Global Business Environment

Unit 25

Lecture 11
Forms and Ownership of
Foreign Production
 LECTURER INFORMATION
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 LECTURE CONTENTS
I. Why Export and Import May Not Suffice

II. Why and How do Companies Make Wholly Owned FDI

III. Why Companies Collaborate

IV. Forms of and Choice of Collaborative Arrangements

V. Why Collaborative Arrangements Fail or Succeed

I. Why Export and Import May Not
Suffice
Companies may find more advantages to locate production in foreign countries
than export to them

1. When production abroad is cheaper than at home

2. When transportation costs are too high for moving goods or services internationally

3. When companies lack domestic capacity

4. When products and services need to be altered substantially to gain sufficient
consumer demand abroad
5. When governments inhibit the import of foreign products

6. When buyers prefer products originating from a particular country

When It’s cheaper to produce abroad

Producing products in their home markets may be too expensive

⇒ Turkey has been a growing market for automobiles.
⇒ It is generally less expensive to produce the vehicles in Turkey than to export them
there because the country’s skilled laborers and sophisticated engineers cost less and
are willing to work more days per year and longer hours per day than workers in the
home countries.
⇒ Automakers (e.g., Toyota, Renault, Fiat Chrysler, Ford) and many of their parts
suppliers have established Turkish production to serve that market.
When Transportation costs too much

The cost of transportation added to production costs makes some products

and services impractical to export
⇒ The more distant the market, the higher the transportation costs
⇒ The higher those are relative to production costs, the harder it is for
companies to develop viable export markets.
When Domestic Capacity isn’t Enough

A company with excess capacity may export effectively as long as the excess
exists
⇒ Its average cost of production per unit usually falls as it uses more of its
capacity
⇒ This decrease continues only as long as there is unused capacity.
When Products and Services Need Altering

Product alterations for foreign markets

⇒ Require additional investment,
⇒ May lead to foreign production of the products.
When Trade Restrictions Hinder Imports

Despite worldwide reduction in overall import barriers, there are still many
import restrictions
⇒ India charges a high duty on fully built imported cars
⇒ Regional or bilateral trade agreements may also attract direct investment
because they create expanded markets that may justify scale economies
When Country of Origin Becomes an Issue

Exporting to countries where consumers prefer to buy goods from certain

countries is difficult
⇒ Consumers may also believe goods from certain countries are superior, like
German cars and Italian fashion
⇒ Companies may find advantages in placing production where their output
will best be accepted
II. Why and How do Companies Make
Wholly Owned FDI
Reasons for Wholly Owned Foreign Direct Investment

Market Failure
⇒ Companies may be inadequately equipped to deal efficiently with the entry
company’s technology
⇒ They may know too little about the entering company to entice them to
consign sufficient resources to a collaboration.
Reasons for Wholly Owned Foreign Direct Investment

Internalization - transactions cost theory

⇒ Different operating units within the same company are likely to share a common
corporate culture, which expedites communications
⇒ The company can use its own managers, who understand and are committed to
carrying out its objectives
⇒ The company can avoid protracted negotiations with another company on such
matters as partner responsibilities and how each will be compensated for
contributions
⇒ The company can avoid possible enforcement problems.
Reasons for Wholly Owned Foreign Direct Investment

Appropriability
⇒ The idea of denying rivals access to resources
⇒ Capital, patents, trademarks, and management know-how
⇒ Coca-Cola collaborates with partners all over the world, but it
steadfastly refuses to collaborate in concentrate production
because its formula is too critical to the company’s competitive
viability
Reasons for Wholly Owned Foreign Direct Investment

Freedom to Pursue a Global Strategy

⇒ A wholly owned foreign operation permits a company to more easily
participate in a global strategy
⇒ A U.S. company owning 100 percent of its Brazilian operation might be able to
take actions that could deal more effectively with competitors and customers
globally
Acquisition versus Greenfield
Making Greenfield
Acquisition
Investments
• gaining vital resources • host governments
that are otherwise hard to discourage acquisitions
develop • it is easier to finance
• making financing easier at • available acquisitions are
times performing poorly
• adding no further capacity • personnel in acquiring and
to the market acquired firms may not
• avoiding start-up problems work well together.
III. Why Companies Collaborate
General Motives for Collaborative Arrangements

To Avoid or
To Spread and To Specialize in
Counter
Reduce Costs Competencies
Competition

To Secure
To Gain
Vertical and
Knowledge
Horizontal Links
International Motives for Collaborative Arrangements

To Gain To Overcome
To Diversify
Location-Specific Governmental
Geographically
Assets Constraints

To Minimize Risk
Exposure
 IV. Forms of and Choice of
Collaborative Arrangements
Some Considerations in Choosing a Form

Trade-offs and Limitations

⇒ Each operating mode brings both advantages and disadvantages
⇒ Companies have a wider choice of operating mode when they hold unique
and needed capabilities.
Some Considerations in Choosing a Form

What’s the Purpose?: Alliance Types

⇒ Scale alliances: provide efficiency for partners by pooling similar operations.
⇒ Link alliance: firms use their partners’ complementary resources to expand
into a new business.
⇒ Vertical alliance: connects firms in different links of their value chains
⇒ Horizontal alliance: enables each partner to extend its product offerings on
the same level of the value chain.
Some Considerations in Choosing a Form

Prior Company Expansion

⇒ Companies’ experience and assets in a foreign country influence their choices
of operating mode when introducing new products or businesses.

Compensation
⇒ Collaboration in foreign operations implies less control and a sharing of
profits.
 Point and Counterpoint:
Should Countries Limit Foreign Control
of Key Industries?
Licensing
1. Patents,
2. Copyrights for
inventions, formulas, 3. Trademarks, trade
literary, musical, or
processes, designs, names, brand names
artistic compositions
patterns

5. Methods,
4. Franchises,
programs,
licenses, contracts
procedures, systems
Licensing

Major Motives for Licensing

⇒ Gain faster start-up
⇒ Lower costs
⇒ Access to additional resources
Licensing

Payment Considerations
⇒ The value to the licensee will be greater if potential sales are high.
⇒ Potential sales depend on such factors as the size of the sales territory and
the longevity of the asset’s market value.
Licensing

Licensing to Subsidiaries
⇒ Parent and subsidiary legal separation and the potential effect on taxes.
Franchising

Franchise Organization
⇒ A franchisor may deal directly with individual franchisees abroad
⇒ Set up a master franchise that has rights to open outlets on its own or to
develop subfranchisees in the country or region.
Franchising

Franchisors face a dilemma

⇒ Inadequacy of local supplies may hamper global product uniformity.
⇒ The more global standardization, the less acceptance in the foreign country.
⇒ The more adjustment to the foreign country, the less the franchisor is
needed.
Turnkey Operations

Turnkey operations are

⇒ Most commonly performed by industrial-equipment, construction, and
consulting companies.
⇒ Often performed for a governmental agency.
Turnkey Operations

Contracting to Scale
⇒ Frequently for billions of dollars
⇒ A few very large companies account for a significant market share

Making Contacts
Marshaling Resources
Joint Ventures (JVs)
Possible Combinations
⇒ Two companies from the same country joining together in a foreign market (e.g., NEC and
Mitsubishi [Japan] in the United Kingdom)
⇒ A foreign company joining with a local company (e.g., Barrick [Canada] and Zijin Mining
Group in China)
⇒ Companies from two or more countries establishing a joint venture in a third country (e.g.,
Mercedes-Benz [Germany] and Nissan [Japan] in Mexico)
⇒ A private company and a local government forming a joint venture, or mixed venture (e.g.,
Mitsubishi [Japan] with the government-owned Exportadora de Sal in Mexico)
⇒ A private company joining a government-owned company in a third country (e.g., BP
Amoco [private British-U.S.] and Eni [government-owned Italian] in Egypt)
Equity Alliances
An equity alliance is a collaborative arrangement in which at least one of
the companies takes an ownership position (almost always minority) in the
other(s).
The purpose of the equity ownership is to solidify a collaborating contract, such as a supplier–buyer
contract, so that it is more difficult to break—particularly if the ownership is large enough for the
investing company to secure a board membership
V. Why Collaborative Arrangements Fail
or Succeed
Reasons for Failure

Relative
Divergent
importance to Control problems
objectives
partners

Comparative
Differences in
contributions and
culture
appropriations
Helping Collaborative Operations Succeed

Negotiating
Fitting modes to Finding and
agreements: The
country evaluating
question of
differences partners
secrecy

Controlling Adjusting the

Evaluating
through contracts internal
continually
and trust organization
 Looking to the Future:
Growth in Project Size and Complexity
 Link to the Requirements of P6 + M4:
Design the value chain for the company in new market with
specific product/service (if company have a wide range of products
and services).
Thank you for listening!