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7/29/2017
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Copyright © 2017 Pearson Education, Inc.
International Business: The New Realities, 4th Edition
by
Cavusgil, Knight, and Riesenberger
Foreign Direct Investment and
Collaborative Ventures
Learning Objectives
14.1 Understand international investment and
collaboration.
14.2 Describe the characteristics of foreign direct
investment.
14.3 Explain the motives for FDI and collaborative
ventures.
14.4 Identify the types of foreign direct investment.
14.5 Understand international collaborative ventures.
14.6 Discuss the experience of retailers in foreign
markets.14-2Copyright © 2017 Pearson Education, Inc.
FDI and Collaborative Ventures
• Foreign direct investment (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. 14-3Copyright © 2017 Pearson Education, Inc.
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
euros 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 centers in
Europe and India to support joint innovation in the
heating and air conditioning industry.14-4Copyright © 2017 Pearson Education, Inc.
Name the location of each brand
Brand Country where brand is based
7-Eleven
14-5Copyright © 2017 Pearson Education, Inc.
Name the location of each brand
Brand Country where brand is based
7-Eleven Japan
KitKat chocolate bars
14-6Copyright © 2017 Pearson Education, Inc.
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Name the location of each brand
Brand Country where brand is based
7-Eleven Japan
KitKat chocolate bars Switzerland
Miller beer
14-7Copyright © 2017 Pearson Education, Inc.
Name the location of each brand
Brand Country where brand is based
7-Eleven Japan
KitKat chocolate bars Switzerland
Miller beer South Africa
Budweiser beer
14-8Copyright © 2017 Pearson Education, Inc.
Name the location of each brand
Brand Country where brand is based
7-Eleven Japan
KitKat chocolate bars Switzerland
Miller beer South Africa
Budweiser beer Belgium
Motel 6
14-9Copyright © 2017 Pearson Education, Inc.
Name the location of each brand
Brand Country where brand is based
7-Eleven Japan
KitKat chocolate bars Switzerland
Miller beer South Africa
Budweiser beer Belgium
Motel 6 France
Thinkpad laptops
14-10Copyright © 2017 Pearson Education, Inc.
Name the location of each brand
Brand Country where brand is based
7-Eleven Japan
KitKat chocolate bars Switzerland
Miller beer South Africa
Budweiser beer Belgium
Motel 6 France
Thinkpad laptops China
Blackberry cell phones
14-11Copyright © 2017 Pearson Education, Inc.
Name the location of each brand
Brand Country where brand is based
7-Eleven Japan
KitKat chocolate bars Switzerland
Miller beer South Africa
Budweiser beer Belgium
Motel 6 France
Thinkpad laptops China
Blackberry cell phones Canada
DHL express delivery
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Name the location of each brand
Brand Country where brand is based
7-Eleven Japan
KitKat chocolate bars Switzerland
Miller beer South Africa
Budweiser beer Belgium
Motel 6 France
Thinkpad laptops China
Blackberry cell phones Canada
DHL express delivery Germany
Captain Morgan Rum
14-13Copyright © 2017 Pearson Education, Inc.
Name the location of each brand
Brand Country where brand is based
7-Eleven Japan
KitKat chocolate bars Switzerland
Miller beer South Africa
Budweiser beer Belgium
Motel 6 France
Thinkpad laptops China
Blackberry cell phones Canada
DHL express delivery Germany
Captain Morgan Rum Britain
Absolut Vodka
14-14Copyright © 2017 Pearson Education, Inc.
Name the location of each brand
Brand Country where brand is based
7-Eleven Japan
KitKat chocolate bars Switzerland
Miller beer South Africa
Budweiser beer Belgium
Motel 6 France
Thinkpad laptops China
Blackberry cell phones Canada
DHL express delivery Germany
Captain Morgan Rum Britain
Absolut Vodka Sweden
Godiva chocolate
14-15Copyright © 2017 Pearson Education, Inc.
Name the location of each brand
Brand Country where brand is based
7-Eleven Japan
KitKat chocolate bars Switzerland
Miller beer South Africa
Budweiser beer Belgium
Motel 6 France
Thinkpad laptops China
Blackberry cell phones Canada
DHL express delivery Germany
Captain Morgan Rum Britain
Absolut Vodka Sweden
Godiva chocolate Turkey
14-16Copyright © 2017 Pearson Education, Inc.
World’s Most International Non-Financial MNEs
Sources: Based on Hoovers company database at www.hoovers.com, 2015; UNCTAD, “Annex table 28. The World’s Top 100
Non-Financial TNCs, Ranked by Foreign Assets,” in World Investment Report 2014 (New York: United Nations, 2015),
accessed June 8, 2015, at www.unctad.org.
Copyright © 2017 Pearson Education, Inc. 14-17
Service Multinationals
• Firms that offer services – Such as lodging, construction, and personal care – must offer them when and where they are consumed.
• Service firms establish either a permanent presence via FDI (e.g., retailing), or a temporary relocation of personnel (e.g., construction industry).
• Many support services – Such as advertising, insurance, accounting, and package delivery – are best provided at the customer’s location.
Copyright © 2017 Pearson Education, Inc. 14-18
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Large International Financial MNEs
Sources: Based on Hoovers company database at www.hoovers.com, 2015, and annual reports at websites of the listed
companies.Copyright © 2017 Pearson Education, Inc. 14-19
Leading Destinations for FDI
• Advanced economies in Europe (especially Britain),
Japan, and North America, are popular FDI
destinations, mainly as attractive markets.
• In recent years, emerging markets and developing
economies have gained appeal as FDI destinations.
• Examples:
➢ Firms target China, Mexico, and Eastern
Europe to do low-cost manufacturing and to
easily access huge adjoining regional
markets.14-20Copyright © 2017 Pearson Education, Inc.
Factors Relevant to Selecting Locations for FDI
Copyright © 2017 Pearson Education, Inc.
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).14-21
Nature of Foreign Direct Investment
• The most advanced, expensive, complex, and
riskiest entry strategy, involving the establishment of
manufacturing plants, marketing subsidiaries, or
other facilities abroad.
• Undertaken by firms from both the advanced
economies and emerging markets.
• Target countries are both advanced economies and
emerging markets.
• Occasionally raises patriotic sentiments among
citizens (e.g., Haier and Maytag; Dubai Ports). 14-22Copyright © 2017 Pearson Education, Inc.
Key Features of Foreign Direct Investment
1. Represents substantial resource commitment.
2. Implies local presence and operations.
3. Firms invest in countries that provide specific
comparative advantages.
4. Substantial risk and uncertainty.
5. Direct investors deal more intensively with specific
social and cultural variables in the host market.
14-23Copyright © 2017 Pearson Education, Inc.
Motives for Foreign Direct Investment
Market-
seeking
motives
• Gain access to
new markets
or opportunities
• Follow key
customers
• Compete with
key rivals in their
own markets
Resource-
or asset-
seeking motives
• Access raw
materials
• Gain access to
knowledge or
other assets
• Access
technological and
managerial know-
how available in a
key market
Efficiency-
seeking
motives
• Reduce sourcing
and production
costs
• Locate production
near customers
• Take advantage of
government
incentives
• Avoid trade
barriers
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Market-Seeking Motives
• Gain access to new markets or opportunities.
The existence of a large market motivates many
firms to produce goods at or near customer locations.
Boeing, Coca-Cola, IBM, McDonald's, and Toyota all
generate more sales abroad than they do at home.
• Follow key customers. Firms often follow their key
customers abroad to preempt other vendors from
servicing them. E.g., Tradegar Industries supplies
the plastic that its customer Procter & Gamble uses
to make disposable diapers. When P&G built a plant
in China, Tradegar established production there too.
14-25Copyright © 2017 Pearson Education, Inc.
Market-Seeking Motives (cont’d)
• Compete with key rivals in their own markets.
Some MNEs choose to compete with competitors
directly in their home markets. The purpose is to
weaken and force the rival to expend resources
defending its own market. E.g., Caterpillar entered
Japan to tie up arch-rival Komatsu, to hamper
Komatsu’s ability to expand its activities in the USA.
Copyright © 2017 Pearson Education, Inc. 14-26
Resource 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.
14-27Copyright © 2017 Pearson Education, Inc.
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. H&M14-28
Copyright © 2017 Pearson Education, Inc.
Efficiency Seeking Motives (cont’d)
• 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).
14-29Copyright © 2017 Pearson Education, Inc.
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. 14-30Copyright © 2017 Pearson Education, Inc.
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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
14-31Copyright © 2017 Pearson Education, Inc.
Greenfield Investment vs. M&As
• 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.
• Acquisition: Direct investment or purchase an
existing company or facility.
14-32Copyright © 2017 Pearson Education, Inc.
Toyota’s Factories in the United States
Copyright © 2017 Pearson Education, Inc.
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Sources: Based on Alex Taylor, “America’s Best Car Company,”Fortune, March 19, 2007, pp. 98–101; Toyota Operations 2015,
www.toyota.com; Toyota, “Fast Facts,”2015, www.toyota.com.
The Nature of Ownership
• Equity participation: Acquisition of partial ownership in an existing firm.
• Wholly owned direct investment: Investor fully owns the foreign assets
• Equity joint ventures:Partnership in which a separate firm is created through the investment of assets by two or more parent firms that gain joint ownership of a new legal entity.
14-34Copyright © 2017 Pearson Education, Inc.
Level of Integration
• Vertical integration: The firm owns, or seeks to own, multiple stages of a value chain for producing, selling, and delivering a product. E.g., Toyota owns some Toyota car dealerships around the world. 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., Microsoft acquired a Montreal-based firm that makes software used to create movie animation.
14-35Copyright © 2017 Pearson Education, Inc.
Ethical Connections
• FDI offers numerous benefits to recipient countries.
• However, FDI side effects can harm the natural
environment, especially in countries with weak
environmental laws. Pollution and ecological destruction
may emerge alongside rapid economic growth.
• One MNE, a manufacturer of food additives, allowed
untreated wastewater to flow into the ThiVai river in
Vietnam. Resulting pollution nearly destroyed the
livelihood of thousands of downstream farmers.
• MNEs must behave responsibly in their international
dealings. Governments must not allow development
goals to compromise citizen well-being.14-36Copyright © 2017 Pearson Education, Inc.
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Copyright © 2017 Pearson Education, Inc.
You Can Do It: Jennifer Knippen
• In college, Jennifer majored in Economics and
International Business.
• She was inspired to pursue an international career
following a study-abroad program in Valencia, Spain.
After graduation, she returned to Spain for five months
of intensive training in Spanish and travel.
• Jennifer next took a sales position with the U.S. subsidiary KONE, Inc., a leading manufacturer of elevators and escalators based in Helsinki, Finland.
14-37Copyright © 2017 Pearson Education, Inc.
You Can Do It: Jennifer Knippen (cont’d)
• After experiencing the challenges and benefits of
working for the local subsidiary of a large,
multinational firm, Jennifer returned to school and
obtained a Masters degree in Global Management
from Thunderbird, a graduate school specialized in
international business.
• International travel, study abroad, and learning
Spanish enhanced her credentials to pursue a
career in global management.
• Jennifer set career goals and worked hard to
achieve them.
1-3814-38
International Collaborative Venture
• A partnership between two or more firms.
• Includes equity joint ventures and non-equity,
project-based ventures.
• Sometimes called partnerships or strategic
alliances.
• Collaboration helps overcome the often substantial
risk and high costs of international business. It
makes possible the achievement of projects that
exceed the capabilities of the individual firm.
14-39
Copyright © 2017 Pearson Education, Inc.
Equity vs. Project-Based Joint Ventures
• Equity joint ventures are normally formed when no
one party has all the assets needed to exploit an
opportunity. Typically, the local partner contributes a
factory, market navigation know-how, connections,
or low-cost labor.
• A project-based joint venture has a narrow scope
and limited timetable. No new legal entity is created.
Typically, partners collaborate on joint development
of new technologies, products, or share other
expertise with each other. Such cooperation helps
them catch up with rivals in technology development.
14-40Copyright © 2017 Pearson Education, Inc.
Other Types of Collaborative Ventures
• Consortium: Project-based, usually non-equity venture with multiple partners fulfilling a large-scale project. E.g., Commercial aircraft manufacturing (Boeing and Airbus).
• Cross-licensing agreement: Type of a project-based, non-equity venture where partners agree to access licensed technology developed by the other, on preferential terms. E.g., Telecommunications industry for inventing new technologies.
14-41Copyright © 2017 Pearson Education, Inc.
Advantages and Disadvantages
of Collaborative Ventures
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Managing Collaborative Ventures: Key Questions
• How dependent will we be on our partner?
• How will responsibilities and competencies be shared
with the partner?
• Are our assets at risk? How can we protect them?
• What other risks do we face by partnering?
• Will we close growth opportunities due to this
venture?
• How will the venture be managed? What burdens will
be created on managerial, financial, or other
resources?
14-43Copyright © 2017 Pearson Education, Inc.
A Systematic Process to
International Business Partnering
Copyright © 2017 Pearson Education, Inc. 14-44
Success Factors in Collaborative Ventures
• Half of all global collaborative ventures fail in the
first 5 years of operations due to unresolved
disagreements, confusion, and frustration. Thus,
partners should:
▪ Be aware of cultural differences;
▪ Pursue common goals;
▪ Pay attention to planning and management of the
venture;
▪ Safeguard core competencies; and
▪ Adjust to shifting environmental circumstances.
14-45Copyright © 2017 Pearson Education, Inc.
Retailers: A Special Case of Internationalization
Retailers typically internationalize via FDI and
collaborative ventures. Retailing takes various forms:
• Department stores (e.g., Marks & Spencer, Macy's);
• Specialty retailers (Body Shop, Gap, Disney Store);
• Supermarkets (Sainsbury, Safeway, Sparr);
• Convenience stores (Circle K, 7-Eleven, Tom Thumb); discount stores (Zellers, Tati, Target);
• “Big box stores” (Home Depot, IKEA, Toys "R" Us).
• Wal-Mart has over 100 stores and 50,000 employees in China, sourcing almost all its merchandise locally and providing thousands of local jobs.
14-46Copyright © 2017 Pearson Education, Inc.
Barriers to Retailer Success Abroad
1. Culture and language barriers. E.g., Differing
product and service portfolio, store hours, store
layout, relations between management and labor.
2. Consumers tend to develop strong loyalty to
indigenous retailers. E.g., Both Galleries Lafayette
in New York, and Wal-Mart in Germany failed.
3. Legal and regulatory barriers. Countries have
idiosyncratic laws that affect retailing. E.g., Germany
limits store hours and requires recycling.
4. Retailers often must develop local sources of
supply. E.g., McDonald’s in Russia; KFC in China.
14-47Copyright © 2017 Pearson Education, Inc.
Walmart’s Mixed Experience
• Germany: Failing to understand the market, Walmart
could not compete with local firms, and left the market.
• Mexico: Built huge U.S.-style parking lots. But most
Mexicans lack cars, and city bus stops were far away,
so shoppers could not haul their purchases home.
• Brazil: Families do their big shopping on payday.
Aisles were too narrow
to accommodate the rush.
• Argentina: Walmart’s red-
white-and-blue banners,
reminiscent of the U.S.
flag, offended local tastes. Copyright © 2017 Pearson Education, Inc. 14-48
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Success Factors for Retailers
1. Advance research and planning. French retailer
Carrefour spent 12 years building its business in Taiwan,
to better understand Chinese culture.
2. Establish logistics and purchasing networks
in each market. Well-organized sourcing and logistics
ensure inventory is always maintained.
3. Assume entrepreneurial, creative approach. Virgin
megastore expanded to Asia, Europe, and North
America, using creative approaches.
4. Adjust business model to suit local conditions. In
Mexico, Home Depot packages merchandise to suit
smaller budgets and offers flexible payment plans.
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