Forms of
International
Business
Forms of International Business
Exporting Licensing Franchising Joint Venture
Management Trunkey Strategic Foreign Direct
Contracts Projects Alliances Investment
EXPORTING
Exporting means producing/procuring in
Forms of the home market and selling in the
foreign market. Exporting is not an
International activity just for large multinational
enterprises; small firms can also make
Business money by exporting. In recent days,
exporting has become easier though it
remains a challenge for many firms.
Licensing
Forms of A licensing is an agreement whereby a
licensor grants the rights to intangible
International property (patents, intentions, formulas,
processes, designs, copyrights and
Business trademarks) to another entity (licensee) for a
specified period and in return the licensor
receives a royalty/fee from the licensee.
Franchising
Franchising is basically a
Forms of specialized form of licensing in
which the franchiser not only sells
International intangible property to the
Business franchisee but also insists that the
franchisee agrees to abide by strict
rules as to how it does business.
Forms of Joint Venture
International joint venture entails establishing a firm that
is jointly owned by two or more independent
Business firms.
Management Contracts
Forms of firm in one country agrees to
operate facilities or provide other
International management services to a firm in
Business another country for an agreed upon
fees.
Trunkey Projects
Forms of In a turnkey project, the contractor agrees to
handle every details of the project for a
International foreign client, including the training of
operating personnel. At completing of the
Business contract the foreign client handles the ‘key’
of a plant that is ready for full operation
Strategic Alliances
Forms of A strategic international alliance is
a business relationship established
International by two or more companies to
cooperate out of mutual need and
Business to share risk in achieving a
common objective.
Foreign Direct Investment
Forms of Direct foreign investment is another
important form of international business.
International Companies may manufacture locally to
capitalize on low cost labor, to avoid high
Business import taxes, to reduce the high cost of
transportation to market, to gain access to
raw materials or gaining market entry.
Chapter 8
FOREIGN DIRECT
INVESTMENT
Foreign direct investment (FDI) occurs when a firm invests
directly in new facilities to produce and/or market in a foreign
country
the firm becomes a multinational enterprise
What Is FDI? FDI can be in the form of
greenfield investments - the
acquisitions or mergers with
establishment of a wholly new
existing firms in the foreign country
operation in a foreign country
Most cross-border investment is in the form of mergers and
acquisitions rather than greenfield investments
Firms prefer to acquire existing assets
because
Why Do Firms mergers and acquisitions are quicker to
Choose execute than greenfield investments
it is easier and perhaps less risky for a firm
Acquisition to acquire desired assets than build them
from the ground up
Versus firms believe that they can increase the
Greenfield efficiency of an acquired unit by
transferring capital, technology, or
Investments? management skills
The flow of FDI - the amount of FDI undertaken over a given
outflows of FDI are the
time period
inflows of FDI are the flows
flows of FDI out of a
of FDI into a country
country
What Are The
The stock of FDI - the total accumulated value of foreign-
Patterns Of owned assets at a given time
FDI?
Both the flow and stock of FDI have increased over the last
30 years
What Are The
Patterns Of FDI?
FDI Outflows 1982-2010
($ billions)
What Are The Patterns Of FDI?
FDI Inflows by Region 1995-
2010 ($ billion)
The growth of FDI is a result of
1. A fear of protectionism
want to circumvent trade barriers
2. Political and economic changes
deregulation, privatization, fewer
restrictions on FDI
What Are The 3. New bilateral investment treaties
Patterns Of FDI? designed to facilitate investment
4. The globalization of the world economy
many companies now view the world as
their market
need to be closer to their customers
What Is The Source Of FDI?
Cumulative FDI Outflows 1998-
2010 ($ billions)
Why Choose FDI?
Question: Why choose FDI not exporting or licensing?
Exporting - producing goods at home and then shipping them to the receiving
country for sale
Licensing - granting a foreign entity the right to produce and sell the firm’s product
in return for a royalty fee on every unit that the foreign entity sells
•• internalization
internalization theory
theory (aka
(aka market
market imperfections
imperfections theory)
theory)
Knickerbocker - FDI flows are a reflection of strategic rivalry between firms in the
global marketplace
•• multipoint
multipoint competition
competition
Vernon - firms undertake FDI at particular stages in the life cycle of a product
Why Choose FDI?
Dunning’s eclectic paradigm - it is important to consider
location-specific advantages - that arise from using resource
endowments or assets that are tied to a particular location
and that a firm finds valuable to combine with its own unique
assets
externalities - knowledge spillovers that occur when
companies in the same industry locate in the same area
What Are The Theoretical Approaches To FDI?
Pragmatic nationalism -
The radical view - the
The free market view - FDI has both benefits
MNE is an instrument of
international production (inflows of capital,
imperialist domination
should be distributed technology, skills and
and a tool for exploiting
among countries jobs) and costs
host countries to the
according to the theory (repatriation of profits
exclusive benefit of their
of comparative to the home country and
capitalist-imperialist
advantage a negative balance of
home countries
payments effect)
What Does FDI Mean For The Host Country?
Benefits of inward FDI for a Costs of inward FDI for a host
host country country
• Resource transfer effects • Adverse effects on
• Employment effects competition within the host
• Balance of payments effects nation
• Effects on competition and • Adverse effects on the
economic growth balance of payments
• Perceived loss of national
sovereignty and autonomy
Benefits of FDI for the home country
include
• The positive effect on the capital account from the
What Does inward flow of foreign earnings
• The employment effects that arise from outward FDI
• The gains from learning valuable skills from foreign
FDI Mean For markets that can subsequently be transferred back to
the home country
The Home
Costs of FDI for the home country include
Country? • The negative effect on the balance of payments
• Employment may also be negatively affected if the FDI
is a substitute for domestic production
How Does Government Influence FDI?
1 2 3 4
Governments can Governments can Governments can Governments can
encourage outward restrict outward FDI encourage inward restrict inward FDI
FDI • limit capital outflows, FDI • use ownership restraints
• government-backed manipulate tax rules, or • offer incentives to and performance
insurance programs to outright prohibit FDI foreign firms to invest in requirements
cover major types of their countries
foreign investment risk
Managers need to consider what trade
theory implies about FDI, and the link
between government policy and FDI
What Does
FDI The direction of FDI can be explained
through the location-specific advantages
Mean For argument associated with John Dunning
Managers?
A host government’s attitude toward FDI
is an important variable in decisions about
where to locate foreign production
facilities and where to make a foreign
direct investment
What Does FDI
Mean For Managers?
A Decision Framework
