chapter summary (CHAPTER9 Foreign Direct Investment and Collaborative…
Foreign Direct Investment and Collaborative Ventures
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.
Firms that offer services – Such as lodging, construction, and personal care – must offer them when and where they are consumed.
Many support services – Such as advertising, insurance, accounting, and package delivery – are best provided at the customer’s location.
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.
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).
FACTOR SELECTING FDI LOCATION
PROFIT RETENTION FACTOR
+LEGAL AND REGULATORY
+HUMAN RESOURCES FACTOR
KEY FEATURES OF FDI
Represents substantial resource commitment.
Implies local presence and operations.
Firms invest in countries that provide specific comparative advantages.
Substantial risk and uncertainty.
Direct investors deal more intensively with specific social and cultural variables in the host market.
MARKET SEEKING MOTIVES
1.Gain access to new markets or opportunities
2.Follow key customers.
3.Compete with key rivals in their own markets.
RESOURCES 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.
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
FDI Provides Economies of Scale
Falling fixed costs. Many industries and productive tasks have high per-unit fixed costs that decline the more the task is performed. FDI helps concentrate production and/or results in high sales volumes.
Managerial resource efficiencies. Highly international firms employ a relatively fixed number of headquarters staff across more subsidiaries and affiliates.
Specialization of labor. FDI facilitates hiring more specialized workers, which increases efficiencies.
Financial economies. Large firms with extensive international operations usually can access capital at lower cost.
Licensing, Franchising, and Other Contractual Strategies
Licensing: An arrangement in which the owner of intellectual property grants another firm the right to use that property for a specified period of time in exchange for royalties or other compensation.
Franchising: Arrangement in which the firm allows another the right to use an entire business system in exchange for fees, royalties or other compensation.
Royalty: A fee paid periodically to compensate a licensor for the temporary use of its intellectual property, often based on a percentage of gross sales generated from the use of the licensed asset.
Typical Types of Intellectual Property
A licensing agreement specifies the nature of the relationship between the licensor (owner of intellectual property) and the licensee (the user).
A copyright gives the owner the exclusive right to reproduce art, music, literature, software, and other such works, as well as prepare derivative works, distribute copies, or perform or display the work publicly.
Master franchiser: An independent company authorized to establish, develop, and manage the entire franchising network in its market. E.g., McDonald's in Japan.
ADVANTAGES AND DISADVANTAGES
Advantages for licensor
Low effort, once established
Low-cost initial entry strategY
Disadvantages for licensor
Performance depends on the foreign licensee
Licensor has limited control over its asset(s) abroad
Runs the risk of creating a future competitor
Most typical arrangement is business format franchising, in which franchisor transfers to the franchisee a total business method – including production and marketing methods, sales systems, procedures, training, and the use of its name
EXPORTING AND GLOBAL SOURCING
-export means that a country export goods to the other country for sale.
-it must have the strategy to export to the other country that has different culture, environment, policies and other.
METHOD OF PAYMENT
Export Intermediation Options
ADVANTAGE AND DISADVANTAGES OF EXPORTING
Increase sales volume; improve market
Generate better profit margins.
Increase economies of scale.
4 .Diversify customer base.
Stabilize sales fluctuations.
1.offers fewer opportunities to learn about customers, competitors, and other aspects of foreign markets.
dedicate new capabilities in international sales contracts and transactions, international financing methods, and logistics and documentation, all of which can strain organizational resources.
Exposes the firm to tariffs and other trade barriers as well as fluctuating exchange rates.
SOURCES OF EXPORT FINANCING
BUYERS AND SUPPLIER
INDIRECT EXPORTING 2. DIRECT EXPORTING
COMPANY-OWNED FOREIGN SUBSIDIARY
Quotation or pro forma invoice 2. Commercial invoice 3.Bill of lading 4. Shipper's export declaration 5.Certificate of origin 6. Insurance certificate
CASH 2. OPEN ACCOUNT 3. LETTER OF CREDIT
Types of Exporting Intermediaries
Export management company (EMC)