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Direct

Investment
and
Collaborative
Ventures
What is Foreign Direct
Investment
?
A strategy in which the firm establishes a
physical presence abroad through acquisition of
productive assets such as capital, technology,
labor, land, plant and equipment.
International Portfolio
Investment
Passive ownership of
foreign securities such
as stocks and bonds to
generate financial
returns.
Joint
Venture
A form of collaboration between two or more firms to create a
new, jointly owned enterprise.
Factors to
consider in
Choosing FDI
Locations
1 Political and
Governmental
Factors
Extent of
Political bureaucracy
and red tape
Stability

Openness Transparency
to foreign and
investment corruption
2 Human Resources
Factors
Cost,
Availability
and quality
Availability & of
productivity managerial
of skilled workforce
labor
Involvement
of labor Employment
unions Regulations
3 Infrastructural

Availability
Factors
Cost,
availability
and quality and quality
of local of utilities &
manufac- finance
turing Efficiency Quality of
of physical marketing
distribu- and
tion distribution
4 Economic
Factors

Cost of Stability of
land and currency
facilities
State of Extent of
the local regional and
economy free trade
5 Legal and
regulatory factors

Regulation Intellectua
on FDI & l property
technology collection
transfer
Nature of Extent of
legal tarifs, other
systems trade
and laws barriers
6 Profit Retention
Factors
Complexity
Types and of tax
level of system
taxes

Tax rates
Rate of
for profit
repatriation inflation
7
Size and
Market
Factors

growth of Proximity to
national key export
market Size and
growth of
regional
market
Characteristics
of Foreign Direct
Investment
FDI is an advanced form of foreign market entry
with distinctive characteristics. Key features of FDI
include:

• Substantial resource commitment.


• Local presence and operations
• Investment in countries that provide
specific comparative advantages.
• Intense dealings in the host market.
• Intense dealings in the host market.
• Substantial risk and uncertainty.
• Substantial resource commitment. As the ultimate
internationalization strategy, it is far more taxing on the
firm’s resources and capabilities than any other entry
strategy.

• Local presence and operations. With FDI, the firm


establishes itself directly in the market, leading to direct
contact with customers, intermediaries, facilitators, and
governments. Some firms concentrate operations in one
or a few locations; other disperse their FDI among many
countries. The MNE network may become so extensive
that the firm effectively loses its nationality.
• Investment in countries that provide specific
comparative advantages. Managers invest in
countries based on the advantages these locations
offer. Thus, firms tend to perform R&D in countries with
leading-edge knowledge for their industry, source from
countries home to suppliers that provide superior
goods, build factories in location with low labor costs,
and establish marketing subsidiaries in countries with
excellent sales potential.
• Intense dealings in the host market. Firms that
enter through FDI necessarily deal more intensely with
culture and other aspects of the host country. MNE’s
with high-profile, conspicuous operations are especially
vulnerable to close public scrutiny of their actions. To
minimize potential problems, managers often favor
investing in countries that are culturally and
linguistically familiar.
• Substantial risk and uncertainty. Establishing a
permanent, fixed presence abroad makes the firm
vulnerable to country risk and intervention by local
governments. In addition to local labor practices, direct
investors also must contend with local economic
condition such as inflation and recessions.
Ethics, Social
Responsibility, and
FDI
• FDI offers numerous benefits to recipient
countries.
• Many MNEs are responding to global
sustainability agendas.
Motives for FDI
and
Collaborative
Ventures
Gain access
1
to new
Market-
Seeking
Motives
markets or
opportunities. The existence of a substantial
market motives many firms to produce offerings
at or near customer locations. Local production
improves customer service and reduces the cost
of transporting goods to buyer locations.
Market-
Seeking
Motives
Follow key customers. Firms often follow their
key customers abroad to preempt other vendors
from serving them. Establishing local operations
also positions the firm to serve customer needs
better.
Market-
Seeking
Motives
Compete with key rivals in their own markets.
Some MNE’s may choose to confront current or
potential competitors directly, in the competitors’ home
market. The strategic purpose is to weaken the
competitor by forcing it to expend resources to defend
its market.
2
Resource-or
Asset-Seeking
Motives
Raw materials needed in extractive and
agricultural industries. Firms in the mining, oil, and
crop-growing industries have little choice but to go
where the raw materials are. In the wine industry,
companies establish wineries in countries suited for
growing grapes, such as France and Chile. Oil
companies establish refineries in countries with
abundant petroleum reserves such as Kuwait.
Resource-or
Asset-Seeking
Motives
Knowledge or other assets. By establishing a local
presence through FDI, the firm is better positioned to
deepen its understanding of target markets. FDI
provides the foreign firm better access to market
knowledge, customers, distribution systems, and
control over local operations. By collaborating in R&D,
production, and marketing, the focal firm can benefit
from the partner’s know-how.
Resource-or
Asset-Seeking
Motives
Technological and managerial know-how. The firm may
benefit by establishing a presence in a key industrial cluster.
Companies can obtain many advantages from locating at the
hub of knowledge development and innovation in a given
industry. Many firms enter a collaborative venture abroad as a
prelude to wholly owned FDI. Collaboration with a local partner
reduces the risks of entry and provides the entrant local
expertise before launching operations of its own in the market.
Resource-or
Asset-Seeking
Motives
Technological and managerial know-how. The firm may
benefit by establishing a presence in a key industrial cluster.
Companies can obtain many advantages from locating at the
hub of knowledge development and innovation in a given
industry. Many firms enter a collaborative venture abroad as a
prelude to wholly owned FDI. Collaboration with a local partner
reduces the risks of entry and provides the entrant local
expertise before launching operations of its own in the market.
3 Efficiency-
Seeking
Motives
Reduce sourcing and production costs by
assessing inexpensive labor and other cheap
inputs to the production process. This motive
accounts for the massive investment by foreign firms in
factories and service-producing facilities in China,
Mexico, Eastern Europe, and India. MNE’s establish
factories in such locations to reduce production costs.
Efficiency-
Seeking
Motives
Locate production near customers. In industries that need to
be especially sensitive to customer needs or in which tastes
change rapidly, companies often locate factories or assembly
operations near important customers.
Efficiency-
Seeking
Motives
Avoid trade barriers. Companies often enter markets through
FDI to avoid tariffs and other trade barriers because these
usually apply only to exporting. By establishing a physical
presence inside a country or an economic bloc, the foreign
company obtains the same advantages as local firms. Partnering
with a local firm also helps overcome regulations or trade
barriers and satisfy local content rules.
Efficiency-
Seeking
Motives
Avoid trade barriers. Companies often enter markets through
FDI to avoid tariffs and other trade barriers because these
usually apply only to exporting. By establishing a physical
presence inside a country or an economic bloc, the foreign
company obtains the same advantages as local firms. Partnering
with a local firm also helps overcome regulations or trade
barriers and satisfy local content rules.
Types of Foreign Direct
Investment
Greenfield Vertical
Investment Integration

Acquisition

Horizontal
Merger
Integration
LD
INVESTME
NT
-a direct investment to build a new existing
manufacturing, marketing, or administrative
facility as opposed to acquiring existing facility.
ACQUISITIO
N
- a direct investment to purchase an existing
company or facility.
VERTICAL
INTEGRATI
ON
an arrangement whereby the firm owns, or seeks to
own, multiple stages of a value chain for producing,
selling, and delivering a product or service.

Downstream value-chain facilities – such as


marketing and selling operations.
Upstream value-chain facilities – such as factories
or assembly plants.
AL
INTEGRATI
ON
- an arrangement whereby the firm owns, or seeks to
own, the activities performed in a single stage of its
value chain.

MERGER
- a special type of acquisition in which two firms join
to form a larger enterprise.
Nature of
Ownership in FDI
Equity participation or equity ownership – acquisition of
partial ownership in an existing firm.

Wholly owned direct investment – a foreign direct


investment in which the investor fully owns the foreign asset.

Equity joint venture – a type of partnership in which a new


firm is created through the investment or pooling of assets by
two or more parent firms that gain joint ownership of the new
legal entity.
International
Collaborative
Ventures
EQUITY JOINT
VENTURES
are traditional collaborations of a type that has
existed for decades. Joint ventures are normally
formed when no one party possesses all the assets
needed to exploit an available opportunity
PROJECT-BASED, NON-EQUITY
VENTURE
- is a collaboration in which the partners create a
project with a relatively narrow scope and a well-
defined timetable, without creating a new legal
entity.
Advantages and Disadvantages of
International Collaborative Ventures
Advantages Disadvantages
Equity • Afford greater control • Complex management
Joint over future directions structure
Venture • Facilitate transfer of • Coordination between the
knowledge between the partners may be a
partners concern
• Common goals drive • Difficult to terminate
the joint venture • Greater exposure to
political risk
Advantages and Disadvantages of
International Collaborative Ventures
Advantages Disadvantages
Project-based, • Easy to set up • Knowledge transfer may be less
Non-equity • Simple management structure; can straightforward between the partners
Ventures be adjusted easily • No equity commitment; thus, puts
• Takes advantage of partners’ greater emphasis on trust, good
respective strengths communications, and developing
• Can respond quickly to changing relationships
technology and market conditions • Conflict may be harder to resolve
• Easy to terminate • Division of costs and benefits may
strain relationship
- a project-based, non-equity venture
initiated by multiple partners to fulfil
CONSORTIUM large scale project. It is typically formed
with a contract that delineates the rights
and obligations of each member.

CONSORTIUM
A type of project-based, non-equity
venture in which partners agree to
access licensed technology developed
by the other on preferential terms.
The initial decision in internationalization is
MANAGING
COLLABORA- to choose the most appropriate target
TIVE market because the market determines the
VENTURE characteristics needed in a business partner.
If the firm plans to enter an emerging
market, for example, it may need a partner
with political clout or connections. In this
way, country targeting and partner selection
are interdependent choices.

Exhibit 14.7 outlines the process for identifying and working with a suitable
business partner. It reveals that managers need to draw on their cross-cultural
competence, legal expertise, and financial planning skills.
When managers first contemplate internationalization through FDI, they usually
think in terms of a wholly owned operation. Many are accustomed to retaining
the control and sole. 
Exhibit 14.7
A Systematic Process for International Business Partnering

1.Choose “going it alone” or 2.Decide on the type 3.Screen and quality


collaboration of ideal partner partner candidates

What advisors,
Do we need a business consultants, and
partner in this market? How What qualifications secondary sources of
can we choose between a should we seek in the information and
collaborative venture versus business partner? assistance can we tap to
a wholly owned operation? identify suitable
partners?
4.Determine the nature of
5.Negotiate a formal 6.Build trust, empathy,
legal relationship with the
agreement and reciprocity
prospective partner

If we seek a legal agreement What can we do to ensure a


(distributor contract, joint mutually beneficial and
Should we seek a formal venture agreement, etc.) with successful relationship? How
agreement or trial period? the foreign partner, what can we provide the partner
aspect of the relationship with the necessary technical
should the contract govern? and managerial support?
7.Establish explicit criteria 8.Monitor and measure
for measuring venture performance; make plans
performance about long-term goals

How should we monitor


What specific benchmarks the performance of this
should we use to measure collaborative venture?
performance of the What plans should we
venture? make for the future of this
relationship?
SUCCESS IN
COLLABORATIVE VENTURES
is attained by following
 Be cognizant several guidelines:
of cultural differences.
 Pursue common goals.
 Give due attention to planning and management of the
venture.
 Safeguard core competencies.
 Adjust to shifting environmental circumstances.
The Experience of Retailers
in Foreign Market
Retailers represent a special case of international
service firms that internationalize substantially through
FDI and Collaborative Ventures.
 Retailers usually choose between FDI and franchising
as a foreign market entry strategy.
 The larger, more experienced firms tend to
internationalize through FDI.
They typically own their stores and maintain direct control over
operations and propriety assets.
 Smaller and less internationally experienced firms tend to
rely on networks of independent franchisees.
 Other firms may employ a dual strategy-using FDI in some
markets and franchising in others.
 Many retailers have floundered in foreign markets.
VARIOUS FORMS OF MAJOR DRIVERS OF RETAILER
INTERNATIONALIZATION
RETAILING:

 Department stores  Saturation of home-country


 Specialty retailers markets
 Supermarkets  Deregulation of
international investment
 Convenience stores
 Opportunities to benefit
 Discount stores
from lower costs abroad.
 Big-box stores
Challenges of International
Retailing
Culture and language are a significant obstacle.
 Consumers tend to develop strong loyalty to indigenous
retailers.
 Managers must address legal and regulatory barriers that can
be idiosyncratic.
 When entering a new market, retailers must develop local
sources for thousands of products, including some that local
suppliers may be unwilling or unable to provide.
International Retailing
Success Factors
 Advanced research and planning
 Establish efficient logistics and purchasing networks
 Assume an entrepreneurial, creative approach to
foreign markets
 Adjust business model to suit local conditions.
Members:
Suril, Pia T.
Endriga, Lucille Mae
Quiao, Joyce Ann
Hiavia, Angel