Manag., December-2019 – Q19
- Option : B
- Explanation : FDI-related Entry Modes: There are at least four modes of entry that come under the above headline. One thing common to all the five modes is that there is an investment by an MNC in the host country. This feature
contrasts with earlier modes of entry which generally involved only trade agreements without equity investment. The four FDIrelated entry modes are:
Branch office
Co-operative joint-venture
Equity joint venture
Portfolio investment
Wholly owned subsidiary
Branch Office: An MNC opens a branch office in a host country. The branch may be required to engage in production and operating activities, but fully monitored by the parent company. Branch offices are particularly opened by international banks, law firms, accounting, and consulting firms. British Standard Bank, for example, has more than 1000 branches in South Africa. It also has branches in 14 other sub-Saharan countries.
Co-operative joint-venture: Strategic alliance is another name for cooperative joint-venture. This is a co-operative agreement between firms that go beyond normal company to company dealings. Alliances can involve joint research efforts, technology sharing, joint use of production facilities, marketing one another’s products, or joining forces to manufacture components or assemble finished products. Cooperative ventures may be equity or non-equity based. In a non-equity alliance, co-operating firms agree to work together to carry on activities, but do not take equity positions in each other or form an independent organization to manage their co-operative efforts. These non-equity alliances are managed through contracts that may be either trade-related or transfer related entry modes. In an equity alliance, co-operating firms supplement contracts with equity holdings.
Portfolio Investments: This involves investments in the equity of another company or lending money to it in the form of bonds or bills. They are important for many companies with extensive international operations, and except for equity, they are used mainly for short-term financial gain—as a relatively safe means of earning more money on a company’s investment. To earn higher yields on short term investments, companies routinely move funds from country to country.
Equity Joint-Venture: Equity joint venture is a shared ownership in a foreign business. Generally, the venture is a 50-50 ownership firm in which there are two (or more) parties, each holding a 50 percent ownership stake. The venture is together managed by the alliance partners. Host countries generally prescribe investment limits on alliance partners. The Government of India had put ceilings on foreign investments in India but now has relaxed in many industries.
Lack of trust between the two partners makes life short-lived. It is observed that the partners do not share trade secrets with each other. The exception to this perception is the collaboration between Tatas and Starbucks. Starbucks shared with Tatas some of the roasting secrets, which the MN Chad perfected for over four decades and guarded very closely.
On the plus side, Joint-ventures facilitate easy access into host markets; local partners are familiar with wishes and dislikes of host country citizens; and host partner’s distribution networks, brand image and managerial skills are made available to the joint-venture
Wholly-owned subsidiary: As the title itself suggests this entry mode involves 100 per cent ownership by an MNC in a venture located in a host country. Such a firm can come into being in either of two ways: setting up a totally new project or acquisition of an existing company. The MNC can establish a totally new facility in which case it is called a greenfield project and the finance is called greenfield investment. The ‘green’ is appended for the reason that such a venture is a set up in a green agricultural field. In the alternative, the MNC can acquire an existing company located in the host country outright.
Developing countries prefer greenfield investments because they generate employment opportunities, add to the existing manufacturing capacities and bring new technology.
Compared to greenfield investment, a crossborder acquisition benefits the MNC in at least two ways. First, the acquisition is quicker than establishing a firm. Second, the acquisition may be a cost-effective way of gaining competitive advantage such as technology, brand name, and logistical and distribution advantages, while simultaneously eliminating any local competitor. There are problems associated with the acquisition. There may be the possibility of paying too high a price. Meshing different cultures can be a traumatic experience. Managing the post-acquisition the process is generally characterized by downsizing to minimize costs. This leaves bitterness in the host country's citizens. Host governments may interfere in matters relating to pricing, financing, employee hiring, and other activities.
Greenfield or acquisition, wholly-owned the subsidiary route represents fully blown crossborder transactions. In fact, such entry modes manifest the true spirit of international business.
