Forms of FDI

Ownership


Relatedness
  

Wholly owned operations

GreenGreen-field investment  Full acquisition


Horizontal FDI Vertical FDI Unrelated diversification

Partially owned operations

Partial acquisition  Joint venture


Forms of FDI: Ownership

Home Country
Green Field 100% Owned

Host Country New Entity

Full Acquisition (i.e., 100%)

MNE
Partial Acquisition (e.g., 50%) Ownership = s%

Local Firm
Ownership = (1 - s)%

Joint Venture

The Form of FDI: Acquisitions versus Green-Fields Green

The majority of investments is in the form of mergers and acquisitions:



Why the preference for mergers and acquisitions?

 

Represents about 77% of all flows in developed countries. Represent about 33% of all flows in developing countries.


Fewer target firms.

Quicker to execute. Foreign firms have valuable strategic assets. Believe they can increase the efficiency of the acquired firm.

Entry Decision Making Under Uncertainty: TradeTrade-off Between Flexibility and Commitment


Timing: When is a good time to enter?



Speed of expansion: How fast to grow?

  

Potential gain from waiting Cost of delay Small scale: Establish a foothold to learn Large scale: Acquire first mover advantage


Scale of entry
 

Value of learning Preemption of competitors Constraints of internal resources Some modes have more flexibility embedded Some modes reduce resource requirements

Mode

Choice of Market Entry Mode

Value Chain of an MNE

Company Infrastructure R&D Production Advanced Technology & KnowHow Marketing and Sales IndustrySpecific Marketing Expertise

Innovative Capabilities

Organization, Coordination & HRM What additional resources may the MNE need to enter a foreign market? Local expertise: marketing, government relations, etc.

Typical Value Chain of a Local Firm

Company Infrastructure R&D Production Older Technology and KnowHow Marketing and Sales CountrySpecific Marketing Expertise

Imitative Capabilities

Organization, Coordination & HRM What may the MNE desire from a local firm?  Complementary resources  Not necessarily strength in every area

Complementarity of Resources
MNE s Resources
 

Local Firm s Resources

 

Innovative capabilities Advanced technology and know-how Industry-specific marketing expertise Organization structure and systems

Imitating capabilities Older technology and know-how Country-specific marketing expertise Country specific organization skills

Going it Alone: Export

HOME COUNTRY Revenues HOST COUNTRY

MNE

Customers

Export of Goods

Going it Alone: Export

  

Advantages Low initial investment Reach customers quickly Complete control over production Benefit of learning for future expansion

Disadvantages Potential costs of trade barriers

 

Transportation cost Tariffs and quotas

Foregoes potential location economies Difficult to respond to customer needs well

  

When Is Export Appropriate? Low trade barriers Home location has cost advantage Customization not crucial

Licensing Agreement
HOME COUNTRY HOST COUNTRY Licensing of Technology

MNE

Local Firm
Fees and Royalties

Licensing Agreement
  

 

Advantages Low initial investment Avoids trade barriers Potential for utilizing location economies Access to local knowledge Easier to respond to customer needs

Disadvantages Lack of control over operations Difficulty in transferring tacit knowledge

 

Negotiation of a transfer price Monitoring transfer outcome

Potential for creating a competitor

  

When Is Licensing Appropriate? Well codified knowledge Strong property rights regime Location advantage

Foreign Acquisition
HOME COUNTRY HOST COUNTRY

MNE

Investment

Local Firm

Profit

Foreign Acquisition


Advantages Access to target s local knowledge Control over foreign operations Control over own technology

Disadvantages Uncertainty about target s value Difficulty in absorbing acquired assets Infeasible if local market for corporate control is underdeveloped

  

When Is Acquisition Appropriate? Developed market for corporate control Acquirer has high absorptive capacity High synergy

Going it Alone: Green Field Entry

HOME COUNTRY HOST COUNTRY

MNE
Profit

Investment

New Subsidiary Company

Going it Alone: Green Field Entry

 

Advantages Normally feasible Avoids risk of overpayment Avoids problem of integration Still retains full control

 

Disadvantages Slower startup Requires knowledge of foreign management High risk and high commitment

  

When Is Green Field Entry Appropriate? Lack of proper acquisition target In-house local expertise InEmbedded competitive advantage

Management Contract
HOME COUNTRY HOST COUNTRY Management Fees

MNE
Profit

Local Firm
Managerial Service

Technological Inputs

Wholly-Owned Subsidiary

Management Contract


Advantages Access to local management skills Avoids buying unwanted assets Retains strategic control

Disadvantages Potential incentive problem Potential adverse selection problem



How do you know the competencies of the manager?

When Is a Management Contract Appropriate? Manager has a reputation to protect

 

Hotels Consulting companies

PerformancePerformance-based contract provides no perverse incentives

Joint Venture
HOME COUNTRY HOST COUNTRY

MNE
Inputs Share of Profit

Local Firm
Inputs Share of Profit Joint Venture Company

Joint Venture


Advantages Access to partner s local knowledge Reduction of concern about overpayment Both parties have some performance incentives Significant control over operation

Disadvantages Potential loss of proprietary knowledge Potential conflicts between partners Neither partner has full performance incentive Neither partner has full control

  

When Is a Joint Venture Appropriate? Both partners contribute hard-to-measure inputs hard-toLarge expected mutual gains in the long-run longTrade secrets can be walled off

Common Market Entry Modes

HOME COUNTRY Licensing Acquisition HOST COUNTRY

MNE
Export Joint Venturing Green Field Entry

Local Firm
Joint Venture Company New Subsidiary Company

Int l Sourcing
HOME COUNTRY HOST COUNTRY Design, spec and/or technology

MNE
OEM goods Payment
  

Local Firm

Applicable to manufacturing of mature products (e.g., shoes) Access to location economies Competition among OEM producers lowers costs.

Compensation Trade
HOME COUNTRY Equipment and technology HOST COUNTRY

MNE
Output
 

Local Firm

Common reason: Local firm s lack money to buy equipment Economic benefits
 

Enhanced incentives for MNE to make sure that equipment works MNE s skills in marketing the products in its home country

Kumar & Subramaniam (1997) A Contingency Framework for the Mode of Entry Decision
  

Risk Return Control

Modes of entry
Exporting Contractual Agreeme nt Risk Return Control Integration Low Low Moderate Negligible Low Low Low Negligible Joint Venture Moderate Moderate Moderate Low Acquisition Greenfield Investm ent High High High High

High High High Moderate

Decision Strategies:


Rational Analytic Strategy Cybernetic Strategy



Serendipity

Discovers

The Australian Challenge

  

What s Freixenet core competency? Evaluate Freixenet s market entry modes Freixenet in Australia


What lessons can we draw?

 

Where next? Adds: what is the theme?



Is it a global theme (standarization/adaptaion? Gloc Glocalization (Akio Morita)

Good luck!

Future Reading
- Anderson, Erin and Hubert Gatignon. 1986. Modes of Foreign Entry: A Transaction Cost Analysis. Journal of International Business Studies, 17: 1-26. 1- Kogut, B. and H. Singh. 1988. The effect of national culture on the choice of entry mode. Journal of International Business Studies, 19: 411411-432. - Hennart, J.-F. and Y.-R. Park. 1993. Greenfield vs. acquisition: The J.Y.strategy of Japanese investors in the United States. Management Science, 39(9): 1054-1070. 1054- Hennart, J. F., and Reddy, S. 1997. The Choice Between Mergers/Acquisitions and Joint Ventures: The Case of Japanese Investors in the United States. Strategic Management Journal 18: 1-12. 1- Barkema, H. G. and Vermeulen, F. 1998. International Expansion Through Start-up or Acquisition: A Learning Perspective. Academy of StartManagement Journal 41: 7-26. 7- Brouthers, K. D. and Brouthers, L. E. 2000. Acquisition or Greenfield StartStart-up? Institutional, Cultural and Transaction Cost Influences. Strategic Management Journal 21: 89-97. 89-