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© 2001 Prentice Hall 14-1

To explain the major motives that guide managers when choosing a collaborative arrangement for IB
To define the major types of collaborative arrangements
To describe what companies should consider when entering into arrangements with other companies
To discuss what collaborative arrangements succeed or fail
To discuss how companies can manage diverse collaborative arrangements
© 2001 Prentice Hall 14-2

Companies must choose an international operating mode, many of which are collaborative
• Collaboration frequently lessens control
• MNEs with fully global orientation use most of the operational modes available
Strategic alliance
— collaboration is of strategic importance to one or more of the companies
Collaborations — provide different opportunities and problems than do trade or wholly owned direct investment
© 2001 Prentice Hall 14-3

EXTERNAL INFLUENCES OPERATIONS
OBJECTIVES
PHYSICAL AND
SOCIETAL FACTORS
STRATEGY
COMPETITIVE
ENVIRONMENT
MEANS
Modes
• Self-handling
•Collaborative arrangements
Function s
Overlaying
Alternatives
© 2001 Prentice Hall 14-4

PRODUCTION
OWNERSHIP
Equity
Arrangements
PRODUCTION LOCATION
Home country Foreign country a. Exporting a. Wholly owned operations b. Partially owned with remainder widely held
Non-equity arrangements c. Joint ventures d. Equity alliances a. Licensing b. Franchising c. Management contracts d. Turnkey operations
Collaborative arrangements shaded in blue
© 2001 Prentice Hall 14-5

OBJECTIVES OF INTERNATIONAL BUSINESS
•
Sales expansion
•
Resource acquisition
• Diversification
• Competitive risk minimization
MOTIVES FOR COLLABORATION
General
•
Spread and reduce costs
• Specialize in competencies
• Avoid competition
• Secure vertical and horizontal links
•
Gain market knowledge
MOTIVES FOR COLLABORATION
Specific to international business
•
Gain location-specific assets
• Overcome legal constraints
• Diversify geographically
• Minimize exposure in risky environments
© 2001 Prentice Hall 14-6

Some of the motives for collaboration for domestic operations are both:
• The same for international operations
• Different for international operations
Each participating company has its own primary objective for international operations and its own motive for collaboration
Spread and reduce costs — sometimes it is cheaper to get another company to handle work, especially:
• At small volume can spread fixed costs
• When the other company has excess capacity
– company handling production or sales may lower its average costs
• Cooperative ventures may increase operating costs
© 2001 Prentice Hall 14-7

Specialize in competencies
• Resource-based view of the firm —holds that each company has a unique combination of competencies
• Large, diversified companies realign to focus on their major strengths
– licensing can yield a return on a product that does not fit the company’s strategic priority based on its best competencies
Avoid competition — when markets are too small, companies band together so as not to compete
• Companies may combine resources to combat larger competitors
• Companies may collude to raise everyone’s profits
Secure vertical links — companies may lack competence or resources to become fully vertically integrated
Secure horizontal links — may provide finished products or components
© 2001 Prentice Hall 14-8

Gain market knowledge — learn about a partner’s technology, operating methods, or home markets
Gain location-specific assets — collaboration with local firm used to deal with barriers encountered when operating abroad
• Foreign companies may gain operational assets when teaming with local companies
Overcome legal constraints — country may require foreign companies to share ownership
• Collaboration a means of protecting assets
– hinders nonassociated companies from pirating the asset
Diversify geographically — can smooth its sales and earnings because business cycles differ
Minimize exposure in risky environments — reduce base of assets located abroad
© 2001 Prentice Hall 14-9

Forms of foreign operations differ in the:
• Amount of resources committed to the operation
• Proportion of resources located abroad
Type of collaborative arrangement selected may necessitate trade-offs among objectives
Companies with difficult-to-duplicate resource have a wider choice of operating form
Some Considerations in Collaborative Arrangements
Desire for control over foreign operations
• The greater reliance on collaboration, the greater the loss of control over decision making
• External arrangements imply the sharing of revenues
Prior expansion of the company abroad — may reduce some advantages of more foreign expansion
© 2001 Prentice Hall 14-10

Licenser grants rights to intangible property to licensee to use in a specified geographic area for a specified period
• Licensee ordinarily pays a royalty to licenser
• Intangible property includes patents, copyrights, trademarks, franchises, and methods or systems
Licensing often has an economic motive
— the desire for faster start-up, lower costs, or access to additional resources
Cross-licensing — exchange of technology among companies
• Reduces competition on products and in markets
Payment — varies in amount and type of payment
• Several factors determine the payment amount
• Bargaining used to establish the price
Most licenses granted to companies in which licensee has an ownership stake
© 2001 Prentice Hall 14-11

AGREEMENT-SPECIFIC FACTORS
Affecting the Technology Value
• Market restrictions (including exports)
• Exclusivity of the license
• Limits on production size
•
Product quality requirements
• Grantback provisions
• Tie-in provisions
• Duration of the agreement
•
Age of the technology
•
Duration of the patent
• Other constraints on the use of technology
ENVIRONMENT-SPECIFIC FACTORS
Affecting the Technology Value
• Government (of both licensor’s and licensee’s countries) regulation of licensing
• Level of competition among alternative suppliers of similar technology
• Political and business risks in the licensee’s country
• Product and industry norms
•
Technology-absorbing capacity of the licensee’s country
© 2001 Prentice Hall 14-12

LICENSOR’S OFFER
PRICE
LICENSEE’S BID PRICE
Upper limit: Smaller of
1. Estimate of licensee’s additional profits from use of technology or
2. Estimate of licensee’s cost of obtaining same or similar technology from alternative sources
Bargaining range
Upper limit: Smallest of
1. Estimate of additional profits from use of technology or
2. Estimate of cost of developing same or similar technology or
3. Estimate of costs of obtaining same or similar technology from best alternative source
Lower limit:
Estimate of direct transfer costs, opportunity costs, and R&D costs
Lower limit:
Estimate of licensor’s direct transfer costs
Zero price
© 2001 Prentice Hall 14-13

Specialized form of licensing — franchisor
• Sells an independent franchisee the use of intangible property
• Operationally assists the business
Franchisor and franchisee — act like a vertically integrated company
Organization of franchising
• Franchisor enters foreign market by setting up a master franchise that has the authority to open outlets or develop subfranchises
• Franchisor may may enter market by dealing directly with individual franchisees
– easier for known franchisors to attract investors
© 2001 Prentice Hall 14-14

Operational modifications
• Problems faced by franchisor include securing good locations, finding suppliers, and gaining operating permission from the government
• Difficult to transfer factors that affect success
– the more standardization, the less acceptance in the foreign country
– the more adjustment to the foreign country, the less the franchisor is needed
Means by which a company may transfer managerial talent
• Management personnel assists foreign company
• Company gains income with little capital outlay
Host country gets assistance without needing direct investment
© 2001 Prentice Hall 14-15

Company contracts another to build complete, ready-to-operate facilities
• Involve industrial-equipment manufacturers and construction companies
• Customer is often a governmental agency
• Usually involve very large, expensive contracts
Securing contracts entails — public relations, price, export financing, managerial and technological quality, experience, and reputation
More than one organization owns a company
• Consortium —more than two organizations participate
Management problems increase with more owners
• A partner’s control of operations decreases
Appeal to companies new at foreign operations
© 2001 Prentice Hall 14-16

Many
Wholly owned
Consortium
Joint venture
Equity alliance
Management contract
Turnkey
Franchise
License
Sales contract
Tight control
Medium control
Little control
None
Equity
(more ownership)
OWNERSHIP CONSORTIUM
Sharing
© 2001 Prentice Hall
Nonequity
(less ownership)
14-17

Collaborative arrangement in which at least one company takes an ownership position in the other(s)
• Each party may take an ownership position in the other partners’ businesses
• Helps solidify collaboration
Many arrangements develop problems that lead partners to renegotiate their relationship
• In spite of renegotiated relationships, many agreements break down or are not renewed
Collaboration’s importance to partners
• One partner may devote more managerial attention to the collaboration
– due to differences in size of the partners
Differing objectives — partners’ objectives may evolve differently over time
© 2001 Prentice Hall 14-18

Control problems
• Company loses some control over assets shared with others in collaborative arrangement
– may lose control of the extent or quality of use of assets
• Even though control is ceded to one of the partners, both may be held responsible for problems
• Not clear who controls employees in joint ventures
• Without control residing with one of the partners, joint operation may lack direction
Partners’ contributions and appropriations
• Partners’ capabilities to contribute may change
– weak link may cause drag on the relationship
• Suspicions may arise about what other partner(s) is taking from the operation
© 2001 Prentice Hall 14-19

Differences in culture
• Companies differ by nationality in how they evaluate the success of their operations
– differences can mean that one partner is satisfied while the other is not
• Some companies prefer not to collaborate with companies of very different cultures
– joint ventures from culturally distant countries survive at least as well as those between partners from similar cultures
• Differences in corporate cultures may also create problems within joint ventures
– compatibility of corporate cultures is important in cementing relationships
© 2001 Prentice Hall 14-20

As the arrangement evolves:
• Partners will have to reassess certain decisions
• Environment likely to change
• Must reexamine the fit between collaboration and strategy
Dynamics of collaborative arrangements
• Companies typically move from external to internal handling of foreign operations
– as commitment deepens, cost of switching from one mode of operation to another may be high
• Collaboration with local partner provides the company with opportunities to learn about culture and more confidently deepen its commitment to foreign operation
• Tensions may develop internally as a company’s international operations change and grow
© 2001 Prentice Hall 14-21

Finding compatible partners — company can:
• Seek out a partner for foreign operations
• Respond to proposals from other companies
• Must evaluate compatibility
– proven ability to handle similar types of collaboration
Negotiating process
• Some technology transfer considerations are unique to collaborative arrangements
– provisions to not divulge technical information
– retention of a key component so that partner will not obtain complete information
• Secrecy surrounding the financial terms of collaborative arrangements
© 2001 Prentice Hall 14-22

Contractual provisions — guard against consequences of loss of control of assets or intangible property
• Contract should spell out:
– terminating the agreement
– methods of testing quality
– geographical limitations on the asset’s use
– management responsibilities of each partner
– future commitments of each partner
– partner’s disposal of outcomes of collaborative arrangement
Performance assessment — when collaborating with another company it is necessary to:
• Establish mutual goals
• Spell out expectations in the contract
• Continue to monitor performance
• Determine whether to take over the operations
© 2001 Prentice Hall 14-23