* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download Greenfield investment
Survey
Document related concepts
Corporate venture capital wikipedia , lookup
Venture capital financing wikipedia , lookup
Market (economics) wikipedia , lookup
Investor-state dispute settlement wikipedia , lookup
Early history of private equity wikipedia , lookup
Investment management wikipedia , lookup
History of investment banking in the United States wikipedia , lookup
Environmental, social and corporate governance wikipedia , lookup
Investment banking wikipedia , lookup
Investment fund wikipedia , lookup
Transcript
COURSE: GLOBAL BUSINESS MANAGEMENT MGT610 DR. DIMITRIS STAVROULAKIS PROFESSOR OF HUMAN RESOURCE MANAGEMENT DEPT OF ACCOUNTING TEI OF PIRAEUS Unit 7: Entry Modes & Foreign Direct Investment Training Material: -“FDI”, entry from: Wankel, C. (ed.) (2009): Encyclopedia of Business in Today’s World. London: Sage, 695-697. -Chapter12 from: Hill, C.W.L., (2008): Global Business Today. Irwin, McGraw-Hill (5th Edition). Entry Modes Entry Mode: A critical strategic decision that involves the way through which a MNC is going to establish its presence in a new country It affects future decisions and operations of the MNC in the new market. Includes exporting, licensing, franchising, contract manufacturing, turnkey projects, and joint venturing. Exporting Entails physical transfer of merchandise to a foreign market (with or without the mediation of an agent) for financial gain. A safe activity, however confronted with shortcomings such as high transportation costs, and tariffs/barriers. Obstacles to trade include: High transportation costs (heavy & bulky products) Tariffs Quotas are restrictions on quantities of certain products that are allowed to be imported in certain countries. Discriminatory government procurements favor certain companies, thus establishing informal monopolies. Governments may also issue restrictive technical regulations and specifications, which exclude the mainstream of competitors. Customs procedures may be lengthy, costly, and complicated, therefore favoring bribery. Exporting (cont) Piggyback is the practice through which a manufacturer uses the sales & distribution network of another company in order to expand market or export products. E.g. in the 80’s the French government encouraged Rhone-Poulenc (chemicals) to dispose its networks to numerous SME. Pillsbury invited other firms to utilize its network after its flour sales declined. It accepted also packaged food and farm machinery. Netflix movies are streamed through Amazon servers Licensing The licensor grants the rights to use brand name or any kind of intellectual property (IP) to another company (the licensee), for a specific period, in return for a royalty fee. Godiva, Coca Cola, PepsiCo. The product is marketed locally by the licensee. Legal issues: Exclusive or non-exclusive contract, sub-license, conditions of termination, intellectual property infringement. Advantages: The licensor avoids barriers to trade and exploits best the local market through the infrastructure of the licensee. In countries where there are barriers to investment, licensing allows a foreign firm to exploit its know-how (intangible property). It is appropriate mostly to newborn MNC that lack capabilities for international expansion. Licensing (cont) Disadvantages: Unrestricted dissemination of know-how and experience is likely to lead to imitation practices and to the transformation of licensees to potential competitors, particularly in countries where patent protection is weak. Passive presence in foreign countries implies limited opportunities for market learning. Investigating compliance of the licensee to the terms of agreement in certain countries might be costly, complicated, or even impossible. Control is looser than other entry forms (contract manufacturing, franchise). In case that the product performs better than expected, there are limited opportunities for the licensor to bargain for better terms. Franchise Similar to license, but usually restricted to services. Also control is tighter and the franchisee has to comply with strict rules on how to conduct business. Extensive training of franchisees is required in order to ensure quality of services. Allows rapid expansion of MNC networks and fast cash through royalties. Disadvantages: In specific sectors (food), cultural patterns may dissuade consumers from adhering to foreign brand names. Unfavorable developments regarding a MNC in one country may affect its whole franchise chain in others (e.g. horse meatballs in IKEA stores in Czech republic – 25/2/ 2013). The process should be incremental. However, some MNCs are eager to pocket cash without questioning viability of franchisees, a fact resulting in the creation of a fragile infrastructure. A massive close-down of franchisees would be fatal. Infrequent inspections and inadequate control procedures lead to degradation of quality standards, eventually eroding the brand name. Differences between License and Franchise License is assigned normally to one only company per country, while franchise is expanded over numerous small shops. The product is marketed locally by the licensee. The franchisee may contribute a small fee for advertisement, but the franchisor is the one who undertakes the marketing strategy. Licensing does not require any particular knowledge of the licensee's country. On the other hand, co-ordination of the franchise structure is carried out locally and its effectiveness depends on knowledge of the local market. Control of licensee’s activities by the licensor is often weak, while the philosophy of franchise entails tight control of franchisees. Licensing may be recommended (among others) to weak MNC that lack know-how on foreign markets entry. On the contrary, franchise is appropriate mostly to experienced companies that have already established a strong presence in foreign markets. The licensee normally possesses higher bargaining power than the franchisee. The licensor may not be in the position to modify contract terms in case that his product performs better than expected. Contract Manufacturing Many MNCs (IKEA, Nike etc) subcontract local manufacturers to produce items under the umbrella of their own brand name, according to the same technical standards as their subs. The contract is restricted solely to manufacturing. Products bear the MNC brand name, while marketing & sales are undertaken exclusively by the MNC. This entry mode may be selected either because MNCs wish to exploit local resources, or to avoid heavy taxation, or to minimize transportation costs, or to overcome tariffs, quotas and other entry barriers, or because this is explicitly required by the host country government (China). Foxconn, Pegatron: Contract manufacturers for Apple iseries hardware. Disadvantages: Difficulties in performing frequent inspections in local firms may result in the violation of the agreed technical standards. Relocation of production may cause labor unrest and trade union action due to the loss of employment positions in subs & HQ. Illicit labor practices of contractors (child labor, unsafe work conditions, environmental issues) will backfire on the MNC brand. Emergence of contractors to potential competitors is likely, due to their familiarization with the MNC practices and specifications. More safe is to assign parts, not the whole product. Turnkey Projects The MNC agrees to deliver to the foreign client the whole project (design, construction, quality control, testing), ready to operate. The package includes all issues, from maintenance to personnel training. Are applicable in heavy industries which require advanced know- how (hydro-electric plants, oil refineries, steel factories) – Varangis PLC. Abound in oil-rich Middle East countries. Advantages: Important economic returns. Less tricky than FDI, since long-term engagement is avoided in high-risk countries. Disadvantages: Emergence of potential competitors, since the local recipients may eventually acquire the know-how Limited presence in strategic local markets. This problem may be compensated through the acquisition of a minority equity interest by the MNC. Joint Venture A firm that has been created by two or more independent companies which pool resources in order to exploit assets of the host country. The foreign partners benefit from the local partner’s network and knowledge of the business environment. Often JVs are temporary, formed in order to exploit specific assets (e.g. mines, oil deposits). Development costs & risks are shared. In certain countries, a joint venture is the only feasible mode of entry (e.g. auto makers in China – VW & GM with Shanghai Automotive). First entrants (VW, GM & Peugeot) were favored in the Chinese market. Motorola had managed to establish a temporary monopoly in the 80s and 90s. Most common in Greek supermarkets and retail chains worldwide (Tesco in Hungary, Malaysia, China, Thailand). Chrysler, Mitsubishi & Hyundai formed Global Engine Manufacturing Alliance in order to research and develop aluminum engines. Joint Venture (cont) Advantages: High rates of return Direct control over operations Contact with the market agents & government Drawbacks: Due to these, about 40%-60% JV fail. Disputes may arise concerning allocation of resources and ownership of patents & brand names. Caution is recommended with regard to the selection of partners and terms of agreement. Haste to present results to shareholders has proved detrimental. Emergence of conflict pertaining to cultural distance. Dissonance of attitudes toward risk needs to be treated from the outset. Lack of total control over the JV incurs less profits for individual participants. Modes of entry Exporting Contract Agreement Joint Venture Acquisition Greenfield Invest Risk Low Low Moderate High High Return Low Low Moderate High High Control Moderate Low Moderate High High Integration Negligible Negligible Low Moderate High FDI: Working Definitions “A category of international investment that indicates an intention to acquire a lasting interest in an enterprise operating in another economy. It covers all financial transactions between the investing enterprise and its subsidiaries abroad”. (European Commission) “An investment involving a long-term relationship and reflecting a lasting interest and control of a resident entity in one economy in an enterprise resident in an economy other than that of the investor”. (UN) In short: Establishment of an important function of the company (production, assembly, customer service, R&D etc) in a foreign country Inflows & Outflows of country FDI. 16 What is not FDI Portfolio investment: Investment that involves the exchange of equity with the aim of attaining a return on the invested capital, rather than achieve some form of control. Non-equity investment (company bonds, state bonds, property, cash etc) Licensing production or technology rights to another company abroad. Strategic alliances. 17 Terminology – contrast: Greenfield investment Brownfield investment A brand new project that lacks any constraints set by previous work. The metaphor concerns the greenfield land, where there is no need to reform an existing structure. Refers to undertaking initiatives in places where a “dirty business” (steel mill, oil refinery) previously operated. The term appeared first at the USA Senate in 1992. A greenfield investment concerns the creation of infrastructures in regions where no previous facilities exist. In addition to creating new facilities, MNCs also offer long-lasting jobs. It is usually referred in contrast to other business forms (M&A, Franchise, Joint Ventures). Purpose of the new business may be either: To clean up the area in order to make it appropriate for commercial use or for residence. To modify previous operation in order to initiate a new activity, that might be irrelevant to environmental concerns. Regional trends – Greenfield projects 2008-2009 4.000 • Decline in FDI most markets • Biggest decline in Rest of Europe - by 40% 3.500 3.000 2008 Q1-Q3 2009 Q1-Q3 2.500 2.000 1.500 1.000 500 0 Asia-Pacific Western Europe Rest of Europe Source: fDi Markets database from fDi Intelligence, Financial Times Ltd North America Latin America Middle East & Caribbean Africa EC study: FDI attracted in regions that have: Access to a populous national market (national market size effect). Borders with the home country and/or language in common with home country (proximity and culture effect) A high level of business English language proficiency (internationalization effect) Low corporate taxes and business incentives (fiscal incentive effect) Many advanced consumers with high purchasing power (national GDP per capita) Low unemployment level (proxy for few rigidities on the labor market) FDI attracted in regions that have (cont): A large share of other foreign investors (signal effect). Good infrastructure and accessibility (access effect). A highly educated regional workforce (skill effect). A high level of spending on R&D (innovation effect). Penetration of information & communication technologies (ICT effect). A large presence of competitors, clients and suppliers within the firm’s industry (agglomeration & clustering effect). Fame as prominent social milieus and commercial centers (fame effect). Low labor costs (labor effect). FDI: Επενδύσεις ή ξεπούλημα? (ναυπηγεία, χρυσός, κρατικά λαχεία, ΟΠΑΠ, νησιά) Περίπτωση ΕΛΛΗΝΙΚΟΥ 2012 Εμίρης Κατάρ: 5,5 δις. Υποστηρίζει ότι δεν γνώριζε: Περιβαλλοντικούς όρους Όρους δόμησης & περιβαλλοντικό σχέδιο Απαλλοτριώσεις (ποιες και αν θα γίνουν) Χαρτογράφηση & ιδιοκτησιακό καθεστώς: o Καταπατήσεις κατοίκων o Τοπικές πρωτοβουλίες: «Να μετατραπεί το Ελληνικό σε πάρκο βιολογικών καλλιεργειών» Joint Ventures Types of foreign direct investment BY INVESTMENT STRATEGY Greenfield & Brownfield investment: Market entry by establishing a new plant, or adapting an existing one Mergers and acquisitions: Market entry by acquiring an existing plant. E.g. Fourlis by Dixons, Violex by Bic, Athens Brewery by Amstel, Tasty Foods by PepsiCo, Misco by Barilla etc. Divestment due to economic crisis – in periods of crisis MNC leave the country. Business Alliances: Include Joint Ventures, capital investments, sales agreements either on particular geographic areas or on complementary products, common procurement of raw materials etc. 30 Types of foreign direct investment BY ACTIVITY Horizontal FDI Similar plants at the same stage of the production process located in different national markets “Market-seeking investment” Vertical FDI Plants operate at adjacent stages of a vertically related set of production processes. Ford River Rouge Complex- Michigan, 1928: Steel mills, electricity plants, rainwater reclamation systems, glass plants etc – one car produced per 30 seconds. Carnegie Steel Company: Owns ore mines, coal mines, ships, trains, furnaces, etc. “Natural resource-seeking investment”. Oil MNC: Locating deposits, drilling, extracting, transporting, refining. Diversified FDI Plants’ outputs are not related to each other Risk diversification VERTICAL FDI Foreign Acquisition HOME COUNTRY HOST COUNTRY Investment MNC Local Firm Profit Foreign Acquisition Advantages Access to target’s local knowledge Control over foreign operations Control over target’s technology Disadvantages Uncertainty about target’s value Difficulty in “absorbing” acquired assets Risky if corporate governance is underdeveloped in the foreign country. The MNC may be entangled in complicated legal issues and to unfair competition When Is Acquisition Appropriate? Developed market for corporate governance & control Acquirer has high “absorptive” capacity High synergy between the two firms Acquisitions: Problems Too large Acquisitions Too much diversification Integration difficulties Inadequate evaluation of target Managers overly focused on acquisitions Large or extraordinary debt Inability to achieve synergy Indicative Value Chain of a MNC Company Infrastructure R&D Innovative Capabilities Production Marketing and Sales Advanced Technology & KnowHow IndustrySpecific Marketing Expertise Organization, Coordination & HRM What additional resources may the MNC need to enter a foreign market? Local expertise: marketing, government relations, etc. Indicative Value Chain of a Local Firm Company Infrastructure R&D Imitative Capabilities Production Marketing and Sales Older Technology and KnowHow CountrySpecific Marketing Expertise Organization, Coordination & HRM What may the MNC desire from a local firm? Complementary resources – minerals, oil, market share Not necessarily strength in every area Complementarity of Resources MNE’s Resources Local Firm’s Resources Innovative capabilities Imitating capabilities Advanced technology Older technology and and know-how Industry-specific marketing expertise Organization structure and systems know-how Country-specific marketing expertise Country specific organization skills Greenfield Entry HOME COUNTRY HOST COUNTRY MNC Profit Investment New Subsidiary Company Greenfield Entry Advantages Disadvantages Avoids risk of overpayment Slower startup Avoids problem of Requires knowledge of foreign management High risk and high commitment Complexity of government regulations Need to hire and train local workforce When Is “Green Field” Entry Appropriate? Lack of proper acquisition target In-house local expertise Embedded competitive advantage Strong corporate culture integration Retains full control