International Business: Foreign Direct Investment and Collaborative Ventures 11

International Investment and Collaboration

Learning Objectives

• Understand international investment and collaboration.
• Describe the characteristics of foreign direct investment (FDI).
• Explain the motives for FDI and collaborative ventures.
• Identify the types of foreign direct investment.
• Understand international collaborative ventures.
• Discuss the experience of retailers in foreign markets.

FDI and Collaborative Ventures

• Foreign Direct Investment (FDI): A strategy where a 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 where partnering firms pool their resources and share costs and risks.
• Joint Venture (JV): A form of collaboration between two or more firms to create a jointly-owned enterprise.

Examples of FDI

• Volkswagen invested $1 billion$ to build a factory in Poland.
• Samsung's FDI in Vietnam related to EV and rechargeable batteries.
• Lego Group invested over $100 million euros$ to build a toy factory in China.

Service Multinationals

• Service firms (e.g., retailing, construction, personal care) must offer services where they are consumed.
• They either establish a permanent presence via FDI (e.g., consulting firms) or temporarily relocate personnel (e.g., construction).
• Support services like consulting, advertising, insurance, accounting, and package delivery are best provided at the customer’s location.

Large International MNEs in Services

• Walmart (United States): Retailing, \486 billion revenues.
• AT&T (United States): Telecommunications, media, \164 billion revenues.
• EXOR Group (Italy): Investments, \155 billion revenues.
• ICBC (China): Banking, financial services, \148 billion revenues.
• AmerisourceBergen (United States): Drug wholesaling, \147 billion revenues.
• China State Construction Engineering (China): Construction, \145 billion revenues.
• AXA (France): Financial services, \144 billion revenues
• Amazon.com (United States): Online retailing, \136 billion revenues.
• China Construction Bank (China): Banking, financial services, \135 billion revenues.
• Allianz (Germany): Insurance, \122 billion revenues.
• Costco (United States): Retailing, \119 billion revenues.
• Walgreens Boots Alliance (United States): Retailing, \117 billion revenues.
• Agricultural Bank of China (China): Banking, financial services, \117 billion revenues.
• Ping An Insurance (China): Insurance, \117 billion revenues.

Choosing Foreign Direct Investment

• Methods of FDI:
  • Opening a foreign branch.
  • Forming a new foreign subsidiary.
  • Acquiring a foreign firm.
  • Entering into a joint venture.
  • Acquiring majority ownership.
• Note: Liaison office is not FDI
• Restrictions, risks, and legal consequences should be considered.

Leading Destinations for FDI

• Advanced economies in Europe, Japan, and North America are popular due to their attractive markets.
• Emerging markets and developing economies are gaining appeal.
• Firms target China, Mexico, and Eastern Europe for low-cost manufacturing and access to regional markets.

Factors Relevant to Selecting Locations for FDI

• Market factors:
  • Size and growth of national and regional markets.
  • Proximity to key export markets.
• Human resource factors:
  • Cost, availability, and productivity of skilled labor.
  • Involvement of labor unions.
  • Availability and quality of managerial workforce.
  • Employment regulations.
• Infrastructural factors:
  • Availability and quality of local manufacturing.
  • Efficiency of physical distribution.
  • Cost, availability, and quality of utilities and finance.
  • Quality of marketing and distribution.
• Political and governmental factors:
  • Political stability.
  • Openness to foreign investment.
  • Extent of bureaucracy and red tape.
  • Transparency and corruption.
• Profit retention factors:
  • Types and level of taxes.
  • Tax rates for profit repatriation.
  • Complexity of tax system.
  • Rate of inflation.
• Legal and regulatory factors:
  • Regulations on FDI and technology transfer.
  • Nature of legal system and laws.
  • Intellectual property protection.
  • Extent of tariffs and other trade barriers.
• Economic factors:
  • Cost of land and facilities.
  • State of the local economy.
  • Stability of currency.
  • Extent of regional integration and free trade.

Nature of Foreign Direct Investment

• It is the most advanced, expensive, complex, and riskiest entry strategy.
• It involves establishing manufacturing plants, marketing subsidiaries, or other facilities abroad.
• Undertaken by firms from both advanced and emerging economies.
• Target countries are both advanced and emerging markets.
• May raise patriotic sentiments or help the host nation's security.

Key Features of Foreign Direct Investment

• Represents substantial resource commitment.
• Implies local presence and operations.
• Firms invest in countries that provide specific comparative advantages.
• Involves substantial risk and uncertainty.
• Direct investors deal more intensively with social and cultural variables in the host market.

Motives for Foreign Direct Investment

• Market-seeking motives:
  • Gain access to new markets or opportunities.
  • Follow key customers.
  • Compete with key rivals in their own markets.
• Resource- or asset-seeking motives:
  • Access raw materials.
  • Gain access to knowledge or other assets.
  • Access technological and managerial know-how.
• Efficiency-seeking motives:
  • Reduce sourcing and production costs.
  • Locate production near customers.
  • Take advantage of government incentives.
  • Avoid trade barriers.

Market-Seeking Motives

• Gain access to new markets or opportunities:
  • Large markets motivate firms to produce goods near customer locations (e.g., Hyundai, Toyota, Coca-Cola, IBM, McDonald's).
• Follow key customers:
  • Firms follow customers abroad to prevent other vendors from servicing them (e.g., Hyundai Motors and vendors in Montgomery, Tradegar Industries with P&G).
• Compete with key rivals:
  • Compete directly in rivals' home markets to weaken them (e.g., Caterpillar entered Japan to tie up Komatsu).

Resource or Asset-Seeking Motives

• Access raw materials:
  • Needed in extractive and agricultural industries (e.g., mining and oil industries, EcoPro in Indonesia, SK on FDI in Australia).
• Gain access to knowledge or other assets:
  • Partnerships to access brands and distribution networks (e.g., Whirlpool partnered with Philips in Europe).
• Access technological and managerial know-how:
  • Establishing presence in key industrial clusters (e.g., robotics in Japan, fashion in Italy, software in the U.S.).

Efficiency-Seeking Motives

• Reduce sourcing and production costs:
  • Access to inexpensive labor and inputs in China, Mexico, Eastern Europe, and India.
• Locate production near customers:
  • In the fashion industry (e.g., Zara and H&M).
• Take advantage of government incentives:
  • Subsidies and tax concessions (e.g., IRA for EV battery, Chips Act).
• Avoid trade barriers:
  • Establishing a physical presence to gain advantages like local firms (e.g., Hyundai Motors, Samsung, Posco’s additional FDI in the USA because of high tariffs).

FDI Provides Economies of Scale

• Falling fixed costs: High per-unit fixed costs decline with increased production.
• Managerial resource efficiencies: International firms use a relatively fixed number of headquarters staff across more subsidiaries.
• Specialization of labor: FDI facilitates hiring more specialized workers.
• Financial economies: Large firms can access capital at lower cost.

Types of FDI

• Greenfield investment vs. M&A (mergers and acquisitions).
• Portfolio investment is not FDI.
• Nature of ownership: Wholly owned direct investment vs. equity joint venture.
• Level of integration: Vertical vs. horizontal FDI.

Ethical Connections

• FDI offers benefits to recipient countries.
• However, side effects can harm the environment, especially in countries with weak laws.
• Pollution and ecological destruction may occur alongside economic growth.
• MNEs must behave responsibly; governments must not compromise citizen well-being.
• Example: Food additive manufacturer polluting the ThiVai river in Vietnam.

Country and Regional Risks in FDI

• Political Risk and Government Stability: Regime changes can affect investments.
• Managing political risk: Political risk analysis and insurance.

Country and Regional Risks in FDI

• Political Risk Insurance:
  • Government Agencies: OPIC (Overseas Private Investment Corp) gives preference to investment in the relatively low income countries.
  • MIGA (Multilateral Investment Guarantee Agency) - Independent affiliate of World Bank.
  • Private insurers: Lloyd of London, other insurance syndicates.
  • Advantage of private insurance: No political agenda, faster.

Resolving Investment Disputes

• Convention on the Settlement of Investment Disputes Between States and Nationals of other States.
  • 159 signatory countries; disputes are solved by ICSID.
  • International Centre for the Settlement of Investment Disputes (ICSID).

Resolving Investment Disputes

• Growth of cross-border trade and investment led to bilateral investment treaties (BITs).
  • By the end of 1980s, $385$ BITs.
  • Two countries agree to provide investment protection, national treatment, most favored nation treatment, and guarantees of compensation of expropriation.
  • To protect investors against state action.
  • Most BITs designate ICSID as a forum for arbitration.

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 risk and high costs of international business.
• It makes possible the achievement of projects that exceed the capabilities of the individual firm.

Equity vs. Project-Based Joint Ventures

• Equity joint ventures: Formed when no one party has all assets needed.
  • Local partner contributes a factory, market knowledge, connections, or low-cost labor.
• Project-based joint ventures: Narrow scope and limited timetable; no new legal entity created.
  • Partners collaborate on developing technologies, products, or share expertise.
  • Example: Hewlett-Packard's non-equity joint venture with Foxconn.

Other Types of Collaborative Ventures

• Consortium: Project-based, usually non-equity venture with multiple partners fulfilling a large-scale project (e.g., Samsung for Burj Khalifa).
• Cross-licensing agreement: Project-based, non-equity venture where partners access licensed technology developed by each other (e.g., Telecommunications industry for inventing new technologies).

Advantages and Disadvantages of Collaborative Ventures

• Equity Joint Ventures:
  • Advantages: Facilitate knowledge transfer, common goals.
  • Disadvantages: Coordination concerns, difficult to terminate, greater political risk.
• Project-Based, Non-Equity Ventures:
  • Advantages: Easy setup, simple management, takes advantage of partners' strengths, responds quickly, easy to terminate.
  • Disadvantages: Knowledge transfer may be less straightforward, requires trust and good communication, division of costs and benefits may strain relationship.

Success Factors in Collaborative Ventures

• Half of global collaborative ventures fail in the first five years.
• Partners should:
  • Be aware of cultural differences.
  • Pursue common goals, mutual benefits
  • Safeguard core competencies.
  • Adjust to shifting environmental circumstances.

Retailers: A Special Case of Internationalization

• Retailers 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, Target, Trade Club).
  • “Big box stores” (Home Depot, IKEA).
• Example: Wal-Mart in China.

Barriers to Retailer Success Abroad

• Culture and language barriers.
• Consumers tend to develop loyalty to indigenous retailers (e.g., Wal-Mart in Korea, Germany).
• Legal and regulatory barriers (Store hours and recycling laws in Germany)
• Retailers must develop local sources of supply (e.g., McDonald’s in Russia; KFC in China).

Walmart’s Mixed Experience

• Mexico: Built U.S.-style parking lots but most Mexicans lack cars and could not haul their purchases home by bus.
• Brazil: Aisles were too narrow for shopping rushes on payday.
• Argentina: Red-white-and-blue banners offended local tastes.

Success Factors for Retailers

1. Advance research and planning (e.g., Carrefour in Taiwan).
2. Establish logistics and purchasing networks (e.g., Walmart Mexico).
3. Assume entrepreneurial, creative approach (e.g., Lotte Mart Cook Kitchen in Indonesia).
4. Adjust business model to suit local conditions (e.g., Home Depot in Mexico offers flexible payment plans).