International Business

Chapter Eight
Direct Investment and
Collaborative Strategies
Alternative Types of Foreign
Operations
• Foreign-owned operations (FDI) may be established
either as start-ups (greenfield ventures) or via
acquisition.
• Foreign-owned operations (FDI) may take the form
of wholly-owned subsidiaries or joint ventures.
• Nonequity (collaborative) types of foreign operations
include licensing and other contractual forms of
business ventures.
The resource-based view of the firm holds that each
company has a unique combination of competencies and
can maximize its performance by concentrating on those
activities that best fit its competencies.
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Reasons Why Foreign Production
May Be Preferable to Exporting
• Production costs are cheaper abroad than at home.
• Transportation costs to move products internationally
are relatively high.
• Domestic capacity is insufficient.
• Products must be substantially altered in order to
capture sufficient foreign demand.
• Governments restrict or prevent the importation of
foreign products.
• Customers prefer products originating from a particular
foreign country.

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Foreign Direct Investment:
Control Objectives
Companies generally want controlling interests in their
foreign operations for three reasons:
• internalization objectives
[It’s more profitable to control operations internally
(transaction cost theory);
it’s strategically preferable to control operations internally.]
• appropriability objectives
[Foreign investment is favored as a way to prevent potential
competitors from gaining access to proprietary information
(intellectual property and managerial know-how).]
• globalization objectives
[Foreign investment provides the freedom to pursue global or
transnational objectives by optimizing corporate strategies.]

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Foreign Direct Investment:
Comparative Advantages

Acquisitions and start-ups offer largely

opposite benefits to a firm.
• The advantages of an acquisition may include:
– existing facilities, an existing labor force, and
knowledgeable local management
– existing goodwill and brand identification
– an immediate cash flow
– access to local financing
– the avoidance of excess capacity
[continued]

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• The advantages of a start-up, i.e.,
a greenfield venture, may include:
– the existence of first-mover advantages
due to a lack of viable competitors and
available acquisitions
– the opportunity to establish new (more efficient)
facilities, to escape punitive labor contracts, to hire
and train fresh labor forces, and to implement com-
patible managerial styles and practices, i.e.,
the avoidance of carry-over problems
– the existence of government incentives
– the availability of development capital
– the creation of additional capacity

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Collaborative Arrangements:
Basic Motives
Collaborative arrangement: a formal,
long-term contractual agreement
between or amongst firms
• Each partner in a collaborative arrangement has its
own primary objective for operating internationally
and its own motive for collaborating.
– Scale alliances: provide efficiency through the
pooling of similar assets so that partners can carry
out business activities in which they already have
experience
– Link alliances: use complementary resources to
expand into new business areas
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Collaborative Arrangements:
General Motives
• To spread and reduce costs
[potential volume is relatively low; excess capacity exists]
• To specialize in core competencies
[licensing may yield returns on products that lie
outside of a firm’s strategic priority]
• To avoid or counter competition
[markets are too small to support many competitors;
firms combine to challenge a market leader]
• To secure vertical and horizontal links
[savings and supply assurances exist across the value chain;
horizontal economies of scope exist in distribution]
• To gain knowledge
[learn about a partner’s technology, operating
methods, and/or home markets]

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Collaborative Arrangements:
International Motives
• To gain location-specific assets
[desire to overcome cultural, political/legal,
competitive, and/or economic barriers]
• To overcome legal constraints
[prohibition of foreign ownership in particular sectors;
regulations affecting operations and profitability;
effective protection of intellectual property rights]
• To diversify geographically
[greater and faster spread of assets across countries;
smoothing of sales and earnings cycles]
• To minimize exposure in risky environments
[secure the safety of foreign assets and earnings;
smooth risk across countries]

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Fig. 14.4: Relationship of Strategic Alliances
to Companies’ International Objectives

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Collaborative Arrangements:
Basic Considerations
Dependencia theory: the out-of-vogue idea that emerging
economies essentially have no power as host countries
when dealing with large MNEs
Bargaining school theory: the idea that the negotiated
terms of foreign investments depend upon investors’
and host countries’ needs for one another’s assets
• When a firm is highly diversified and/or its operations
are limited, existing foreign facilities and operations may
not complement its planned expansion.
• The more a firm depends upon collaborative arrange-
ments, the greater the likelihood that it will lose control
over decisions regarding quality, flexibility, revenues,
competition, expansion, and information-sharing.
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Collaborative Arrangements:
Basic Types
Licensing: a licensor grants a licensee rights to
intangible property to use in a specified area for
a specified period of time in exchange for a fee
– Intangible property may be classified as:
• patents, inventions, formulas, processes, designs, or patterns
• copyrights for literary, musical, or artistic compositions
• trademarks, trade names, or brand names
• franchises, licenses, or contracts
• methods programs, procedures, or systems
• Cross-licensing: firms in various countries exchange
technology, rather than compete with each other with
every product in every market
Many licenses are given to firms owned in whole or in part by the licensor
as a means of legally transferring technology to a subsidiary.
[continued]

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Franchising: a specialized form of licensing in which
the franchisor grants an independent franchisee the
use of essential intangible property and opera-
tionally assists the business on a continuing basis
– Franchise success is derived from three factors:
• product standardization
• effective cost control
• high recognition
• The two partners act like a vertically integrated firm
because (i) they are interdependent and (ii) each
produces a part of the product that ultimately reaches
the customer.
A franchisor may deal directly with its foreign franchisees or
set up a master franchise with the right to open outlets
and/or develop sub-franchises on its own.
[continued]

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Management contract: an arrangement in which a
contractor provides management personnel to per-
form general or specialized functions to a client for
a fee
• On the one hand, host countries and clients get needed
assistance without foreign ownership or control of oper-
ations; on the other, the management firm is able to
generate revenues without making a capital investment.
Turnkey operation: an arrangement in which one firm
contracts with another to build complete, ready-to-
operate facilities
• Usually, suppliers of turnkey facilities and operations are
industrial-equipment manufacturers and construction
companies; projects may cost billions of dollars; custo-
mers are most often governments or large MNEs.
[continued]

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Joint venture: a direct investment in which two or
more partners share ownership
– Forms of joint ventures include:
• consortiums, i.e., the joining together of several entities to combine
resources and perhaps pursue a major undertaking
• two firms from the same country joining together in a foreign
market
• firms from two or more countries establishing an operation in a
third country
• a private firm and a local government
• a private firm joining a government-owned firm in a third country

Equity alliance: an arrangement in which at least one

of the collaborating partners takes an ownership
position (usually a minority) in the other(s)
• The purpose of an equity alliance is to solidify a collab-
oration, thus making it more difficult to break a contract.
The more partners in a joint venture or an equity alliance,
the more complex the management of the arrangement.
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 Fig. 14.5: Control Complexity
Related to Collaborative Strategy

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Collaborative Arrangements:
Problems
• Partners view the importance of a collaborative arrangement
very differently.
• Partners have different objectives for a collaborative venture,
particularly as a venture evolves over time.
• Partners disagree on control issues, or provide insufficient
direction to a venture.
• Partners’ abilities to contribute, and their tendencies to
appropriate each others’ contributions, change over time.
• Differences in both national and corporate cultures lead to (i)
incompatible operations or (ii) conflicting evaluations of the
success of a venture.
Although joint ventures from culturally distant countries tend
to survive at least as well as those between partners from
similar cultures, nearly half of all joint ventures eventually fail.

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Fig. 14.6: Alternative Dissolution of
Joint Ventures

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Managing Foreign Arrangements

As a collaborative venture evolves, partners need

to reassess the following factors in light of
(i) their own resource bases and
(ii) external environmental changes:
• the costs and other consequences of evolving to
different modes of operation at various locations
• the proven abilities of potential partners, the resources
they offer, and their willingness to work together
• pre-agreements designed to protect technology and the
secrecy of financial terms, i.e., the negotiating process
[continued]

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• contractual provisions concerning:
– the termination of the agreement if parties do not adhere to its
directives
– methods of testing for quality
– the geographical limitations of the venture’s use
– which partner will manage which parts of the operation
– the future commitments of each partner
– the ways in which each partner will buy from, sell to, or use
intangible assets that come out of the collaborative venture
• the stated expectations and actual performance of the
venture
• the need for a change in the type of collaboration
Over time, even though a partner is doing what is expected,
a firm may determine that a collaborative venture is
no longer in its best interest.

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Fig. 14.7: Country Attractiveness—
Company Strength Matrix

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Implications/Conclusions

• Motivations for collaborative arrangements specific to

international operations are to gain location-specific
assets, to overcome legal constraints, to diversify across
countries, and to minimize exposure in risky
environments.
• Although the type of collaborative arrangement a firm
chooses should match its strategic objectives, the choice
will often mean a trade off amongst objectives.
• Each partner to a collaborative arrangement has a say
in critical decisions, but the global performance of each
partner may be improved in different ways.

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• The forms of foreign operations differ in terms of how
many resources a firm commits and the proportion of
resources committed at home rather than abroad.
• A firm may use more than one mode of operation within
the same country, as well as in different countries or for
different products.
• A common motive for jointly owned operations is to take
advantage of complementary resources that firms have
at their disposal.
• The dissolution of collaborative ventures can be planned
or unplanned, friendly or unfriendly, mutual or non-
mutual.

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