CORPORATE STRATEGY AND FOREIGN DIRECT INVESTMENT

1
CORPORATE STRATEGY AND FOREIGN DIRECT INVESTMENT

• The process of Oversees Expansion
• Theory of Multinational Corporation
• The Strategy of Multinational Enterprise
• Designing a Global Expansion Strategy

2
Multinational Corporations

• Innovation-Based Multinationals
• 3M (USA), N.V. Phillips (Netherlands), Sony
  (Japan)
• Mature Multinationals
• Coca-Cola, McDonalds, Nestle, Procter Gamble
• Senescent Multinationals
• Crown Cork Steal

3
Important Factors

• Cost Reduction
• Economies of Scale (world-scale)
• Multiple Sourcing
• Knowledge Seeking
• Keeping Domestic Customers

4
Strategy Design

• Awareness of Profitable Investments
• Selecting a Mode of Entry
• Auditing the Effectiveness of Entry Mode
• Using Appropriate Evaluation Criteria
• Estimating the longevity of a competitive
  advantage

5
Example Phillips
6
QA

• Q What's the big trend in Asia?
• A Thirty-five years ago, companies thought of
  Asia as a place to sell things manufactured in
  Europe. The next phase was when manufacturing
  moved from Europe to Asia. The phase after
  that, in the last five years, was the transfer
  of competencies from Europe and the U.S. into
  Asia. That happened to Taiwan, Japan, Korea, and
  Singapore. The shift now is that Philips is
  moving into China with competencies,
  product-creation processes, and development of
  new technologies.

7
QA

• Q How important is China to Philips?
• A China will be the leading part of our Asia
  strategy. That's why we moved from Singapore to
  Hong Kong -- to be close to the driving force of
  the electronics industry, which will be Northeast
  Asia. And we believe that Greater China will be
  the leader over time. The origins of initiatives
  in the electronics sector will largely come out
  of China.

8
QA

• Q What sort of RD work is Philips doing in
  China?
• A The continuous discussion is what kind of
  technology we want to develop. If you look at TV,
  the transfer has been from Europe, 10 years back,
  to Singapore. Now Singapore is transferring TV
  development to Suzhou near Shanghai. Basic
  research is in the Shanghai area. The global
  audio division headquarters, which was in Hong
  Kong, is moving to Shenzhen across the border
  from Hong Kong. The LCD division for cell phones
  was headquartered in Hong Kong and has moved to
  Shanghai. We have no choice, we must move there
  more and more.

9
QA

• Q Why?
• A There's a tremendous pool of well-trained
  people in China, and that's where the market is
  available.

10
QA

• Q Philips has had its share of difficulties in
  China, especially when it comes to getting
  Chinese manufacturers of DVD players to pay
  royalties to Philips and other companies that
  control the intellectual-property rights. Are
  things getting better?
• A Philips had a lot of problems with the Chinese
  government over royalties. But those differences
  have been resolved. From a historic perspective
  on intellectual property IP, they didn't
  understand the need to respect IP and pay for IP.
  With Beijing's entry into the WTO, this has
  been solved. The agreement with the government
  over DVD royalties has been the first real
  breakthrough showing that there's an
  understanding of IP in China.

11
QA

• Q How do you see other Asian countries competing
  against China?
• A Taiwan is trying to achieve a fast change into
  a knowledge economy, which is the only way they
  can go. That's the same thing that Singapore is
  doing, that Japan is doing, that Korea will be
  doing. But the fact of life is that China is
  doing the same thing as well.

12
QA

• Q In that case, what's the Philips division of
  labor for Asian RD?
• A Our biggest Asian center is in Singapore. We
  have a major operation in Bangalore, India,
  which is a major part of Philips' software
  development. We have a big unit in Taiwan for
  semiconductors and components. And there's a new
  one in Shanghai, which started three or four
  years ago, doing basic research. Shanghai also is
  for product research consumer electronics, a
  little bit of lighting.

13
QA

• Q What's the impact on your RD operations
  elsewhere?
• A We are refocusing our number of development
  spots in the world, and Asia is the growing part
  of those activities. We used to have, in Europe,
  God knows how many places. Those days are over.
  We are centralizing development activities into
  competence centers Bangalore for software,
  Singapore for consumer electronics, Taiwan for
  semiconductors and components -- and Shanghai for
  all of them.

14
(No Transcript)
15
Entry Modes
16
EXPORTING

• Disadvantages
• High transportation costs
• Trade barriers
• Problems with local marketing agents
• Inability to realize full sales potential of the
  product

• Advantages
• Avoiding substantial set-up costs in a host
  country
• Immediate profits
• Achieving experience curve and location economies

17
TURNKEY PROJECTS

• A project in which a firm agrees to set up an
  operating plant for foreign client and hand over
  the key when the plant is fully operational

18
TURNKEY PROJECTS

• Advantages
• Ability to earn returns from process technology
  skills in countries where FDI is restricted
• Less risky than conventional FDI

• Disadvantages
• Creating efficient competitors
• Selling the technology selling competitive
  advantage
• Lack of long-term market presence

19
LICENSING

• Agreements where licensor grants the rights to
  intangible property to another entity for a
  specific period, and in return, the licensor
  receives royalty fee from licensee.

20
LICENSING

• Advantages
• Reduces development costs and risks of
  establishing foreign enterprise
• Lack capital for venture
• Unfamiliar or politically volatile market
• Overcomes restrictive investment barriers
• Others can develop business applications of
  intangible property

• Disadvantages
• Lack of control
• Inability to involve into global strategic
  coordination
• Cross-border licensing may be difficult
• Creating a competitor

21
FRANCHISING

• A specialized for of licensing in which the
  franchiser not only sells intangible property to
  the franchisee (normally a trademark), but also
  insists that franchisee agrees to abide by strict
  rules as to how it does the business.

22
FRANCHISING

• Advantages
• Reduces costs and risk of establishing enterprise
• Ability to build global presence quickly

• Disadvantages
• May prohibit movement of profits from one country
  to support operations in another country
• Quality control

23
JOINT VENTURE

• A joint venture entails establishing a firm that
  is jointly owned by two or more otherwise
  independent firms

24
JOINT VENTURE

• Advantages
• Access to local partners knowledge
• Sharing development costs and risks
• Politically acceptable

• Disadvantages
• Risk giving control of technology to partner
• Absence of tight control
• Shared ownership can lead to conflict

25
WHOLLY OWNED SUBSIDIARY

• Advantages
• Protection of technology
• Ability to engage into global strategic
  coordination
• Ability to realize location and experience
  economies

• Disadvantages
• High costs and risks

26
SELECTING AN ENTRY MODE

• Technological Know-How
• Wholly owned subsidiary, except
• Venture is structured to reduce risk of loss of
  technology
• Technology advantage is transitory
• Then licensing or joint venture OK
• Management Know-How
• Franchising, subsidiaries (wholly owned or joint
  venture)
• Pressure for Cost Reduction
• Combination of exporting and wholly owned
  subsidiary

27
Theories of the Multinational Corporation

• Market Imperfections
• Theory of Industrial Organization
• Internalization Theory
• Financial Market Imperfections
• Strategic Behavior Theory (F.T. Knickerboker)
• The Product Life Cycle Theory (R. Vernon)
• Location-Specific Advantages Theory (J.Dunning)