International Strategy and Organization

Part II:

International Licensing, Joint Ventures, Consortia, Franchising, Mergers & Acquisitions,

Clusters and Counter Trade

Josef WindspergerProfessor of Organization and Management

Content

3 Management of Networks of the MNC

3.1 Theoretical Foundation of Networks of the MNC3.2 International Licensing3.3 International Strategic Alliances, Joint Ventures and Consortia3.4 Internationalization through Franchising3.5 Internationalization through M&As3.6 Internationalization through Clusters3.7 Internationalization through Counter Trade3.8 Organization Design of the MNC of the Future

3.1 Theoretical Foundations of Networks

Hierarchy Stable Network

Internal Dynamic

Network Network

One Firm Several Firms

High

Inte

ractio

n L

evel

low

Cooperation

Licensing

Cross-Licensing

Franchising

Countertrade

Consortium

Joint Venture

CompetitionCooperation Propensity

Cooperation

Cluster

Networks of the MNC

Theories of Networks

Transaction Cost Theory

Property Rights-Theory

Resource-based Theory

Relational View

3.1.1 Transaction Cost Theory O. E. Williamson (1975)

Atmosphere

Bounded Rationality Uncertainty/Complexity

‚Transaction Costs‘

Opportunism Transaction Specifity

Quasi-Rents, Specific Investments and Hold-up

g AB

A‘s quasi-rent: QRAB = (gAB – gAC)

A Bg BA

CD g ACg BD

A‘s profit with B: gAB B‘s profit with A: gBA

B‘s quasi-rent: QRBA = (gBA – gBD)

HOLD-UP Potential of B (HB)Quasi-rent of A (QRBA) =

Transaction Costs and Networks

TC

Specifity, UncertaintyComplexity of Know How

Market Network Hierarchy

S1 S2 S3

3.1.2 Property Rights-Theory

a. the right to use the goodb. the right to change the goodc. the right to capture the profit or to bear the lossd. the right to sell the good and to receive the liquidation

value

a + b = decision rightsc + d = ownership rights

Contractability (due to intangibility) of assets determines the structure of residual rights

Example: Franchising-Network

Intangible assets of the franchisor:Brand name assets, system-specific know-how

Intangible assets of the franchisee:Outlet-specific knowledge

ao and a1 are contactible – market coordination

ao and a1 are noncontractible – network coordination

3.1.3 Resource-based Theory

Resources

Organizational Capabilities

Strategic Rents (SR) = Competitive Advantage

(Schumpeterian and Ricaridian Rents)

Resource Characteristics

Intangible, tangible resources and organizational capabilities

Heterogenity

Imitability

Substitutability

Firm specifity

3.1.4 Relational View: Networks and Trust

g AB

A‘s Quasi-Rents: QRAB = (gAB – gAC)

A Bg BA

CD g ACg BD

A‘s Reputation capital: RA B‘s Reputation capital: RB

B‘s Quasi-Rents: QRBA = (gBA – gBD)

Quasi-Rents of A (QRAB) + reputation capital of A (RA)

HA - cooperative behaviorHA - opportunistic behavior

><

3.2 International LicensingLicensing agreementA company (licencee) is allowed to use the licensor‘s trademark,patent, manufacturing process or some other value creating activity of the licensor.

Objectives(a) In-licencing: Access to complementary assets(b) Out-licensing: Risk reduction, deterrence of potential competitors,standard creation

Cross Licensing Agreement on the exchange of rights for the entire portfolio of technology for a certain time period.

Licensee pays fixed fees and/or royalties (percentage of sales)

Conditions for Licensing

Complementary and contractible resourcesResources• easy to replicate (contractible)• property rights are well defined

TC and Licensing

TC

SpecificInvestmentKnow-how ComplexityUncertainty

LicensingHierarchy:FDI

S1 S2S3

Property Rights-Explanation

ContractibleKnow-how

Non-contractible Know-how

Contractible Know-how Non-contractible Know-how

B

A

NetworkA to B:

Licensing

B to A:Licensing

Market Contract

Austrian company A wants to enter the market in Ukraine. TheCompany B in Chernivtsi has intangible knowledge at the consumer and labour market. On the other hand, the know-how of A is contractible.

Licensing as a Strategy for Technological Innovations

Country Culture and Licensing

Does the national culture influence the choice between licensing and foreign direct investments?

“The national differences in levels of trust impact the choice of foreign market entry mode” (Shane, 1994)

Results - High Trust Countries → Licensing - Low Trust Countries → Foreign Direct Investment

“Resorting to hierarchies is less common where trust among people is greater.” (Shane, 1994)

3.3 International Joint Ventures, Strategic Alliances and Consortia as stable Networks

JV

A B

Joint Venture

Strategic alliance

A B

a b

a, b

3.3.1 Joint Ventures – Strategic Alliances

Strategic Alliance:Agreement to gain competitive advantage through access to partner’s

resources, including markets, technologies, capital and human resources.

Joint Venture

a.Scale JV:Firms enter together into a stage of production, distribution or a new

market (for example: JV that produce components for

automobile producers). Objective: Economies of Scale

b.Link JV:Firms combine resources and capabilities from different stages of the value

chain. Objective: Synergies in R&D, production, distribution, marketing.

JV and Strategic Alliances as Stable Networks

Characteristics:– High specific investments, high uncertainty

and/or– Complementary firm-specific resources and

organizational capabilities– Joint Ventures: Allocation of decision and

ownership rights– Strategic alliances: Allocation of decision rights,

no ownership rights– Weak Ties:

Trust instead of formal coordination mechanisms

Conditions for JV and SA

Hennart 1988: „When knowledge is tacit, it cannot be effectively transferred in codified form; its exchange must rely on intimate human contact“ (366)

- High TC:Markets for intermediate inputs are subject to high transaction costs due to high specific investments and high uncertainty, leading to a transfer of decision and ownership rights.

- Firm-specific resources: The inputs are difficult to imitate by one of the parties.

TC, Licensing and Joint Venture

TC

Specifity,Know-how Complexity,Uncertainty

Licensing JV Internal Hierarchy

S1 S2 S3

Determinants of Decision and Ownership Rights in JV

Hennart 1988: „When knowledge is tacit, it cannot be effectively transferred in codified form; its exchange must rely on intimate human contact“ (366)

- According to the PR-theory, the contractibility of assets determines the governance structure.- Noncontractible assets require the transfer of decision and ownership rights.- Intangible assets refer to organizational, marketing, country-specific and technological know how.

Property Rights-Explanation

ContractibleKnow-how

Non-contractible Know-how

Contractible Know-how Non-contractible Know-how

B

A

Joint VentureA to B:

Licensing

B to A:Licensing

Market Contract

Joint Venture: Choice of Entry Mode

- Licensing

- Joint venture

- Wholly-owned subsidiary

Market Entry and Control

Licensing: low control Joint Ventures: shared control Subsidiary (WOS): Decision and ownership

rights have the foreign headquarter

Licensing: Low

Joint Venture: Medium

Wholly-owned Subsidiary: High

Market Entry and Resource Commitments

Market Entry and Diffusion Risk

Licensing: High

Joint Venture: Medium

Wholly-owned Subsidiary: Low

Form of Market Entry

Strategic Variables

1. Scale Economies

2. Global Concentration

3. Market Potential

Environmental Variables

1. Country Risks

2. Cultural Distances

3. Demand Uncertainty

4. Competitive Dynamics

Resource Variables

1. Value of the Firm-specific Know-how

2. Tacit Knowledge of the Partner

3. International Experience

Eclectic Theory: Hill et al. 1990

Latin „consortium“: association, society

= a temporary collaboration to perform a certain task or to provide a specific service or product more efficiently

= association of two or more individuals, companies, universities, or governments (or any combination)

Separate legal status Control over each participant is generally limited to

activities refering to the joint project

3.3.2 Consortia

Consortium: NewPC-Consortium in Taiwan

Consortia versus Internalization

Firms have to decide how much of the R&D they should be internally procured

- not possible to procure all R&D from outside - in-house R&D is necessary for implementation

This decision depends on a number of factors:- transaction and disincentive costs- technological and organizational capabilities

Transaction Cost Explanation

Organization has to balance transaction costs with incentives

– Firm is more likely to integrate R&D activities (in-house) where transaction costs are high

– Firm is more likely to procure R&D from external partners where incentives can be enhanced with market competition

Organizational Capability Theory (1)

Schumpeter (1912, 1942) and Penrose (1959)

(resource based view)capabilities of the firm result in competitive

advantagescapabilities have to be enhanced through

innovation and learning

Organizational Capability Theory (2)

R&D transactions: companies acquire scientific knowledge from outside and form alliances with other firms with different capabilities.

Organizational Capability theory Organizational Capability theory - lack of knowledge and sufficient capabilities of the firms- advantage of utilizing the new capabilities of external

partners can exceed the coordinaton cost disadvantages.

Sakakibara‘s ModelMotives for Consortia

Economic View Economic View Cost-sharing MotivesCost-sharing Motives– symmetrical firms in terms of capabilities or knowledge

– same industry & outcome

Organizational View Organizational View Skill-Sharing Motives Skill-Sharing Motives– heterogeneous capabilities

– direct competitors in the product market

– knowledge base tacit knowledge difficult to transmit complementary knowledge

Sakakibara‘s ModelSummary

Motives Motives Cost-sharingCost-sharing Skill-sharingSkill-sharingcompetition in R&D consortia

single-industry competition

wide industry participation

firm capabilities in R&D consortia

homogeneous, substitutable

heterogeneous, complementary

role of R&D consortia

divide tasks create/transfer knowledge

private R&D spending

can decrease can increase

constraints firms face

financial resources research capabilities

3.4 Internationalization through Franchising-Networks

to

Franchisor: System-specific Know-howFranchisee: Initial FeeSpecific Investments

t

Royalties

Characteristics:-Franchisees and franchisor are entrepreneurs.- Intangible Assets: Franchisor‘s brand name, system-specific know howFranchisee‘s local market know how-Incentive system:Royalties and intial fees

Transaction Cost Theory

TC

Specifity,Uncertainty

Licensing FranchisingCompany-owned subsidiaríes

S1 S2 S3

‚Hostage Model‘

Intangible assetsSystem-specific und local market knowledge

Residual decision rights

Proportion ofcompany-owned Outlets (PCO)

Royalties/Initial Fees

A Property Rights View

Ownership rights (Residual income rights)

H1

H2

H3

How is the knowledge distrubutedBetween the franchisor and the franchisee?

Who is the residual decision maker (whose decisions influences the residual income)?

How are the ownership rights allocated?

Entry Forms

Determinants of the Market Entry Choice: Environmental and Organisational Factors

- Geographic distance

- Cultural distance

- Country risk

- Political risk

- Market volume and growth

- Resources of the partner- Brand name assets- International experience

- Financial situation of the franchisor

Efficiency Comparison

Subsidiary (WOS)1. High resource commitments2. Central control3. Protection of the system-specific know how Appropriate:

– High cultural and geographic distance– Strong brand name– Important system-specific know how– High market potential and growth– International experience

Area Development Agreement1. Lower resource commitment2. Relatively strong central control3. Fast market entry

Appropriate:– High geographic and cultural distances– Uncertain market development– Instable legal environment– Local market knowledge is very important– No international experience

Direct FranchisingHigh control and agency costs

Appropriate:– Low geographic and cultural differences

– Strong local market know how of the franchisees

– Relatively small market potential and growth

Joint Venture1. Shared control

2. Know-how diffusion risk

3. Lower risk

Appropriate:

– Franchisor has not enough local market knowledge

– Uncertain market development

– High legal and political uncertainty

– Relatively high cultural differences

– Legal barriers

Master FranchisingLower central control

Appropriate:– High geografic and cultural differences– No international experience – High political risk– Strong market growth– High market uncertainty– Local market know-how is very important.

3.5 Mergers & Acquisitions Merger Waves

Source: 1895-1920: Nelson (1959); 1921-1939: Thorp/Crowder (1941), 1940-1962: FTC (1971, 1972), 1963-99: MergerStat Review, 2000-03: Thomson Financial, FH Zwickau

1895 00 05 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 00

1000

2000

3000

4000

5000

6000

7000

0

97-04 16-29

(1) „IndustrialRevolution"leads tomonopolies

65-69(2) New Anti-trust laws leads tovertical integrations

(3) “Conglomerate era"due to diversification theory

(4) “Merger mania",

liberalization and deregul-

ation 84-89

(5) Globalization,Single European Market,

Shareholder ValueInternet

93-??

8000

90001999:9.218

10000# of casesWith US-firm involvements

110002000:10.952

2001:9.614

2002:8.423

30.09.2003:5.444

05

Mergers and Diversification Strategies (1)

Unrelated M&A: Conglomerate Mergers– NPV(A+B) = NPV(A) + NPV(B)– P = NPV(A+B) – NPV(A)– Only generates normal economic profit

Related M&A: Vertical and Horizontal IntegrationNPV(A+B) > NPV(A) + NPV(B) M&A generate strategic rents

NPV = Synergies – Premium (preacquisition value – paid price)

Mergers and Diversification Strategies (2)

NVP(A) = 15000; NVP(B) = 10000 Unrelated M&A: Conglomerate Mergers

– NPV(A+B) = NPV(A) + NPV(B) = 25000– P = NPV(A+B) – NPV(A) = 10000– Only generates normal economic profit

Related M&A: Vertical and Horizontal Integration– NPV(A+B) = 30000 > NPV(A) + NPV(B)– P = NPV(A+B) – NPV(A) = 15000 M&A generate strategic rents

Technical economies (functional and management synergies)

marketing, production, organization, scheduling, and compensation

Pecuniary economies

dictate prices by exerting market power

Diversification economies (financial synergies)

portfolio management and risk reduction

Lubatkin (1983)

The reduction of production/distribution/coordination costs:

1. Through economies of scale

2. Through the adoption of more efficient production or organizational technology

3. Through the increased utilization of the bidder’s management team

4. Through a reduction of agency costs

Jensen & Ruback 1983 (1)

Financial Motivations:

1. To avoid bankruptcy costs

1. To increase leverage opportunities

1. To gain tax advantages

To gain power in product markets

To eliminate inefficient target management

Jensen & Ruback 1983 (2)

Target Firm’s Responses against the Bidding Firm

Greenmail: target firm purchases any of its stock owned by a bidding firm for a price which is greater than the current market price.

Poison Pills: any action of a target firm that makes the acquisition very costly, e.g. issue rights for the current stockholders for a special cash dividend in the case of a unfriendly take-over.

Crown jewel sale: target sells parts of the company, which are most profitable for the bidding firm.

Synergy realization

Organizational integration

Combination potential

Employees‘

resistance

+

+

+

+

+

-

Postmerger Integration Model

Combination Potential

Economies of scale – similar operations

Operational synergies Administration synergies Managerial synergies Financial synergies

Employee Resistance

M&As affect career plans M&As create appearance of psychological

problems such as:– “We versus they” antagonism– Distrust, Tension and Hostility

Cultural problems

Management style similarity– Attenuates employee resistance– Cushions the degree of change and enhances organizational

integration Cross-border Combination

– Impede the interaction and coordination because of country differences

– Culture clashes promoting employee resistance Relative Size

– Insufficient managerial attention to smaller targets– Positively associated with organizational integration

Factors influencing integration

• The higher the combination potential, the larger the synergy

realisation.

• The stronger the organizational integration, the larger the synergy

realisation.

• The higher the employee resistance, the lower the synergy

realisation.

•The higher the combination potential, the greater the organizational

integration.

• The higher the combination potential, the larger the employee

resistance.

• The greater the organizational integration, the larger the employee

resistance.

Hypotheses

Networks and M&Asa. Alliances versus M&A

Alliances allow simultaneous and fast entering into multiple countries

Both achieve complementary capabilities and/or economies of scale effects

Alliances have a lower degree of organizational integration than acquisitions

In alliances all decisions must be made by consensus among the partner firms

Alliances are more flexible to adjust to environmental changes

Alliances result in higher knowledge spill-over risks

b.Acquisitions versus Greenfield Investments

Advantages of greenfield investments: - Know-how advantage of the MNC

(ownership-specific advantages)- High market potential- Long-term market growth- Few competitiors- Stable legal and political institutional factors

c. Greenfield/Brownfield Investment/Acquisition

Mode Choice

Preference for external expansion(acquisition)

Preference for internal expansion(greenfield)

The acquired foreign firmhas sufficient

resources?

Critical resources arefreely available at the foreign market.

A B G B

yes no yes no

Global and multidomestic strategies are associated with different types of firm-specific advantages (FSAs):1.location-bound FSAs2.Nonlocation bound FSAs

Global companies: exploitation of nonlocation-bound home based firm-specific advantages

Multidomestic companies: exploitation of location-bound FSAs using host country specific advantages

Impact of International Strategy on the Market Entry Mode (1)

International Strategy: Impact onM&A and Network Form (2)

Hypotheses:- Companies following Global Strategy higher proportion of Greenfield Investments

- Companies following Multidomestic Strategy higher proportion of Acquisitions and Alliances

Firm Strategy, Structure and

Rivalry

Factor Conditions

Related and Supporting Industries

Demand Conditions

Government

Porter‘s Diamond Model

3.6 Internationalization through Clusters

Competitive Advantage through Clusters

They include an array of linked industries and other entities important to competition.

Many clusters include governmental and other institutions that provide specialized training, education, information, research and technical support.

Clusters can be extended downstream, horizontally and laterally.

„Clusters are geographic concentrations of interconnected companies and institutions in a particular field.“ (Michael E.Porter)

Organisation Design of Clusters

Characteristics:

– Stable network based on the core competencies of partner firms

– Location-bound

– Institutional support Configuration:

– Less formal coordination

- Exclusive brand name at the market

- Stable pool of cooperation partners Soft Integration Factors:

– Trust as coordination mechanism IT-supported network relations

Evolution of Clusters

historical circumstances; unusual local demand; existence of supplier industry and related industries; a couple of innovative companies stimulate others.

Birth

Decline

Evolution

influence of government and other institutions expands; new entrepreneurs are attracted; suppliers emerge; information accumulates; infrastructure is improved.

technological discontinuities; a shift in buyer‘s needs

Advantages of Clusters (1)

(A) Access to employees and suppliers

Can recruit from a pool of specialized and experienced employees lowers search and transactions costs

Offer a specialized supplier network minimizes the need for inventory eliminates delays lowers the opportunism risk and coordination costs

Advantages of Clusters (2)(B) Preferred access to specialized information Extensive market, technical and competitive

information accumulates within a cluster

(C) Access to institutions and public goods Investments by government or other public

institutions and universities can enhance a company’s productivity

Advantages of Clusters (3)

(D) Higher motivation and easier performance measurement

Local rivalry is highly motivating Peer pressure leads to competitive pressure Easier to compare and measure performances

because of local competition

Regional Objective: Creation of Location-specific Competitive Advantage

Innovation und Know-How-Upgrading

Strong local

competition

Suppliers with high

capabilities

Sophisticated demand

Specific

resources

3. 7 Internationalization through Countertrade

- Explanation:Market failure at the international product and financial markets

Advantages for the MNC: Realization of a higher market potential

-Informal coordination mechanisms (reputation capital, trust) instead of formal coordination mechanisms

Forms of Counter Trade

Classical barter

- Clearing arrangement

- Switch Trading Buy-Back Counterpurchase Offset

Use of Counter Trade

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Barter Offset Buyback Counterpurchase Switches

Barter

Clearing arrangement:

- purchase equal value of goods and services

Switch-trading:

- goods that are useless to the trading country can be sold or transferred to a third country

Advantages of Barter

To open new markets To avoid protectionist barriers To stimulate trade To trade with the Second World

Advantages of Offsets

Secure competitive advantage Increase local employment Create alternative sources of financing Transfer technology Avoid taxes and tariffs

Counter Purchase

Two hard currency contracts Goods are taken back by the seller These goods are not those produced with

the equipment sold. They are from a list which is set up by the importer.

Buy-Back

Transfer of technology, plant, equipment and technical assistance

Purchase of a certain percentage of the output Long-term orientation

Buy-back-contractExample

A producer of luxery products from France (F) sells a machine to a company in Ukraine in order to produce and sell these products in Ukraine. The Ukraine producer (U) cannot use these production technology for other products.

Questions:a) Market contract between F and Ukraineb) Vertical integrationc) Buy-back: The F-producer concludes a contract to buy a certain amount of

product from the Ukraine producer.

F UMarket Contract:What is the problem?

Buy-back:‚double hostage effect‘

Hostage Model of Countertrade (Williamson 1983; Hennart 1988)

TC

Specifity,Uncertainty

Licensing Countertrade Hierarchy: DI

S1 S2 S3

‚Hostage-effect‘

3.8 Organization Design of the ‘MNC of the Future’

Theses (based on expert interviews)

I. Evolution of ‘virtual countries’

II. Evolution of networks

„Shifting Networks“ „Virtual Countries“

Processes External Internal

Employment Ad hoc projects with independent partners

Employees

Marketing Partner-specific branding Umbrella branding

OrganizationSelf-organizing teams and networks

Hierarchy with decentralized structures

Cases for Discussion

Case Study: Joint Venture The car producer ADOK uses the input goods A and B for the production of OMEGA.

The following resources are given: ADOK has firm-specific production know how in producing A but has now experience

in producing B. MAX has firm-specific advantages in developing and producing B. MAX has built up

his ownership-specific advantages through high R&D-investments in the last decades. His capabilities are difficult to imitate by potential competitors.

In addition, the market environment is very uncertain; especially the technological uncertainty is very high because new competitors frequently enter the industry.

A) Which organizational form should be used to produce B?(Market contract, joint venture between MAX and ADOK or internal production)B) Now we assume that MAX has no firm-specific advantages in B; in addition the market

uncertainty is relatively low. Which organizational decision should be made by ADOK in this situation?

C) Assume that ADOK is in Germany and MAX in Bulgaria? Does this influence the organization decision for ADOK and why?

Case: Joint Venture, Acquisition and Greenfield Investment ALPHA want to enter the following markets:Market A:Characteristics:

High market uncertainty, high market potential and growth, unstable political and legal institutional structure, high cultural differences. In addition, the competitors in the host country have high local market advantages (knowledge of the product and labour market).

(1) ALPHA’S Market entry decision:Joint venture/acquisition/greenfield investment?

Market B:Characteristics:

Many competitors, no market entry barriers, high market potential and growth, longterm international experience. In addition, ALPHA has high competitive advantages in production and R&D. In addition, ALPHA’s organizational culture enables empowerment and decentralized decision making.

(2) Which market entry strategy is efficient in this market?(3) Under which condition would you choose brownfield investment?

Case: Discussion of Hypotheses – Market Entry in China: JV vs. Licensing

H1: European companies (EC) which consider China as a high risk country are less likely to enter china through JV.

H2: The larger the cultural distance between EC firms’ home countries and China, the more likely they are to employ JV.

H3: The larger the political and economic distance between EC firms’ home countries and China, the less likely these firms are to employ JV.

H4: The greater the international experience of EC firms in China, the more they will employ JV.

H5: The larger the firm size, the more likely that firms will employ JV. H6: When know how is of a tacit nature, it is more likely to be transferred through

JV. H7: The greater the transaction complexity and uncertainty, the greater the

likelihood that firms will use JV. H8: Firms employing a marketing mix strategy with standardized elements are

more likely to use licensing.

Case: Market Entry of Japanese Firms in US – Acquisitions vs. Greenfield Investments

Discuss: H1: The greater the J-investor’s research and development intensity,

the higher the probability of greenfield investments. H2: The greater the J-investor’s experience in U.S. market, the higher

the probability of acquisitions. H3: The higher the rate of growth of demand in target market, the

higher the incentive to enter through acquisitions. H4:The lower the J-investor’s endowment in human resources, the

higher the likelihood of acquisitions. H5: The larger the size of subsidiary relative to that of the investor,

the higher the probability of an acquisition.