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International Business Strategy, Management & the New Realities by Cavusgil, Knight & Riesenberger. Chapter 14 Foreign Direct Investment and Collaborative Ventures. FDI and Collaborative Ventures.

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International Business Strategy, Management & the New Realities by Cavusgil, Knight & Riesenberger

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International business strategy management the new realities by cavusgil knight riesenberger l.jpg

International BusinessStrategy, Management& the New RealitiesbyCavusgil, Knight & Riesenberger

Chapter 14

Foreign Direct Investment and Collaborative Ventures

International Business: Strategy, Management, and the New Realities


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FDI and Collaborative Ventures

Foreign direct investment (FDI): an internationalization strategy in which the firm establishes a physical presence abroad by acquiring productive assets such as capital, technology, labor, land, plant, and equipment.

International collaborative venture: a cross-border business alliance in which partnering firms pool their resources and share costs and risks of a venture.

Joint venture (JV): a form of collaboration between two or more firms to create a jointly-owned enterprise.

International Business: Strategy, Management, and the New Realities


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Examples of FDI

  • Vodafone, a British firm, acquired the Czech telecom Oskar Mobil

  • eBay, a U.S. firm, acquired Luxembourg’s Skype Technologies, a prepackaged software company

  • Japan Tobacco Inc. acquired the British cigarette maker Gallaher Group PLC for almost $15 billion

  • Dubai International Capital Group acquired the British theme park operator Tussauds Group for $1.5 billion

International Business: Strategy, Management, and the New Realities


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Nature of FDI

  • The most advanced, expensive, complex, and riskiest entry strategy, involving the establishment of manufacturing plants, marketing subsidiaries, or other facilities abroad.

  • Undertaken by firms from both the advanced economies and emerging markets.

  • Target countries are both advanced economies and emerging markets.

  • Occasionally raises patriotic sentiments among citizens (e.g., Haier and Maytag; Dubai Ports).

International Business: Strategy, Management, and the New Realities


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Considerations Relevant to Choice of Foreign Market Entry Strategy

  • Degree of control that the firm wants to maintain over decisions, operations, and strategic assets involved in a venture;

  • Degree of risk firm is willing to tolerate, and the timeframe in which it expects returns;

  • Organizational and financial resources (e.g., capital, managers, technology) firm will commit to the venture;

  • Availability and capabilities of partners in the market;

  • Value-adding activities firm wants to perform itself in the market, and what activities it will leave to partners;

  • Long-term strategic importance of the market.

International Business: Strategy, Management, and the New Realities


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Service Multinationals

  • Firms that offer services – such as lodging, construction, and personal care – must offer them when and where they are consumed.

  • Service firms establish either a permanent presence through FDI (e.g., retailing), or a temporary relocation of personnel (e.g., construction industry).

  • Many support services – such as advertising, insurance, accounting, and package delivery – are best provided at the customer’s location.

International Business: Strategy, Management, and the New Realities


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Leading Destinations for FDI

  • Advanced economies in Europe (especially Britain), Japan, and North America, are popular FDI destinations, mainly as attractive markets

  • In recent years, emerging markets and developing economies have gained appeal as FDI destinations.

  • Examples:

    • Firms target China to do low-cost manufacturing and as a huge target market

    • Firms target Eastern Europe to do low-cost manufacturing, and to easily access the huge European Union

    • Firms target Mexico to do low-cost manufacturing and to easily access the United States.

International Business: Strategy, Management, and the New Realities


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Types of FDI

  • Greenfield investment vs. mergers and acquisitions

  • The nature of ownership: Wholly owned direct investment vs. equity joint venture

  • Level of integration: Vertical vs. horizontal FDI

International Business: Strategy, Management, and the New Realities


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Greenfield Investment vs. M&As

  • Greenfield investment: firm invests to build a new manufacturing, marketing or administrative facility, as opposed to acquiring existing facilities.

  • Acquisition : direct investment or purchase an existing company or facility.

  • Merger: special type of acquisition in which two firms join to form a new, larger company.

International Business: Strategy, Management, and the New Realities


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Nature of Ownership

  • Equity participation: Acquisition ofpartial ownership in an existing firm.

  • Wholly owned direct investment: Investor fully owns the foreign assets

  • Equity joint ventures: Partnership in which a separate firm is created through the investment of assets by two or more parent firms that gain joint ownership of a new legal entity.

International Business: Strategy, Management, and the New Realities


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Level of Integration

  • Vertical integration: The firm owns, or seeks to own, multiple stages of a value chain for producing, selling, and delivering a product. E.g., Toyota owns some Toyota car dealerships around the world. Ford once owned steel mills that produced steel used to make Ford cars.

  • Horizontal integration: Arrangement whereby the firm owns, or seeks to own, the activities involved in a single stage of its value chain. E.g., Microsoft acquired a Montreal-based firm that makes software used to create movie animation.

International Business: Strategy, Management, and the New Realities


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International Collaborative Venture

  • A partnership between two or more firms.

  • Includes equity joint ventures and non-equity, project-based ventures.

  • Sometimes called partnerships and strategic alliances.

  • Collaboration helps overcome the often substantial risk and high costs of international business. It makes possible the achievement of projects that exceed the capabilities of the individual firm.

International Business: Strategy, Management, and the New Realities


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Other Collaborative Ventures

  • Consortium: project-based, usually non-equity venture with multiple partners fulfilling a large-scale project. E.g., commercial aircraft manufacturing (Boeing and Airbus).

  • Cross-licensing agreement: type of a project-based, non-equity venture where partners agree to access licensed technology developed by the other, on preferential terms. E.g., telecommunications industry for inventing new technologies.

International Business: Strategy, Management, and the New Realities


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Success Factors in Collaborative Ventures

Half of all global collaborative ventures fail

within the first 5 years of operations due to

unresolved disagreements, confusion, and

frustration. Therefore, partners should:

  • Be aware of cultural differences;

  • Emphasize communications and building trust;

  • Pay attention to planning and management of the venture;

  • Protect core competencies.

International Business: Strategy, Management, and the New Realities


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Retailers: A Special Case of Internationalization

Retailers internationalize substantially through FDI and

collaborative ventures. Retailing takes various forms:

  • Department stores (e.g., Marks & Spencer, Macy's);

  • Specialty retailers (Body Shop, Gap, Disney Store);

  • Supermarkets (Sainsbury, Safeway, Sparr);

  • Convenience stores (Circle K, 7-Eleven, Tom Thumb); discount stores (Zellers, Tati, Target);

  • ‘Big box stores” (Home Depot, IKEA, Toys "R" Us).

  • Wal-Mart has over 100 stores and 50,000 employees in China, sourcing almost all its merchandise locally and providing thousands of local jobs.

International Business: Strategy, Management, and the New Realities


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Barriers to Retailer Success Abroad

  • Culture and language barriers. E.g., differing product and service portfolio, store hours, store layout, relations between management and labor.

  • Consumers tend to develop strong loyalty to indigenous retailers.E.g., Both Galleries Lafayette in New York, and Wal-Mart in Germany failed.

  • Legal and regulatory barriers. Countries have idiosyncratic laws that affect retailing. E.g., Germany limits store hours and requires recycling

  • Retailers often must develop local sources of supply. E.g., McDonald’s in Russia; KFC in China.

International Business: Strategy, Management, and the New Realities


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Corporate Social Responsibility (CSR)

  • Refers to operating a business in a manner that meets or exceeds the ethical, legal, commercial, and public expectations of stakeholders (customers, shareholders, employees, and communities).

  • Represents a set of core values that includes avoiding human rights abuses; upholding the right to join or form labor unions; elimination of compulsory and child labor; avoiding workplace discrimination; protecting the natural environment; and guarding against corruption, including extortion and bribery.

International Business: Strategy, Management, and the New Realities


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Relativism vs. Normativism in CSR

  • Some believe it is sufficient to simply follow the laws and regulations in each country. However, many countries have weak legal and regulatory systems, and much corruption.

  • Relativism: A belief that ethical truths are relative to the groups that hold them. Akin to the advice: “When in Rome, do as the Romans do.” Accordingly, a Japanese MNE that believes bribery is wrong might pay bribes in countries where the practice is customary.

  • Normativism : A belief in universal behavioral standards that firms and individuals should uphold. Accordingly, the Japanese MNE that believes bribery is wrong will enforce this standard everywhere in the world.

  • The U.N. and other CSR proponents encourage companies to follow a normative approach.

International Business: Strategy, Management, and the New Realities


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