Content And Formulation
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Chapter 5 Multinational and Participation Strategies: Content and Formulation
Copyright© 2004 Thomson Learning All
Learning Objectives •• Appreciate Appreciate the the complexities complexities of of the the global-local global-local dilemma dilemma •• Understand Understand the the content content of of the the multinational multinational strategies strategies •• Formulate Formulate aa multinational multinational strategy strategy •• Understand Understand the the content content of of the the participation participation strategies strategies •• Formulate Formulate aa participation participation strategy strategy Copyright© 2005 South-Western/Thomson Learning
Multinational Strategies: Dealing with the Global-Local Dilemma •• Local-responsiveness Local-responsiveness solution: solution: customize customize to to country country or or regional regional differences differences •• Global Global integration integration solution: solution: conduct conduct business business similarly similarly throughout throughout the the world world •• Global-local Global-local dilemma: dilemma: choice choice between between aa local-responsiveness local-responsiveness or or global global approach approach to to aa multinational’s multinational’s strategies strategies Copyright© 2005 South-Western/Thomson Learning
Multinational Strategies: Dealing with the Global-Local Dilemma •• Four Four broad broad multinational multinational strategies strategies ••Multidomestic Multidomestic ••Transnational Transnational ••International International ••Regional Regional
Copyright© 2005 South-Western/Thomson Learning
Multidomestic Strategy •• Emphasizing Emphasizing local-responsiveness local-responsiveness issues issues ••Ex.: Ex.: different different packages, packages, colors colors ••Costs Costs more more to to produce, produce, need need to to charge charge higher higher prices prices to to recoup recoup ••AA form form of of the the differentiation differentiation strategy strategy ••Not Not limited limited to to large large multinationals multinationals Copyright© 2005 South-Western/Thomson Learning
Transnational Strategy •• Two Two goals goals get get top top priority priority ••Seeking Seeking location location advantages advantages ••Gaining Gaining economic economic efficiencies efficiencies from from operating operating worldwide worldwide •• Location Location advantages: advantages: dispersing dispersing valuevaluechain chain activities activities anywhere anywhere in in the the world world where where they they can can be be done done best best or or cheapest cheapest Copyright© 2005 South-Western/Thomson Learning
Transnational Strategy (cont.) •• Global Global platform: platform: country country location location where where aa firm firm can can better better perform perform some some of of its its value-chain value-chain activities activities •• Comparative Comparative advantage: advantage: advantages advantages of of nations nations over over other other nations nations ••No No longer longer only only available available to to domestic domestic firms firms •• Location Location advantages advantages can can exist exist for for all all activities activities of of the the value value chain chain Copyright© 2005 South-Western/Thomson Learning
International Strategy •• International International strategy: strategy: selling selling global global products products and and using using similar similar marketing marketing techniques techniques worldwide worldwide ••AA compromise compromise approach approach ••Limited Limited adjustment adjustment in in product product offerings offerings and and marketing marketing strategies strategies ••Upstream Upstream and and support support activities activities remain remain concentrated concentrated at at home home country country Copyright© 2005 South-Western/Thomson Learning
Regional Strategy •• Regional Regional strategy: strategy: managing managing rawrawmaterial material sourcing, sourcing, production, production, marketing, marketing, and and support support activities activities within within aa particular particular region region ••Another Another compromise compromise strategy strategy ••Attempts Attempts to to gain gain economic economic advantages advantages from from regional regional network network ••Attempts Attempts to to gain gain local local adaptation adaptation advantages advantages from from regional regional adaptation adaptation Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.1: Content of the Four Basic Multinational Strategies
Copyright© 2005 South-Western/Thomson Learning
Resolving the Global-Local Dilemma: Formulating a Multinational Strategy •• Selection Selection of of strategy strategy depends depends on on degree degree of of globalization globalization in in an an industry industry •• Globalization Globalization drivers: drivers: conditions conditions in in aa industry industry that that favor favor transnational transnational or or international international strategies strategies •• Four Four categories categories of of global global drivers: drivers: markets, markets, costs, costs, governments, governments, and and competition competition Copyright© 2005 South-Western/Thomson Learning
Global Markets •• Are Are there there common common customer customer needs? needs? •• Are Are there there global global customers? customers? •• Can Can you you transfer transfer marketing? marketing?
Copyright© 2005 South-Western/Thomson Learning
Costs •• Are Are there there global global economies economies of of scale? scale? •• Are Are there there global global sources sources of of low-cost low-cost raw raw materials? materials? •• Are Are there there cheaper cheaper sources sources of of highly highly skilled skilled labor? labor? •• Are Are product-development product-development costs costs high? high?
Copyright© 2005 South-Western/Thomson Learning
Governments •• Do Do the the targeted targeted countries countries have have favorable favorable trade trade policies? policies? •• Do Do the the target target countries countries have have regulations regulations that that restrict restrict operations? operations?
Copyright© 2005 South-Western/Thomson Learning
The Competition •• What What strategies strategies do do your your competitors competitors use? use? •• What What is is the the volume volume of of imports imports and and exports exports in in the the industry? industry?
Copyright© 2005 South-Western/Thomson Learning
Competitive Advantage in the Value Chain •• Location Location of of competitive competitive advantage advantage in in value value chain chain determines determines choice choice of of generic generic strategy strategy •• Upstream Upstream advantages: advantages: low-cost low-cost or or highhighquality quality design design ••Favor Favor transnational transnational strategy strategy or or an an international international strategy strategy •• Downstream Downstream advantages: advantages: marketing, marketing, sales, sales, service service ••Favor Favor multidomestic multidomestic strategy strategy Copyright© 2005 South-Western/Thomson Learning
Competitive Advantage in the Value Chain (cont.) •• Mixed Mixed conditions conditions ••Competitive Competitive strength strength downstream downstream in in industry industry with with strong strong globalization globalization drivers drivers ••Competitive Competitive strength strength upstream upstream in in industries industries with with local local adaptation adaptation pressures pressures ••Both Both favor favor regional regional strategies strategies Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.2: Pressures for Globalization vs. Localization
Copyright© 2005 South-Western/Thomson Learning
Transnational or International: Which Way for the Global Company? •• Select Select aa transnational transnational over over an an international international strategy strategy when: when: ••Benefits Benefits of of dispersing dispersing activities activities worldwide worldwide offset offset the the costs costs of of coordinating coordinating aa more more complex complex organization organization •• Select Select an an international international strategy strategy over over aa transnational transnational when: when: ••Cost Cost savings savings of of centralization centralization offset offset the the lower lower costs costs of of higher higher quality quality raw raw materials/labor materials/labor from from worldwide worldwide locations locations Copyright© 2005 South-Western/Thomson Learning
Participation Strategies: The Content Options •• Participation Participation strategies: strategies: the the choice choice of of how how to to enter enter each each international international market market ••Exporting Exporting ••Licensing Licensing ••Strategic Strategic alliances alliances ••Foreign Foreign direct direct investment investment
Copyright© 2005 South-Western/Thomson Learning
Exporting •• Easiest Easiest way way to to sell sell aa product product in in international international market market •• Passive Passive exporter: exporter: company company that that treats treats and and fills fills overseas overseas orders orders like like domestic domestic orders orders •• Alternatively, Alternatively, aa company company can can put put extensive extensive resources resources into into exporting exporting with with dedicated dedicated export export department department Copyright© 2005 South-Western/Thomson Learning
Export Strategies ••Indirect Indirect exporting: exporting: uses uses intermediaries intermediaries or or gogobetween between firms firms ••The The most most common common intermediaries intermediaries ••Export Export Management Management Company Company (EMC) (EMC) and and Export Export Trading Trading Company Company (ETC) (ETC) ••Specialize Specialize in in products, products, countries, countries, or or regions regions ••Provide Provide ready-made ready-made access access to to markets markets ••Have Have networks networks of of foreign foreign distributors distributors
Copyright© 2005 South-Western/Thomson Learning
Export Strategies ••Direct Direct exporting: exporting: direct direct contact contact with with customers customers in in the the foreign foreign market market ••More More aggressive aggressive exporting exporting strategy strategy ••Requires Requires more more contact contact with with foreign foreign companies companies ••Uses Uses foreign foreign sales sales representatives, representatives, distributors, distributors, or or retailers retailers ••May May require require branch branch offices offices in in foreign foreign countries countries Copyright© 2005 South-Western/Thomson Learning
Export Strategies (cont.) •• Channels Channels in in direct direct exporting exporting ••Sales Sales representatives representatives use use the the company’s company’s promotional promotional literature literature and and samples samples ••Foreign Foreign distributors distributors resell resell the the products products ••Sell Sell directly directly to to foreign foreign retailers retailers or or end end users users Copyright© 2005 South-Western/Thomson Learning
Licensing •• Licensing: Licensing: contractual contractual agreement agreement between between aa domestic domestic licensor licensor and and aa foreign foreign licensee licensee •• Licenser Licenser has has valuable valuable patent, patent, knowknowhow, how, or or trademark trademark •• Foreign Foreign licensee licensee pays pays royalties royalties for for use use
Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.3: Contents of a Licensing Agreement
Copyright© 2005 South-Western/Thomson Learning
Special Licensing Agreements •• International International franchising: franchising: the the franchisor franchisor grants grants the the use use of of aa whole whole business business operation operation •• Contract Contract manufacturing: manufacturing: production production following following the the foreign foreign companies’ companies’ specifications specifications •• Turnkey Turnkey operation: operation: multinational multinational company company makes makes aa project project fully fully operational operational before before the the foreign foreign owner owner takes takes control control Copyright© 2005 South-Western/Thomson Learning
International Strategic Alliances •• Cooperative Cooperative agreements agreements between between firms firms from from different different countries countries to to participate participate in in business business activities activities •• May May include include any any value-chain value-chain activity activity
Copyright© 2005 South-Western/Thomson Learning
Types of International Strategic Alliances •• Equity Equity International International Joint Joint Ventures Ventures (IJV): (IJV): two two or or more more firms firms from from different different countries countries have have an an equity equity position position in in aa separate separate company company •• International International Cooperative Cooperative Alliance Alliance (ICA): (ICA): two two or or more more firms firms from from different different countries countries agree agree to to cooperate cooperate in in any any value-chain value-chain activity activity Copyright© 2005 South-Western/Thomson Learning
Foreign Direct Investment •• Companies Companies own own and and control control directly directly aa foreign foreign operation operation ••Symbolizes Symbolizes the the highest highest stage stage of of internationalization internationalization •• Greenfield Greenfield investments: investments: starting starting foreign foreign operations operations from from scratch scratch
Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.5: World’s Top Companies Ranked by Foreign Assets
Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.5: World’s Top Companies Ranked by Foreign Assets
Copyright© 2005 South-Western/Thomson Learning
Formulating Participation Strategy •• Must Must take take into into account account several several issues: issues: ••Basic Basic functions functions of of each each participation participation strategy strategy ••Strategic Strategic considerations considerations and and intent intent of of company company ••How How best best to to support support company’s company’s multinational multinational strategy strategy Copyright© 2005 South-Western/Thomson Learning
Deciding on Export Strategy •• Does Does management management need need to to control control sales, sales, customer customer credit, credit, and and sale sale of of the the product? product? ••IfIf yes, yes, choose choose direct direct exporting exporting •• Does Does company company have have resources resources to to manage manage export export operations? operations? ••IfIf not, not, use use indirect indirect exporting exporting •• Does Does company company have have resources resources to to design/execute design/execute international international promotional promotional activities? activities? ••IfIf not, not, use use foreign foreign intermediaries intermediaries and and indirect indirect exporting exporting Copyright© 2005 South-Western/Thomson Learning
Export Strategy ••Does Does company company have have resources resources to to support support extensive extensive international international travel travel or or possibly possibly an an expatriate expatriate sales sales force? force? IfIf so, so, choose choose direct direct exporting. exporting. ••Does Does company company have have time time and and expertise expertise to to develop develop overseas overseas contacts contacts and and networks? networks? IfIf not, not, rely rely on on foreign foreign intermediaries intermediaries or or indirect indirect exporting. exporting. ••Will Will time time and and resources resources affect affect domestic domestic operations? operations? IfIf not, not, choose choose direct direct exporting. exporting.
Copyright© 2005 South-Western/Thomson Learning
Licensing Decision •• Based Based on on three three factors factors ••Characteristics Characteristics of of the the products products •Best •Best products products are are older older or or soon-to-be soon-to-be replaced replaced ••Characteristics Characteristics of of the the target target country country •Situation •Situation in in target target country country ••Nature Nature of of the the licensing licensing company company •Company •Company may may lack lack resources resources to to go go international international Copyright© 2005 South-Western/Thomson Learning
Licensing: Disadvantages •• Gives Gives up up control control •• May May create create new new competitors competitors •• Often Often generates generates only only low low revenues revenues •• Opportunity Opportunity costs costs (barriers (barriers to to other other participation participation strategies) strategies)
Copyright© 2005 South-Western/Thomson Learning
Motivations for Strategic Alliances •• Partner’s Partner’s knowledge knowledge of of the the market market •• Government Government requirements requirements •• To To share share risks risks •• To To share share technology technology •• Economies Economies of of scale scale •• Low Low cost cost raw raw materials materials or or labor labor
Copyright© 2005 South-Western/Thomson Learning
Key Considerations for Alliances •• Could Could other other participation participation strategies strategies better better satisfy satisfy strategic strategic objectives? objectives? •• Does Does firm firm have have management management and and capital capital resources resources to to contribute? contribute? •• Can Can partner partner benefit benefit the the company’s company’s objectives? objectives? •• What What is is expected expected payoffs? payoffs? Copyright© 2005 South-Western/Thomson Learning
Foreign Direct Investment (FDI) •• Most Most experienced experienced international international firms firms choose choose FDI FDI •• Advantages Advantages ••Greater Greater control control ••Lower Lower costs costs of of supplying supplying host host country country ••Avoid Avoid import import quotas quotas ••Greater Greater opportunity opportunity to to adapt adapt product product to to local local markets markets ••Better Better local local image image of of the the product product Copyright© 2005 South-Western/Thomson Learning
Disadvantages of FDI •• Increased Increased capital capital investment investment •• Increased Increased investment investment of of managerial managerial and and other other resources resources •• Greater Greater exposure exposure of of the the investment investment to to political political and and financial financial risks risks
Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.6: Advantages and Disadvantages of FDI
Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.6: Advantages and Disadvantages of FDI
Copyright© 2005 South-Western/Thomson Learning
Choosing Participation Strategy: Strategic Considerations •• Company’s Company’s strategic strategic intent intent regarding regarding profits profits vs. vs. learning learning •• Company Company capabilities capabilities •• Local Local government government regulations regulations •• Characteristics Characteristics of of the the target target product product and and market market
Copyright© 2005 South-Western/Thomson Learning
Choosing Participation Strategy: Strategic Considerations (cont.) •• Geographic Geographic and and cultural cultural distance distance •• Political Political and and financial financial risk risk of of investment investment •• Need Need for for control control
Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.7: The Risk versus Control Tradeoff
Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.8: Decision Matrix for Formulating Participation Strategies
Copyright© 2005 South-Western/Thomson Learning
Participation Strategies and the Multinational Strategies •• What What is is the the strategic strategic reason reason to to be be in in the the market? market? ••Location Location advantages advantages vs. vs. market market penetration penetration ••E.g., E.g., source source of of raw raw materials, materials, R&D, R&D, production, production, etc. etc. •• AA mix mix of of participation participation strategies strategies often often support support the the basic basic multinational multinational strategy strategy Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.9: Participation Strategies and the Multinational Strategies
Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.9: Participation Strategies and the Multinational Strategies
Copyright© 2005 South-Western/Thomson Learning
Copyright© 2004 Thomson Learning All
Learning Objectives •• Appreciate Appreciate the the complexities complexities of of the the global-local global-local dilemma dilemma •• Understand Understand the the content content of of the the multinational multinational strategies strategies •• Formulate Formulate aa multinational multinational strategy strategy •• Understand Understand the the content content of of the the participation participation strategies strategies •• Formulate Formulate aa participation participation strategy strategy Copyright© 2005 South-Western/Thomson Learning
Multinational Strategies: Dealing with the Global-Local Dilemma •• Local-responsiveness Local-responsiveness solution: solution: customize customize to to country country or or regional regional differences differences •• Global Global integration integration solution: solution: conduct conduct business business similarly similarly throughout throughout the the world world •• Global-local Global-local dilemma: dilemma: choice choice between between aa local-responsiveness local-responsiveness or or global global approach approach to to aa multinational’s multinational’s strategies strategies Copyright© 2005 South-Western/Thomson Learning
Multinational Strategies: Dealing with the Global-Local Dilemma •• Four Four broad broad multinational multinational strategies strategies ••Multidomestic Multidomestic ••Transnational Transnational ••International International ••Regional Regional
Copyright© 2005 South-Western/Thomson Learning
Multidomestic Strategy •• Emphasizing Emphasizing local-responsiveness local-responsiveness issues issues ••Ex.: Ex.: different different packages, packages, colors colors ••Costs Costs more more to to produce, produce, need need to to charge charge higher higher prices prices to to recoup recoup ••AA form form of of the the differentiation differentiation strategy strategy ••Not Not limited limited to to large large multinationals multinationals Copyright© 2005 South-Western/Thomson Learning
Transnational Strategy •• Two Two goals goals get get top top priority priority ••Seeking Seeking location location advantages advantages ••Gaining Gaining economic economic efficiencies efficiencies from from operating operating worldwide worldwide •• Location Location advantages: advantages: dispersing dispersing valuevaluechain chain activities activities anywhere anywhere in in the the world world where where they they can can be be done done best best or or cheapest cheapest Copyright© 2005 South-Western/Thomson Learning
Transnational Strategy (cont.) •• Global Global platform: platform: country country location location where where aa firm firm can can better better perform perform some some of of its its value-chain value-chain activities activities •• Comparative Comparative advantage: advantage: advantages advantages of of nations nations over over other other nations nations ••No No longer longer only only available available to to domestic domestic firms firms •• Location Location advantages advantages can can exist exist for for all all activities activities of of the the value value chain chain Copyright© 2005 South-Western/Thomson Learning
International Strategy •• International International strategy: strategy: selling selling global global products products and and using using similar similar marketing marketing techniques techniques worldwide worldwide ••AA compromise compromise approach approach ••Limited Limited adjustment adjustment in in product product offerings offerings and and marketing marketing strategies strategies ••Upstream Upstream and and support support activities activities remain remain concentrated concentrated at at home home country country Copyright© 2005 South-Western/Thomson Learning
Regional Strategy •• Regional Regional strategy: strategy: managing managing rawrawmaterial material sourcing, sourcing, production, production, marketing, marketing, and and support support activities activities within within aa particular particular region region ••Another Another compromise compromise strategy strategy ••Attempts Attempts to to gain gain economic economic advantages advantages from from regional regional network network ••Attempts Attempts to to gain gain local local adaptation adaptation advantages advantages from from regional regional adaptation adaptation Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.1: Content of the Four Basic Multinational Strategies
Copyright© 2005 South-Western/Thomson Learning
Resolving the Global-Local Dilemma: Formulating a Multinational Strategy •• Selection Selection of of strategy strategy depends depends on on degree degree of of globalization globalization in in an an industry industry •• Globalization Globalization drivers: drivers: conditions conditions in in aa industry industry that that favor favor transnational transnational or or international international strategies strategies •• Four Four categories categories of of global global drivers: drivers: markets, markets, costs, costs, governments, governments, and and competition competition Copyright© 2005 South-Western/Thomson Learning
Global Markets •• Are Are there there common common customer customer needs? needs? •• Are Are there there global global customers? customers? •• Can Can you you transfer transfer marketing? marketing?
Copyright© 2005 South-Western/Thomson Learning
Costs •• Are Are there there global global economies economies of of scale? scale? •• Are Are there there global global sources sources of of low-cost low-cost raw raw materials? materials? •• Are Are there there cheaper cheaper sources sources of of highly highly skilled skilled labor? labor? •• Are Are product-development product-development costs costs high? high?
Copyright© 2005 South-Western/Thomson Learning
Governments •• Do Do the the targeted targeted countries countries have have favorable favorable trade trade policies? policies? •• Do Do the the target target countries countries have have regulations regulations that that restrict restrict operations? operations?
Copyright© 2005 South-Western/Thomson Learning
The Competition •• What What strategies strategies do do your your competitors competitors use? use? •• What What is is the the volume volume of of imports imports and and exports exports in in the the industry? industry?
Copyright© 2005 South-Western/Thomson Learning
Competitive Advantage in the Value Chain •• Location Location of of competitive competitive advantage advantage in in value value chain chain determines determines choice choice of of generic generic strategy strategy •• Upstream Upstream advantages: advantages: low-cost low-cost or or highhighquality quality design design ••Favor Favor transnational transnational strategy strategy or or an an international international strategy strategy •• Downstream Downstream advantages: advantages: marketing, marketing, sales, sales, service service ••Favor Favor multidomestic multidomestic strategy strategy Copyright© 2005 South-Western/Thomson Learning
Competitive Advantage in the Value Chain (cont.) •• Mixed Mixed conditions conditions ••Competitive Competitive strength strength downstream downstream in in industry industry with with strong strong globalization globalization drivers drivers ••Competitive Competitive strength strength upstream upstream in in industries industries with with local local adaptation adaptation pressures pressures ••Both Both favor favor regional regional strategies strategies Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.2: Pressures for Globalization vs. Localization
Copyright© 2005 South-Western/Thomson Learning
Transnational or International: Which Way for the Global Company? •• Select Select aa transnational transnational over over an an international international strategy strategy when: when: ••Benefits Benefits of of dispersing dispersing activities activities worldwide worldwide offset offset the the costs costs of of coordinating coordinating aa more more complex complex organization organization •• Select Select an an international international strategy strategy over over aa transnational transnational when: when: ••Cost Cost savings savings of of centralization centralization offset offset the the lower lower costs costs of of higher higher quality quality raw raw materials/labor materials/labor from from worldwide worldwide locations locations Copyright© 2005 South-Western/Thomson Learning
Participation Strategies: The Content Options •• Participation Participation strategies: strategies: the the choice choice of of how how to to enter enter each each international international market market ••Exporting Exporting ••Licensing Licensing ••Strategic Strategic alliances alliances ••Foreign Foreign direct direct investment investment
Copyright© 2005 South-Western/Thomson Learning
Exporting •• Easiest Easiest way way to to sell sell aa product product in in international international market market •• Passive Passive exporter: exporter: company company that that treats treats and and fills fills overseas overseas orders orders like like domestic domestic orders orders •• Alternatively, Alternatively, aa company company can can put put extensive extensive resources resources into into exporting exporting with with dedicated dedicated export export department department Copyright© 2005 South-Western/Thomson Learning
Export Strategies ••Indirect Indirect exporting: exporting: uses uses intermediaries intermediaries or or gogobetween between firms firms ••The The most most common common intermediaries intermediaries ••Export Export Management Management Company Company (EMC) (EMC) and and Export Export Trading Trading Company Company (ETC) (ETC) ••Specialize Specialize in in products, products, countries, countries, or or regions regions ••Provide Provide ready-made ready-made access access to to markets markets ••Have Have networks networks of of foreign foreign distributors distributors
Copyright© 2005 South-Western/Thomson Learning
Export Strategies ••Direct Direct exporting: exporting: direct direct contact contact with with customers customers in in the the foreign foreign market market ••More More aggressive aggressive exporting exporting strategy strategy ••Requires Requires more more contact contact with with foreign foreign companies companies ••Uses Uses foreign foreign sales sales representatives, representatives, distributors, distributors, or or retailers retailers ••May May require require branch branch offices offices in in foreign foreign countries countries Copyright© 2005 South-Western/Thomson Learning
Export Strategies (cont.) •• Channels Channels in in direct direct exporting exporting ••Sales Sales representatives representatives use use the the company’s company’s promotional promotional literature literature and and samples samples ••Foreign Foreign distributors distributors resell resell the the products products ••Sell Sell directly directly to to foreign foreign retailers retailers or or end end users users Copyright© 2005 South-Western/Thomson Learning
Licensing •• Licensing: Licensing: contractual contractual agreement agreement between between aa domestic domestic licensor licensor and and aa foreign foreign licensee licensee •• Licenser Licenser has has valuable valuable patent, patent, knowknowhow, how, or or trademark trademark •• Foreign Foreign licensee licensee pays pays royalties royalties for for use use
Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.3: Contents of a Licensing Agreement
Copyright© 2005 South-Western/Thomson Learning
Special Licensing Agreements •• International International franchising: franchising: the the franchisor franchisor grants grants the the use use of of aa whole whole business business operation operation •• Contract Contract manufacturing: manufacturing: production production following following the the foreign foreign companies’ companies’ specifications specifications •• Turnkey Turnkey operation: operation: multinational multinational company company makes makes aa project project fully fully operational operational before before the the foreign foreign owner owner takes takes control control Copyright© 2005 South-Western/Thomson Learning
International Strategic Alliances •• Cooperative Cooperative agreements agreements between between firms firms from from different different countries countries to to participate participate in in business business activities activities •• May May include include any any value-chain value-chain activity activity
Copyright© 2005 South-Western/Thomson Learning
Types of International Strategic Alliances •• Equity Equity International International Joint Joint Ventures Ventures (IJV): (IJV): two two or or more more firms firms from from different different countries countries have have an an equity equity position position in in aa separate separate company company •• International International Cooperative Cooperative Alliance Alliance (ICA): (ICA): two two or or more more firms firms from from different different countries countries agree agree to to cooperate cooperate in in any any value-chain value-chain activity activity Copyright© 2005 South-Western/Thomson Learning
Foreign Direct Investment •• Companies Companies own own and and control control directly directly aa foreign foreign operation operation ••Symbolizes Symbolizes the the highest highest stage stage of of internationalization internationalization •• Greenfield Greenfield investments: investments: starting starting foreign foreign operations operations from from scratch scratch
Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.5: World’s Top Companies Ranked by Foreign Assets
Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.5: World’s Top Companies Ranked by Foreign Assets
Copyright© 2005 South-Western/Thomson Learning
Formulating Participation Strategy •• Must Must take take into into account account several several issues: issues: ••Basic Basic functions functions of of each each participation participation strategy strategy ••Strategic Strategic considerations considerations and and intent intent of of company company ••How How best best to to support support company’s company’s multinational multinational strategy strategy Copyright© 2005 South-Western/Thomson Learning
Deciding on Export Strategy •• Does Does management management need need to to control control sales, sales, customer customer credit, credit, and and sale sale of of the the product? product? ••IfIf yes, yes, choose choose direct direct exporting exporting •• Does Does company company have have resources resources to to manage manage export export operations? operations? ••IfIf not, not, use use indirect indirect exporting exporting •• Does Does company company have have resources resources to to design/execute design/execute international international promotional promotional activities? activities? ••IfIf not, not, use use foreign foreign intermediaries intermediaries and and indirect indirect exporting exporting Copyright© 2005 South-Western/Thomson Learning
Export Strategy ••Does Does company company have have resources resources to to support support extensive extensive international international travel travel or or possibly possibly an an expatriate expatriate sales sales force? force? IfIf so, so, choose choose direct direct exporting. exporting. ••Does Does company company have have time time and and expertise expertise to to develop develop overseas overseas contacts contacts and and networks? networks? IfIf not, not, rely rely on on foreign foreign intermediaries intermediaries or or indirect indirect exporting. exporting. ••Will Will time time and and resources resources affect affect domestic domestic operations? operations? IfIf not, not, choose choose direct direct exporting. exporting.
Copyright© 2005 South-Western/Thomson Learning
Licensing Decision •• Based Based on on three three factors factors ••Characteristics Characteristics of of the the products products •Best •Best products products are are older older or or soon-to-be soon-to-be replaced replaced ••Characteristics Characteristics of of the the target target country country •Situation •Situation in in target target country country ••Nature Nature of of the the licensing licensing company company •Company •Company may may lack lack resources resources to to go go international international Copyright© 2005 South-Western/Thomson Learning
Licensing: Disadvantages •• Gives Gives up up control control •• May May create create new new competitors competitors •• Often Often generates generates only only low low revenues revenues •• Opportunity Opportunity costs costs (barriers (barriers to to other other participation participation strategies) strategies)
Copyright© 2005 South-Western/Thomson Learning
Motivations for Strategic Alliances •• Partner’s Partner’s knowledge knowledge of of the the market market •• Government Government requirements requirements •• To To share share risks risks •• To To share share technology technology •• Economies Economies of of scale scale •• Low Low cost cost raw raw materials materials or or labor labor
Copyright© 2005 South-Western/Thomson Learning
Key Considerations for Alliances •• Could Could other other participation participation strategies strategies better better satisfy satisfy strategic strategic objectives? objectives? •• Does Does firm firm have have management management and and capital capital resources resources to to contribute? contribute? •• Can Can partner partner benefit benefit the the company’s company’s objectives? objectives? •• What What is is expected expected payoffs? payoffs? Copyright© 2005 South-Western/Thomson Learning
Foreign Direct Investment (FDI) •• Most Most experienced experienced international international firms firms choose choose FDI FDI •• Advantages Advantages ••Greater Greater control control ••Lower Lower costs costs of of supplying supplying host host country country ••Avoid Avoid import import quotas quotas ••Greater Greater opportunity opportunity to to adapt adapt product product to to local local markets markets ••Better Better local local image image of of the the product product Copyright© 2005 South-Western/Thomson Learning
Disadvantages of FDI •• Increased Increased capital capital investment investment •• Increased Increased investment investment of of managerial managerial and and other other resources resources •• Greater Greater exposure exposure of of the the investment investment to to political political and and financial financial risks risks
Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.6: Advantages and Disadvantages of FDI
Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.6: Advantages and Disadvantages of FDI
Copyright© 2005 South-Western/Thomson Learning
Choosing Participation Strategy: Strategic Considerations •• Company’s Company’s strategic strategic intent intent regarding regarding profits profits vs. vs. learning learning •• Company Company capabilities capabilities •• Local Local government government regulations regulations •• Characteristics Characteristics of of the the target target product product and and market market
Copyright© 2005 South-Western/Thomson Learning
Choosing Participation Strategy: Strategic Considerations (cont.) •• Geographic Geographic and and cultural cultural distance distance •• Political Political and and financial financial risk risk of of investment investment •• Need Need for for control control
Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.7: The Risk versus Control Tradeoff
Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.8: Decision Matrix for Formulating Participation Strategies
Copyright© 2005 South-Western/Thomson Learning
Participation Strategies and the Multinational Strategies •• What What is is the the strategic strategic reason reason to to be be in in the the market? market? ••Location Location advantages advantages vs. vs. market market penetration penetration ••E.g., E.g., source source of of raw raw materials, materials, R&D, R&D, production, production, etc. etc. •• AA mix mix of of participation participation strategies strategies often often support support the the basic basic multinational multinational strategy strategy Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.9: Participation Strategies and the Multinational Strategies
Copyright© 2005 South-Western/Thomson Learning
Exhibit 5.9: Participation Strategies and the Multinational Strategies
Copyright© 2005 South-Western/Thomson Learning
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