INTERNATIONAL ECONOMIC RELATIONS

Lecture 3:
Collaborative strategies

Marc Arza Nolla

marc.arza@urv.cat
February 2024
Goals

The main purpose of this lecture is to tackle with two different questions: i)
why exporting might not be the most convenient strategy for a firm; ii) main
collaborative agreements with foreign partners.

References

Daniel, J.D. and L.H. Radebaugh (1989): International Business, Chapter 15,
Some more forms of foreign involvement. Ed. Addison-Wesley Publishing
Company, 5ᵗʰ edition.
1. Introduction

2. Why exporting may be or not be feasible

3. Non-collaborative foreign-equity agreement
4. Why do companies collaborate?
5. Types of collaborative arrangements
1. Introduction

2. Why exporting may be or not be feasible

3. Non-collaborative foreign-equity agreement
4. Why companies collaborate?
5. Types of collaborative arrangements
 1. Introduction

Once a firm decides to enter into a foreign market, the question is.. Which
is the best mode of entry? Firms use basically six different modes to
enter foreign markets:

- exporting - licensing
- m&a - franchising
- setting up a wholly owned - joint ventures
subsidiary

When forming objectives and implementing strategies in a variety of

country environments, firms must either handle international
business operations on their own or collaborate with other
companies.
Although exporting is usually the preferred alternative since it allows
firms to produce in their home countries, participating in some markets
may require using a variety of other equity and nonequity
arrangements. These can range from wholly owned operations to
partially owned subsidiaries, joint ventures, equity alliances, licensing,
franchising, etc.
1. Introduction

2. Why exporting may be or not be feasible

3. Non-collaborative foreign-equity agreement
4. Why do companies collaborate?
5. Types of collaborative arrangements
 2. Why exporting may be or not be feasible

Exporting has two advantages:

Adv1. It avoids the often-substantial costs of establishing

manufacturing operations in the host country.
By manufacturing the product in a centralized location and exporting it
to other national markets, the firm may realize substantial scale
economies from its global sales volume.

Example. Sony came to dominate the global TV market, and also

many Japanese auto firms enter into the US auto market by exporting.

Adv2. Exporting may help a firm achieve experience curve and

location economies.
 2. Why exporting may be or not be feasible

However, exporting has a number of drawbacks:

Drawb1. Exporting from the firm's home base may not be appropriate if
there are lower-cost locations for manufacturing the product
abroad. In other words, it may be preferable to manufacture where the
mix of factor conditions is most favorable from a value creation
perspective and to export to the rest of the world from that location.
Note: This is not so much an argument against exporting but an
argument against exporting from the firm's home country.

Drawb2. High transport costs can make exporting uneconomical,

particularly for bulk products. One way of getting around this is to
manufacture bulk products regionally.

Drawb3. Tariff barriers can make exporting uneconomical. Similarly,

the threat of tariff barriers by the host-country government can make it
very risky.
 2. Why exporting may be or not be feasible

Hence, we must take into account:

1. Cheaper to produce abroad: Competition requires companies to
control their costs and to choose production locations with this factor in
mind.
2. Transportation costs: Some products and services become
impractical to export after the cost of transportation is added to
production costs. In general, the farther the target market is from the
home country, the higher transportation costs are relative to production
costs, the more difficult it is to be competitive through exporting.
3. Lack of domestic capacity: When demand exceeds capacity,
however, new facilities are needed and are often located nearer to the
end consumers in other countries.
4. Need to alter products and services: The more that products must
be altered for foreign markets, the more likely production will shift to
those foreign markets.
 2. Why exporting may be or not be feasible

Hence, we must take into account:

5. Trade restrictions: Although import barriers have been on the
decline, some significant tariffs continue to exist. Avoiding barriers
through production in the target country must be weighed against
other considerations such as the market size of the country and the
scale of technology used in production.
6. Country of origin effects: Consumers may prefer goods
produced in their own country over imports because of nationalistic
feelings. Other considerations like the availability of service and
replacement parts for imported products, or adoption of just-in-time
manufacturing systems may influence production locations.
1. Introduction

2. Why exporting may be or not be feasible

3. Non-collaborative foreign-equity agreement
4. Why do companies collaborate?
5. Types of collaborative arrangements
 3. Non-collaborative foreign-equity agreement

Two forms of FDI that do not involve collaboration are wholly owned
operations and partially owned operations with the remainder widely
held.

A. Foreign Direct Investment and Control

To qualify as a FDI, the investor must have control. This can be
established with a small percentage of the holdings if ownership is
widely dispersed. The more ownership a company has, the greater its
control over the management decisions of the operation.

There are 3 main reasons for companies to want a controlling interest:

1. Internalization. Transactions cost theory holds that companies should
organize operations internally when the costs of doing so are lower than
contracting with another party to handle it for them.
2. Appropriability. Appropriability theory is the idea that companies want to
deny rivals and potential rivals access to resources such as capital, patents,
trademarks & know-how.
3. Pursuit of Global Strategies. When a company has a wholly owned foreign
operation, it may more easily have that operation participate in a global or
transnational strategy.
 3. Non-collaborative foreign-equity agreement

Two forms of FDI that do not involve collaboration are wholly owned
operations and partially owned operations with the remainder widely held.

B. Methods for Making FDI

FDI usually involves international capital movement, but could also
involve the transfer of other assets such as managers, cost control
systems. Companies can either acquire an interest in an existing
company or construct new facilities, known as a greenfield investment.
1. Reasons for Buying. Companies may acquire existing operations in order to
avoid adding further capacity to the market, to avoid start-up problems, obtain
easier financing, and get an immediate cash flow rather than tying up funds
during construction. A company may also save time, reduce costs, and reduce
risks by buying an existing company.
2. Reasons for Greenfield. Companies may choose to build if no suitable
company is available for acquisition, if the acquisition is likely to lead to carry-over
problems, and if the acquisition is harder to finance. In addition, local
governments may prevent acquisitions because they want more competitors in
the market and fear foreign domination.
1. Introduction

2. Why exporting may be or not be feasible

3. Non-collaborative foreign-equity agreement
4. Why do companies collaborate?
5. Types of collaborative arrangements
 4. Why companies collaborate?

Strategic alliances refer to cooperative agreements between potential

or actual competitors.
Here, we are concerned specifically with strategic alliances between
firms from different countries.

Strategic alliances run the range from:

- formal joint ventures, in which two or more firms have equity stakes
- to short-term contractual agreements, in which two companies agree
to cooperate on a particular task (such as developing a new product)
 4. Why companies collaborate?

Companies collaborate with other firms in either their domestic or foreign

operations in order to:
1. Spread and reduce costs. When the volume of business is small, or one partner
has excess capacity, it may be less expensive to collaborate with another firm.
2. Specialize in competencies. The resource-based view the firm holds that each
firm has a unique combination of competencies. Thus, a firm can maximize its
performance by concentrating on those activities that best fit its competencies.
3. Avoid or counter competition. When markets are not large enough for numerous
competitors, or when firms need to confront a market leader, they may band together.
4. Secure vertical and horizontal links. If a firm lacks the competence and/or
resources to own & manage all of the activities of the value chain, a arrangement may
yield greater vertical access and control. At the horizontal level, economies of scope in
distribution and earnings and access to bigger projects is key.
5. Gain knowledge. Many firms pursue arrangements in order to learn about their
partners’ technology, operating methods, or home markets and broaden
competitiveness.
 4. Why companies collaborate?

Companies collaborate with other firms in their foreign operations in

order to:
1. Gain location-specific assets. Cultural, political, competitive, and economic
differences among countries create challenges for companies that operate
abroad. To overcome such barriers and gain access to location-specific assets
(e.g., distribution access or a competent workforce), firms may pursue
arrangements.
2. Overcome governmental constraints. Countries may prohibit or limit the
participation of foreign firms in certain industries, or discriminate against foreign
firms via tax rates and profit repatriation. Firms may be able to overcome such
barriers via collaboration with a local partner.
3. Diversify geographically. By operating in a variety of countries, a firm can
smooth its sales and earnings; arrangements may also offer a faster initial
means of entering multiple markets or establishing multiple sources of supply.
4. Minimize exposure in risky environments. The higher the risk managers
perceive with respect to a foreign operation, the greater their desire to form a
arrangement.
1. Introduction

2. Why exporting may be or not be feasible

3. Non-collaborative foreign-equity agreement
4. Why do companies collaborate?
5. Types of collaborative arrangements
 5. Types of collaborative arrangements

A licensing agreement is an arrangement whereby a licensor grants

the rights to intangible property to another entity (the licensee) for a
specified period, and in return, the licensor receives a royalty fee from
the licensee. Intangible property includes patents, inventions, formulas,
processes, designs, copyrights, and trademarks.

In the typical international licensing deal, the licensee puts up most of

the capital necessary to get the overseas operation going.
1) Thus, an advantage of licensing is that the firm does not have to bear the
development costs and risks associated with opening a foreign market.
2) Licensing is also often used when a firm wishes to participate in a foreign
market but is prohibited from doing so by barriers to investment.
3) Finally, licensing is frequently used when a firm possesses some intangible
property that might have business applications, but it does not want to develop
those applications itself. (e.g., Coca-Cola T-shirts).
 5. Types of collaborative arrangements

In many respects, franchising is similar to licensing, although

franchising tends to involve longer-term commitments than licensing.

Franchising is basically a specialized form of licensing in which the

franchiser not only sells intangible property to the franchisee
(normally a trademark), but also insists that the franchisee agree to
abide by strict rules as to how it does business.

The franchiser will also often assist the franchisee to run the business
on an ongoing basis. As with licensing, the franchiser typically receives
a royalty payment.

Whereas licensing is pursued primarily by manufacturing firms,

franchising is employed primarily by service firms. McDonald's is a
good example of a firm that has grown by using a franchising strategy.
 5. Types of collaborative arrangements

The disadvantages are less pronounced than in the case of licensing.

Since franchising is often used by service companies, there is no

reason to consider the need for coordination of manufacturing to
achieve experience curve and location economies.

But franchising may inhibit the firm's ability to take profits out of one
country to support competitive attacks in another.

A more significant disadvantage of franchising is quality control. The

foundation of franchising arrangements is that the firm's brand name
conveys a message to consumers about the quality of the firm's
product. This presents a problem in that foreign franchisees may not be
as concerned about quality as they are supposed to be, and the result
of poor quality can extend beyond lost sales in a particular foreign
market to a decline in the firm's worldwide reputation.
 5. Types of collaborative arrangements

A joint venture entails establishing a firm that is jointly owned by

two or more otherwise independent firms.

Establishing a joint venture with a foreign firm has long been a

popular mode for entering a new market. The typical joint venture is
a 50/50 venture, in which each party hold a 50% ownership and
contributes a team of managers to share operating control.
However, some firms only go for joint ventures in which they have
more than 50%.
 5. Types of collaborative arrangements

Advantages:
1. A firm benefits from a local partner's knowledge of the host country's
competitive conditions, culture, language, political systems, and business
systems.
2. When the development costs and/or risks of opening a foreign market are
high, a firm might gain by sharing these costs and/or risks with a local
partner.
3. On top of it in many countries, political considerations make joint ventures
the only feasible entry mode.

Disadvantages:
1. As with licensing, a firm that enters into a joint venture risks giving control
of its technology to its partner.
2. A joint venture does not give a firm the tight control over subsidiaries that it
might need to realize experience curve or location economies.
3. The shared ownership arrangement can lead to conflicts and battles for
control between the investing firms if their goals and objectives change or if
they take different views about strategy.
 5. Types of collaborative arrangements

Sony-Ericsson is a joint venture by the Japanese consumer electronics

company Sony Corporation and the Swedish telecommunications
company Ericsson to make mobile phones. The stated reason for this
venture is to combine Sony's consumer electronics expertise with
Ericsson's technological leadership in the communications sector. Both
companies have stopped making their own mobile phones.
[03/03/2012]: This joint venture agreement is no more available.

Virgin Mobile India Limited is a cellular telephone service provider

company which is a joint venture between Tata Tele service and Richard
Branson's Service Group. Currently, the company uses Tata's CDMA
network to offer its services under the brand name Virgin Mobile, and it
has also started GSM services in some states.
5. Types of collaborative arrangements
5. Types of collaborative arrangements
5. Types of collaborative arrangements