International Business Strategy, Management

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International BusinessStrategy, Management the
New RealitiesbyCavusgil, Knight Risenberger

• Chapter 14
• Foreign Direct Investment and Collaborative
  Ventures

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Learning Objectives

1. An organizing framework for foreign market entry
   strategies
2. Motives for foreign direct investment (FDI) and
   collaborative ventures
3. Foreign direct investment
4. Types of foreign direct investment
5. International collaborative ventures
6. Managing collaborative ventures
7. The experience of retailers in foreign markets
8. Foreign direct investment, collaborative
   ventures, and ethical behavior

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FDI and Collaborative Ventures

• Foreign direct investment (FDI) is an
  internationalization strategy in which the firm
  establishes a physical presence abroad through
  acquisition of productive assets such as capital,
  technology, labor, land, plant, and equipment.
• International collaborative venture refers to a
  cross-border business alliance in which
  partnering firms pool their resources and share
  costs and risks of the venture.
• Joint venture (JV) a form of collaboration
  between two or more firms to create a
  jointly-owned enterprise.

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Recent Examples of FDI

• Vodafone, a British firm, which acquired the
  Czech telecom Oskar Mobil
• eBay, a U.S. firm, acquired Luxembourgs Skype
  Technologies, a prepackaged software company
• Japan Tobacco Inc. acquired the British cigarette
  maker Gallaher Group PLC for almost 15 billion
• Dubai International Capital Group acquired the
  British theme park operator Tussauds Group for
  1.5 billion
• Sing Tel, a Singapore firm, acquired 49
  cross-border firms worth over 36 billion over
  eight years, including Cable and Wireless Optus
  Ltd. of Australia.

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FDI A Complex Foreign Market Entry Strategy

• FDI is the most advanced and complex entry
  strategy, and involves establishing manufacturing
  plants, marketing subsidiaries, or other
  facilities abroad.
• For the firm, FDI requires substantial resource
  commitment, local presence and operations in
  target countries, and global scale efficiency.
• FDI also entails greater risk, as compared to
  other entry modes.

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Patterns in FDI

• Companies from both the advanced economies and
  emerging markets are active in FDI.
• Destination or recipient countries for such
  investments include both advanced economies and
  emerging markets.
• Companies employ multiple strategies to enter
  foreign markets as investors, including
  acquisitions and collaborative ventures.
• Companies from all types of industries, including
  services, are active in FDI and collaborative
  ventures.
• Direct investment by foreign companies
  occasionally raises patriotic sentiments among
  citizens.

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FDI may Raise Patriotic Sentiments

• The possibility of a Haier takeover of Maytag
  Corp. in 2005 stirred anti-Chinese sentiment in
  the U.S. over East Asian companies gobbling up
  U.S. businesses.
• That same year, a bid by China oil company CNOOC
  Ltd. to buy California-based Unocal Corp. for
  18.5 billion raised concerns over national
  security. When the public objected to the
  possibility of a Chinese state enterprise gaining
  control in a critical sector such as energy, the
  U.S. Congress banned the deal.

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Considerations Relevant to Choice of Foreign
Market Entry Strategy

• The degree of control it wants to maintain over
  the decisions, operations, and strategic assets
  involved in the venture
• The degree of risk it is willing to tolerate, and
  the timeframe in which it expects returns
• The organizational and financial resources (e.g.,
  capital, managers, technology) it will commit to
  the venture
• The availability and capabilities of partners in
  the market
• The value-adding activities it is willing to
  perform itself in the market, and what activities
  it will leave to partners
• The long-term strategic importance of the market.

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An Organizing Framework Based on Degree of
Control Available to the Focal Firm

• Low-control strategies are exporting,
  countertrade and global sourcing. They provide
  the least control over foreign operations, since
  the focal firm delegates considerable
  responsibility to foreign distributors.
• Moderate-control strategies are contractual
  relationships such as licensing and franchising
  and project-based collaborative ventures.
• High-control strategies are equity joint ventures
  and FDI. The focal firm attains maximum control
  by establishing a physical presence in the
  foreign market.

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Trade-Offs in Foreign Market Entry Strategies

• High-control strategies require substantial
  resource commitments by the focal firm.
• Because the firm becomes anchored or physically
  tied to the foreign market for the long term, it
  has less flexibility to reconfigure its
  operations there, as conditions in the country
  evolve over time.
• Longer term involvement in the market also
  implies considerable risk due to uncertainty in
  the political and customer environments.

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Motives for FDI and Collaborative Ventures

• Firms pursue FDI and international collaborative
  ventures for complex and overlapping reasons.
• The ultimate goal is to enhance firm
  competitiveness in the global marketplace.
• Motives can be classified into three categories
• market-seeking motives,
• resource or asset-seeking motives, and
• efficiency-seeking motives.

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Market-Seeking Motives

• Gain access to new markets or opportunities. The
  existence of a substantial market motivates many
  firms to produce offerings at or near customer
  locations. Boeing, Coca-Cola, IBM, McDonald's,
  and Toyota all generate more sales abroad than
  they do at home.
• Follow key customers. Firms often follow their
  key customers abroad to preempt other vendors
  from servicing them. E.g, Tradegar Industries,
  which supplies the plastic that its customer
  Procter Gamble uses to manufacture disposable
  diapers. When PG built a plant in China,
  Tradegar management established production there
  as well.
• Compete with key rivals in their own markets.

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Resource or Asset-Seeking Motives

• Access raw materials needed in extractive and
  agricultural industries. E.g., firms in the
  mining, oil, and crop-growing industries have
  little choice but to go where the raw materials
  are located.
• Gain access to knowledge or other assets. E.g.,
  when Whirlpool entered Europe, it partnered with
  Philips to benefit from the latter firms
  well-known brand name and distribution network.
  
• Access technological and managerial know-how
  available in a key market. The firm may benefit
  by establishing a presence in a key industrial
  cluster, such as the robotics industry in Japan,
  chemicals in Germany, fashion in Italy, and
  software in the U.S.

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Efficiency Seeking Motives

• Reduce sourcing and production costs by accessing
  inexpensive labor and other cheap inputs to the
  production process. This motive accounts for the
  massive development of manufacturing facilities
  in China, Mexico, Eastern Europe, and India.
• Locate production near customers. In the fashion
  industry, Spains Zara and Swedens HM locate
  much of their garment production in key markets
  such as Spain and Turkey.
• Take advantage of government incentives. In
  addition to restricting imports, governments may
  offer subsidies and tax concessions to foreign
  firms to encourage them to invest locally.
• Avoid trade barriers. By establishing a physical
  presence within a country, the investor obtains
  the same advantages as local firms. The desire to
  avoid trade barriers helps explain why Japanese
  automakers set up factories in the U.S. (1980s).

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Features of FDI

• FDI is the entry strategy most associated with
  the MNE. Sony, Nestlé, Nokia, Motorola, and
  Toyota have extensive FDI-based operations around
  the world.
• Service firms usually establish agency
  relationships and retail facilities.
• FDI should not be confused with international or
  foreign portfolio investment. International
  portfolio investment refers to passive ownership
  of foreign securities such as stocks and bonds
  for the purpose of generating financial returns.
  
• International portfolio investment is not direct
  investment which seeks control of a business
  abroad and represents a long-term commitment.

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Key Features of FDI

• FDI requires greater resource commitment by the
  firm.
• FDI means the company must have local presence
  and operations.
• FDI assumes the firm wants to achieve global
  scale efficiency.
• FDI entails great risk and uncertainty. The firm
  sets up a permanent, physical presence in a
  foreign country, and exposes the firm to new
  risks.
• FDI means the firm must have greater contact with
  the social and cultural factors of the host
  market.
• MNEs need to behave in socially responsible ways
  in host countries.

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Who Is Active in Direct Investment?

• Direct investment is the typical foreign market
  entry strategy for large MNEs firms with
  extensive experience in international business.
• Exhibit 14.3 shows the MNEs with the greatest
  amount of such foreign assets as subsidiaries and
  affiliates, worldwide.
• E.g., U.K-based Vodafone is a mobile phone
  supplier with numerous sales offices in most
  major cities around the world.

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Service Multinationals

• Firms must offer services, such as lodging,
  construction, and personal care, when and where
  they are consumed.
• Service firms establish either a permanent
  presence through FDI (e.g., retailing), or a
  temporary relocation of personnel (e.g.,
  construction industry.
• E.g., management consulting is a service that is
  usually embodied in human experts who interact
  directly with clients to dispense advice. Firms
  such as McKinsey and Cap Gemini generally
  establish offices abroad.
• Many support services, such as advertising,
  insurance, accounting, the law, and package
  delivery, are also best provided at the
  customers location.

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Leading Destinations for FDI

• Advanced economies such as Australia, Belgium,
  Britain, Canada, Germany, Japan, Netherlands, and
  the United States long have been popular
  destinations for FDI because of their strong GDP
  per capita, GDP growth rate, density of knowledge
  workers, and superior business infrastructure.
• In recent years, emerging markets and developing
  economies have gained appeal as FDI destinations.
  According to A.T. Kearneys FDI Confidence
  Index, the top destination for foreign investment
  today is China. India is now in third place,
  having risen rapidly in Kearneys annual rankings
  

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Factors Relevant to Selecting FDI Locations

• Market attractiveness
• Human resource factors
• Infrastructure
• Profit retention factors (e.g.,taxes)
• Economic environment
• Legal and regulatory environment
• Political and governmental structure

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Types of FDI

• Greenfield investment vs. mergers and
  acquisitions
• The nature of ownership Wholly owned direct
  investment vs. equity joint venture
• Level of integration Vertical vs. horizontal FDI

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Greenfield Investment vs. MAs

• Greenfield investment occurs when a firm invests
  to build a new manufacturing, marketing or
  administrative facility, as opposed to acquiring
  existing facilities.
• An acquisition refers to a direct investment or
  purchase of an existing company or a facility.
• A merger is a special type of acquisition in
  which two firms join to form a new, larger firm.

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Nature of Ownership

• Equity participation Acquisition of partial
  ownership in an existing firm.
• Wholly owned direct investment A foreign direct
  investment in which the investor fully owns the
  foreign assets
• Equity joint ventures A type of partnership in
  which a separate firm is created through the
  investment or pooling of assets by two or more
  parent firms that gain joint ownership of the new
  legal entity.
• Joint ventures may be the only way that a company
  can expand into a country. E.g., until recently,
  the Chinese government prohibited foreign firms
  from having more than 49 equity investment in
  local businesses.

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Level of Integration

• Vertical integration The firm owns, or seeks to
  own, multiple stages of a value chain for
  producing, selling, and delivering a product.
• In forward vertical integration, the firm
  develops the capacity to sell its outputs by
  investing in downstream value-chain facilities,
  that is, marketing and selling operations.
• Forward vertical integration is less common than
  backward vertical integration, in which the firm
  acquires the capacity abroad to provide inputs
  for its foreign or domestic production processes
  by investing in upstream facilities, typically
  factories, assembly plants or refining
  operations.

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International Collaborative Ventures

• A collaborative venture is essentially a
  partnership between two or more firms and
  includes equity joint ventures as well as
  non-equity, project-based ventures.
• International collaborative ventures are
  sometimes referred to as international
  partnerships and international strategic
  alliances.
• Collaboration helps firms overcome the often
  substantial risk and high costs of international
  business. It makes possible the achievement of
  projects that exceed the capabilities of the
  individual firm.

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Equity Joint Ventures

• JVs ventures are normally formed when no one
  party possesses all of the assets needed to
  exploit an available opportunity.
• Typically, the foreign partner contributes
  capital, technology, management expertise,
  training, or some type of product.
• The local partner contributes the use of its
  factory or other real estate knowledge of the
  local language and culture market navigation
  know-how useful connections to the host country
  government or lower-cost production factors such
  as labor.
• The partnership allows the foreign firm to access
  key market knowledge, gain immediate access to a
  distribution system and customers, and greater
  control over local operations.

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Project-Based, Non-Equity Ventures

• Project-based, non-equity venture is a
  collaboration in which the partners create a
  project with a relatively narrow scope and a
  well-defined timetable, without creating a new
  legal entity.
• Combining personnel, resources, and capabilities,
  the partners collaborate until the venture bears
  fruit, or until they no longer consider it
  valuable to collaborate.
• Typically, partners collaborate on joint
  development of new technologies, products, or
  share other expertise with each other. Such
  cooperation may help them catch up with rivals in
  technology development.

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How Project-Based Collaborations are Different
From Equity Joint Ventures

• No new legal entity is created partners carry on
  their activity within the guidelines of a
  contract.
• Parent companies do not necessarily seek
  ownership of an ongoing enterprise they simply
  contribute their knowledge, expertise, personnel,
  and monetary resources in order to derive
  knowledge or access-related benefits.
• Collaboration does not last indefinitely it
  tends to have a well-defined timetable and an end
  date partners go their separate ways once the
  objectives have been accomplished or the partners
  find no reason for continuation.
• The nature of collaboration is narrower in scope,
  typically revolving around one or more RD
  project, new products, marketing, distribution,
  sourcing, or manufacturing.

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Other Examples of Collaborative Ventures

• A consortium is a project-based, usually
  non-equity venture with multiple partners
  fulfilling a large-scale project. It is typically
  formed with a contract, which delineates the
  rights and obligations of each member.
• A cross-licensing agreement is a type of a
  project-based, non-equity venture where partners
  agree to access licensed technology developed by
  the other, on preferential terms. The agreement
  assumes each partner has or expects to have
  something to license.

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Management of Collaborative Ventures Understand
Potential Risks in Collaboration

• As a firm, are we likely to grow very dependent
  on our partner?
• By partnering, will we stifle growth and
  innovation in our own organization?
• Will we share our competencies excessively, to
  the point where corporate interests are
  threatened? How can we safeguard our core
  competencies?
• Will we be exposed to significant commercial,
  political, cultural, or currency risks?
• Will we close certain growth opportunities by
  participating in this venture?
• Will managing the venture place an excessive
  burden on corporate resources, such as
  managerial, financial, or technological resources?

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Pursue a Systematic Process for Partnering

• The initial decision in internationalization is
  the choice of the most appropriate target market.
  
• The chosen market determines the characteristics
  needed in a business partner. If the firm is
  planning to enter an emerging market, for
  example, it may want a partner with political
  clout or "connections."
• Exhibit 14.8 reveals that managers need to draw
  on their cross-cultural competence, legal
  expertise, and financial planning skills in this
  process.

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Compete and Collaborate

• Collaborative ventures require much due
  diligence, strong negotiation skills, high levels
  of commitment by management, competence in
  managing cultural differences, clear objectives,
  and a high level of trust among partners.
• Foreign partners are certain to have their own
  agenda and purpose for pursuing the venture. The
  focal firm must be sure to maintain and negotiate
  its agenda as well. Intel has worked to protect
  its proprietary technology by not revealing too
  much of it to Chinese partners.
• Some U.S. SMEs have regretted forming joint
  ventures with Chinese partners Too much trust
  and not enough due diligence have often resulted
  in a critical loss of intellectual property.

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Success Factors in Collaborative Ventures

• Half of all global collaborative ventures fail
  within the first 5 years of operations due to
  unresolved disagreements, confusion, and
  frustration Therefore, partners should
• Be aware of cultural differences.
• Pursue common values and culture.
• Pay attention to planning and management of the
  venture.
• Protect core competencies.
• Adjust to new environmental circumstances.

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Retailers A Special Case of Internationalization

• Retailers internationalize substantially through
  FDI and collaborative ventures. Retailing takes
  various forms
• Department stores (e.g., Marks Spencer, Bay,
  Macy's)
• Specialty retailers (Body Shop, Gap, Disney
  Store)
• Supermarkets (Sainsbury, Safeway, Sparr)
• Convenience stores (Circle K, 7-Eleven, Tom
  Thumb) discount stores (Zellers, Tati, Target)
• Big box stores (Home Depot, IKEA, Toys "R" Us).
• Wal-Mart now has roughly 100 stores and 50,000
  employees in China. It sources almost all its
  merchandise locally, providing jobs for thousands
  of Chinese.

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The Experience of Retailers

• Internationalization of retailers has been driven
  by saturation of home country markets,
  deregulation of other markets, and opportunities
  of lower costs abroad. Many foreign markets have
  pent-up demand, fast growth, and a growing and
  sophisticated middle-class.
• Many international retailing ventures have
  failed, however. The French department store
  Galleries Lafayette and Britain's Marks Spencer
  failed in the United States and Canada. IKEA
  failed in Japan, and Wal-Mart left Germany
  defeated because of local competitors and
  cultural disconnects.

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Wal-Marts Mixed Experience

• Wal-Mart is the worlds largest retailer but
  suffered dismal results in Germany because it
  could not compete with local competitors and
  eventually exited the market.
• In Mexico, Wal-Mart constructed massive
  U.S.-style parking lots for its new super
  centers. But most Mexicans dont have cars, and
  city bus stops were beyond the huge lots, so
  shoppers could not haul their goods home.
• In Brazil, most families do their big shopping
  once a month, on payday. Wal-Mart built aisles
  too narrow and crowded to accommodate the rush.
  It stocked shelves with unneeded leaf blowers in
  urban Sao Paulo.
• In Argentina, Wal-Marts red-white-and-blue
  banners, reminiscent of the U.S. flag, offended
  local tastes. Sams Club flopped in Latin
  America partly because its huge multi-pack items
  were too big for local shoppers with low incomes
  and small apartments.

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Barriers to Retailer Success Abroad

1. Cultural and language barriers Retailers must
   respond to local market requirements, e.g., by
   customizing the product and service portfolio,
   adapting store hours, modifying store size and
   layout, and meeting labor union demands.
2. Consumers tend to develop strong loyalty to
   indigenous retailers. As Galleries Lafayette in
   New York and Wal-Mart in Germany discovered, the
   foreign firm competes against local competitors
   that usually enjoy much loyalty from local
   consumers.

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Barriers to Retailer Success Abroad (cont.)

• 3. Managers must address legal and regulatory
  barriers. Countries have idiosyncratic laws that
  affect retailing. E.g., Germany limits store
  opening hours, and retailers must close on
  Sundays. Japans Large-Scale Store Law meant
  that foreign warehouse and discount retailers
  needed permission from existing small retailers
  to enter.
• 4. When entering a new market, retailers must
  develop local sources of supply. Local suppliers
  may be unwilling or unable to supply. E.g., when
  Toys "R" Us entered Japan, local toy
  manufacturers were reluctant to work with the
  U.S. firm. Some retailers end up importing many
  of their offerings, which requires establishing
  complex and costly international supply chains.

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FDI or Franchising A Choice for Retailers

• The larger, more experienced firms, such as
  Carrefour, Royal Ahold, IKEA, and Wal-Mart, tend
  to internationalize via FDI i.e., they tend to
  own their stores.
• Smaller, less experienced international firms
  such as Borders bookstores tend to rely on
  networks of independent franchisees. In
  franchising, the retailer adopts a business
  system from, and pays an ongoing fee to, a
  franchisor.
• Other firms may employ a dual strategy using FDI
  in some markets and franchising in others.
  Franchising provides a fast way to
  internationalize. Relative to FDI, it affords
  the firm less control over its foreign
  operations, which can be risky in countries with
  weak IP laws.
• Starbucks, Carrefour, IKEA, Royal Ahold, and
  Wal-Mart usually internationalize through
  company-owned stores. FDI allows these firms to
  maintain direct control over their foreign
  operations and proprietary assets.

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Success Factors for Retailers

• Advanced research and planning is essential. In
  the run-up to launching stores in China,
  management at the giant French retailer Carrefour
  spent 12 years building up its business in
  Taiwan, developing a deep understanding of
  Chinese culture.
• Establish efficient logistics and purchasing
  networks in each market. Scale economies in
  procurement are especially critical. Retailers
  need to organize sourcing and logistical
  operations to ensure that adequate inventory is
  always maintained.
• Assume an entrepreneurial, creative approach to
  foreign markets. Virgin megastore expanded
  Virgin to numerous markets throughout Europe,
  North America, and Asia. Its stores are big,
  well lit, and music albums are arranged in a
  logical order.
• Adjust business model to suit local conditions.
  Home Depot offers merchandise in Mexico that
  suits the small budgets of do-it-yourself
  builders. It has introduced payment plans for
  customers and promotes the do-it-yourself mindset
  in a country where most cannot afford to hire
  professional builders.

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IKEA An Exceptional Success Story

• IKEA, the worlds largest furniture retailer, has
  experienced great international success,
  launching over 200 furniture mega-stores in
  dozens of countries.
• IKEAs success derives from strong leadership and
  skillful management of human resources.
  Management balances global integration of
  operations with responsiveness to local tastes.
• In each store, IKEA offers as many standardized
  products as possible while maintaining sufficient
  flexibility to accommodate specific local
  conditions.
• This is achieved in part by testing the waters
  and learning in smaller markets before entering
  big markets. For instance, IKEA perfected its
  retailing model in German-speaking Switzerland
  before entering Germany.

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Corporate Social Responsibility (CSR)

• CSR refers to operating a business in a manner
  that meets or exceeds the ethical, legal,
  commercial, and public expectations of
  stakeholders (customers, shareholders, employees,
  and communities).
• It represents a set of core values that includes
  avoiding human rights abuses upholding the right
  to join or form labor unions elimination of
  compulsory and child labor avoiding workplace
  discrimination protecting the natural
  environment and guarding against corruption,
  including extortion and bribery.
• Exhibit 14.9 illustrates the diversity of CSR
  initiatives that firms worldwide undertake.

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Petrobras An Example of Corporate Citizenship
CSR

• Petrobras, the Brazilian oil company, operations
  span 21 countries, many of which have unstable
  political or social environments.
• In Brazil, Petrobras has developed extensive
  CSR-oriented programs related to poverty
  reduction, youth education, child labor and
  abuse, and fundamental rights for people with
  physical and mental impairments.
• In Africa and elsewhere, Petrobras has developed
  CSR initiatives in areas such as reconstruction
  projects for schools, day-care centers,
  hospitals, and in rural communities.
• In Colombia, the firm developed a program to
  train community health agents. In Nigeria,
  Petrobras cooperates with a local
  non-governmental organization to provide HIV/AIDS
  prevention education in schools.

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Relativism vs. Normativism in CSR

• Some believe that it is sufficient to simply
  follow the laws and regulations in place in each
  country. However, many countries are
  characterized by weak legal and regulatory
  systems, and widespread corruption.
• Relativism refers to the belief that ethical
  truths are relative to the groups that hold them.
  Relativism is akin to the advice When in Rome,
  do as the Romans do. Accordingly, a Japanese
  MNE that believes bribery is wrong might pay
  bribes in countries where the practice is
  customary and culturally acceptable. It is
  natural for the firm to follow the values and
  behaviors prevailing in the countries where it
  does business.
• Normativism is a belief in universal behavioral
  standards that firms and individuals should
  uphold. According to this view, the Japanese
  multinational that believes bribery is wrong will
  enforce this standard everywhere in the world.
• The U.N. and other CSR proponents increasingly
  encourage companies to follow a normative
  approach.