives and carry out their strategies. Companies most preference and common modes of international business are exporting and importing. Nevertheless, we’ll discuss some compelling reasons that make exporting and importing impractical. The truly experienced MNE with a fully global orientation usually uses most of the operational modes available, selecting them according to company capabilities, specific product and foreign operating characteristics. Further, these modes may be combined. Factors Affecting Operating Modes in International Business

The

SESSION 10: DIRECT INVESTMENT AND COLLABORATIVE STRATEGIES Figure shows the factors that affect a company’s choice of operating mode. Companies may conduct international business operations independently or in collaboration with other companies. The choice will be determined both by external factors in the firms operating environment and by internal factors that include its objectives, strategies and means of operation (e.g. such modes of international business as exporting, franchising, etc.)

Physical and Social Factors:  Political issues and Legal policies  Cultural Factor  Economic Forces  Geographical influences Competitive factors:  Competitive product strategy  Company resources and experience  Competitors in each market

Objectives:  Sales expansion  Resource acquisition  Risk minimization Means:  Importing and exporting  Tourism and transportation  Licensing and franchising  Turnkey operations  Management contracts  Direct and portfolio investment

Foreign Expansion: Alternative Operating Modes

Functions:  Marketing  Global manufacturing and supply chain management  Accounting  Finance  Human Resources Overlaying Alternatives:  Choice of alternatives  Org. and control mechanisms

SESSION 10: DIRECT INVESTMENT AND COLLABORATIVE STRATEGIES

This Figure shows alternative operating modes. Experienced global companies like Coca-Cola tend to use all of the different options. A firm may choose to operate globally either through equity arrangements (e.g. joint venture) or through nonequity arrangements (e.g. licensing). Exporting operations are conducted in the home country while other modes entail production in foreign locations. The modes listed in the violet box are collaborative arrangements. In any given location, a firm can conduct operations in multiple modes. Why Exporting may not be feasible? In some cases, it can be more advantageous to produce in foreign countries than to export to them. In particular, exporting is not attractive when:      

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

Non-Collaborative Foreign Equity Arrangements In general, the more ownership a company has, the more control over decisions the firm has. (Ex. Govt. often protects minority owners so that the majority owners do not act against their interest.) Three main theories that explain why companies want control are internalization theory, appropriability theory, and freedom to pursue global objectives. Why do firms want control? •

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Internalization – choose the lower cost between conducting operations internally and contracting to another party – it may be cheaper to handle operations internally Appropriability – do not transfer vital resources to another company to avoid having competitive position undermined Freedom to pursue a global strategy Global strategy – type of international strategy, in which some companies treat the world as a single market, preferring to market standardized products to a specific global segment strategy of acquiring wholly owned subsidiaries supports a global international strategy

SESSION 10: DIRECT INVESTMENT AND COLLABORATIVE STRATEGIES

There are two ways to invest in a foreign country – Acquisition of existing facilities – Building new facilities – known as greenfield investment Why Companies Collaborate? Collaborative Arrangements and International Objectives Companies collaborate or form strategic alliances for many reasons. This Figure shows both the general

and the internationally specific reasons for collaboration. Types of Collaborative Arrangements 1. Licensing –

a company grants intangible property rights to another company to use in a specified geographic area for a specified period in exchange for royalties Can be:  

exclusive or nonexclusive used for patents, copyrights, trademarks, and other intangible property

2. Franchising o o

a specialized form of licensing includes providing an intangible asset and continually infusing necessary assets  Franchise organization – Master franchise  Operational modifications

SESSION 10: DIRECT INVESTMENT AND COLLABORATIVE STRATEGIES

Types of Collaborative Arrangements 3. Management contract o

a company is paid a fee to transfer management personnel and administrative know-how abroad to assist a company

Foreign management contracts are used primarily when the foreign company can manage better than the owners 4. Turnkey operation o

one company contracts with another to build complete, ready-to-operate facilities

Most commonly performed by industrial-equipment, construction, and consulting companies Often performed for a governmental agency 5. Joint ventures o

involve more than two companies, one of which may own more than 50 percent 

may have various combinations of ownership

A consortium involves more than two organizations 6. Equity alliances o

an arrangement in which at least one of the companies takes an ownership position in the other Collaborative Strategy and Complexity of Control

SESSION 10: DIRECT INVESTMENT AND COLLABORATIVE STRATEGIES The Figure shows that as a company increases the number of partners and decreases the amount of equity it owns in a foreign operation, its ability to control that operation decreases. Problems with Collaborative Arrangements •

Problems with collaborative arrangements include: –

Relative importance

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Divergent objectives

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Questions of control

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Comparative contributions and appropriations

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Culture clashes

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Differences in corporate cultures

This Figure shows that the end of a joint venture can be friendly or unfriendly, planned or unplanned, and mutual or non-mutual. Managing International Collaboration Collaborative arrangements are dynamic The motivation for collaboration can change over time because of changes in – the company’s capabilities – the external environment Companies need to continually reassess the fit between collaboration and strategy to determine if it still makes sense. Keep in mind that moving to a different operating mode can be the result of experience, may necessitate costly termination fees, and can create organizational tension. • •

SESSION 10: DIRECT INVESTMENT AND COLLABORATIVE STRATEGIES •

Potential collaborative partners should be evaluated in terms of: – the resources they will supply – their motivation – compatibility

Trust is essential in collaborative arrangements. Companies without proven track records may have to negotiate harder and make more concessions. •

Contracts should address: – Whether the contract will be terminated if the parties do not adhere to the directives – What methods will be used to test for quality – What geographic limitations should be placed on an asset’s use – Which company will manage which parts of the operation – What each company’s future commitments will be – How each company will buy from, sell to, or otherwise use intangible assets that result from the arrangement Contracts should spell out mutual goals and expectations.

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When collaborating with another company, managers must – Continue to monitor performance – Assess whether to change the form of operations – Develop competency in managing a portfolio of arrangements Finally, keep in mind that finding a capable and compatible partner is not enough. Managers must also look for ways to improve performance.

References: Daniels, Radebaugh, and Sullivan. Retrieved 2013, from International Business Environments and Operations 14th edition....