1. International Business Environments & Operations
Daniels ● Radebaugh ● Sullivan
International Business Environments and Operations 15e by Daniels, Radebaugh, and Sullivan
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2. Direct Investment and Collaborative Strategies
Chapter 15
Direct Investment and Collaborative Strategies
Chapter 15: Direct Investment and Collaborative Strategies
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Learning Objectives
Understand why companies collaborate
Learn about various types of collaborative arrangements
Evaluate various types of collaborative arrangements using a few criteria
Learn how companies can manage various collaborative arrangements
The Learning Objectives for this chapter are
To clarify why companies may need to use modes other than exporting to operate effectively in international business
To comprehend why and how companies make foreign direct investments
To understand the major motives that guide managers when choosing a collaborative arrangement for international business
To define the major types of collaborative arrangements
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4. Why Companies Collaborate
Collaborative Arrangements and International Objectives
Companies collaborate or form strategic alliances for many reasons. This Figure shows both the general and the internationally specific reasons for collaboration.
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5. Foreign Expansion: Alternative Operating Modes
This Figure shows alternative operating modes. Experienced global companies like Coca-Cola tend to use all of the different options.
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Equity Arrangements
There are two ways to invest in a foreign country
Acquisition of existing facilities
Greenfield Investment – Building new facilities
Why do firms want full or partial control?
Internalization
choose the lower cost between conducting operations internally and contracting to another party
it may be cheaper to handle operations internally
Appropriability
do not transfer vital resources to another company to avoid having competitive position undermined
In general, the more ownership a company has, the more control over decisions the firm has.
Three main theories that explain why companies want control are internalization theory, appropriability theory, and freedom to pursue global objectives.
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7. Types of Collaborative Arrangements (Entry Strategies)
Licensing
Franchising
Management contracts
Turnkey operations
Joint venture
Equity Alliance
Wholly-owned subsidiary (WOS)-no collaboration but is an important entry strategy

8. Criteria for Evaluating Collaborative (Entry) Strategies
Legal
Cost
Risk
Control
Competition
Experience
Product/industry
Complexity
Country factors

9. Evaluating Collaborative Arrangements (Entry Strategies)
Country
Complexity
Product
Experience
Competition
Control
Risk
Cost
Legal
WOS
Joint
Venture
Turnkey
Management
contracts
Franchising
Licensing
Exporting

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Licensing
Licensing: a company grants intangible property rights to another company to use in a specified geographic area for a specified period in exchange for royalties.
Examples/Applications of licensing:
Patents, inventions, formulas, processes, designs, patterns
Copyrights for literary, musical or artistic compositions
Trademarks, trade names, brand names
Franchises, licenses, contracts
Methods, programs, procedures, systems
Companies often engage in licensing agreements for economic reasons such as a faster start-up, lower costs, or to gain access to additional resources.
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Franchising
Franchising: a specialized form of licensing that includes providing an intangible asset and also operational assistance on a continuing basis
Examples: McDonalds, Subway, Wal-Mart, Intercontinental Hotels
Franchising is often associated with U.S. fast food companies, but in fact many international franchisors are from other countries and sectors.
Companies can expand in foreign markets using individual franchises, or by setting up a master franchisor which then establishes sub-franchisees.
Because the success of a franchise depends on product and service standardization, high identification through promotion, and effective cost controls, companies need to be sure that operational modifications don’t compromise what the company has to offer.
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Management Contract
Management contract: a company is paid a fee to transfer management personnel and administrative know-how abroad to assist a company
Foreign management contracts are used primarily when the foreign company can manage better than the owners
Host country gets assistance without any equity involvement
A company may pay for managerial assistance when it believes another company can better manage its operation.
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Turnkey Operation
Turnkey operation: one company contracts with another to build complete, ready-to-operate facilities
Most commonly performed by industrial-equipment, construction, and consulting companies
Often performed for a governmental agency
Turnkey operations are often very large, running into the hundreds of millions and even billions of dollars. For example, a current turnkey project run by Spain’s Sacyr Vallehermoso involves building a wider Panama Canal.
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14. Joint Venture and Equity Alliance
Joint ventures: involve more than two companies, one of which may own more than 50 percent, may have various combinations of ownership
A Consortium involves more than two organizations
Equity alliances: an arrangement in which at least one of the companies takes an ownership position in the other
Possible joint venture combinations include
• Two companies from the same country joining together in a foreign market
• A foreign company joining with a local company
• Companies from two or more countries establishing a joint venture in a third country
• A private company and a local government forming a joint venture
• A private company joining a government-owned company in a third country
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15. Types of Collaborative Arrangements
Collaborative Strategy and Complexity of Control
This Figure shows that as a company increases the number of partners and decreases the amount of equity it owns in a foreign operation, its ability to control that operation decreases.
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16. Problems with Collaborative Arrangements
Problems with collaborative arrangements include
Relative importance
Divergent objectives
Questions of control
Comparative contributions and appropriations
Culture clashes
Differences in corporate cultures
Collaborative arrangements don’t always work out. The most common challenges involve the relative importance of the project to each company, divergent objectives, control issues, contribution issues, culture clashes, and different corporate cultures.
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17. Problems with Collaborative Arrangements
How to Dissolve a Joint Venture
This Figure shows that the end of a joint venture can be friendly or unfriendly, planned or unplanned, and mutual or non-mutual.
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18. Country Attractiveness-Company Strength Matrix
This Figure relates country attractiveness with operating forms.
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19. Managing International Collaborations
International collaboration is a complex process. Potential collaborative partners should be evaluated in terms of…
the resources they will provide
their motivation
Compatibility
Contract requirements vary by type of collaborative arrangement
Needs constant evaluation, monitoring
Trust is essential in collaborative arrangements. Companies without proven track records may have to negotiate harder and make more concessions.
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20. Contract Requirements
Contracts should address
Whether the contract will be terminated if the parties do not adhere to the directives
What methods will be used to test for quality
What geographic limitations should be placed on an asset’s use
Which company will manage which parts of the operation
What each company’s future commitments will be
How each company will buy from, sell to, or otherwise use intangible assets that result from the arrangement
Contracts should spell out mutual goals and expectations.
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21. Chapter 15: Discussion Questions
What is a collaborative arrangement? Why firms collaborate? Explain their reasons for collaboration.
What are the different types of collaborative arrangements we discussed in class? Explain.
Explain the criteria for evaluating collaborative strategies. 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).

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