Module 8

Direct
Investment
and
Collaborative
Strategies
 Republic of the Philippines

BATANGAS STATE UNIVERSITY

ARASOF – Nasugbu

Nasugbu, Batangas

COLLEGE OF ACCOUNTANCY, BUSINESS, ECONOMICS,

AND INTERNATIONAL HOSPITALITY MANAGEMENT

BACHELOR OF SCIENCE IN BUSINESS ADMINISTRATION

Direct Investment and Collaborative Strategies

LEARNING OBJECTIVES:
After studying this module, you should be able to:
1. Clarify why companies may need to use modes other than exporting to operate
effectively in international business.
2. Comprehend why and how companies make foreign direct investments
3. Understand the major motives that guide managers when choosing a collaborative
arrangement for international business.
4. Define the major types of collaborative arrangements.
5. Describe what companies should consider when entering international arrangements
with other companies.
6. Grasp why collaborative arrangements succeed or fail.
7. See how companies can manage diverse collaborative arrangements.

Introduction
 Direct Investment
Direct investment or Foreign Direct Investment (FDI) is an investment or a practice of
investing in businesses in foreign countries. It is designed to acquire a controlling
interest in an enterprise. It also provides capital funding in exchange for an equity
interest without the purchase of regular shares of a company’s stock.

 Collaborative Strategies
Collaborative strategies or arrangement is a contractual arrangement between two or
more parties to jointly conduct business activities for their mutual benefit without the
 formation of a separate entity. It allows firms to spread both assets and risks across
countries by entering contractual arrangements with a variety of potential partners.

 Companies choose an international operating mode to achieve their objectives.

Companies must choose an international operating mode to achieve their
objectives and carry out their strategies. When forming objectives and implementing
strategies, companies or firms must either handle international business on their own or
collaborate with other company.

 When exporting and importing is not possible, firms must explore other options.
Although exporting is the usual or always the preferred alternative of firms
because it allows them to produce in their home countries, there are cases in which it
may not be feasible.

This allows the firms to explore other options and engage in direct investment in
other countries or enter markets through various collaborative strategies such as joint
ventures and alliances.

Introduction Illustrations

This
figure

illustrates the factors affecting operating modes in International Business. When we say
operating environment, it is the factor that may affect the business operation in external matters.
There are two operating environment factors that influence and affect the firm's decision on
having operations internationally, the first one is physical and social factors and the second is
competitive factors. When we say Physical and Social factors mean and include geographical
factors like weather, climatic conditions etc. The availability of physical facilities limits the scope
and prospects of business. Social factors that affect international business are language,
education, religion, values, customs, and social relationships. While the Competitive factors are
the skills and capabilities that differentiate a firm from its competitors. As a prerequisite to any
strategic planning, these competitive factors must first be identified and evaluated as to their
relative importance to achieving a firm's strategic goals. So, in the operation businesses need to
know their main objectives and their strategies on what operation modes they will be using to
succeed in trading internationally. The means are the modes, functions, and overlying
alternatives. In modes of operation there are two options: the self-conducted operations or
collaborative operations. Self-conducted operation is any business that is directly engaged in
sales of its own. Collaborative operation is to use internal and external connections to generate
ideas, find solutions, and achieve your company's common goals.

This figure illustrates the Foreign Expansion: Alternative operating Modes. Businesses can
choose to enter in foreign markets either through equity or non-equity arrangements. Equity
arrangement means that the owner has a direct involvement in the business. Since it requires
direct involvement, the exporting will be the way to operate on their own or internationally.
Because when we say exporting it means the sales of products and services in foreign countries
that are from the domestic or home country. It can be either wholly or partially owned, joint
ventures or equity alliances. Non-equity arrangements are defined as a contract that sets forth
the rights and obligations of a partner who has no equity in a business. It obtains sales and
profits without direct equity in the foreign market, and it involves the licensing, franchising,
management contracts and turnkey operations. Note that exporting is the only way or mode for
market expansion to promote the business internationally. But a business can and may use
more than one of operating modes within the same location of the business.
Non- Collaborative Foreign Equity Arrangements

Why do firms want control?

Companies want generally controlling interests in their foreign operations for three reasons:

 Internalization
Internalization occurs when a transaction is handled internally by an entity rather
than being routed to another entity. It is also applicable to a multinational corporation.
Internalization selects the lower cost option between conducting operations internally
and contracting to a third party; it may also be less expensive to handle operations
internally.

 Appropriability
Appropriability is the firm's ability to keep the added value it creates for its own
benefit. This does not involve transferring critical resources to another company to avoid
undermining the company's competitive position.

 Freedom to pursue global strategy

Foreign investment provides the freedom to pursue global or transnational
objectives by optimizing corporate strategies. A global strategy is one that a company
takes when it wants to compete and expand in the global market. It is the plan that an
organization has developed to target growth beyond its borders.

There are two ways to invest in a foreign country

 Acquisition of existing facilities - There are several approaches to acquiring an

international company. A company may choose to purchase the entire company, parts of
the company, or a significant portion of the company that grants it certain ownership
rights.

 Building new facilities - known as greenfield investment - A green field investment is

a corporate investment in which a new entity is built in a foreign country. It is one in
which the parent company seeks to establish a new business, usually with the parent
company's branding. It can be made to target customers in a foreign region, or they can
be made to build facilities and hire labor for work that reduces a company's overall costs.

Why exporting may not be feasible?

According to International Business Management (2018), most companies may find more
advantages by producing in foreign countries rather than by exporting to them due to some of
reasons, such as.

A. Cheaper to Produce Abroad

 Competition requires companies to control their costs and to choose production locations
with this factor in mind.

B. 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 the transportation costs. Also, the higher transportation costs are relative to
production costs, the more difficult it is to be competitive through exporting. Some services are
impossible to export and require establishing operations in the target country.

C. Lack of Domestic Capacity

If a company has excess capacity, it can service foreign markets and price based on
variable rather than full costs. When demand exceeds capacity, however, new facilities are
needed and are often located nearer to the end consumers in other countries.

D. Need to Alter Products and Services

Special requirements for products in some markets may require additional investments that
are often better made in the country the company intends to sell to. The more that products
must be altered for foreign markets, the more likely production will shift to those foreign markets.

E. Trade Restrictions

Although import barriers have been on the decline, some significant tariffs continue to exist.
In these situations, 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. When barriers fall within a group of countries, companies may be attracted
to make direct investments to serve the entire region since the expanded market may justify
scale economies.

F. Country of Origin Effects

Consumers may prefer goods produced in their own country over imports because of
nationalistic feelings. For some products, consumers may prefer imported goods from specific
countries due to a perception that those products are superior. 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.

Why do companies collaborate?

General Motives

 To 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.

[potential volume is relatively low; excess capacity exists]

  To specialize in core competencies. The resource-based view states 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.

[licensing may yield returns on products that lie outside of a firm’s strategic priority]

 To 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.

[markets are too small to support many competitors; firms combine to challenge a
market leader]

 To secure vertical and horizontal links. If a firm lacks the competence and/or
resources to own and manage all the activities of the value chain, 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.

[savings and supply assurances exist across the value chain; horizontal economies of
scope exist in distribution]

 To gain knowledge. Many firms pursue arrangements to learn about their partners’
technology, operating methods, or home markets and broaden competitiveness.

[learn about a partner’s technology, operating methods, and/or home markets]

International Motives

 To 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 collaborative arrangements with
local companies.

[desire to overcome cultural, political/legal, competitive, and/or economic barriers]

 To overcome legal 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. It is also helpful to have a collaborative relationship with a local firm to
protect assets. Some countries provide protection only if intellectual property is exploited
locally within a specified time. Local partners can monitor the illegal usage of the firm’s
intellectual property.

[prohibition of foreign ownership in particular sectors; regulations affecting operations

and profitability; effective protection of intellectual property rights]

 To diversify geographically. By operating in a variety of countries, a firm can smooth

its sales and earnings; collaborative arrangements may also offer a faster initial means
of entering multiple markets or establishing multiple sources of supply.
 [greater and faster spread of assets across countries, smoothing of sales and earnings
cycles]

 To minimize exposure in risky environments. The higher the risk managers perceive
with respect to a foreign operation, the greater their desire to form a collaborative
arrangement.

[secure the safety of foreign assets and earnings, smooth risk across countries]

Types of Collaborative Arrangement

 Licensing

In exchange for loyalty, licensing grants another company intangible property rights to
use in a specified geographic area for a specified period. It may be either exclusive or
non-exclusive. In general, licensing entails granting another company permission to use
patents, copyrights, trademarks, and other intangible property in exchange for a
percentage of revenue or a fee.

 Franchising

It is a specialized type of licensing. Franchising entails providing an intangible asset as

well as constantly infusing necessary assets. It is a well-known marketing strategy for
business expansion that involves a partnership between a franchisor and a franchisee.

A contract is formed between the Franchisor and the Franchisee. The franchisor grants
franchisees the right to sell their products, goods, and services as well as the right to use
their trademark and brand name. The franchisee functions as a dealer. In exchange, the
franchisee pays the franchisor a one-time fee or commission, as well as a portion of the
revenue.

 Management Contract
A management contract is an agreement in which the operational control of an
enterprise is delegated to a separate enterprise that performs the necessary managerial
functions in exchange for a fee. It entails not only selling a method of doing things, but
also doing them.
 Turnkey Operations

It is the stage at which a company fully designs, builds, and equips a manufacturing or
service facility. Multiple contractors collaborate on a single project in turnkey operations.
It is primarily carried out by industrial equipment, construction, and consulting firms. It is
frequently carried out by a government agency.

 Joint Ventures
 A joint venture is an agreement in which parties agree to contribute equity to the
development of a new entity and new assets. They exercise control over the business
and, as a result, share revenues, expenses, and assets.

A consortium involves more than two organizations. It is formed when one party seeks
technological expertise, franchise, and brand use agreements, management contracts
and rental agreements for one-time contracts.

 Equity Alliances

Equity alliances are alliances that have some form of shareholding and are used on a
regular basis. It is an arrangement in which at least one of the companies acquires a
stake in the other.

There are three types of equity alliances: joint ventures, minority stakes, and
shareholdings. In practice, however, they are more commonly used to reap economies
of scale, share the risks associated with large projects, and gain access to foreign
markets than for R&D and innovation.

Learning Objective 5

To describe what companies should consider when entering into international

arrangements with other companies

 It has become imperative for most companies to market their products and services
outside their domestic markets. A company must be wise in selecting or choosing a
collaborative arrangement when entering international arrangements with other
companies.
 While collaborative arrangements allow for a greater spreading of assets across countries,
the various types of arrangements necessitate among objectives. Finding a desirable
partner can be problematic. A firm has a wider choice of operating forms and partners
when there is less likelihood of competition and when it has a desired, unique, difficult to
duplicate resource.

There are two key factors that influence the type of collaborative arrangement, and these are a
firm’s desire for control over its foreign operations and prior expansion into foreign ventures.

 Control
 The loss of control over flexibility, revenues and competition is a critical variable
in the selection of forms of foreign operation. The more a firm depends on
collaborative arrangements, the more likely its control will be lessened over
decisions regarding quality, new product directions and product expansion.
  Prior expansion

 If a firm already owns and controls operations in a foreign country, the

advantages of collaboration may not be as attractive as otherwise.

What is Collaborative Arrangement?

Collaborative arrangement is a contractual arrangement under which two or more parties

actively participate in a joint operating activity and are exposed to significant risks and rewards
that depend on the activity’s commercial success.

TYPES OF COLLABORATIVE ARRANGEMENTS

A. LICENSING

 So, licensing is when a company grants intangible property rights to another company to
use in a specified geographic area for a specified period in exchange for royalties.
o Can be
 Exclusive or nonexclusive
 Used for patents, copyrights, trademarks, and other intangible property

- Under a licensing agreement, the firm (the licensor) grants rights to intangible property to
another company (the licensee) to use in a specified geographic area for specified period of time;
In exchange, the licensee ordinarily pays a royalty to the licensor for the rights granted under the
licensing agreement and sells the licensed products according to its own managerial and
marketing strategies.
 Such rights may be exclusive or nonexclusive.
An exclusive license grants the licensee singular permission to
exploit the intellectual property in question. No other entity, including the
party granting the license (the licensor), is allowed to use the intellectual
property covered by the license unless specific carve-outs are included in
the agreement.
Non-exclusive licenses grant the licensee rights in the intellectual
property but also allow the licensor rights to exploit the intellectual
property in question – including granting licenses to other entities. In
general, non-exclusive licensees face competition from other licensees.

 Usually, the licensor is obliged to furnish technical information and

assistance, while the licensee is obliged to exploit the rights effectively
and pay compensation to the licensor. Intangible property may be
classified and used as for:
 Patents (inventions, formulas, processes, designs, patterns)
  Copyrights (for literary, musical, or artistic compositions)
 Trademarks (trade names, brand names)
 Other intangible property (franchises, licenses, contracts)
(methods, programs, procedures, systems)

What is Franchising?

 It is a system in which semi-independent business owners (franchisees) pay fees and

royalty to a parent company (franchiser) in return for the right to be identified by its
trademark, to sell its products or services and often to use its business format or system.

B. FRANCHISING

 A specialized form of licensing

 Franchising represents a specialized form of licensing in which the franchisor not

only sells an independent franchisee the use of the intangible property essential to
the franchisee business, but also operationally assists the business on a
communicating basis. It means in franchising, it is the whole business concept
that is the subject of a franchising agreement whereby the owner of the concept,
or franchisor, allows another company, or franchisee, to replicate that very kind of
business according to the same concept, model, image and quality standard.

 In a sense, the two partners act like a vertically integrated firm because they are
interdependent, and each produces a part of the product that ultimately reaches the
customer.
 Includes providing an intangible asset and continually infusing necessary assets
o Franchise Organization.
 A franchisor may penetrate a foreign country by dealing directly with its
foreign franchisees, or by selling up a franchise and giving that
organization the right to open outlets on its own or to develop
subfranshises in the country or region.
 master franchise
- is a franchise relationship in which the owner of the franchise brand (the
master franchisor) grants to another party the right to recruit new
franchisees in a specific area. It is a type of franchising that involves three
levels of participants: the franchisor, the master franchisee and the
franchisees. Typically, the master franchisee will pay an initial fee and
agree to a minimum development schedule. The master franchisee will
benefit from a designated territory, the right to open and operate units
directly and the right to grant third parties the right to open and operate
units. This type of relationship is often well suited for international
markets, as the master franchisee is often far more knowledgeable and
connected in the culture and business of the designated country or
countries.
  Operational Modification. Franchise success is derived from three
factors:product standardization, effective cost control, and high identification
through promotion. Nonetheless, franchisors face a classic dilemma: the more
they standardize on a global basis, the lower the potential for product acceptance
in a given country; the more they permit adaptation to local conditions, the less
the franchisor can offer the franchisee, the higher the costs and the less the control
by the franchisor.

C. MANAGEMENT CONTRACT

 A company is paid a fee to transfer management personnel and administrative know-how

abroad to assist a company.

 A management contract is an arrangement under which operational control of an

enterprise is vested by contract in a separate enterprise that performs the
necessary managerial functions in return for a fee. Management contracts involve
not just selling a method of doing things but involve actually doing them. A
management contract can involve a wide range of functions, such as technical
operation of a production facility, management of personnel, accounting,
marketing services and training.

FOREIGN MANAGEMENT CONTRACTS are used primarily when the foreign company
can manage better than the owners

 In terms of foreign management contracts, it is used primarily when the foreign

company can manage better than the owners since a firm usually pursues such contracts
when it believes a partner can manage certain operations more efficiently and effectively
than it can itself.

D. TURNKEY OPERATION

 One company contracts with another to build complete, ready-to-operate facilities

 Turnkey Operations represent a type of collaborative arrangement in which one
firm contracts with another to build complete, ready-to-operate facilities.
Turnkey means ready for immediate use. It means a firm enters into a contract
with another firm for the products or services that they need when it has arrived,
is already complete, installed, and ready to use upon delivery or installation.
 In agreements like these, the seller agrees to put up the plant or business, with his
own financing and does not collect anything from the buyer. The seller is
guaranteed to be paid by the buyer upon delivery of the fully operational
installation. Applied to franchises, turnkey operations mean just the same. If you
buy a franchise under this agreement, it means that you will pay the seller upon
 the completion of the project. The same thing applies to turnkey operations in
buying an existing business. You pay the seller after all your conditions are fully
satisfied.

o Most commonly performed by industrial-equipment and construction companies

 Usually, suppliers of turnkey facilities are performed by industrial-
equipment and construction companies since they need the product or
service that is complete and ready to use to facilitate their business.
o customers most often are government agencies or large multinational enterprise
 In a turnkey contract, one client company contracts another company to
build and deliver a ready-to-operate industrial plant or infrastructure
facility, such as a power plant, a highway or a port, where mostly the
customers are government agencies or large multinational enterprises
Why are government agencies or large multinational enterprises most often customers in
turkey operation?
 Industrial or infrastructure projects are complex undertakings, the implementation of
which involves the mobilization and articulation of many different disciplines and a
variety of suppliers. These may include various engineering branches (mechanical,
electrical, civil), the manufacturing and supply of equipment, management of the project
implementation activities and commissioning and start-up operations.

E. JOINT VENTURES

 Involve more than two companies, one of which may own more than 50 percent
 A joint venture involves more than two companies, one of which may own more
than 50 percent. It represents a direct investment in which more than one
organization shares ownership. Although companies usually form a joint venture
to achieve a particular objective, it may continue to operate indefinitely as the
objective is redefined.
 May have various combinations of ownership
 A joint venture (JV) may have various combinations of ownership
as long as the two or more parties agree to pool their resources for
the purpose of accomplishing a specific task or they want to
achieve some common objectives and expand international
operations.
 A consortium involves more than two organizations
 A consortium involves more than two organizations meaning it represents the
joining together of several entities like (e.g. companies and governments) to
combine resources and or to strengthen the possibility of pursuing a major
undertaking.
F. EQUITY ALLIANCES

 An arrangement in which at least one of the companies takes an ownership position in the
other
 An equity alliance represents a collaborative arrangement in which at least one of
the collaborating firms takes an ownership position (usually a minority) in the
others. The purpose of an equity alliance is to solidify a collaborating contract,
thus making it more difficult to break.

This figure illustrates the Collaborative Strategy and Complexity of Control in the Types of
Collaborative Arrangements.

We can see on the left side or the vertical side the number of partners ranging from none to many
that will determine the level of control when it comes to the different types of collaborative
arrangement while on the horizontal part is all about the ownership continuum which means
(continuum is a continuous sequence in which adjacent elements are not perceptibly different
from each other, although the extremes are quite distinct.)
So, in simple terms, this table determines the degree of control or ownership when it comes to
different types of collaborative strategy from equity which means greater degree of ownership,
going to sharing up to non-equity or lesser degree of ownership

We can see in the figure that Wholly owned has tight control while Consortium, Joint Venture,
and Equity Alliance have medium control, and lastly the Management Contract, Turnkey,
Franchise, Licensee, and Sales Contract can be considered with little control.

PROBLEMS WITH COLLABORATIVE ARRANGEMENTS

Learning Objective 6: To grasp why collaborative arrangements succeed or fail

 Dissatisfaction with the results of collaboration can cause an arrangement to break

down. Problems arise for a number of reasons. The major strains or problems on
collaborative arrangements are due to six factors:
1. Relative importance
- One partner may give more attention to the collaboration than to the other because of
a difference in size. If things go wrong, an active partner will blame the less active
partner for its lack of attention, while the less active partner will blame the other for
poor decisions. The difference in attention may be due to the different sizes of
partners.

2. Divergent Objectives
- Although the companies or firms may enter into collaborative arrangements with
complementary capabilities and objectives, their views regarding such things as
reinvestment vs. profit repatriation and desirable performance standards may evolve
quite differently over time. For instance, one partner may want to reinvest earnings
for growth and the other may want to receive dividends. One partner may want to
expand the product line and sales territory, and the other may see it as a competition
with its owned operations.

3. Questions of Control
- When no single party has control of a collaborative arrangement, the venture may
lack direction; if one party dominates, it must still consider the interest of the other.
By sharing assets with another firm, a company may lose some control over the
extent and/or quality of the assest’s use. Yet poor quality may affect sales of all
products using the brand name and logo. Furthermore, even when control is ceded to
one of the partners, both may be held responsible for problems.

4. Comparative contributions and appropriations

- One partner’s ability to contribute technology, capital and other assets may diminish
(at least on a relative basis) over time. Further, in almost all collaboration the danger
exists that one partner will use others’ contributed assets or take more than its fair
 share from the operation, thus enabling it to become a direct competitor. Such
weaknesses may cause a drag on a venture and even lead to the dissolution of the
agreement.

5. Culture clashes
- It is a situation in which the diverging attitudes, morals, opinions, or customs of two
dissimilar cultures or subcultures are revealed. This may occur, for example, when
people in different professions, such as academics and businesspeople, collaborate on
a project. Managers and the companies for which they work are affected by their
national cultures, such as in how they evaluate the success of the operations.

6. Differences in corporate cultures

- Differences in corporate cultures may cause and create problems with collaborative
arrangements, especially in joint ventures. For example, some firms may have an
entrepreneurial culture and others are risk averse. Compatibility of corporate cultures
is important to the success of joint venture projects.

How to Dissolve a Joint Venture

Planned/Unplanned
 The alliance between General Motors and Toyota Motors provides an
interesting example of a planned divorce scenario. In 1984, the U.S. Federal Trade
Commission authorized the formation of New United Motor Manufacturing, Inc. (NUMMI), a
manufacturing collaboration between General Motors and Toyota Motors, with a provision that
the joint venture will have a limited life of twelve years. As a result of the twelve-year limit
imposed by the U.S Federal Trade Commission on NUMMI, both General Motors and Toyota
Motors knew at the beginning of their joint venture that they would have to plan for their
divorce.

Planned divorces, such as the case of NUMMI, are the exception rather than the
rule. Divorces between companies in an international alliance are typically unanticipated. Most
companies enter into an international alliance without really knowing how long their partnership
will last. The dissolution of the collaborative partnerships between General Motors and Toyota
Motors, Meiji and Borden, and AT&T and Olivetti are examples of unplanned divorces.

Friendly/Unfriendly

Some international alliances terminate under friendly terms, while others do not. The
divorce between Vitro and Corning, is an example of an alliance that ended on friendly terms.
Both companies amicably agreed to terminate their equity ventures, and Corning paid Vitro its
original investment in the Joint Venture. In addition, both companies agreed to continue their
distributorship agreements.

Friendly separations are typically handled through negotiated settlements. In contrast,

unfriendly divorces are often contested in courts or end up in arbitration proceedings. One such
case is the ongoing dispute between Coors Brewing Company and its Canadian Partner and
licensee, Molson Breweries.

The financial condition of the international alliance at the time of the divorce often
determines whether a separation is handed on friendly or unfriendly terms. According to William
Mooz, an attorney in the law firm of Holland and Hart in Denver, “Partners are more willing to
work with each other if the venture is making money. It is usually more difficult to negotiate the
termination of an alliance in cases when the venture is losing money.

Mutually Agreed Upon/Disputed

Having a partner that refuses to terminate an alliance presents one of the most
complex divorce scenarios.

Ex. Ralston Purina (US) and Taiyo Fishery (Japan) and Sover S.P.A (Italy) and Suzhou
Spectacles No. 1 Factory (China).

POSSIBLE OUTCOMES OF TERMINATION

What are the possible outcomes of the termination of an international alliance?

We found three common outcomes: termination by acquisition, termination by

dissolution, and ter mination by reorganization/restructuring of the alliance.

In a majority of the divorces that we studied, the alliance terminated with one of
the partners acquiring the stake of the other partner. Termination by acquisition could also take
the form of one partner selling its equity stake in the joint venture to another company (e.g.,
British Aerospace selling its equity stake in Rover to BMW), or both partners selling their shares
to a third company.

Termination by acquisition is most common in international equity alliances. In

contrast, most non-equity alliances, such as licensing agreements or marketing/distributorship
partnerships, terminate by dissolving their contractual arrangements (Meiji and Borden)

Another possible outcome of termination is termination by

reorganization/restructuring of the alliance. In lieu of termination, partners to an international
alliance may agree to redefine or restructure their original agreement. For example, Matsushita
Electric Industries, Co. of Japan (MEI) and Solbourne Computer, Inc. of US entered into an
ambitious partnership in 1987 to compete with Sun Microsystems’ SPARC computers. When the
venture failed, MEI and Solbourne agreed in 1992 to recraft their initial agreement into a more
limited partnership agreement.

MANAGING INTERNATIONAL COLLABORATION

Learning Objective 7

To see how companies can manage diverse collaborative arrangements

 As a collaborative arrangement evolves, partners need to reassess certain decisions in
light of their resources bases and external environmental changes.

 Collaborative arrangements are dynamic

 The evolutionary costs of a firm’s foreign operations may be very high as it
switches from one operational mode to another, especially if it must pay
termination fees.
 The motivation for collaboration can change over time because of changes in

o the company’s capabilities

 The motivation for collaboration can change over time because of changes
in the company’s capabilities since change is the core ingredient to
organizational success. The company's capabilities are evolving and
change to further improve their business in a way that leaders foster shared
mindsets, orchestrate talent, encourage speed of change, collaborate across
boundaries, and learn and hold each other accountable define the
company's culture and leadership edge
 o the external environment

 The motivation for collaboration can change over time because of changes
in the external environment since it comprises the factors that are outside
the organization and which can have an impact on the operations,
performance, decisions and profitability of the organization. Of course as
time goes by there will be new laws that will be implemented. If we
collaborate internationally, there will be other rules or laws that we will
follow. Different countries need to assess the potential impact of a new
external environment before entering a new market. For example, a
business owner who is assessing the possibility of collaborating in an
Islamic country, such as Saudi Arabia or Iran, needs to be aware of how
theocratic law, which is derived from religious doctrines, will impact on
commercial dealings.

This figure illustrates the Country Attractiveness/Company Strength Matrix in Managing

International Collaboration,

A grid technique used by the companies who want to enter foreign markets. This matrix
highlights a country’s specific product advantage on a country-by country basis. The country's
attractiveness is plotted on one axis and the company's competitive strengths on another.

It shows here when a country has a high-country attractiveness and high competitive strength
then it means that they are able to maximize their commitment such as wholly owned operations.
While if they have low country attractiveness and high competitive strength it means that
they are able to individualize strategies. When there is a medium level of country
attractiveness and competitive strength then it means that they are able to individualize their
strategies. If there is a high-country attractiveness and low competitive strength then
collaborations/joint ventures would most likely dominate. Lastly, if there is low country
attractiveness and low competitive strength it could lead to minimization of commitment
through non equity arrangement

 Potential collaborative partners should be evaluated in terms of

o the resources they will supply

o Their motivation

o Compatibility

 Here, there is a need for the evaluation of potential collaborative partners so that they
could assure that their culture and other factors that affect the collaboration are
compatible to avoid clashes or dissatisfaction that could result in dissolution of the
collaborative arrangement. What is the sense of having a collaboration if you can't
combine the resources you use and if you have different motivations or goals. So, the
collaboration arrangement seems useless if you are not compatible with each other.

 Contracts should address

o Whether the contract will be terminated if the parties do not adhere to the directives

o What methods will be used to test for quality

o What geographic limitations should be placed on an asset’s use

o Which company will manage which parts of the operation

o What each company’s future commitments will be

o How each company will buy from, sell to, or otherwise use intangible assets that
result from the arrangement

 Contracts should address whether the contract will be terminated if the parties do not
adhere to the directives. So that both parties are aware of what will happen if they do not
follow the agreement and what the repercussions will be. It also must include how to
compensate for the damage, if any. And if the contract gets terminated, how to resolve it
legally and financially acceptable to both parties. It should be done so that all parties
emerge at the beginning of the contract and termination clause if they want this project to
take place. All parties must be aware of how non-compliance with the terms and
conditions of this contract will influence their bidding cost or proposal.
 Contracts should address what methods should be used to test for quality. A quality
agreement is a detailed written agreement between parties that outlines and sets each
party's manufacturing activities. Items to address in a contract include aspects that affect
the quality, identity, potency, safety, and purity of a product or service. Furthermore, the
details that may affect the contractor's or client's compliance status should include.

Contracts must address how each company will buy, sell, or otherwise use the intangible
assets resulting from the adjustment. If each company does not have a clearly defined
process in place, it can affect both parties. Both companies must always have an explicit
agreement or process. Wherefore they will not get confused about their contracts. The
contract must also include how works created during the collaboration will be secured. It
specifies how each party will handle sensitive information. And whether either side is
allowed to publish or leak certain information. Finally, make sure both parties understand
how their contribution to the other company affects the ownership of that component.

 When collaborating with another company, manager must

o Continue to monitor performance

o Assess whether to change the form of operations

o Develop competency in managing a portfolio of arrangements

 When collaborating with another company, the manager must first, continue to monitor
performance to give the ability to assess organization efficiency, identify if there’s a
problem in the company and to know how to improve workplace’s overall productivity.
Monitoring performance is important because it can make the difference between success
and failure. It is a crucial element in all organizations and businesses. Without monitoring
performance this will result in directionless goals and a confused and aimless working
culture.

 Second, managers must assess whether to change the form of operations to determine
if the operation they are doing in their collaboration is still effective or not. Changing
the operation in an organization leads to many positive aspects-leading to maintaining a
competitive edge and remaining relevant to your area of business. Change encourages
innovation, develops skills, develops staff and leads to better business opportunities, and
improves staff morale.
 Lastly, managers must develop competency in managing a portfolio of arrangements.
It is important to have capable and effective managers that are competitive enough to
make sure that the grouping of all your assets will be easily accessible so that you could
monitor your investment and that could help you to make a sound decision. Because it
ensures that your investments are performing as expected and that they continue to be
aligned with your goals, it is essential to manage your portfolio. Managing your portfolio
effectively is the best way of growing your wealth.
WHY INNOVATION BREEDS COLLABORATION

 Why Innovation Breeds Collaboration?

- Because the cost of invention is often so high, it follows that firms of

considerable size will carry out most innovation. Although firms can become ever larger
through mergers and acquisitions, collaborative arrangements are likely to be
increasingly important in the future as governments opt to restrict such activities because
of antitrust concerns. At the same time, collaborative arrangements will bring forth both
opportunities and problems as firms move simultaneously into new countries and to new
types of contractual arrangements with new patterns. The more partners in a given
alliance, the more strained the decision-making and control process will likely be.