Foreign direct investment (FDI) can occur through mergers and acquisitions or various types of joint ventures and strategic alliances. When embarking on FDI, companies should analyze the level of competitiveness in the target market, conduct thorough market research, consider market expectations, and evaluate their own internal resources. Common forms of FDI include joint ventures, licensing agreements, cross-border mergers and acquisitions, and strategic partnerships.

1. CHAPTER 8
FDI Related Entry Mode Strategy
LEARNING OBJECTIVES
1. Discuss the effect of foreign direct investment (FDI) on entry modes.
2. Explain merger and acquisition (M&A).
3. Discuss the different types of joint venture (JV) or global strategic alliance
(GSA).
4. Explain umbrella holding company.
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2. 1. foreign direct investment or FDI is a direct investment made by a company or
entity based in one country, into a company or entity based in another country.
2. foreign direct investment, in its classic definition, is defined as a company from
one country making a physical investment into building a factory in another
country.
3. the direct investment in buildings, machinery and equipment is in contrast with
making a portfolio investment, which is considered an indirect investment.
4. FDI has come to play a major role in the internationalization of firms. factors that
induce firms that adopt FDI are changes in technology, growing liberalization of
the national regulatory framework governing investment in enterprises, and
changes in global capital markets.
5. the majority of foreign direct investment is made in the form of direct investment,
fixtures, machinery, equipment and buildings and it can also be done through
mergers & acquisitions as well.
FOREIGN DIRECT INVESTMENT (FDI) RELATED
ENTRY MODE STRATEGY
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3. 1. there has been a dramatic increase in the number
of technology startups and this, together with the
rise in prominence of internet usage, has fostered
increasing changes in foreign investment patterns.
2. many of these high tech startups are very small
companies that have grown out of research &
development projects often affiliated with major
universities and with some government
sponsorship especially in the area of software
development and licensing.
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FOREIGN DIRECT INVESTMENT (FDI) RELATED
ENTRY MODE STRATEGY

4. 1. licensing and technology transfer have been important in promoting
cooperation between the academic and business communities.
2. since the policy allowed universities to hold title to research and
development done in their labs, licensing agreements have helped
turned raw technology into finished products that are viable in
competitive marketplaces.
3. licensing agreements allow companies to take full advantage of new
and exciting technologies while limiting their overall risk to royalty
payments until a particular technology is fully developed.
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Licensing and Technology Transfer

5. 1. usually occurs between two companies, within the same or
affiliated industries, both agreed to act as a national distributor
for each other’s products e.g. a U.S. based manufacturer of
tables signs a mutual distribution agreement with a Spanish
based manufacturer of chairs. both companies gain direct
access to each other distribution network without having to pay
distributor support payments and other related expenses found
within the distribution channel and neither company can hurt
the other’s market for its products.
2. without such an agreement in place, the Spanish manufacturer
might very well have to invest in a national sales office to
coordinate its distributor network, manage warehousing,
inventory and shipping as well as to handle administrative tasks
such as accounting, public relations and advertising.
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Reciprocal distribution agreements

6. 1. joint venture involves two firms who are within the same
industry who are partnering for some strategic
advantage. reasons for the partnering might include the
need to access the proprietary technology, the desire to
gain access to intellectual, to access to channels of
distribution in key regions of the world.
2. joint ventures involving three or more parties are usually
called syndicates and are most often formed for specific
projects such as large construction or public works
projects that might involve a wide variety of expertise
and resources for successful completion.
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Joint Venture and other Hybrid Strategic Alliances

7. The four basic requirements are the level of competitiveness,
new market analysis, market expectations and assessment of
internal resources.
1) level of competitiveness
FDI may be considered as an attractive and a feasible option
depending on the industry sector and type of business. from
the competitive view, it is important to be aware of
competitors who are expanding into a foreign market and
how they are doing it. at the same time, it also becomes
imperative to monitor how globalization is affecting
domestic clients on their products/services needs.
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Basic requirements for embarking using FDI

8. 2) new market analysis
firms must have realistic assessment in aspect such as
resource utilization, local industry and foreign
investment regulations, government incentives, profit
retention, financing, distribution, and other factors
before entering the market.
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Basic requirements for embarking using FDI

9. 3) market expectations
foreign production or location begins to look more cost
effective when product or service reaches a critical mass of
amount and cost. any decision on investing must carefully
consider factors such as the feasibility to operate in a large
capacity that will lead the firms to acquire economies of
scale in manufacturing to meet demand in a large market.
another factor that should be taken into consideration is
that firms must have access to supply chain channel
members and logistic transportation in order to produce
and distribute products to international market.
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Basic requirements for embarking using FDI

10. 4) INTERNAL RESOURCES
the last factor that the firms have to consider is
internal resources e.g. does the firm have support
from all its stakeholder for the foreign
investment? does the firm have the capabilities
and strong knowledge to go abroad? These
questions need to be taken seriously by the
management of the firm before deciding to
embark in a foreign land using FDI to minimize
risks.
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Basic requirements for embarking using FDI

11. merger and acquisition (M&A)
1. a merger is a combination of two companies
to form a new company, while an acquisition
is the purchase of one company by another
in which no new company is formed.
2. merged companies typically will operate on
a cooperative basis, while an acquisition
involves absorbing part or all of another
company.
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Basic requirements for embarking using FDI

12. Joint venture (JV)
JV is the cooperation of two or more businesses in which each agrees to
share revenues, expenses and assets including profit, loss and control in a
specific enterprise.
1. there are also other types of companies such as JV limited by
guarantee, and JV limited by guarantee with partners holding shares.
2. when two or more individuals come together to form a temporary
partnership for the purpose of carrying out a particular project, such
partnership can also be called a joint venture where the parties are “co-
venturers”. the venture can be for one specific project only and
sometimes also is being referred to a consortium or a continuing
business relationship.
3. the consortium JV(also known as a cooperative agreement) is formed
where one party seeks technological expertise or technical service
arrangements, franchise and brand use agreements, management
contracts, rental agreements, for one-time contracts.
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Basic requirements for embarking using FDI

13. Global Strategic Alliances (GSA)
A global strategic alliance is usually established when a
company wishes to enter into a related business or new
geographic market – particularly one where the government
prohibits imports in order to protect domestic industry.
typically, alliances are formed between two or more
corporations, each based in their home country, for a
specified period of time. their purpose is to share in
ownership of a newly formed venture and maximize
competitive advantages in their combined territories.
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Basic requirements for embarking using FDI

14. Global Strategic Alliances (GSA)
in general there are six types of global strategic alliance. there are joint
exploration, research and development consortium, co-production or co-
service agreement, co-marketing arrangements, long term supply
management and co-management arrangement.
1) joint exploration
joint exploration is a type of joint venture that specifically involves with
companies that are extracting minerals, oil and gas exploration. the act of
exploring, penetrating, or ranging over for purposes of discovery, especially
of geographical discovery; examination; as, the exploration of unknown
countries are jointly together by few companies e.g. Shell & Petronas
signed a contract for joint exploration in search for gas & oil in offshore
Sarawak.
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Basic requirements for embarking using FDI

15. 2) Research & Development Consortium
research and development (R&D) consortia are formed by
manufacturing companies, for the purpose of conducting
shared research on new technologies for the benefit of the
consortium’s member companies, often with the support of
government. in japan, government-supported R&D consortia
(Kumaia) have been in existence since1960s.
R&D consortia is most frequently formed in the electronics,
semiconductor, and pharmaceutical industries. for example,
Sematech, a Texas-based consortia of major semiconductor
manufacturers founded in 1987, has had dramatic success in
helping its member companies regain dominant market shares
in the international semiconductor equipment and silicon-chip
markets.
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Basic requirements for embarking using FDI

16. 3) co-production and co-service agreement
i. an international co-production is a production where two
or more different production companies are working
together to in a specific project e.g. a co-production
agreements enable canadian and foreign producers to
pool their creative, artistic, technical and financial
resources to coproduce projects that enjoy the status of
national productions in the countries involved.
ii. co-service agreement is an agreement entered between a
consultant or independent contractor and firms to provide
management, consulting or other services for a fee.
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Basic requirements for embarking using FDI

17. 4) co-marketing arrangements
co-branding is also known as brand partnership. brand
partnership happens when two companies form an alliance to
work together in marketing aspects, creating marketing
synergy. co-branding could be considered to include
sponsorships, for example, Marlboro lends it name to Ferrari
or accountants Ernst & Young support the Monet exhibition.
the typical co-branding agreement involves two or more
companies acting in cooperation to associate any of various
logos, color schemes, or brand identifiers to a specific
product that is contractually designated for this purpose.
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Basic requirements for embarking using FDI

18. 5) long term supply management
i. the concept of “just-in-time”, “lean manufacturing” and “agile
manufacturing practices” help furthering the implementation strategy
of the long term supply management among global firms.
ii. other factors that make long term supply change management
feasible is due to technological changes, particularly the dramatic fall
in information communication costs, which is important part of
transaction costs, have led to changes in coordination among the
members of the supply chain network in the long run.
iii. as firms strive to focus on core competencies and becoming more
flexible, they may reduce their ownership of raw materials, resources
and distribution channels. these functions are increasingly being
outsourced to other firms that can perform the activities better or
more cost effectively e.g. Dell inshoring its pc delivery services to
FedEx and ups on its facilities.
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Basic requirements for embarking using FDI

19. 6) co-management arrangement
the world bank has defined co-management as ‘the sharing
of responsibilities, rights and duties between the primary
stakeholders, in particular, local communities and the nation
state; a decentralized approach to decision-making that
involves the local users in the decision-making process as
equals with the nation-state’. The definition regarded co-
management as some kind of partnership between public
and private actors. There are six facet of co-management
arrangement.
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Basic requirements for embarking using FDI

20. 1) co-management as power sharing
resource management falls under the jurisdiction of the
central or state government, but there may be
arrangements for sharing power and responsibility with
business users.
2) co-management as institution building
in order to create co-management as an institution
building, government must create a favourable policy
environment to assists the emergence of functional co-
management arrangements by giving feedback, between
government policy and local institutions.
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Basic requirements for embarking using FDI

21. 3) co-management as trust and social capital
direct user involvement in joint management boards did not
increase the likelihood of co-operation but the frequent presence of
government bodies really increased the trust between parties.
4) co-management as process
co-management must agreed on a process for sharing management
rights and responsibilities.
5) co-management as problem solving
management decision-making means parties have to make choices
between different alternatives. but adaptive management requires
collaborative processes to establish consensus among the parties
before feedback-based problem solving can proceed.
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Basic requirements for embarking using FDI

22. 6) co-management as governance
co-management as governance often involves a diversity of
players including public and private actors. The polycentric
approach recognizes that effective governance often requires
multiple links across levels and domains, and seeks
overlapping centers of authority. Such a decision-making
structure contributes to the creation of an institutional
dynamic appropriate for adaptive co-management and more
broadly, for adaptive governance.
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Basic requirements for embarking using FDI

23. Umbrella Holding Company
umbrella holding company as a company that owns multiple chains of
majority- and minority-owned operating subsidiaries. umbrella
holding company is a type of business organization that allows a firm
(called parent) and its directors to control or influence other firms
(called subsidiaries) e.g. TNB has many subsidiaries including TSG, TCI,
MTM etc.
Benefit and drawback:
one of the advantages of umbrella holding company is getting
discounted insurance and benefits. since most of this type of company
is big, it has to deal with many insurance policies, payroll companies,
and staffing agencies. one of the risks of an umbrella corporation is
they can often grow so large that they eventually become inefficient.
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Basic requirements for embarking using FDI