International Business International Business

Chapter FourteenChapter Fourteen

Direct Investment and Direct Investment and Collaborative StrategiesCollaborative Strategies

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IntroductionIntroduction Mode of entry (entry strategy of the Mode of entry (entry strategy of the

company)company)• Equity arrangements (e.g., joint venture Equity arrangements (e.g., joint venture

or wholly owned subsidiary)or wholly owned subsidiary)• Nonequity arrangements (e.g., licensing, Nonequity arrangements (e.g., licensing,

franchising, management contracts, or franchising, management contracts, or turnkey). turnkey).

Firms opt for collaborative arrangements Firms opt for collaborative arrangements when exporting as an alternative may not when exporting as an alternative may not be feasiblebe feasible

Companies collaborate for various Companies collaborate for various reasons-depends on the entry reasons-depends on the entry motive/strategymotive/strategy

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Why Companies Collaborate: Why Companies Collaborate: Reasons for CollaborationReasons for Collaboration

To spread and reduce costsTo spread and reduce costsTo specialize in competenciesTo specialize in competenciesTo avoid or counter competitionTo avoid or counter competitionTo secure vertical and horizontal linksTo secure vertical and horizontal linksTo gain knowledgeTo gain knowledgeTo gain location-specific assetTo gain location-specific assetTo overcome governmental constraintsTo overcome governmental constraintsTo diversify geographicallyTo diversify geographicallyTo minimize exposure in risky environmentsTo minimize exposure in risky environments

Types of Collaborative Types of Collaborative Arrangements (Entry Strategies)Arrangements (Entry Strategies)

Licensing Licensing Franchising Franchising Management contracts Management contracts Turnkey operations Turnkey operations Joint ventureJoint venture Equity AllianceEquity Alliance Consortium Consortium Wholly-owned subsidiary (WOS) Wholly-owned subsidiary (WOS)

Criteria for EvaluatingCriteria for EvaluatingCollaborative (Entry) StrategiesCollaborative (Entry) Strategies

Legal Legal CostCost Risk Risk ControlControl CompetitionCompetition Experience Experience Product/industry Product/industry ComplexityComplexity Country factorsCountry factors

Evaluating Collaborative Arrangements Evaluating Collaborative Arrangements (Entry Strategies)(Entry Strategies)

Country Country

ComplexityComplexity

ProductProduct

ExperienceExperience

CompetitioCompetitionn

ControlControl

RiskRisk

CostCost

LegalLegal

WOSWOSJoint Joint

VentureVentureTurnkeyTurnkeyMgt Mgt

contractscontractsFranchisinFranchisingg

LicensingLicensingExportingExporting

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Foreign Direct InvestmentForeign Direct Investment Acquisitions vs. Greenfield VentureAcquisitions vs. Greenfield Venture Motives of FDIMotives of FDI

• Internationalization theoryInternationalization theory• Appropriability theoryAppropriability theory

LicensingLicensing

Company grants rights to intangible Company grants rights to intangible property to another company to use in a property to another company to use in a specific geographic area for a specified specific geographic area for a specified periodperiod

Licensing involves Patents, Formulas, Licensing involves Patents, Formulas, Designs, Copyrights, Trademarks, Brand Designs, Copyrights, Trademarks, Brand names, Franchises, Methods/programsnames, Franchises, Methods/programs

Why a company goes for licensing? What Why a company goes for licensing? What factors or circumstances influence a factors or circumstances influence a company’s decisioncompany’s decision

FranchisingFranchising

Franchising: specialized form of licensing Franchising: specialized form of licensing in which franchisor not only sells an in which franchisor not only sells an independent franchisee the use of independent franchisee the use of intangible property essential to the intangible property essential to the franchise’s business to assist in areas such franchise’s business to assist in areas such as promotion and training.as promotion and training.

Examples: McDonalds, Subway, Wal-Mart, Examples: McDonalds, Subway, Wal-Mart, Intercontinental HotelsIntercontinental Hotels

Management ContractManagement Contract

Management contracts are means by Management contracts are means by which a company may transfer which a company may transfer management talent to assist a foreign management talent to assist a foreign company for a specified period for a set company for a specified period for a set feefee

Host country gets assistance without any Host country gets assistance without any equity involvementequity involvement

Turnkey OperationsTurnkey Operations

Arrangement in which one company contracts Arrangement in which one company contracts another to build complete, ready-to-operate another to build complete, ready-to-operate facilitiesfacilities

Typically very large contracts like construction Typically very large contracts like construction projects, government projectsprojects, government projects

Requires top-level contacts abroadRequires top-level contacts abroad MotivationsMotivations

• Export financingExport financing• Managerial and technological qualityManagerial and technological quality• ExpertiseExpertise• Turnkey operator are specialists in working in remote Turnkey operator are specialists in working in remote

areas oftenareas often

Joint VentureJoint Venture

Type of ownership sharing popular Type of ownership sharing popular among international companies, cane among international companies, cane between companies or governmentsbetween companies or governments

When more than two companies are When more than two companies are involved it becomes a “consortium”involved it becomes a “consortium”

Contract is important, who is doing Contract is important, who is doing whatwhat

Sharing resources and trust is the keySharing resources and trust is the key

Wholly-Owned Subsidiary (WOS)Wholly-Owned Subsidiary (WOS)

Company has 100% equityCompany has 100% equity Mostly adopted for control (operations, Mostly adopted for control (operations,

license, technology etc.)license, technology etc.) Not all countries allow thisNot all countries allow this When a company should opt for JV over When a company should opt for JV over

WOS (or vice versa)?WOS (or vice versa)?

Chapter 14: Discussion QuestionsChapter 14: Discussion Questions

1.1. What is a collaborative arrangement? What is a collaborative arrangement? Why firms collaborate? Explain their Why firms collaborate? Explain their reasons for collaboration.reasons for collaboration.

2.2. Explain the criteria for evaluating Explain the criteria for evaluating collaborative strategies. collaborative strategies.

3.3. When would a firm opt for licensing over When would a firm opt for licensing over joint venture? Make specific arguments. joint venture? Make specific arguments. (Similar questions can also be asked for (Similar questions can also be asked for other strategies, one over the other).other strategies, one over the other).

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Control Complexity Related to Control Complexity Related to Collaborative StrategyCollaborative Strategy

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Country Attractiveness—Company Country Attractiveness—Company Strength MatrixStrength Matrix