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Chapter 15
International Business: The New Realities, 3rd Edition
by
Cavusgil, Knight, and Riesenberger
Copyright © 2014 Pearson Education Inc.
Learning Objectives
1. International investment and collaboration
2. Motives for FDI and collaborative ventures
3. Characteristics of foreign direct investment
4. Types of foreign direct investment
5. International collaborative ventures
6. Managing collaborative ventures
7. The experience of retailers in foreign markets
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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
• Vodafone, a British firm, acquired the Czech telecom
Oskar Mobil.
• eBay, a U.S. firm, acquired Luxembourg’s Skype
Technologies, a prepackaged software company.
• Japan Tobacco Inc. acquired the British cigarette
maker Gallaher Group PLC for almost $15 billion.
• Dubai International Capital Group acquired the
British theme park operator Tussauds Group for $1.5
billion.
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Name the location of each brand
Brand Country where brand is based
7-Eleven
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Name the location of each brand
Brand Country where brand is based
7-Eleven Japan
KitKat chocolate bars
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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
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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
Copyright © 2014 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
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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
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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
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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
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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
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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 Britain
Absolut Vodka
Copyright © 2014 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
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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 Britain
Absolut Vodka Sweden
Godiva chocolate Turkey
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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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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. Entails substantial risk and uncertainty
5. Direct investors deal more intensively with specific
social and cultural variables in the host market.
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World’s Most International Non-Financial
MNEs
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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.
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Large International Financial MNEs
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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 for low-cost manufacturing and to
easily access huge adjoining regional
markets.
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Inward FDI Performance Index, Advanced
and Developing Economies, 2007–2010
Source: UNCTAD, World Investment Report 2011 (New York: United Nations, 2011) Permission item
Note: The exhibit shows the ratio of a country’s share in global FDI inflows to its share of global GDP.
A value greater than 1 indicates the country receives more FDI than its relative economic size, a value
below 1 shows the country receives less.
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A. T. Kearney
Global Services Location Index™
Country Financial People Business Total
Attractiveness Skills and Environment Score
Availability
India 313 248 130 691
China 259 233 137 629
Malaysia 276 124 197 598
Thailand 305 130 141 577
Indonesia 323 147 099 569
Egypt 307 120 137 564
Philippines 319 117 124 560
Chile 241 120 189 550
Jordan 299 091 159 549
Vietnam 321 102 124 547
Mexico 248 150 145 543
Brazil 218 183 137 539
Bulgaria 283 089 162 534
United 047 271 215 533
States
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Ethical Connections
• FDI offers numerous benefits to recipient countries.
• FDI may produce side effects that 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.
Source: H. Nguyen and H. Pham, “The Dark Side of Development in Vietnam,” Journal of Macromarketing, 32, no. 1 (2012): 74-86.
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Factors Relevant to Selecting Locations for FDI
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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.
Toyota’s Factories in the United States
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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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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.
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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? Copyright © 2014 Pearson Education Inc.
A Systematic Process to
International Business Partnering
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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;
Adjust to shifting environmental circumstances.
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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.
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Barriers to Retailer Success Abroad
1. Culture and language barriers. E.g., differing
product and service portfolios, store hours, store
layouts, 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.
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Wal-Mart’s Mixed Experience
• Germany: Failing to understand the market, Wal-Mart
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: Wal-Mart's red,
white, and blue banners,
reminiscent of the U.S.
flag, offended localCopyright
tastes.© 2014 Pearson Education Inc.
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 an 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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