Chapter 15
International Business: The New Realities, 3rd Edition
by
Cavusgil, Knight, and Riesenberger
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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.
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Examples of FDI
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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 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).
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Motives for Foreign Direct Investment
Market- Resource- Efficiency-
seeking or asset- seeking
motives seeking motives motives
• Gain access to • Access raw • Reduce sourcing
new markets materials and production
or opportunities costs
• Gain access to
• Follow key knowledge or • Locate production
customers other assets near customers
• Compete with • Access • Take advantage of
key rivals in their technological and
own markets managerial know- government
how available in a incentives
key market
• Avoid trade
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barriers
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.
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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 and hamper
Komatsu’s ability to expand its activities in the USA.
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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.
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Resource Seeking Motives
Firms in the petroleum industry internationalize to access raw materials; in
this case, oil reserves in areas with appropriate natural resources such as
the Middle East. PicturedCopyright
is an oil refinery
© 2014 in Saudi
Pearson Education Inc. Arabia.
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&M
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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).
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Economies of Scale Long-run Average Cost
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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
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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.
and
• Acquisition: direct investment or purchase of an
existing company or facility.
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Mergers & Acquisitions
The Chinese computer maker Lenovo, whose Beijing factory is shown here,
purchased IBM’s personal computer business for $1.25 billion and now earns
more than two-thirds of its revenue from
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Pearson ambitiousInc. acquisition.
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.
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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.
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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.
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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.
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