Chapter 15

Copyright © 2014 Pearson Education

International Business: The New Realities, Global Edition, 3rd Edition

by

Cavusgil, Knight, and Riesenberger

Chapter 15


Learning Objectives

1. International investment and collaboration

2. Motives for FDI and collaborative ventures

3. Characteristics of foreign direct investment

4. Types of foreign direct investment

5. International collaborative ventures

6. Managing collaborative ventures

7. The experience of retailers in foreign marketsCopyright © 2014 Pearson Education

FDI and Collaborative Ventures

• Foreign direct investment (FDI): 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.


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.


Name the location of each brand

Brand Country where brand is based

7-Eleven




7-Eleven Japan

KitKat chocolate bars




7-Eleven Japan

KitKat chocolate bars Switzerland

Miller beer




7-Eleven Japan


Miller beer South Africa

Budweiser beer




7-Eleven Japan



Budweiser beer Belgium

Motel 6




7-Eleven Japan




Motel 6 France

Thinkpad laptops




7-Eleven Japan




Motel 6 France

Thinkpad laptops China

Blackberry cell phones




7-Eleven Japan




Motel 6 France


Blackberry cell phones Canada

DHL express delivery




7-Eleven Japan




Motel 6 France



DHL express delivery Germany

Captain Morgan Rum




7-Eleven Japan




Motel 6 France




Captain Morgan Rum Britain

Absolut Vodka




7-Eleven Japan




Motel 6 France





Absolut Vodka Sweden

Godiva chocolate


Name the location of each brandBrand Country where brand is based

7-Eleven Japan




Motel 6 France





Absolut Vodka Sweden

Godiva chocolate Turkey


Nature of Foreign Direct Investment

• 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 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).


Motives for Foreign Direct Investment

Market-seeking motives

• Gain access to new markets or opportunities

• Follow key customers

• Compete with key rivals in their own markets

Resource- or asset-

seeking motives

• Access raw materials

• Gain access to knowledge or other assets

• Access technological and managerial know- how available in a key market

Efficiency-seeking motives

• Reduce sourcing and production costs

• Locate production near customers

• Take advantage of

government incentives

• Avoid trade barriers


Market-Seeking Motives

• Gain access to new markets or opportunities. The existence of a large market motivates many firms to produce goods at or near customer locations. Boeing, Coca-Cola, IBM, McDonald's, and Toyota all generate more sales abroad than they do at home.

• Follow key customers. Firms often follow their key customers abroad to preempt other vendors from servicing them. E.g., Tradegar Industries supplies the plastic that its customer Procter & Gamble uses to make disposable diapers. When P&G built a plant in China, Tradegar established production there too.


Market-Seeking Motives (cont’d)

• Compete with key rivals in their own markets. Some MNEs choose to compete with competitors directly in their home markets. The purpose is to weaken and force the rival to expend resources defending its own market. E.g., Caterpillar entered Japan to tie up arch-rival Komatsu and hamper Komatsu’s ability to expand its activities in the USA.


Resource or Asset-Seeking Motives

• Access raw materials needed in extractive and agricultural industries. E.g., firms in the mining and oil industries must go where the raw materials are located.

• Gain access to knowledge or other assets. When Whirlpool entered Europe, it partnered with Philips to access a well-known brand name and distribution network.

• Access technological and managerial know-how available in a key market. The firm may benefit by establishing a presence in a key industrial cluster, such as the robotics industry in Japan, chemicals in Germany, fashion in Italy, and software in the U.S.


Resource Seeking Motives

Firms in the petroleum industry internationalize to access raw materials; in this case, oil reserves in areas with appropriate natural resources such as the Middle East. Pictured is an oil refinery in Saudi Arabia. Copyright © 2014 Pearson Education

Efficiency Seeking Motives

• Reduce sourcing and production costs by accessing inexpensive labor and other cheap inputs to the production process. This motive accounts for the massive development of manufacturing facilities in China, Mexico, Eastern Europe, and India.

• Locate production near customers. In the fashion industry, Spain’s Zara and Sweden’s H&M locate much of their garment production in key markets such as Spain and Turkey. H&M


Efficiency Seeking Motives (cont’d)

• Take advantage of government incentives. In addition to restricting imports, governments may offer subsidies and tax concessions to foreign firms to encourage them to invest locally.

• Avoid trade barriers. By establishing a physical presence within a country, the investor obtains the same advantages as local firms. The desire to avoid trade barriers helps explain why Japanese automakers set up factories in the United States (1980s).


Economies of Scale Long-run Average Cost


Key Features of Foreign Direct Investment

1. Represents substantial resource commitment

2. Implies local presence and operations

3. Firms invest in countries that provide specific comparative advantages.

4. Entails substantial risk and uncertainty

5. Direct investors deal more intensively with specific social and cultural variables in the host market.


World’s Most International Non-Financial MNEs


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 via 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. Copyright © 2014 Pearson Education

Large International Financial MNEs


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, Mexico, and Eastern

Europe for low-cost manufacturing and to easily access huge adjoining regional markets.


Inward FDI Performance Index, Advanced and Developing Economies, 2007–2010

Source: UNCTAD, World Investment Report 2011 (New York: United Nations, 2011) Permission itemNote: The exhibit shows the ratio of a country’s share in global FDI inflows to its share of global GDP. A value greater than 1 indicates the country receives more FDI than its relative economic size, a value below 1 shows the country receives less.


A. T. Kearney Global Services Location Index™

Country Financial Attractiveness

People Skills and

Availability

Business Environment

Total Score

India 313 248 130 691

China 259 233 137 629

Malaysia 276 124 197 598

Thailand 305 130 141 577

Indonesia 323 147 099 569

Egypt 307 120 137 564

Philippines 319 117 124 560

Chile 241 120 189 550

Jordan 299 091 159 549

Vietnam 321 102 124 547

Mexico 248 150 145 543

Brazil 218 183 137 539

Bulgaria 283 089 162 534

United States

047 271 215 533


Ethical Connections

• FDI offers numerous benefits to recipient countries. • FDI may produce side effects that harm the natural

environment, especially in countries with weak environmental laws. Pollution and ecological destruction may emerge alongside rapid economic growth.

• One MNE, a manufacturer of food additives, allowed untreated wastewater to flow into the ThiVai river in Vietnam. Resulting pollution nearly destroyed the livelihood of thousands of downstream farmers.

• MNEs must behave responsibly in their international dealings. Governments must not allow development goals to compromise citizen well-being.

Source: H. Nguyen and H. Pham, “The Dark Side of Development in Vietnam,” Journal of Macromarketing, 32, no. 1 (2012): 74-86.


Factors Relevant to Selecting Locations for FDI


Types of FDI

• Greenfield investment vs. mergers and acquisitions

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

• Level of integration: Vertical vs. horizontal FDI


Greenfield Investment vs. M&As

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

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

and

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


Mergers & Acquisitions

The Chinese computer maker Lenovo, whose Beijing factory is shown here, purchased IBM’s personal computer business for $1.25 billion and now earns more than two-thirds of its revenue from this ambitious acquisition. Copyright © 2014 Pearson Education

Toyota’s Factories in the United States


The Nature of Ownership

• Equity participation: Acquisition of partial 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.


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 Collaborative Venture

• A partnership between two or more firms

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

• Sometimes called partnerships or 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.


Equity vs. Project-Based Joint Ventures

• Equity Joint Ventures are normally formed when no one party has all the assets needed to exploit an opportunity. Typically, the local partner contributes a factory, market navigation know-how, connections, or low-cost labor.

• A project-based joint venture has a narrow scope and limited timetable. No new legal entity is created. Typically, partners collaborate on joint development of new technologies, products, or share other expertise with each other. Such cooperation helps them catch up with rivals in technology development.


Other Types of 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.


Advantages and Disadvantages of Collaborative Ventures


Managing Collaborative Ventures: Key Questions

• How dependent will we be on our partner?

• How will responsibilities and competencies be shared with the partner?

• Are our assets at risk? How can we protect them?

• What other risks do we face by partnering?

• Will we close growth opportunities due to this venture?

• How will the venture be managed? What burdens will

be created on managerial, financial, or other resources? Copyright © 2014 Pearson Education

A Systematic Process to International Business Partnering


Success Factors in Collaborative Ventures

• Half of all global collaborative ventures fail in the first 5 years of operations due to unresolved disagreements, confusion, and frustration. Thus, partners should: Be aware of cultural differences; Pursue common goals;

Pay attention to planning and management of the venture;

Safeguard core competencies; Adjust to shifting environmental circumstances.


Retailers: A Special Case of Internationalization

Retailers typically internationalize via FDI andcollaborative 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.


Barriers to Retailer Success Abroad

1. Culture and language barriers. E.g., differing product and service portfolios, store hours, store layouts, relations between management and labor.

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

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

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


Wal-Mart’s Mixed Experience

• Germany: Failing to understand the market, Wal-Mart could not compete with local firms and left the market.

• Mexico: Built huge U.S.-style parking lots. But most Mexicans lack cars, and city bus stops were far away, so shoppers could not haul their purchases home.

• Brazil: Families do their big shopping on payday. Aisles were too narrow to accommodate the rush.

• Argentina: Wal-Mart's red,white, and blue banners, reminiscent of the U.S. flag, offended local tastes.


Success Factors for Retailers

1. Advance research and planning. French retailer Carrefour spent 12 years building its business in Taiwan to better understand Chinese culture.

2. Establish logistics and purchasing networks in each market. Well-organized sourcing and logistics ensure inventory is always maintained.

3. Assume an entrepreneurial, creative approach. Virgin megastore expanded to Asia, Europe, and North America using creative approaches.

4. Adjust business model to suit local conditions. In Mexico, Home Depot packages merchandise to suit smaller budgets and offers flexible payment plans.



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Chapter 15

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