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c) Following the Customer to other countries: Every company has some core
customers. Companies follow their core customers where ever they go in the
international arena. However Govt. forces the MNC to have local suppliers. E.g. In
the case of GE, the GE or home suppliers come along with GE to the host country
where GE is operating. The main threat is when GE finds the local suppliers to be
more cost effective than the home country suppliers and prefers working with the
former.
d) Lead Market: Companies want to be leaders in some market and just want to be
present in some other lead markets. Lead markets tell the future of the industry. If a
company wants to be global, then it needs to have a presence in the lead market to
know the product trend. A company might not make profit and lose, but will learn or
find a probable alliance, so it goes to the lead market. E.g. Perfume and fashion
market in France, car market in Japan or Germany
2) To acquire resources:
a) Better quality or competitive resources
b) Resources available at lower cost
c) Resources (Technology, HR) might be scarce in the host country
d) Global Sourcing: Companies prefer not to depend on a few countries. They want to
spread the risk in acquiring resources.
E.g. BOSCO comes to India for Iron Ore
3) Reducing Risk: Companies try to reduce risk by spreading operations around the
world.
a) Business Cycles: There are ups and downs in the economy, but all countries are not
equally affected. If there is more spread it can average out returns.
b) Overdependence on a particular country for market and resources can be a problem,
especially during sensitive situations like war times. E.g. Gulf War. Thus for a
country it was better during that period to have other sources of oil.
c) Cross patrolling: Divert the competition posed by a company by trying to compete
with them in their home country. It is an offensive but very effective, as sometimes
offense is the best form of defense. If you follow your competitors, you may get the
second mover advantage. E.g. Caterpillar of USA expanded to UK first and then tried
to enter Japan. COMADSO of Japan was giving stiff competition. Then COMADSO
attacked Caterpillar in USA, thereby diverting Caterpillar from the Japanese market to
its home country.
d) Defensive reason: Companies want to counter advantages gained by competitors in
foreign markets that might hurt them elsewhere.
What is Globalisation?
It is the transformation of national and regional market into one common world/global market
for free flow of goods, services, capital, people and technology across nations.
#Piggy Back: When other companies use the distribution of a particular company. E.g.
Voltas. It has an excellent distribution network in India. Other companies approach Voltas for
distribution. They are non-competing products. Voltas gets paid for it. Foreign companies
pay Voltas for distribution. E.g. Fiat is using Tatas distribution now. Tata uses Fiats engine.
They are mutually helping each other. #
2) Manufacturing in host country: The manufacturing in the host country can be done
either by contract manufacturing or by licensing.
b) Licensing: In licensing the licensor permits the use of technology for a certain period
of time to the licensee for the manufacturing of licensed products and sale of the
licensed products in the licensed territories. Here the licensor owns the technology.
The licensee is permitted to use the technology. For this the licensee pays down-
payment as well as royalty to the licensor. Royalty is always on sales and not on
production. Host country Govt. sets the guidelines and rules.
Companies get into licensing as there is a pressure to shorten the PLC. Once the
license is over, the licensee can use the technology, but it is not possible for licensor
to enter into the market. Licensing is good when the political risk is high. Licensor
can use the royalty on R & D and create next generation product in accordance with
the market need.
Licensee is using depreciated assets, but licensor works with todays costs, i.e. cost
factor is higher for the licensor. No customer relations exist so licensor starts from the
beginning. Thus there is higher risk in licensing than contract manufacturing.
The advantages are:
i) Recovery of R & D investment as fast as possible
ii) Lesser capital investment
iii) Brand value is known
iv) No labour issues
The disadvantages are:
i) Creating a competition, as the licensee is in touch with the customer.
FDI BASED:
1) Licensing
2) Assembly
3) Joint Venture
4) Wholly owned subsidiary
5) Acquisition/ Merger
They are named in increasing order of risk.
1) Exports:
The Company goes for exports because it has higher competitive advantage. The
transportation costs are low. The tariff rates are also low.
2) Contract Manufacturing:
In contract manufacturing the parent/hiring company approaches a firm known as
contract manufacturer with a design/formula. Once the contract is finalized then the
contract manufacturer manufactures the components/products for the hiring company.
Freedom from managing the labour, tech/design diffusion will occur but only for
manufacturing part. There is no FDI and there is flexibility of switching.
3) Licensing:
In licensing, first the licensor searches for a potential licensee. Then the licensor
permits the use of technology for manufacturing a component/product to the licensee
for a definite period at a certain location. The role of the licensee is to both
manufacture and market.
A contract manufacturer only produces products where as a licensee produces as
well as sells for the licensor.
i) Royalty set by the host country based on the percentage of sales. Royalty is
always on sales and not on production.
ii) Lump sum payment for documentation, process manuals and opportunity
costs. It is negotiable.
iii) Training purposes
Lump sum payment up to 8 % of projected sales is easily accepted by the Indian Govt. It is
paid only once. R & D cost has to be recovered in 3 years on an average.
The advantages are:
a) Lesser capital investment
b) Good income and faster R & D recovery which can be invested to come up with
newer versions
c) Right capacity to license
d) Licensor gets tie ups with best distributors, knows local market and has cost
advantage
e) Licensor can cover many countries in the world at faster speed.
f) Brand value of licensor increases.
g) No labour laws issues.
If licensor is ready with the new version, and the host country is also ready for it, then
licensing is profitable, else it is not.
While licensing deals with products, franchising refers to services. E.g. Mc Donalds.
It involves not the use of technology but the trade mark or brand name. The territory will not
cover countries. Royalty is lower compared to licensing. Customization/Adaptation is
required for each country.
4) Assembly:
In case of assembly, different parts of the product are manufactured in different countries.
The assembly of the parts takes place in the host country. Over a period of time the
product becomes local to the host country. It involves local labour.
The advantages are:
a) Host country likes it, as it creates employment, causes technology upgradation, and
causes increase in indirect and corporate tax collection resulting from profits.
b) Scale economies as there is no transportation cost.
c) Customization is easier and can be done as per host country rules
d) Employment generation
e) Government will ask manufacturers to manufacture parts in host country. Tax benefits
can be demanded for backward integration in this case.
f) Local procurement: Host country suppliers get better prices.
5) Joint Venture:
In a Joint Venture, both the parties contribute a certain amount of equity and form a
new company. It involves sharing risk and cost with local partner. E.g. Tata and
Honeywell
The advantages are:
a) Local market familiarity i.e. suppliers, distributors, employers and established channel
partners etc can be known through the local company
b) Labor management
c) Host country relation / relation with banks
d) Reduces risk as sharing risk and cost in unknown market
e) Cultural bridge
f) Local JV company having good political contacts can be leveraged upon
g) Synergy
h) Liability in host country is responsibility of JV. So parent company is insulated. E.g.
Union Carbide- Bhopal Gas Tragedy
The disadvantages are:
a) Cross-cultural differences/ Cultural mismatch due to environmental changes, guard
technology
b) Change in company strategies may lead to Divergence E.g. Tata decided it does not
want to explore instrumentation. Honeywell offered to buy Tatas share without legal
hassles.
c) No intended technology transfer but technology gets diffused.
d) Synergy issues
e) Loss of interest by one party.
f) Due to high profits, the company wants to become independent and leave the sleeping
partner.
# In UAE, local partnership is 51% except in Jabel Ali Free Zone: 100% free zone in Dubai
1) Connectivity advantage as it is the gateway to Europe, Africa, South-East Asia and
West Asia
2) Volatile, politically unsafe (frequent way)
3) Distance from equator #
7) Acquisition:
Acquisition may be defined as a corporate action in which a company buys most, if
not all, of the target companys ownership stakes in order to assume the control of the
target firm.
The advantages are:
1) Acquiring the entire target company
2) Saves time as it is quick to reach the market
3) Ease of access in the market, due to well established distribution and sales channel
4) The competition in the market remains unchanged
5) Company has a good domain knowledge and benefits from local technology
# In case of acquisition or merger, as in Tata and Corus, the capacity of Tata + Corus remains
unchanged, rivalry remains same. In wholly owned subsidiary, new capacity is created,
rivalry increases #
# In JV, companies choose location, in merger companies choose only the time of it. #
# Expropriation vs. Nationalisation:
If the government of any country takes over any foreign company, then it is known as
expropriation whereas if the government takes over any localised company, then it is known
as Nationalisation. Wholly owned subsidiaries are exposed to expropriation where as joint
venture agreements protect firms from expropriation. #
1) World market
2) Political environment
3) Legal system
4) Cultural difference
5) Communication
6) Distance are higher
7) Diversity
8) Uncertainty-Political, economical and currency risks
9) Uncontrollability-The degree of Uncontrollability is higher in host countries
10) Competitions
11) Competence-people in different countries are at different levels of competence.
Why is IB complex?
Types of MNEs:
1) Global
2) Multi-domestic
3) International
4) Transnational
1) Global Company:
a) Integrates its operations around the world
b) Produces for the world market
c) Utilises best resources
d) Operates on scale economies
e) It has a global brand
f) No customization of global brands so might lose some segment of the market
E.g. Mc Donalds, Intel
3) International Company:
a) Runs on core competency
b) Less pressure for adaptation or customization and low cost
E.g. IBM
4) Transnational Company:
a) World is the market
b) Learns the best practices from anywhere in the worldwide operations
c) Leverages learning
d) Integrates operations worldwide to reduce cost.
e) Lower the cost of customization
E.g. Caterpillar, GE
# FDI (Foreign Direct Investment): is made by the company for the control of operations. It is
a long term investment. Govt. welcomes FDI. Exit is difficult.
FPI (Foreign Portfolio Investment): no control. Hedge (balancing risks), currency risks, better
returns are the main incentives. It is for short term gains and has moderate risks. Liquidity is
an important consideration for FPI. Foreign Institutional Investors are the major players of
FPI.
For the home country, FDI brings dividends; FPI brings both interest and dividends. #