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Copyright © 2015 Pearson Education, Inc. 15-1
International
Business
Environments & Operations
15e
Daniels ● Radebaugh ● Sullivan
Copyright © 2015 Pearson Education, Inc. 15-2
Chapter 15
Direct Investment
and Collaborative
Strategies
Copyright © 2015 Pearson Education, Inc. 15-3
Learning Objectives
 Clarify why companies may use modes
other than exporting to operate effectively
in international business
 Comprehend why and how companies
make foreign direct investments
 Understand the major motives that guide
managers to choose a collaborative
arrangement for international business
 Compare the major types of collaborative
arrangements
Learning Objectives
 Describe what to consider when entering
into international arrangements with other
companies
 Grasp why collaborative arrangements
succeed or fail
 See how companies can manage diverse
collaborative arrangements
 Appreciate how growth in project size and
complexity will require more future
collaboration
Copyright © 2015 Pearson Education, Inc. 15-4
Copyright © 2015 Pearson Education, Inc. 15-5
Introduction
 Companies choose an international
operating mode to achieve their objectives
 When exporting and importing is not
possible, firms must explore other options
Copyright © 2015 Pearson Education, Inc. 15-6
Introduction
Factors Affecting Operating Modes in International Business
Copyright © 2015 Pearson Education, Inc. 15-7
Introduction
Foreign Expansion: Alternative Operating Modes
Copyright © 2015 Pearson Education, Inc. 15-8
Why Exporting May
Not Be Feasible
Learning Objective:
Clarify why companies may use modes
other than exporting to operate effectively
in international business
Copyright © 2015 Pearson Education, Inc. 15-9
Why Exporting May
Not Be Feasible
 When production abroad is cheaper than
at home
 When transportation costs to move goods
or services internationally are too
expensive
 When companies lack domestic capacity
Why Exporting May Not Be
Feasible
 When products and services need to be
altered substantially to gain sufficient
consumer demand abroad
 When governments inhibit the import of
foreign products
 When buyers prefer products originating
from a particular country
Copyright © 2015 Pearson Education, Inc. 15-10
Copyright © 2015 Pearson Education, Inc. 15-11
Non-Collaborative Foreign
Equity Arrangements
Learning Objective:
Comprehend why and how companies
make foreign direct investments
Copyright © 2015 Pearson Education, Inc. 15-12
Non-Collaborative Foreign
Equity Arrangements
 Why do firms want control?
 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
Copyright © 2015 Pearson Education, Inc. 15-13
Non-Collaborative Foreign
Equity Arrangements
 There are two ways to invest in a
foreign country
 Acquisition of existing facilities
 Greenfield Investment – Building new
facilities
Copyright © 2015 Pearson Education, Inc. 15-14
Why Companies Collaborate
Learning Objective:
Understand the major motives that guide
managers to choose a collaborative
arrangement for international business
Copyright © 2015 Pearson Education, Inc. 15-15
Why Companies Collaborate
Collaborative Arrangements and International Objectives
Copyright © 2015 Pearson Education, Inc. 15-16
Types of Collaborative
Arrangements
Learning Objective:
Describe what to consider when entering
into international arrangements with other
companies
General Motives for
Collaborative Arrangements
 To spread and reduce costs
 To specialize in competencies – the
resource-based view
 To avoid or counter competition
 To secure Vertical and Horizontal Links
 To gain knowledge
Copyright © 2015 Pearson Education, Inc. 15-17
International Motives for
Collaborative Arrangements
 To gain location-specific assets
 To overcome governmental constraints
 Protecting assets
 To diversify geographically
 To minimize risk exposure
Copyright © 2015 Pearson Education, Inc. 15-18
Copyright © 2015 Pearson Education, Inc. 15-19
Types of Collaborative
Arrangements
 Two key factors influence the type of
collaborative arrangement
 Control
 Prior expansion
 Compensation
Copyright © 2015 Pearson Education, Inc. 15-20
Types of Collaborative
Arrangements
 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 to protect intangible property
Licensing Applications
 Patents, inventions, formulas, processes,
designs, patterns
 Copyrights for literary, musical or artistic
compositions
 Trademarks, trade names, brand names
 Franchises, licenses, contracts
 Methods, programs, procedures, systems
Copyright © 2015 Pearson Education, Inc. 15-21
Copyright © 2015 Pearson Education, Inc. 15-22
Types of Collaborative
Arrangements
 Franchising
 a specialized form of licensing
 includes providing an intangible asset and also
operational assistance on a continuing basis
 Franchise organization
 Master franchise
 Operational modifications
Copyright © 2015 Pearson Education, Inc. 15-23
Types of Collaborative
Arrangements
 Management contract
 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
Copyright © 2015 Pearson Education, Inc. 15-24
Types of Collaborative
Arrangements
 Turnkey operation
 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
Copyright © 2015 Pearson Education, Inc. 15-25
Types of Collaborative
Arrangements
 Joint ventures
 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
Copyright © 2015 Pearson Education, Inc. 15-26
Types of Collaborative
Arrangements
 Equity alliances
 an arrangement in which at least one of
the companies takes an ownership
position in the other
Copyright © 2015 Pearson Education, Inc. 15-27
Types of Collaborative
Arrangements
Collaborative Strategy and Complexity of Control
Copyright © 2015 Pearson Education, Inc. 15-28
Problems with
Collaborative Arrangements
Learning Objective:
Grasp why collaborative arrangements
succeed or fail
Copyright © 2015 Pearson Education, Inc. 15-29
Problems with
Collaborative Arrangements
 Problems with collaborative arrangements
include
 Relative importance
 Divergent objectives
 Questions of control
 Comparative contributions and appropriations
 Culture clashes
 Differences in corporate cultures
Copyright © 2015 Pearson Education, Inc. 15-30
Problems with
Collaborative Arrangements
How to Dissolve a Joint Venture
Copyright © 2015 Pearson Education, Inc. 15-31
Managing International
Collaboration
Learning Objective:
See how companies can manage diverse
collaborative arrangements
Copyright © 2015 Pearson Education, Inc. 15-32
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
Copyright © 2015 Pearson Education, Inc. 15-33
Managing International
Collaboration
Country Attractiveness/Company Strength Matrix
Copyright © 2015 Pearson Education, Inc. 15-34
Managing International
Collaboration
 Potential collaborative partners should be
evaluated in terms of
 the resources they will supply
 their motivation
 compatibility
Copyright © 2015 Pearson Education, Inc. 15-35
Managing International
Collaboration
 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
Copyright © 2015 Pearson Education, Inc. 15-36
Managing International
Collaboration
 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
Copyright © 2015 Pearson Education, Inc. 15-37
Why Innovation Breeds
Collaboration
 Collaborative arrangements will bring both
opportunities and problems as companies
move simultaneously to new countries and
to contractual arrangements with new
companies
Copyright © 2015 Pearson Education, Inc. 15-38
All rights reserved. No part of this publication may be reproduced, stored in
a retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior
written permission of the publisher. Printed in the United States of America.

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Daniels ib15inppt 15

  • 1. Copyright © 2015 Pearson Education, Inc. 15-1 International Business Environments & Operations 15e Daniels ● Radebaugh ● Sullivan
  • 2. Copyright © 2015 Pearson Education, Inc. 15-2 Chapter 15 Direct Investment and Collaborative Strategies
  • 3. Copyright © 2015 Pearson Education, Inc. 15-3 Learning Objectives  Clarify why companies may use modes other than exporting to operate effectively in international business  Comprehend why and how companies make foreign direct investments  Understand the major motives that guide managers to choose a collaborative arrangement for international business  Compare the major types of collaborative arrangements
  • 4. Learning Objectives  Describe what to consider when entering into international arrangements with other companies  Grasp why collaborative arrangements succeed or fail  See how companies can manage diverse collaborative arrangements  Appreciate how growth in project size and complexity will require more future collaboration Copyright © 2015 Pearson Education, Inc. 15-4
  • 5. Copyright © 2015 Pearson Education, Inc. 15-5 Introduction  Companies choose an international operating mode to achieve their objectives  When exporting and importing is not possible, firms must explore other options
  • 6. Copyright © 2015 Pearson Education, Inc. 15-6 Introduction Factors Affecting Operating Modes in International Business
  • 7. Copyright © 2015 Pearson Education, Inc. 15-7 Introduction Foreign Expansion: Alternative Operating Modes
  • 8. Copyright © 2015 Pearson Education, Inc. 15-8 Why Exporting May Not Be Feasible Learning Objective: Clarify why companies may use modes other than exporting to operate effectively in international business
  • 9. Copyright © 2015 Pearson Education, Inc. 15-9 Why Exporting May Not Be Feasible  When production abroad is cheaper than at home  When transportation costs to move goods or services internationally are too expensive  When companies lack domestic capacity
  • 10. Why Exporting May Not Be Feasible  When products and services need to be altered substantially to gain sufficient consumer demand abroad  When governments inhibit the import of foreign products  When buyers prefer products originating from a particular country Copyright © 2015 Pearson Education, Inc. 15-10
  • 11. Copyright © 2015 Pearson Education, Inc. 15-11 Non-Collaborative Foreign Equity Arrangements Learning Objective: Comprehend why and how companies make foreign direct investments
  • 12. Copyright © 2015 Pearson Education, Inc. 15-12 Non-Collaborative Foreign Equity Arrangements  Why do firms want control?  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
  • 13. Copyright © 2015 Pearson Education, Inc. 15-13 Non-Collaborative Foreign Equity Arrangements  There are two ways to invest in a foreign country  Acquisition of existing facilities  Greenfield Investment – Building new facilities
  • 14. Copyright © 2015 Pearson Education, Inc. 15-14 Why Companies Collaborate Learning Objective: Understand the major motives that guide managers to choose a collaborative arrangement for international business
  • 15. Copyright © 2015 Pearson Education, Inc. 15-15 Why Companies Collaborate Collaborative Arrangements and International Objectives
  • 16. Copyright © 2015 Pearson Education, Inc. 15-16 Types of Collaborative Arrangements Learning Objective: Describe what to consider when entering into international arrangements with other companies
  • 17. General Motives for Collaborative Arrangements  To spread and reduce costs  To specialize in competencies – the resource-based view  To avoid or counter competition  To secure Vertical and Horizontal Links  To gain knowledge Copyright © 2015 Pearson Education, Inc. 15-17
  • 18. International Motives for Collaborative Arrangements  To gain location-specific assets  To overcome governmental constraints  Protecting assets  To diversify geographically  To minimize risk exposure Copyright © 2015 Pearson Education, Inc. 15-18
  • 19. Copyright © 2015 Pearson Education, Inc. 15-19 Types of Collaborative Arrangements  Two key factors influence the type of collaborative arrangement  Control  Prior expansion  Compensation
  • 20. Copyright © 2015 Pearson Education, Inc. 15-20 Types of Collaborative Arrangements  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 to protect intangible property
  • 21. Licensing Applications  Patents, inventions, formulas, processes, designs, patterns  Copyrights for literary, musical or artistic compositions  Trademarks, trade names, brand names  Franchises, licenses, contracts  Methods, programs, procedures, systems Copyright © 2015 Pearson Education, Inc. 15-21
  • 22. Copyright © 2015 Pearson Education, Inc. 15-22 Types of Collaborative Arrangements  Franchising  a specialized form of licensing  includes providing an intangible asset and also operational assistance on a continuing basis  Franchise organization  Master franchise  Operational modifications
  • 23. Copyright © 2015 Pearson Education, Inc. 15-23 Types of Collaborative Arrangements  Management contract  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
  • 24. Copyright © 2015 Pearson Education, Inc. 15-24 Types of Collaborative Arrangements  Turnkey operation  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
  • 25. Copyright © 2015 Pearson Education, Inc. 15-25 Types of Collaborative Arrangements  Joint ventures  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
  • 26. Copyright © 2015 Pearson Education, Inc. 15-26 Types of Collaborative Arrangements  Equity alliances  an arrangement in which at least one of the companies takes an ownership position in the other
  • 27. Copyright © 2015 Pearson Education, Inc. 15-27 Types of Collaborative Arrangements Collaborative Strategy and Complexity of Control
  • 28. Copyright © 2015 Pearson Education, Inc. 15-28 Problems with Collaborative Arrangements Learning Objective: Grasp why collaborative arrangements succeed or fail
  • 29. Copyright © 2015 Pearson Education, Inc. 15-29 Problems with Collaborative Arrangements  Problems with collaborative arrangements include  Relative importance  Divergent objectives  Questions of control  Comparative contributions and appropriations  Culture clashes  Differences in corporate cultures
  • 30. Copyright © 2015 Pearson Education, Inc. 15-30 Problems with Collaborative Arrangements How to Dissolve a Joint Venture
  • 31. Copyright © 2015 Pearson Education, Inc. 15-31 Managing International Collaboration Learning Objective: See how companies can manage diverse collaborative arrangements
  • 32. Copyright © 2015 Pearson Education, Inc. 15-32 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
  • 33. Copyright © 2015 Pearson Education, Inc. 15-33 Managing International Collaboration Country Attractiveness/Company Strength Matrix
  • 34. Copyright © 2015 Pearson Education, Inc. 15-34 Managing International Collaboration  Potential collaborative partners should be evaluated in terms of  the resources they will supply  their motivation  compatibility
  • 35. Copyright © 2015 Pearson Education, Inc. 15-35 Managing International Collaboration  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
  • 36. Copyright © 2015 Pearson Education, Inc. 15-36 Managing International Collaboration  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
  • 37. Copyright © 2015 Pearson Education, Inc. 15-37 Why Innovation Breeds Collaboration  Collaborative arrangements will bring both opportunities and problems as companies move simultaneously to new countries and to contractual arrangements with new companies
  • 38. Copyright © 2015 Pearson Education, Inc. 15-38 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

Editor's Notes

  1. International Business Environments and Operations 15e by Daniels, Radebaugh, and Sullivan
  2. Chapter 15: Direct Investment and Collaborative Strategies
  3. The Learning Objectives for this chapter are 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
  4. 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 appreciate how growth in project size and complexity will require more future collaboration
  5. Firms that depend on foreign production may own it outright or in part, develop or acquire it, and/or use some type of collaborative arrangement with another company.
  6. This Figure shows the factors that affect a company’s choice of operating mode.
  7. This Figure shows alternative operating modes. Experienced global companies like Coca-Cola tend to use all of the different options.
  8. Learning Objective : To clarify why companies may need to use modes other than exporting to operate effectively in international business.
  9. In some cases, it can be more advantageous to produce in foreign countries that 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, or buyers prefer products originating from a particular country. production abroad is cheaper than at home, when transportation costs to move goods or services internationally are too expensive, when companies lack domestic capacity, when products and services need to be altered substantially to gain sufficient consumer demand abroad, when governments inhibit the import of foreign products, and when buyers prefer products originating from a particular country.
  10. Exporting may not be feasible: When products and services need to be altered substantially to gain sufficient consumer demand abroad When governments inhibit the import of foreign products When buyers prefer products originating from a particular country
  11. Learning Objective : To comprehend why and how companies make foreign direct investments.
  12. In general, the more ownership a company has, the more control over decisions the firm has. Three main theories that explain why companies want control are internalization theory, appropriability theory, and freedom to pursue global objectives.
  13. When investing in a foreign country, companies can either acquire an existing facility, or build a new one. The latter option is known as a greenfield investment. The advantages of acquiring an existing operation include: • Adding no further capacity to the market • Avoiding start-up problems • Easier financing at times Companies may choose to build if: • No desired company is available for acquisition • Acquisition will lead to carryover problems • Acquisition is harder to finance
  14. Learning Objective : To understand the major motives that guide managers when choosing a collaborative arrangement for international business.
  15. Companies collaborate or form strategic alliances for many reasons. This Figure shows both the general and the internationally specific reasons for collaboration.
  16. Learning Objective : To describe what companies should consider when entering into international arrangements with other companies.
  17. The general motives for collaborative arrangements are: To spread and reduce costs To specialize in competencies – the resource-based view To avoid or counter competition To secure Vertical and Horizontal Links To gain knowledge
  18. Further motives are: To gain location-specific assets To overcome governmental constraints Protecting assets To diversify geographically To minimize risk exposure
  19. Choosing between the different types of collaborative arrangements involves tradeoffs. The more a company depends on collaboration, the more likely it is to lose decision making control. How much control a company is willing to give up will influence its choice of collaborative arrangement. Similarly, companies with prior international experience in a country are less likely to benefit from a partner’s knowledge of the market.
  20. Companies often engage in licensing agreements for economic reasons such as a faster start-up, lower costs, or to gain access to additional resources.
  21. Licensing applies to many different aspects of business, such as: Patents, inventions, formulas, processes, designs, patterns Copyrights for literary, musical or artistic compositions Trademarks, trade names, brand names Franchises, licenses, contracts Methods, programs, procedures, systems
  22. Franchising is often associated with U.S. fast food companies, but in fact many international franchisors are from other countries and sectors. Companies can expand in foreign markets using individual franchises, or by setting up a master franchisor which then establishes sub-franchisees. Because the success of a franchise depends on product and service standardization, high identification through promotion, and effective cost controls, companies need to be sure that operational modifications don’t compromise what the company has to offer.
  23. A company may pay for managerial assistance when it believes another company can better manage its operation.
  24. Turnkey operations are often very large, running into the hundreds of millions and even billions of dollars. For example, a current turnkey project run by Spain’s Sacyr Vallehermoso involves building a wider Panama Canal.
  25. Possible joint venture combinations include • Two companies from the same country joining together in a foreign market • A foreign company joining with a local company • Companies from two or more countries establishing a joint venture in a third country • A private company and a local government forming a joint venture • A private company joining a government-owned company in a third country
  26. The purpose of the equity ownership is to solidify a collaborating contract, such as a supplier-buyer contract, so that it is more difficult to break—particularly if the ownership is large enough to secure a board membership for the investing company.
  27. This 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.
  28. Learning Objective : To grasp why collaborative arrangements succeed or fail.
  29. Collaborative arrangements don’t always work out. The most common challenges involve the relative importance of the project to each company, divergent objectives, control issues, contribution issues, culture clashes, and different corporate cultures.
  30. This Figure shows that the end of a joint venture can be friendly or unfriendly, planned or unplanned, and mutual or non-mutual.
  31. Learning Objective : To see how companies can manage diverse collaborative arrangements.
  32. 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.
  33. This Figure relates country attractiveness with operating forms.
  34. Trust is essential in collaborative arrangements. Companies without proven track records may have to negotiate harder and make more concessions.
  35. Contracts should spell out mutual goals and expectations.
  36. Finally, keep in mind that finding a capable and compatible partner is not enough. Managers must also look for ways to improve performance.
  37. Collaborative arrangement must overcome differences in a number of areas • Country cultures that may cause partners to obtain and evaluate information differently • National differences in governmental policies, institutions, and industry structures that constrain companies from operating as they would prefer • Corporate cultures that influence ideologies and values underlying company practices that strain relationships among companies • Different strategic directions resulting from partners’ interests that cause companies to disagree on objectives and contributions • Different management styles and organizational structures that cause partners to interact ineffectively