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IBUS 5003 Global Business

Week 9
Entry Modes:
Trade, Contractual Arrangements,
FDI, Collaborative Ventures

Presented by:
Dr Connie Chui S. Chan

Internationalization Process
• Exporting is usually the firm’s first foreign entry mode (Uppsala model)

• Popular with SMEs: low risk, low cost and flexible

• Expansion through other entry modes with greater involvement

• For some product or services, FDI is more appropriate

• Fragile, perishable, transport cost, support and sales services

• Alternatives: contractual arrangement, joint ventures

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Agreements
- Licensing
- Franchising

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Licensing
• Owner of intellectual property grants another firm the right to use that
property for a specified time in exchange for royalties / compensation.

• A licensing agreement specifies the nature of the relationship between

the licensor (owner of intellectual property) and the licensee (the user).

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Examples of Licensing
• Intel licensed the right to a new process for manufacturing computer chips to a German firm.

• Warner licenses images from the Harry Potter books and movies to companies worldwide.

• Disney licenses the right to use its cartoon characters in producing shirts and hats to clothing
manufacturers in Asia.

• Planters and Sunkist are owned by US firms and sold in the UK and Japan via licensing.

• Coca-Cola has a licensing agreement to distribute Evian bottled water in the US on behalf of
the brand’s owner, French company Danone.

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Franchising
• The franchisor transfers to the franchisee a total business method –
including production and marketing methods, sales systems,
procedures, training, and the use of its name.

• More comprehensive and longer-term than licensing.

• Master franchiser: An independent company authorized to establish,

develop, and manage the entire franchising network in its market.
E.g., McDonald's in Japan.

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Emerging Markets
• Successful franchisors carefully study economic, demographic, legal, and
cultural dimensions before entry to target markets.

• China & India with large population

• Challenges: evolving laws, capital, disposable income, eating habits

Global Middle
Class Consumption

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Other Contractual Arrangements

Management Contracts
An organization may pay for managerial assistance under a management
contract when it believes another can manage its operation more efficiently
than it can, usually because the contractor has industry-specific capabilities.

Turnkey operations
Companies handling turnkey operations are usually industrial-equipment
manufacturers, construction companies, or consulting firms.
Manufacturers sometimes provide turnkey services when they are not
allowed to invest.
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Think about

• Advantages and Disadvantages of

- Licensing

- Franchising

• Why and when do firms choose these contractual agreements?

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International
Collaborative Ventures

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International Collaborative Ventures

• Between two or more firms

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

consortium projects, cross-licensing agreements, cross-distribution
alliances.

• Sometimes called partnerships or strategic alliances.

• JV can be combined with FDI

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Main Types of Joint Ventures

• Equity JV is normally formed when no one party has all the assets
needed to exploit an opportunity. Results in the creation of a new legal
entity.

• Project based has a narrow scope and limited timetable. More flexible
than equity.

• Consortium usually comprise multiple partners (from different countries)

who have specific skills and capabilities necessary for large scale
ventures.

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Why ICV?
• Mitigate substantial risk and high costs of international business.

• Partners pool resources and capabilities to create synergies. Can

achieve projects that exceed the capabilities of the individual firm.

• Help to reduce liability of foreignness and risk.

• Increasingly sought as an entry strategy since the 1980s.

• Access to foreign partners’ local knowledge, capital, distribution

channels, technology or marketing assets.

• Overcome government regulations on foreign ownership.

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Factors for Collaborative Ventures

50% of all global collaborative ventures fail in the first 5 years of operations
due to unresolved disagreements, confusion, and frustration.

Success:
• Awareness and adaptation to differences (more than cultural)
• Assess partners (continuously): capabilities, common goals
• Negotiation, contract, trust
• Internal reorganisation, adjust to changes
• Safeguard firm’s own core competencies
• What are the disadvantages?

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Foreign Direct Investment

- Characteristics
- Motivations

- Theories

- Different types of FDI

- Examples

- Benefits and risks

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Foreign Direct Investment

A strategy in which the firm establishes a physical presence abroad by

merger and acquisition (M & A) of productive assets such as capital,
technology, labour, land, plant, and equipment.

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Key Features of Foreign Direct Investment

• A substantial resource commitment

• Physical local presence and operations

• Invest in countries that provide specific comparative advantages

and exercise firm-specific advantages.

• Deal with risk and uncertainty in the host country

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Examples of FDI
Volkswagen spent $1 billion to build a factory in Poland to
manufacture delivery vans.

The British pharmaceutical firm GlaxoSmithKline purchased the

global Vaccines division of Switzerland’s Novartis for $5.25 billion.

Denmark’s Lego Group spent more than €100 million to build a toy
factory in China.

Japan’s Toshiba formed a joint venture with the U.S. firm United
Technologies to establish R&D centres in Europe and India to
support joint innovation in the heating and air conditioning
industry.
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What are the Motivations for FDI Location choice?

Motives ?

Market Efficiency
seeking seeking

Resource or
asset seeking Strategic assets, technology, brand, skills

The University of Sydney Source: Dunning, J. H. JIBS, Location and the multinational enterprise: A neglected factor?

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Types of FDI
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 e.g. Alcatel & Lucent, Daimler & Chrysler, Disney & Fox.
(usually require government approval)

Acquisition:
Direct investment or purchase an existing company or facility e.g. Microsoft
acquired LinkedIn, Amazon acquired Whole Foods, Lenovo acquired IBM-PC

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FDI Ownership
Wholly owned vs equity joint venture vs leasing

- Toyota WOS / factories in USA

- Joint venture: tap associate’s local knowledge

- Leasing: hotels; buildings; land; aircraft; facilities

Ord River –
Shanghai Zhongfu

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Value chain Integration

Vertical integration
The firm owns, or seeks to own, multiple stages of
(upstream of downstream) value-chain for producing, selling
and delivering a product.
e.g. 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. Marriott's 2016 acquisition of Starwood Hotels & Resorts Worldwide

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Why FDI?
Using theories to explain the drivers of FDI

Economics

International Business

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Monopolistic Advantage Theory

• Argues that MNEs prefer FDI because it provides the firm with control
over resources and capabilities in the foreign market, and a degree of
monopoly power relative to foreign competitors.

• Key sources of monopolistic advantage include proprietary knowledge,

patents, unique know-how, and sole ownership of other assets.

Examples

Novartis earns substantial profits by marketing various patent medications through

its subsidiaries worldwide.

Sony’s unique knowledge enabled it to invent numerous popular products.

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Internalization Theory
• Explains how the MNE chooses to acquire and retain one or more value-
chain activities inside itself.

• “internalization” provides the MNE with greater control over its foreign
operations.

• Internalization avoids the drawbacks of dealing with external partners, such

as reduced quality control and the risk of losing proprietary assets to
outsiders.
Example
In China, Intel owns much of its value chain, to ensure that Intel knowledge, patents, and
other assets are not misused or illicitly obtained by potential rivals.

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Internalization Theory
• Buckley and Casson (1976) demonstrate that the MNE organise
bundles of activities, internally across borders, such that it is able to
develop and exploit firm-specific advantages (FSAs) in knowledge and
other types of intermediate products.

• Internalisation is an alternative to the external market for developing

and exploiting knowledge internationally.

• FDI takes place when benefits exceed costs.

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Dunning’s Eclectic Paradigm

• Conditions that determine whether a company will enter a foreign
location via FDI: O – L – I Advantages

• O: knowledge, skills, capabilities, relationships, or physical assets that the

firm owns and which are the basis of its competitive advantages.

• L: similar to comparative advantages, they are specific advantages that

exist in the country that the MNE has entered, or is seeking to enter, such as
natural resources, low-cost labor, or skilled labor.

• I: control derived from internalizing foreign-based manufacturing,

distribution, or other value chain activities.

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Examples: FDI to China

• Sony manufacturing
• Telsa giga factories

• O : firm’s stock of knowledge, capabilities, R&D and technology

• L: take advantage of China’s low-cost and highly skilled labour

• I : maintain control over knowledge, IP, processes & quality of its products.

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Factors Relevant to Selecting Locations for FDI

Sources: John H. Dunning, Explaining International Production (New York: Routledge, 2015); Daniel Hoi Ki Ho and Peter Tze Yiu Lau, “Perspectives on Foreign Direct Investment Location
Decisions: What Do We Know and Where Do We Go from Here?,” International Tax Journal, 33 No. 3 (2007), pp. 39–48; Robert Green and William Cunningham, “The Determinants
of US Foreign Investment: An Empirical Examination,” Management International Review, 15 No. 2-3 (1975), pp.,113-20; Franklin Root, Entry Strategies for International Markets,
(Hoboken, NJ: John Wiley & Sons, 1994).
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Rugman’s FDI decision framework

FSA/CSA Matrix applies internalisation theory
• Firm specific advantages (FSA), including internalisation, relative to other firms.
• Country specific advantages (CSA) relative to other countries.

FDI Internationalisation Strategies

– Cell 1 : CSA’s important to FDI success

– Cell 4 : FSA’s important to FDI success

– Cell 3 : combination of CSA’s and FSA
important to FDI success

* Relevant to the study of emerging market firms

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Quiz: FDI, JV, Contracts, Trade

Entry Modes High Medium Low

Control

Commitment

Flexibility

Risk

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Classification of Entry Strategies

– Based on Degree of Control for Focal Firms

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FDI inflows: global and by group of economies

2007 - 2018

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Reminder

• Group assignment is due on 2 November 5 pm

• Please coordinate with group members and check the files

• Only one representative needs to submit the report & slides

• Ensure you have followed all the guidelines

• Save the files according to your tutorial times, tutor’s name and title

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Week 10

Lecture
Global Operations

Tutorial
Group Presentation (1)
eReserve, textbook readings and course contents

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