CH 14 Foreign Direct Investment

Chapter 14
Foreign Direct Investment

and Collaborative Ventures
International Business
Strategy, Management
& the New Realities
by
Cavusgil, Knight & Risenberger
International Business: Strategy, Management, and the New Realities 1

Learning Objectives
1. An organizing framework for foreign market

entry strategies
2. Motives for foreign direct investment (FDI) and
collaborative ventures
3. Foreign direct investment
4. Types of foreign direct investment
5. International collaborative ventures
6. Managing collaborative ventures
7. The experience of retailers in foreign markets
8. Foreign direct investment, collaborative
ventures, and ethical behavior

FDI and Collaborative Ventures
Foreign direct investment (FDI) is an

internationalization strategy in which the firm
establishes a physical presence abroad
through acquisition of productive assets such
as capital, technology, labor, land, plant, and
equipment.
International collaborative venture refers to a
cross-border business alliance in which
partnering firms pool their resources and share
costs and risks of the venture.
Joint venture (JV): a form of collaboration
between two or more firms to create a jointly-
owned enterprise.
Recent Examples of FDI
• Vodafone, a British firm, which acquired the Czech

telecom Oskar Mobil;
• eBay, a U.S. firm, acquired Luxembourg’s Skype
Technologies, a prepackaged software company;
• Japan Tobacco Inc. acquired the British cigarette
maker Gallaher Group PLC for almost $15 billion;
 Dubai International Capital Group acquired the
British theme park operator Tussauds Group for
$1.5 billion;
 Sing Tel, a Singapore firm, acquired 49 cross-border
firms worth over $36 billion over eight years,
including Cable and Wireless Optus Ltd. of
Australia.

FDI: A Complex Foreign Market Entry Strategy
• FDI is the most advanced and complex

entry strategy, and involves establishing
manufacturing plants, marketing
subsidiaries, or other facilities abroad.
• For the firm, FDI requires substantial
resource commitment, local presence and
operations in target countries, and global
scale efficiency.
• FDI also entails greater risk, as compared
to other entry modes.
Patterns in FDI
• Companies from both the advanced economies and

emerging markets are active in FDI.
• Destination or recipient countries for such
investments include both advanced economies and
emerging markets.
• Companies employ multiple strategies to enter
foreign markets as investors, including acquisitions
and collaborative ventures.
• Companies from all types of industries, including
services, are active in FDI and collaborative
ventures.
• Direct investment by foreign companies occasionally
raises patriotic sentiments among citizens.

FDI may Raise Patriotic Sentiments
• The possibility of a Haier takeover of Maytag

Corp. in 2005 stirred anti-Chinese sentiment in
the U.S. over East Asian companies gobbling up
U.S. businesses.
• That same year, a bid by China oil company
CNOOC Ltd. to buy California-based Unocal
Corp. for $18.5 billion raised concerns over
national security. When the public objected to
the possibility of a Chinese state enterprise
gaining control in a critical sector such as
energy, the U.S. Congress banned the deal.

Considerations Relevant to Choice of
Foreign Market Entry Strategy
• The degree of control it wants to maintain over the

decisions, operations, and strategic assets involved in
the venture;
• The degree of risk it is willing to tolerate, and the
timeframe in which it expects returns;
• The organizational and financial resources (e.g., capital,
managers, technology) it will commit to the venture;
• The availability and capabilities of partners in the market;
• The value-adding activities it is willing to perform itself in
the market, and what activities it will leave to partners;
• The long-term strategic importance of the market.

An Organizing Framework Based on
Degree of Control Available to the Focal Firm
• Low-control strategies are exporting,

countertrade and global sourcing. They provide
the least control over foreign operations, since
the focal firm delegates considerable
responsibility to foreign distributors.
• Moderate-control strategies are contractual
relationships such as licensing and franchising
and project-based collaborative ventures.
• High-control strategies are equity joint
ventures and FDI. The focal firm attains
maximum control by establishing a physical
presence in the foreign market.

Trade-Offs in Foreign Market Entry Strategies
• High-control strategies require substantial

resource commitments by the focal firm.
• Because the firm becomes ‘anchored’ or
physically tied to the foreign market for the long
term, it has less flexibility to reconfigure its
operations there, as conditions in the country
evolve over time.
• Longer term involvement in the market also
implies considerable risk due to uncertainty in
the political and customer environments.

Motives for FDI and Collaborative Ventures
• Firms pursue FDI and international

collaborative ventures for complex and
overlapping reasons.
• The ultimate goal is to enhance firm
competitiveness in the global marketplace.
• Motives can be classified into three categories:
 market-seeking motives,
 resource or asset-seeking motives, and
 efficiency-seeking motives.

Market-Seeking Motives
• Gain access to new markets or opportunities. The

existence of a substantial market motivates many
firms to produce offerings at or near customer
locations. Boeing, Coca-Cola, IBM, McDonald's, and
Toyota all generate more sales abroad than they do at
home.
• Follow key customers. Firms often follow their key
customers abroad to preempt other vendors from
servicing them. E.g, Tradegar Industries, which
supplies the plastic that its customer Procter &
Gamble uses to manufacture disposable diapers.
When P&G built a plant in China, Tradegar
management established production there as well.
• Compete with key rivals in their own markets.

Resource or Asset-Seeking Motives
• Access raw materials needed in extractive and

agricultural industries. E.g., firms in the mining, oil,
and crop-growing industries have little choice but to
go where the raw materials are located.
• Gain access to knowledge or other assets. E.g.,
when Whirlpool entered Europe, it partnered with
Philips to benefit from the latter firm’s well-known
brand name and distribution network.
• Access technological and managerial know-how
available in a key market. The firm may benefit by
establishing a presence in a key industrial cluster,
such as the robotics industry in Japan, chemicals in
Germany, fashion in Italy, and software in the U.S.

Efficiency Seeking Motives
• Reduce sourcing and production costs by accessing

inexpensive labor and other cheap inputs to the production
process. This motive accounts for the massive development
of manufacturing facilities in China, Mexico, Eastern Europe,
and India.
• Locate production near customers. In the fashion industry,
Spain’s Zara and Sweden’s H&M locate much of their
garment production in key markets such as Spain and Turkey.
• Take advantage of government incentives. In addition to
restricting imports, governments may offer subsidies and tax
concessions to foreign firms to encourage them to invest
locally.
• Avoid trade barriers. By establishing a physical presence
within a country, the investor obtains the same advantages as
local firms. The desire to avoid trade barriers helps explain
why Japanese automakers set up factories in the U.S.
(1980s).
Features of FDI
• FDI is the entry strategy most associated with the MNE.

Sony, Nestlé, Nokia, Motorola, and Toyota have
extensive FDI-based operations around the world.
• Service firms usually establish agency relationships and
retail facilities.
• FDI should not be confused with international or foreign
portfolio investment. International portfolio investment
refers to passive ownership of foreign securities such as
stocks and bonds for the purpose of generating financial
returns.
• International portfolio investment is not direct investment
which seeks control of a business abroad and represents
a long-term commitment.

Key Features of FDI
• FDI requires greater resource commitment by the

firm.
• FDI means the company must have local presence
and operations.
• FDI assumes the firm wants to achieve global scale
efficiency.
• FDI entails great risk and uncertainty. The firm sets
up a permanent, physical presence in a foreign
country, and exposes the firm to new risks.
• FDI means the firm must have greater contact with
the social and cultural factors of the host market.
• MNEs need to behave in socially responsible ways
in host countries.
Who Is Active in Direct Investment?
• Direct investment is the typical foreign

market entry strategy for large MNEs –
firms with extensive experience in
international business.
• Exhibit 14.3 shows the MNEs with the
greatest amount of such foreign assets as
subsidiaries and affiliates, worldwide.
• E.g., U.K-based Vodafone is a mobile
phone supplier with numerous sales
offices in most major cities around the
world.
Service Multinationals
• Firms must offer services, such as lodging,

construction, and personal care, when and where they
are consumed.
• Service firms establish either a permanent presence
through FDI (e.g., retailing), or a temporary relocation
of personnel (e.g., construction industry.
• E.g., management consulting is a service that is
usually embodied in human experts who interact
directly with clients to dispense advice. Firms such as
McKinsey and Cap Gemini generally establish offices
abroad.
• Many support services, such as advertising,
insurance, accounting, the law, and package delivery,
are also best provided at the customer’s location.

Leading Destinations for FDI
• Advanced economies such as Australia, Belgium,

Britain, Canada, Germany, Japan, Netherlands, and
the United States long have been popular destinations
for FDI because of their strong GDP per capita, GDP
growth rate, density of knowledge workers, and
superior business infrastructure.
• In recent years, emerging markets and developing
economies have gained appeal as FDI destinations.
According to A.T. Kearney’s FDI Confidence Index,
the top destination for foreign investment today is
China. India is now in third place, having risen rapidly
in Kearney’s annual rankings

Factors Relevant to Selecting FDI Locations
• Market attractiveness
• Human resource factors
• Infrastructure
• Profit retention factors (e.g.,taxes)
• Economic environment
• Legal and regulatory environment
• Political and governmental structure
Types of FDI
• Greenfield investment vs.

mergers and acquisitions
• The nature of ownership: Wholly
owned direct investment vs.
equity joint venture
• Level of integration: Vertical vs.
horizontal FDI
Greenfield Investment vs. M&As
• Greenfield investment occurs when a

firm invests to build a new manufacturing,
marketing or administrative facility, as
opposed to acquiring existing facilities.
• An acquisition refers to a direct
investment or purchase of an existing
company or a facility.
• A merger is a special type of acquisition in
which two firms join to form a new, larger
firm.
Nature of Ownership
• Equity participation: Acquisition of partial ownership

in an existing firm.
• Wholly owned direct investment: A foreign direct
investment in which the investor fully owns the foreign
assets
• Equity joint ventures : A type of partnership in which
a separate firm is created through the investment or
pooling of assets by two or more parent firms that gain
joint ownership of the new legal entity.
• Joint ventures may be the only way that a company
can expand into a country. E.g., until recently, the
Chinese government prohibited foreign firms from
having more than 49% equity investment in local
businesses.

Level of Integration
• Vertical integration: The firm owns, or seeks to

own, multiple stages of a value chain for
producing, selling, and delivering a product.
• In forward vertical integration, the firm
develops the capacity to sell its outputs by
investing in downstream value-chain facilities,
that is, marketing and selling operations.
• Forward vertical integration is less common than
backward vertical integration, in which the firm
acquires the capacity abroad to provide inputs
for its foreign or domestic production processes
by investing in upstream facilities, typically
factories, assembly plants or refining operations.
International Collaborative Ventures
• A collaborative venture is essentially a

partnership between two or more firms and
includes equity joint ventures as well as non-
equity, project-based ventures.
• International collaborative ventures are
sometimes referred to as international
partnerships and international strategic
alliances.
• Collaboration helps firms overcome the often
substantial risk and high costs of international
business. It makes possible the achievement of
projects that exceed the capabilities of the
individual firm.
Equity Joint Ventures
• JVs ventures are normally formed when no one party

possesses all of the assets needed to exploit an
available opportunity.
• Typically, the foreign partner contributes capital,
technology, management expertise, training, or some
type of product.
• The local partner contributes the use of its factory or
other real estate; knowledge of the local language and
culture; market navigation know-how; useful connections
to the host country government; or lower-cost production
factors such as labor.
• The partnership allows the foreign firm to access key
market knowledge, gain immediate access to a
distribution system and customers, and greater control
over local operations.

Project-Based, Non-Equity Ventures
• Project-based, non-equity venture is a

collaboration in which the partners create a project
with a relatively narrow scope and a well-defined
timetable, without creating a new legal entity.
• Combining personnel, resources, and capabilities,
the partners collaborate until the venture bears
fruit, or until they no longer consider it valuable to
collaborate.
• Typically, partners collaborate on joint
development of new technologies, products, or
share other expertise with each other. Such
cooperation may help them catch up with rivals in
technology development.

How Project-Based Collaborations are
Different From Equity Joint Ventures
• No new legal entity is created; partners carry on their

activity within the guidelines of a contract.
• Parent companies do not necessarily seek ownership of
an ongoing enterprise; they simply contribute their
knowledge, expertise, personnel, and monetary
resources in order to derive knowledge or access-related
benefits.
• Collaboration does not last indefinitely; it tends to have a
well-defined timetable and an end date; partners go their
separate ways once the objectives have been
accomplished or the partners find no reason for
continuation.
• The nature of collaboration is narrower in scope, typically
revolving around one or more R&D project, new products,
marketing, distribution, sourcing, or manufacturing.

Other Examples of Collaborative Ventures
• A consortium is a project-based, usually non-

equity venture with multiple partners fulfilling a
large-scale project. It is typically formed with a
contract, which delineates the rights and
obligations of each member.
• A cross-licensing agreement is a type of a
project-based, non-equity venture where
partners agree to access licensed technology
developed by the other, on preferential terms.
The agreement assumes each partner has or
expects to have something to license.

Management of Collaborative Ventures:
Understand Potential Risks in Collaboration
• As a firm, are we likely to grow very dependent on our

partner?
• By partnering, will we stifle growth and innovation in our
own organization?
• Will we share our competencies excessively, to the point
where corporate interests are threatened? How can we
safeguard our core competencies?
• Will we be exposed to significant commercial, political,
cultural, or currency risks?
• Will we close certain growth opportunities by
participating in this venture?
• Will managing the venture place an excessive burden on
corporate resources, such as managerial, financial, or
technological resources?

Pursue a Systematic Process for Partnering
• The initial decision in internationalization is the

choice of the most appropriate target market.
• The chosen market determines the
characteristics needed in a business partner. If
the firm is planning to enter an emerging market,
for example, it may want a partner with political
clout or "connections."
• Exhibit 14.8 reveals that managers need to draw
on their cross-cultural competence, legal
expertise, and financial planning skills in this
process.

“Compete and Collaborate”
• Collaborative ventures require much due diligence,

strong negotiation skills, high levels of commitment by
management, competence in managing cultural
differences, clear objectives, and a high level of trust
among partners.
• Foreign partners are certain to have their own agenda
and purpose for pursuing the venture. The focal firm
must be sure to maintain and negotiate its agenda as
well. Intel has worked to protect its proprietary
technology by not revealing too much of it to Chinese
partners.
• Some U.S. SMEs have regretted forming joint ventures
with Chinese partners: Too much trust and not enough
due diligence have often resulted in a critical loss of
intellectual property.

Success Factors in Collaborative
Ventures
Half of all global collaborative ventures fail within
the first 5 years of operations due to
unresolved disagreements, confusion, and
frustration: Therefore, partners should:
• Be aware of cultural differences.
• Pursue common values and culture.
• Pay attention to planning and management of
the venture.
• Protect core competencies.
• Adjust to new environmental circumstances.

Retailers: A Special Case of Internationalization
Retailers internationalize substantially through FDI and

collaborative ventures. Retailing takes various forms:
• Department stores (e.g., Marks & Spencer, Bay,
Macy's);
• Specialty retailers (Body Shop, Gap, Disney Store);
• Supermarkets (Sainsbury, Safeway, Sparr);
• Convenience stores (Circle K, 7-Eleven, Tom Thumb);
discount stores (Zellers, Tati, Target);
• ‘Big box stores” (Home Depot, IKEA, Toys "R" Us).
• Wal-Mart now has roughly 100 stores and 50,000
employees in China. It sources almost all its
merchandise locally, providing jobs for thousands of
Chinese.

The Experience of Retailers
• Internationalization of retailers has been driven

by saturation of home country markets,
deregulation of other markets, and opportunities
of lower costs abroad. Many foreign markets
have pent-up demand, fast growth, and a
growing and sophisticated middle-class.
• Many international retailing ventures have failed,
however. The French department store
Galleries Lafayette and Britain's Marks &
Spencer failed in the United States and Canada.
IKEA failed in Japan, and Wal-Mart left Germany
defeated because of local competitors and
cultural disconnects.
Wal-Mart’s Mixed Experience
• Wal-Mart is the world’s largest retailer but suffered dismal

results in Germany because it could not compete with local
competitors and eventually exited the market.
• In Mexico, Wal-Mart constructed massive U.S.-style
parking lots for its new super centers. But most Mexicans
don’t have cars, and city bus stops were beyond the huge
lots, so shoppers could not haul their goods home.
• In Brazil, most families do their big shopping once a month,
on payday. Wal-Mart built aisles too narrow and crowded
to accommodate the rush. It stocked shelves with
unneeded leaf blowers in urban Sao Paulo.
• In Argentina, Wal-Mart’s red-white-and-blue banners,
reminiscent of the U.S. flag, offended local tastes. Sam’s
Club flopped in Latin America partly because its huge multi-
pack items were too big for local shoppers with low
incomes and small apartments.
Barriers to Retailer Success Abroad
1. Cultural and language barriers: Retailers must

respond to local market requirements, e.g., by
customizing the product and service portfolio,
adapting store hours, modifying store size and
layout, and meeting labor union demands.
2. Consumers tend to develop strong loyalty to
indigenous retailers. As Galleries Lafayette in
New York and Wal-Mart in Germany
discovered, the foreign firm competes against
local competitors that usually enjoy much
loyalty from local consumers.

Barriers to Retailer Success Abroad (cont.)
3. Managers must address legal and regulatory barriers.

Countries have idiosyncratic laws that affect retailing.
E.g., Germany limits store opening hours, and
retailers must close on Sundays. Japan’s Large-Scale
Store Law meant that foreign warehouse and discount
retailers needed permission from existing small
retailers to enter.
4. When entering a new market, retailers must develop
local sources of supply. Local suppliers may be
unwilling or unable to supply. E.g., when Toys "R" Us
entered Japan, local toy manufacturers were reluctant
to work with the U.S. firm. Some retailers end up
importing many of their offerings, which requires
establishing complex and costly international supply
chains.
FDI or Franchising: A Choice for Retailers
• The larger, more experienced firms, such as Carrefour, Royal

Ahold, IKEA, and Wal-Mart, tend to internationalize via FDI;
i.e., they tend to own their stores.
• Smaller, less experienced international firms such as Borders
bookstores tend to rely on networks of independent
franchisees. In franchising, the retailer adopts a business
system from, and pays an ongoing fee to, a franchisor.
• Other firms may employ a dual strategy; using FDI in some
markets and franchising in others. Franchising provides a fast
way to internationalize. Relative to FDI, it affords the firm less
control over its foreign operations, which can be risky in
countries with weak IP laws.
• Starbucks, Carrefour, IKEA, Royal Ahold, and Wal-Mart
usually internationalize through company-owned stores. FDI
allows these firms to maintain direct control over their foreign
operations and proprietary assets.

Success Factors for Retailers
• Advanced research and planning is essential. In the run-up to

launching stores in China, management at the giant French
retailer Carrefour spent 12 years building up its business in
Taiwan, developing a deep understanding of Chinese culture.
• Establish efficient logistics and purchasing networks in each
market. Scale economies in procurement are especially critical.
Retailers need to organize sourcing and logistical operations to
ensure that adequate inventory is always maintained.
• Assume an entrepreneurial, creative approach to foreign
markets. Virgin megastore expanded Virgin to numerous
markets throughout Europe, North America, and Asia. Its stores
are big, well lit, and music albums are arranged in a logical order.
• Adjust business model to suit local conditions. Home Depot
offers merchandise in Mexico that suits the small budgets of do-
it-yourself builders. It has introduced payment plans for
customers and promotes the do-it-yourself mindset in a country
where most cannot afford to hire professional builders.

IKEA: An Exceptional Success Story
• IKEA, the world’s largest furniture retailer, has

experienced great international success, launching over
200 furniture mega-stores in dozens of countries.
• IKEA’s success derives from strong leadership and
skillful management of human resources. Management
balances global integration of operations with
responsiveness to local tastes.
• In each store, IKEA offers as many standardized
products as possible while maintaining sufficient
flexibility to accommodate specific local conditions.
• This is achieved in part by testing the waters and
learning in smaller markets before entering big markets.
For instance, IKEA perfected its retailing model in
German-speaking Switzerland before entering Germany.

Corporate Social Responsibility (CSR)
• CSR refers to operating a business in a manner that

meets or exceeds the ethical, legal, commercial, and
public expectations of stakeholders (customers,
shareholders, employees, and communities).
• It represents a set of core values that includes
avoiding human rights abuses; upholding the right to
join or form labor unions; elimination of compulsory
and child labor; avoiding workplace discrimination;
protecting the natural environment; and guarding
against corruption, including extortion and bribery.
• Exhibit 14.9 illustrates the diversity of CSR initiatives
that firms worldwide undertake.

Petrobras:
An Example of Corporate Citizenship CSR
• Petrobras, the Brazilian oil company, operations span 21

countries, many of which have unstable political or social
environments.
• In Brazil, Petrobras has developed extensive CSR-
oriented programs related to poverty reduction, youth
education, child labor and abuse, and fundamental rights
for people with physical and mental impairments.
• In Africa and elsewhere, Petrobras has developed CSR
initiatives in areas such as reconstruction projects for
schools, day-care centers, hospitals, and in rural
communities.
• In Colombia, the firm developed a program to train
community health agents. In Nigeria, Petrobras
cooperates with a local non-governmental organization
to provide HIV/AIDS prevention education in schools.

Relativism vs. Normativism in CSR
• Some believe that it is sufficient to simply follow the laws and

regulations in place in each country. However, many countries
are characterized by weak legal and regulatory systems, and
widespread corruption.
• Relativism refers to the belief that ethical truths are relative to
the groups that hold them. Relativism is akin to the advice:
“When in Rome, do as the Romans do.” Accordingly, a
Japanese MNE that believes bribery is wrong might pay bribes in
countries where the practice is customary and culturally
acceptable. It is natural for the firm to follow the values and
behaviors prevailing in the countries where it does business.
• Normativism is a belief in universal behavioral standards that
firms and individuals should uphold. According to this view, the
Japanese multinational that believes bribery is wrong will enforce
this standard everywhere in the world.
• The U.N. and other CSR proponents increasingly encourage
companies to follow a normative approach.

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CH 14 Foreign Direct Investment

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Chapter 14

Foreign Direct Investment

International Business: Strategy, Management, and the New Realities 1

1. An organizing framework for foreign market

International Business: Strategy, Management, and the New Realities 2

Foreign direct investment (FDI) is an

• Vodafone, a British firm, which acquired the Czech

International Business: Strategy, Management, and the New Realities 4

• FDI is the most advanced and complex

• Companies from both the advanced economies and

International Business: Strategy, Management, and the New Realities 6

• The possibility of a Haier takeover of Maytag

International Business: Strategy, Management, and the New Realities 7

• The degree of control it wants to maintain over the

International Business: Strategy, Management, and the New Realities 8

• Low-control strategies are exporting,

International Business: Strategy, Management, and the New Realities 9

• High-control strategies require substantial

International Business: Strategy, Management, and the New Realities 11

• Firms pursue FDI and international

International Business: Strategy, Management, and the New Realities 12

• Gain access to new markets or opportunities. The

International Business: Strategy, Management, and the New Realities 14

• Access raw materials needed in extractive and

International Business: Strategy, Management, and the New Realities 15

• Reduce sourcing and production costs by accessing

• FDI is the entry strategy most associated with the MNE.

International Business: Strategy, Management, and the New Realities 17

• FDI requires greater resource commitment by the

• Direct investment is the typical foreign

• Firms must offer services, such as lodging,

International Business: Strategy, Management, and the New Realities 21

• Advanced economies such as Australia, Belgium,

International Business: Strategy, Management, and the New Realities 23

• Greenfield investment vs.

• Greenfield investment occurs when a

• Equity participation: Acquisition of partial ownership

International Business: Strategy, Management, and the New Realities 29

• Vertical integration: The firm owns, or seeks to

• A collaborative venture is essentially a

• JVs ventures are normally formed when no one party

International Business: Strategy, Management, and the New Realities 32

• Project-based, non-equity venture is a

International Business: Strategy, Management, and the New Realities 33

• No new legal entity is created; partners carry on their

International Business: Strategy, Management, and the New Realities 34

• A consortium is a project-based, usually non-

International Business: Strategy, Management, and the New Realities 36

• As a firm, are we likely to grow very dependent on our

International Business: Strategy, Management, and the New Realities 37

• The initial decision in internationalization is the

International Business: Strategy, Management, and the New Realities 38

• Collaborative ventures require much due diligence,

International Business: Strategy, Management, and the New Realities 40

International Business: Strategy, Management, and the New Realities 41

Retailers internationalize substantially through FDI and

International Business: Strategy, Management, and the New Realities 42

• Internationalization of retailers has been driven

• Wal-Mart is the world’s largest retailer but suffered dismal

1. Cultural and language barriers: Retailers must

International Business: Strategy, Management, and the New Realities 45

3. Managers must address legal and regulatory barriers.

• The larger, more experienced firms, such as Carrefour, Royal