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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
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Production Ownership
Equity
Arrangements
Production
Location
Home Country
Foreign country
a. Exporting
a. Wholly owned
operations:
b. Partially owned
operations:
c. Joint Ventures:
d. Equity Alliances:
Non Equity
Arrangements
a. Licensing:
b. Franchising:
c. Management
Contracts:
d. Turnkey Operations:
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Non collaborative: Wholly and partially owned
operations
Control/holding accompanies investment
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◦ Internalization theory
◦ Appropriability theory
◦ Freedom to pursue global objectives
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Internalization theory holds that it is
sometimes cheaper to handle operations
oneself than to contract with another company
The idea of denying rivals access to resources
(capital, patents, trademarks, and management
know-how) is called the appropriability theory
When a company has a wholly owned foreign
operation, it may more easily have option to
participate in a global strategy
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The advantages of Acquiring an existing
operation include:
◦ adding no further capacity to the market: in case
of saturated market
◦ avoiding start-up problems
◦ easier financing
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Companies may choose to build or have
Greenfield Investments if:
◦ no desired company is available for acquisition
◦ acquisition will lead to carry-over problems
◦ acquisition is harder to finance
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To Spread work and Reduce Costs: Let
specialist do the job.. handset n software n
apps
To Specialize in Competencies: beverage and
bottling..
To Avoid or Counter Competition: collusion..
telecom
To Secure Vertical and Horizontal Links:
maruti suzuki..
To Gain Knowledge: tata fiat engine, hero
honda.. Now???
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Gain location-specific assets
Overcome legal constraints
Diversify geographically
Minimize exposure in risky environments
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A co. grants right to intangible property to
another for a specific geographical region and
time..
It is paid royalty..
Licensing agreements may be:
◦ Exclusive(only to 1) or nonexclusive
◦ used for patents, copyrights, trademarks, and other
intangible property
Licensing often has an economic motive, such as
the desire for faster start-up, lower costs, or
access to additional resources
Licensing a molecular formula.. Pharma..
Abbott to Novartis… n vice versa..
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Franchising includes providing an intangible
asset (usually a trademark) and continually
infusing necessary assets (goodwill,
advertising)
Franchisors face a dilemma:
◦ the more standardization, the less acceptance in
the foreign country
◦ the more adjustment to the foreign country, the
less the franchisor is needed
Form of vertical integration.. Coke
concentrate to bottling plants..
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Management contracts are used primarily
when the foreign company can manage better
than the owners
Through Management contracts a company
may transfer a part of its’ personnel to assist
foreign company for a specified period for
fee..
Software companies..
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Are a type of collaborative arrangement in
which one company contracts with another to
build, complete, ready-to-operate facilities..
Turnkey operations are:
◦ Most commonly performed by construction
companies, industrial equipment manufacturers..
◦ Often performed for a governmental agency
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Reliance..
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Joint ventures may have various combinations
of ownership
More than one organization owns the
company..
The type of legal organization:
◦ may be a partnership, a corporation etc
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When more than two organizations
participate, the joint venture is sometimes
called a consortium
Audi:…
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An equity alliance is a collaborative
arrangement in which at least one of the
collaborating companies takes an ownership
position (almost always minority) in the
other(s)..
Both have shares in each other..
Equity alliances help solidify collaboration
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The major strains on collaborative
arrangements are due to five factors:
◦
◦
◦
◦
◦
Relative importance to partners
Divergent objectives
Control problems
Comparative contributions and appropriations
Differences in culture
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The evolution to a different operating mode
may:
◦ necessitate costly termination fees
◦ create organizational tensions
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Steps:
1.
2.
3.
4.
Finding compatible partners
negotiating the arrangements
Drawing up the contract
Assessing performance
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