CORPORATE STRATEGY AND FOREIGN DIRECT INVESTMENT

1. CORPORATE STRATEGY AND FOREIGN DIRECT INVESTMENT The process of Oversees Expansion Theory of Multinational Corporation The Strategy of Multinational Enterprise Designing a Global Expansion Strategy

2. Multinational Corporations • Innovation-Based Multinationals • 3M (USA), N.V. Phillips (Netherlands), Sony (Japan) • Mature Multinationals • Coca-Cola, McDonald’s, Nestle, Procter & Gamble • Senescent Multinationals • Crown Cork & Steal

3. Important Factors • Cost Reduction • Economies of Scale (world-scale) • Multiple Sourcing • Knowledge Seeking • Keeping Domestic Customers

4. Strategy Design • Awareness of Profitable Investments • Selecting a Mode of Entry • Auditing the Effectiveness of Entry Mode • Using Appropriate Evaluation Criteria • Estimating the longevity of a competitive advantage

5. Example: Phillips

6. Q&A Q: What's the big trend in Asia? A: Thirty-five years ago, companies thought of Asia as a place to sell things manufactured in Europe. The next phase was when manufacturing moved from Europe to Asia. The phase [after that], in the last five years, was the transfer of competencies from Europe and the U.S. into Asia. That happened to Taiwan, Japan, Korea, and Singapore. The shift now is that Philips is moving into China with competencies, product-creation processes, and development of new technologies.

7. Q&A Q: How important is China to Philips? A: China will be the leading part of our Asia strategy. That's why we moved from Singapore to Hong Kong -- to be close to the driving force of the electronics industry, which will be Northeast Asia. And we believe that Greater China will be the leader over time. The origins of initiatives in the electronics sector will largely come out of China.

8. Q&A Q: What sort of R&D work is Philips doing in China? A: The continuous discussion is what kind of technology we want to develop. If you look at TV, the transfer has been from Europe, 10 years back, to Singapore. Now Singapore is transferring TV development to Suzhou [near Shanghai]. Basic research is in the Shanghai area. The global audio division headquarters, which was in Hong Kong, is moving to Shenzhen [across the border from Hong Kong]. The LCD division for cell phones was headquartered in Hong Kong and has moved to Shanghai. We have no choice, we must move [there] more and more.

9. Q&A • Q: Why? • A: There's a tremendous pool of well-trained people in China, and that's where the market is available.

10. Q&A Q: Philips has had its share of difficulties in China, especially when it comes to getting Chinese manufacturers of DVD players to pay royalties to Philips and other companies that control the intellectual-property rights. Are things getting better? A: Philips had a lot of problems with the Chinese government over royalties. But those differences have been resolved. From a historic perspective on intellectual property [IP], they didn't understand the need to respect IP and pay for IP. With [Beijing's entry into] the WTO, this has been solved. The [agreement with the government over DVD royalties] has been the first real breakthrough showing that there's an understanding of IP in China.

11. Q&A Q: How do you see other Asian countries competing against China? A: Taiwan is trying to achieve a fast change into a knowledge economy, which is the only way they can go. That's the same thing that Singapore is doing, that Japan is doing, that Korea will be doing. But the fact of life is that China is doing the same thing as well.

12. Q&A Q: In that case, what's the Philips division of labor for Asian R&D? A: Our biggest [Asian center] is in Singapore. We have a major operation in Bangalore, [India,] which is a major part of Philips' software development. We have a big unit in Taiwan for semiconductors and components. And there's a new one in Shanghai, which started three or four years ago, doing basic research. Shanghai also is for product research: consumer electronics, a little bit of lighting.

13. Q&A Q: What's the impact on your R&D operations elsewhere? A: We are refocusing our number of development spots in the world, and Asia is the growing part of those activities. We used to have, in Europe, God knows how many places. Those days are over. We are centralizing development activities into competence centers: Bangalore for software, Singapore for consumer electronics, Taiwan for semiconductorsand components -- and Shanghai for all of them.

15. Joint Ventures Exporting Licensing Turnkey Projects Wholly Owned Subsidiaries Franchising Entry Modes

16. Advantages: Avoiding substantial set-up costs in a host country Immediate profits Achieving experience curve and location economies Disadvantages: High transportation costs Trade barriers Problems with local marketing agents Inability to realize full sales potential of the product EXPORTING

17. TURNKEY PROJECTS A project in which a firm agrees to set up an operating plant for foreign client and hand over the “key” when the plant is fully operational

18. Advantages: Ability to earn returns from process technology skills in countries where FDI is restricted Less risky than conventional FDI Disadvantages: Creating efficient competitors Selling the technology = selling competitive advantage Lack of long-term market presence TURNKEY PROJECTS

19. LICENSING Agreements where licensor grants the rights to intangible property to another entity for a specific period, and in return, the licensor receives royalty fee from licensee.

20. Advantages: Reduces development costs and risks of establishing foreign enterprise Lack capital for venture Unfamiliar or politically volatile market Overcomes restrictive investment barriers Others can develop business applications of intangible property Disadvantages: Lack of control Inability to involve into global strategic coordination Cross-border licensing may be difficult Creating a competitor LICENSING

21. FRANCHISING A specialized for of licensing in which the franchiser not only sells intangible property to the franchisee (normally a trademark), but also insists that franchisee agrees to abide by strict rules as to how it does the business.

22. Advantages: Reduces costs and risk of establishing enterprise Ability to build global presence quickly Disadvantages: May prohibit movement of profits from one country to support operations in another country Quality control FRANCHISING

23. JOINT VENTURE A joint venture entails establishing a firm that is jointly owned by two or more otherwise independent firms

24. Advantages: Access to local partners knowledge Sharing development costs and risks Politically acceptable Disadvantages: Risk giving control of technology to partner Absence of tight control Shared ownership can lead to conflict JOINT VENTURE

25. Advantages: Protection of technology Ability to engage into global strategic coordination Ability to realize location and experience economies Disadvantages: High costs and risks WHOLLY OWNED SUBSIDIARY

26. SELECTING AN ENTRY MODE • Technological Know-How: • Wholly owned subsidiary, except: • Venture is structured to reduce risk of loss of technology • Technology advantage is transitory • Then licensing or joint venture OK • Management Know-How: • Franchising, subsidiaries (wholly owned or joint venture) • Pressure for Cost Reduction: • Combination of exporting and wholly owned subsidiary

27. Theories of the Multinational Corporation • Market Imperfections • Theory of Industrial Organization • Internalization Theory • Financial Market Imperfections • Strategic Behavior Theory (F.T. Knickerboker) • The Product Life Cycle Theory (R. Vernon) • Location-Specific Advantages Theory (J.Dunning)