International Business

Chapter Fourteen
Direct Investment and
Collaborative Strategies
2
Introduction
Mode of entry (entry strategy of the
company)
Equity arrangements (e.g., joint venture
or wholly owned subsidiary)
Nonequity arrangements (e.g.,
licensing, franchising, management
contracts, or turnkey).
Firms opt for collaborative arrangements
when exporting as an alternative may not
be feasible
Companies collaborate for various
reasons-depends on the entry
motive/strategy
3
Why Companies Collaborate:
Reasons for Collaboration
To spread and reduce costs
To specialize in competencies
To avoid or counter competition
To secure vertical and horizontal links
To gain knowledge
To gain location-specific asset
To overcome governmental constraints
To diversify geographically
To minimize exposure in risky environments
Types of Collaborative
Arrangements (Entry Strategies)
Licensing
Franchising
Management contracts
Turnkey operations
Joint venture
Equity Alliance
Consortium
Wholly-owned subsidiary (WOS)

Criteria for Evaluating
Collaborative (Entry) Strategies
Legal
Cost
Risk
Control
Competition
Experience
Product/industry
Complexity
Country factors
Evaluating Collaborative Arrangements
(Entry Strategies)
Country
Complexity
Product
Experience
Competition
Control
Risk
Cost
Legal
WOS Joint
Venture
Turnkey Mgt
contracts
Franchising Licensing Exporting
7
Foreign Direct Investment
Acquisitions vs. Greenfield Venture
Motives of FDI
Internationalization theory
Appropriability theory
Licensing
Company grants rights to intangible
property to another company to use in a
specific geographic area for a specified
period
Licensing involves Patents, Formulas,
Designs, Copyrights, Trademarks, Brand
names, Franchises, Methods/programs
Why a company goes for licensing? What
factors or circumstances influence a
companys decision

Franchising
Franchising: specialized form of licensing
in which franchisor not only sells an
independent franchisee the use of
intangible property essential to the
franchises business to assist in areas such
as promotion and training.
Examples: McDonalds, Subway, Wal-Mart,
Intercontinental Hotels
Management Contract
Management contracts are means by
which a company may transfer
management talent to assist a foreign
company for a specified period for a set
fee
Host country gets assistance without any
equity involvement

Turnkey Operations
Arrangement in which one company contracts
another to build complete, ready-to-operate
facilities
Typically very large contracts like construction
projects, government projects
Requires top-level contacts abroad
Motivations
Export financing
Managerial and technological quality
Expertise
Turnkey operator are specialists in working in remote
areas often
Joint Venture
Type of ownership sharing popular
among international companies, cane
between companies or governments
When more than two companies are
involved it becomes a consortium
Contract is important, who is doing
what
Sharing resources and trust is the
key
Wholly-Owned Subsidiary (WOS)
Company has 100% equity
Mostly adopted for control (operations,
license, technology etc.)
Not all countries allow this
When a company should opt for JV over
WOS (or vice versa)?

Chapter 14: Discussion Questions
1. What is a collaborative arrangement?
Why firms collaborate? Explain their
reasons for collaboration.
2. Explain the criteria for evaluating
collaborative strategies.
3. When would a firm opt for licensing over
joint venture? Make specific arguments.
(Similar questions can also be asked for
other strategies, one over the other).


15
Control Complexity Related to
Collaborative Strategy
16
Country AttractivenessCompany
Strength Matrix