Going Global Fdi Licensing


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Going Global Fdi Licensing

  1. 1. Going Global Licensing Strategic Alliances FDI
  2. 2. Exports is not the only Option <ul><li>Barriers to trade such as Tariffs, quotas and complex customs procedures discourage exports </li></ul><ul><li>Other options are </li></ul><ul><ul><li>Licensing </li></ul></ul><ul><ul><li>Strategic Alliances </li></ul></ul><ul><ul><li>Foreign Direct Investments (FDI) </li></ul></ul><ul><li>Optimal mode of entry depends on business strategy, trade barriers & product situation </li></ul>
  3. 3. Entry Barriers <ul><li>Tariff barriers are the most obvious barriers to entry. </li></ul><ul><li>Import Tariffs make imports more expensive when compared to domestic products </li></ul><ul><li>High tariffs create local monopolies, which results in higher prices for consumers </li></ul><ul><li>Tariffs also increase the cost of doing business in that country </li></ul>
  4. 4. Non Tariff barriers <ul><li>Non Tariff barriers are common & include: </li></ul><ul><ul><li>Government Rules & Regulations e.g: FDA rules in US, Purity laws in Germany </li></ul></ul><ul><ul><li>Complex Customs Procedures </li></ul></ul><ul><ul><li>Limited or No access to local distribution network e.g: Fuji prevented its distributors from carrying Kodak products </li></ul></ul><ul><ul><li>Natural Barriers: The local competitors are too competitive, have a dominant market share, have a strong brand name </li></ul></ul>
  5. 5. Developed Vs Developing Countries <ul><li>Trade barriers in developing countries are often tariffs, Rules, Regulations & lack of infrastructure </li></ul><ul><li>Barriers in developed countries are usually natural barriers, Government Rules & regulations </li></ul><ul><li>Developed countries are often the learning grounds for firms from developing countries in their global expansion </li></ul>
  6. 6. Exit Barriers <ul><li>Exit barriers are non-recoverable investments made while operating in a country. </li></ul><ul><li>Often times it is difficult to lay off people, and may have to pay a huge compensation to do so. </li></ul><ul><li>Loss of good will, Brand Value, Brand Image also acts as an Exit barrier </li></ul><ul><li>E.g: Peugeot Exited US market in 1992, Philips is still operating in US even after 15 straight years of losses </li></ul><ul><li>Loss of learning opportunity is cited as an exit barrier </li></ul>
  7. 7. Effect of Barriers on Entry Mode <ul><li>Entry Mode depends heavily on trade barriers </li></ul><ul><li>Firm must be ready to unbundle its Value chain to gain entry </li></ul><ul><ul><li>Compulsory Joint Ventures in China </li></ul></ul><ul><ul><li>Local Content Requirements in Czech </li></ul></ul><ul><ul><li>Lack of distribution network in US </li></ul></ul><ul><li>Firms often build managerial expertise in one mode of entry & would prefer it over others </li></ul><ul><ul><li>IBM, Philips, P&G prefer Wholly Owned Subsidiaries </li></ul></ul><ul><ul><li>Small tech companies may prefer licensing or Joint Ventures </li></ul></ul>
  8. 8. Managerial Skills & Mode of Entry <ul><li>Each Mode of entry involves different managerial skills </li></ul><ul><ul><li>Supervising hundreds of Franchising is different from Running foreign subsidiaries </li></ul></ul><ul><li>Joint Ventures & Wholly owned subsidiaries involve quite a lot of learning, Learning curve effects must be considered while planning the entry mode </li></ul>
  9. 9. Licensing <ul><li>Licensing refers to a firm’s know-how or other intangible asset to a foreign company for a fee, royalty or some other form of payment </li></ul><ul><li>Overcomes tariffs and other trade barriers </li></ul><ul><li>Licensee will learn FSA from the licensor and may become a future competitor </li></ul><ul><li>Loss of FSA can be prevented by proper contracts & licensing agreements </li></ul>
  10. 10. Licensing – How not to do it <ul><li>Gillette avoided investment in market research and investments in Europe, so it licensed its razor blade manufacturing technology to Wilkinson of UK – forgetting to exclude continental Europe in the contract </li></ul><ul><li>As a result Gillette now has to compete with its own technology in Continental Europe – A long uphill battle </li></ul>
  11. 11. Elements of a licensing Contract <ul><li>Technology Package </li></ul><ul><ul><li>Definition, Know-How, Patents, trade marks </li></ul></ul><ul><li>Use Conditions </li></ul><ul><ul><li>Territorial rights, Sublicensing agreements, exclusion zones, performance/Quality conditions, reporting rules </li></ul></ul><ul><li>Compensation </li></ul><ul><ul><li>Mode of payment, Minimum & maximum fees, Other assistance fees, marketing fees </li></ul></ul><ul><li>Other Provisions </li></ul><ul><ul><li>Contract laws, Arbitration conditions, terminations conditions </li></ul></ul>
  12. 12. Franchising <ul><li>Franchising is similar to licensing but in addition franchisor provides a well recognized brand name, marketing support and in some cases raw materials </li></ul><ul><li>Franchisor also provides advertising, employee training, production & quality training </li></ul><ul><li>In return Franchisee must adhere to the rules of the franchisor and both share revenue based on a preset agreement </li></ul><ul><li>Popular for fast foods, Hotels, Auto Repair Shops </li></ul><ul><li>Franchisor has a greater control over the operations </li></ul>
  13. 13. Original Equipment Manufacturing <ul><li>OEM is actually exports </li></ul><ul><li>Manufacturer sends there parts to another company which sells the final product under their Brand name </li></ul><ul><ul><li>Canon provides cartridges for HP printers </li></ul></ul><ul><ul><li>Canon Provides copiers for Savin </li></ul></ul><ul><li>Pro: Avoids expensive marketing efforts </li></ul><ul><li>Con: Firm fails to learn from foreign Markets </li></ul>
  14. 14. Strategic Alliances (SA) <ul><li>SA is a collaboration between 2 firms </li></ul><ul><li>Equity based SA is called Joint Ventures </li></ul><ul><li>SA is mutually beneficial and takes advantages of both firm’s FSA </li></ul><ul><ul><li>Share R&D, Distribute each others products </li></ul></ul><ul><li>In some cases SA involves sharing of vital information – A potential loss of FSA </li></ul><ul><li>Unlike licensing, there is usually no royalty or fees to be paid </li></ul>
  15. 15. Non-Equity SA <ul><li>SA between competitors is relatively new </li></ul><ul><li>Need to access each other’s technology, marketing skills, manufacturing skills to exploit new markets is driving Non-Equity SA </li></ul><ul><li>Shortage of resources is one of the reason </li></ul><ul><li>Control is established by soft skills I.e. the need for mutual gain </li></ul><ul><ul><li>First Mover advantage </li></ul></ul><ul><ul><li>Learn from leading markets </li></ul></ul><ul><ul><li>Reduce competitive pressures </li></ul></ul>
  16. 16. Distribution Alliances <ul><li>Distribution networks are often expensive to setup </li></ul><ul><li>A mutual distribution alliance agreement prevents duplication of efforts while maximizing benefits </li></ul><ul><ul><li>Airlines typically sell seats in other airlines </li></ul></ul><ul><ul><li>Mitsubishi joined hands with Chrysler in US </li></ul></ul><ul><li>Pro: Saves costs & uses a ready network </li></ul><ul><li>Con: </li></ul><ul><ul><li>Limits growth of the partners via a non-compete agreements </li></ul></ul><ul><ul><li>Firm loses learning opportunity </li></ul></ul>
  17. 17. Manufacturing Alliances <ul><li>Manufacturing Alliance is a sharing of manufacturing facilities to save on investment costs, achieve economies of scale, save on transportation costs </li></ul><ul><li>Manufacturing Alliances tend to be unstable as: </li></ul><ul><ul><li>Limits growth of the partners </li></ul></ul><ul><ul><li>Potential loss of know-how </li></ul></ul><ul><ul><li>Priority on manufacturing will always favor one partner over the other </li></ul></ul><ul><ul><li>Loss or learning curve economies </li></ul></ul>
  18. 18. R&D Alliances <ul><li>R&D alliances are often between competitors </li></ul><ul><li>Such alliances are for: </li></ul><ul><ul><li>Developing a common technology </li></ul></ul><ul><ul><li>Need for accessing each other’s technology </li></ul></ul><ul><ul><li>Need to stay ahead of other competition </li></ul></ul><ul><ul><li>Lower R&D costs, Avoid Duplication </li></ul></ul><ul><ul><li>Need to impose a joint technology standard </li></ul></ul><ul><li>Unintended Loss of technology is possible </li></ul>
  19. 19. Joint Ventures <ul><li>Equity Based SA. Usually firms need to transfer capital, man power, technology and management skills to the new venture </li></ul><ul><li>Potential loss of know-how exists </li></ul><ul><li>Mutually beneficial if partners learn from each other and their joint experience </li></ul><ul><li>Usually a first step before setting up a Wholly Owned subsidiary </li></ul><ul><li>Care must be taken in selecting partners </li></ul>
  20. 20. FDI <ul><li>FDI is usually for Wholly owned subsidiaries </li></ul><ul><ul><li>Greater Control over know-how – I.e Internalization of FSA </li></ul></ul><ul><ul><li>Avoid tariff & other barriers </li></ul></ul><ul><ul><li>Faster response to foreign markets </li></ul></ul><ul><ul><li>Lowering prices for buyers, gaining market share, establishing an insider position </li></ul></ul><ul><li>Carries higher risk than any other mode of entry </li></ul><ul><li>May suffer from Country-of-origin effects </li></ul><ul><ul><li>E.g Sony from Malaysia </li></ul></ul>
  21. 21. FDI – Green Field project or Acquisition <ul><li>FDI decisions will have to consider a green field venture or an acquisition of a foreign firm </li></ul><ul><li>Acquisition of an existing company speeds up entry, gains a ready market share </li></ul><ul><li>Benefits from existing facilities, marketing channels etc </li></ul><ul><li>Disadvantages are: </li></ul><ul><ul><li>Incompatible product lines </li></ul></ul><ul><ul><li>Culture mismatch </li></ul></ul><ul><ul><li>Political Backlash or resurgence of national pride </li></ul></ul><ul><ul><li>Loss of Goodwill </li></ul></ul><ul><ul><li>Struck with existing legacy systems </li></ul></ul>
  22. 22. FDI – Financial Analysis <ul><li>FDI requires rigorous financial analysis </li></ul><ul><li>Cash flows are subjected to foreign exchange risks </li></ul><ul><li>IRR or NPV analysis for a foreign project is difficult due to lots of unknowns </li></ul><ul><li>Financial analysis is based on market forecast. In many cases market forecast will be inaccurate </li></ul>
  23. 23. Optimal Entry Strategy
  24. 24. Closing Thoughts
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