International Strategy and OrganizationPart II:International Licensing, Joint Ventures, Consortia, Franchising, Mergers & Acquisitions, Clusters and Counter Trade Josef Windsperger Professor of Organization and Management
Content 3 Management of Networks of the MNC 3.1 Theoretical Foundation of Networks of the MNC 3.2 International Licensing 3.3 International Strategic Alliances, Joint Ventures and Consortia 3.4 Internationalization through Franchising 3.5 Internationalization through M&As 3.6 Internationalization through Clusters 3.7 Internationalization through Counter Trade 3.8 Organization Design of the MNC of the Future
3.1 Theoretical Foundations of Networks Hierarchy Stable Network Internal Dynamic Network Network One FirmSeveral Firms
Networks of the MNC Joint Venture Consortium High Countertrade Interaction Level Franchising Cluster Cross-Licensing Licensing Cooperation low Competition Cooperation Cooperation Propensity
Theories of Networks Transaction Cost Theory Property Rights-Theory Resource-based Theory Relational View
3.1.1 Transaction Cost Theory O. E. Williamson (1975) Atmosphere Bounded Rationality Uncertainty/Complexity ‚Transaction Costs‘ Opportunism Transaction Specifity
Quasi-Rents, Specific Investments and Hold-up g BA A B g AB D g AC C g BD B‘s profit with A: gBA A‘s profit with B: gAB A‘s quasi-rent: QRAB = (gAB – gAC) B‘s quasi-rent: QRBA = (gBA – gBD) HOLD-UP Potential of B (HB) Quasi-rent of A (QRBA) =
Transaction Costs and Networks TC Market Network Hierarchy Specifity, Uncertainty Complexity of Know How S1 S2 S3
3.1.2 Property Rights-Theory a. the right to use the good b. the right to change the good c. the right to capture the profit or to bear the loss d. the right to sell the good and to receive the liquidation value a + b = decision rights c + d = ownership rights Contractability (due to intangibility) of assets determines the structure of residual rights
Example: Franchising-Network Intangible assets of the franchisor: Brand name assets, system-specific know-how Intangible assets of the franchisee: Outlet-specific knowledge ao and a1 are contactible – market coordination ao and a1 are noncontractible – network coordination
3.1.3 Resource-based Theory Strategic Rents (SR) = Competitive Advantage (Schumpeterian and Ricaridian Rents) Organizational Capabilities Resources
Resource Characteristics Intangible, tangible resources and organizational capabilities Heterogenity Imitability Substitutability Firm specifity
3.1.4 Relational View: Networks and Trust g BA A B g AB D g AC C g BD B‘s Reputation capital: RB A‘s Reputation capital: RA A‘s Quasi-Rents: QRAB = (gAB – gAC) B‘s Quasi-Rents: QRBA = (gBA – gBD) Quasi-Rents of A (QRAB) + reputation capital of A (RA) HA - cooperative behavior HA - opportunistic behavior > <
3.2 International Licensing Licensing agreement A company (licencee) is allowed to use the licensor‘s trademark, patent, manufacturing process or some other value creating activity of the licensor. Objectives (a) In-licencing: Access to complementary assets (b) Out-licensing: Risk reduction, deterrence of potential competitors, standard creation Cross Licensing Agreement on the exchange of rights for the entire portfolio of technology for a certain time period. Licensee pays fixed fees and/or royalties (percentage of sales)
Conditions for Licensing • Complementary and contractible resources Resources • easy to replicate (contractible) • property rights are well defined
TC and Licensing TC Hierarchy: FDI Licensing Specific Investment Know-how Complexity Uncertainty S3 S1 S2
Property Rights-Explanation A Contractible Know-how Non-contractible Know-how Contractible Know-how B to A: Licensing Market Contract B Non-contractible Know-how A to B: Licensing Network Austrian company A wants to enter the market in Ukraine. The Company B in Chernivtsi has intangible knowledge at the consumer and labour market. On the other hand, the know-how of A is contractible.
Country Culture and Licensing • Does the national culture influence the choice between licensing and foreign direct investments? “The national differences in levels of trust impact the choice of foreign market entry mode” (Shane, 1994) • Results - High Trust Countries → Licensing - Low Trust Countries → Foreign Direct Investment “Resorting to hierarchies is less common where trust among people is greater.” (Shane, 1994)
3.3International Joint Ventures, Strategic Alliances and Consortia as stable Networks Joint Venture A B b a JV Strategic alliance a, b B A
3.3.1 Joint Ventures – Strategic Alliances Strategic Alliance: Agreement to gain competitive advantage through access to partner’s resources, including markets, technologies, capital and human resources. Joint Venture a.Scale JV: Firms enter together into a stage of production, distribution or a new market (for example: JV that produce components for automobile producers). Objective: Economies of Scale b.Link JV: Firms combine resources and capabilities from different stages of the value chain. Objective: Synergies in R&D, production, distribution, marketing.
JV and Strategic Alliances as Stable Networks Characteristics: • High specific investments, high uncertainty and/or • Complementary firm-specific resources and organizational capabilities • Joint Ventures: Allocation of decision and ownership rights • Strategic alliances: Allocation of decision rights, no ownership rights • Weak Ties: Trust instead of formal coordination mechanisms
Conditions for JV and SA Hennart 1988: „When knowledge is tacit, it cannot be effectively transferred in codified form; its exchange must rely on intimate human contact“ (366) - High TC: Markets for intermediate inputs are subject to high transaction costs due to high specific investments and high uncertainty, leading to a transfer of decision and ownership rights. - Firm-specific resources: The inputs are difficult to imitate by one of the parties.
TC, Licensing and Joint Venture TC Internal Hierarchy Licensing JV Specifity, Know-how Complexity, Uncertainty S1 S2 S3
Determinants of Decision and Ownership Rights in JV Hennart 1988: „When knowledge is tacit, it cannot be effectively transferred in codified form; its exchange must rely on intimate human contact“ (366) - According to the PR-theory, the contractibility of assets determines the governance structure. - Noncontractible assets require the transfer of decision and ownership rights. - Intangible assets refer to organizational, marketing, country-specific and technological know how.
Property Rights-Explanation A Contractible Know-how Non-contractible Know-how Contractible Know-how B to A: Licensing Market Contract B Non-contractible Know-how A to B: Licensing Joint Venture
Joint Venture: Choice of Entry Mode - Licensing - Joint venture - Wholly-owned subsidiary
Market Entry and Control • Licensing: low control • Joint Ventures: shared control • Subsidiary (WOS): Decision and ownership rights have the foreign headquarter
Market Entry and Resource Commitments Licensing: Low Joint Venture: Medium Wholly-owned Subsidiary: High Market Entry and Diffusion Risk Licensing: High Joint Venture: Medium Wholly-owned Subsidiary: Low
Strategic Variables • Scale Economies • Global Concentration • Market Potential • Environmental Variables • Country Risks • Cultural Distances • Demand Uncertainty • Competitive Dynamics Form of Market Entry • Resource Variables • Value of the Firm-specific Know-how • Tacit Knowledge of the Partner • International Experience Eclectic Theory: Hill et al. 1990
3.3.2 Consortia Latin „consortium“: association, society = a temporary collaboration to perform a certain task or to provide a specific service or product more efficiently = association of two or more individuals, companies, universities, or governments (or any combination) Separate legal status Control over each participant is generally limited to activities refering to the joint project
Consortia versus Internalization Firms have to decide how much of the R&D they should be internally procured - not possible to procure all R&D from outside - in-house R&D is necessary for implementation This decision depends on a number of factors: - transaction and disincentive costs - technological and organizational capabilities
Transaction Cost Explanation • Organization has to balance transaction costs with incentives • Firm is more likely to integrate R&D activities (in-house) where transaction costs are high • Firm is more likely to procure R&D from external partners where incentives can be enhanced with market competition
Organizational Capability Theory (1) Schumpeter (1912, 1942) and Penrose (1959) (resource based view) • capabilities of the firm result in competitive advantages • capabilities have to be enhanced through innovation and learning
Organizational Capability Theory (2) • R&D transactions: companies acquire scientific knowledge from outside and form alliances with other firms with different capabilities. Organizational Capability theory • lack of knowledge and sufficient capabilities of the firms • advantage of utilizing the new capabilities of external partners can exceed the coordinaton cost disadvantages.
Sakakibara‘s ModelMotives for Consortia Economic View Cost-sharing Motives • symmetrical firms in terms of capabilities or knowledge • same industry & outcome Organizational View Skill-Sharing Motives • heterogeneous capabilities • direct competitors in the product market • knowledge base • tacit knowledge • difficult to transmit • complementary knowledge
3.4 Internationalization through Franchising-Networks Royalties to t Franchisor: System-specific Know-how Franchisee: Initial Fee Specific Investments • Characteristics: • Franchisees and franchisor are entrepreneurs. • Intangible Assets: • Franchisor‘s brand name, system-specific know how • Franchisee‘s local market know how • Incentive system: • Royalties and intial fees
Transaction Cost Theory TC Company-owned subsidiaríes Licensing Franchising ‚Hostage Model‘ Specifity, Uncertainty S1 S2 S3
A Property Rights View Intangible assets System-specific und local market knowledge How is the knowledge distrubuted Between the franchisor and the franchisee? H1 Residual decision rights Who is the residual decision maker (whose decisions influences the residual income)? H2 Ownership rights (Residual income rights) Royalties/ Initial Fees Proportion of company-owned Outlets (PCO) H3 How are the ownership rights allocated?
Determinants of the Market Entry Choice: Environmental and Organisational Factors - Geographic distance • Cultural distance • Country risk • Political risk • Market volume and growth • Resources of the partner • Brand name assets • International experience • Financial situation of the franchisor
Efficiency Comparison Subsidiary (WOS) 1. High resource commitments 2. Central control 3. Protection of the system-specific know how Appropriate: • High cultural and geographic distance • Strong brand name • Important system-specific know how • High market potential and growth • International experience
Area Development Agreement 1. Lower resource commitment 2. Relatively strong central control 3. Fast market entry Appropriate: • High geographic and cultural distances • Uncertain market development • Instable legal environment • Local market knowledge is very important • No international experience
Direct Franchising High control and agency costs Appropriate: • Low geographic and cultural differences • Strong local market know how of the franchisees • Relatively small market potential and growth
Joint Venture 1. Shared control 2. Know-how diffusion risk 3. Lower risk Appropriate: • Franchisor has not enough local market knowledge • Uncertain market development • High legal and political uncertainty • Relatively high cultural differences • Legal barriers