Going Global Fdi Licensing
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Going Global Fdi Licensing

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Going Global Fdi Licensing Going Global Fdi Licensing Presentation Transcript

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