Foreign Direct Investment - Managing International Joint Venture - Case: NAFTA

Essay 2003 23 Pages

Business economics - Business Management, Corporate Governance


Table of content

I Introduction
1.1 Objective of analysis
1.2 Analytical proceeding

II Foreign Direct Investments (FDI)

III International Joint Venture
1 General overview
1.1 Types of Joint Venture
1.2 Joint Venture System
2 Trust in international joint ventures (IJV)
2.1 Explaining trust
2.2 The role of trust in IJVs: a transaction cost approach
2.3 A process model of trust
3 Managing the international joint venture
3.1 Formation process
3.2 Boundary relationship
3.3 Operational management
4 Creating value in a IJV network
4.1 Transfer
4.2 Transformation
4.3 Harvesting

IV Case Study
1 The IJV Elsa
1.1 The customers
1.2 The managers
1.3 The structure of Elsa
1.4 Summary
2 The IJV Kenam
2.1 The design of the foundry
2.2 The partners
2.3 Summary
3 Conclusion

V Interpretation

VI References

VII Table of figures

VIII Table of tables

I Introduction

The importance of international trade to a nation’s economic welfare and development has been heavily documented in the economics literature since Adam Smiths pioneering inquiry into the nature and causes of the wealth of nations. There are several theories under rubric of foreign direct investment (FDI), including the internalization theory. Internalization theory centres on the nation that firms aspire to develop their own internal markets whenever transactions can be made at lower cost within the firm. Internalization theories endeavour to explain how and why the firm engages in overseas activities and in particular how the dynamic nature of such behaviour can be conceptualized (Morgan et al., 1997).

1.1 Objective of analysis

In this paper two international joint ventures are considered and both of them are in the North American Free Trade Agreement. The names are Elsa and Kenam and the companies are situated in Canada and Mexico. Elsa provides a benchmark of ineffective learning processes, learning outcomes and performance. It struggled for years to even match the Canadian partner's operations expertise and outcomes. The lack of performance was the result of poorly managed relations, tight operational and fiscal controls. Kenam, in contrast, is a turnaround case. It was able to rebound from initial operations problems through learning processes. The American parent assumed it could transfer its technological competence in one material to casting a different material, an assumption that quickly proved wrong. An open-minded attitude, a strong parent-IJV relationship and a long-term view allowed for a third party with the necessary skill to be brought in. The JV was able to leverage what it had learned with new customers. The parents gained valuable knowledge that they could use in other operations.

1.2 Analytical proceeding

When a company today decides to target a particular country, it has to determine the best mode of entry. Its broad choices are indirect exporting, direct exporting, licensing, joint ventures and direct investments. Each succeeding strategy involves more commitment, risk, control and profit potential. This paper describes a form of foreign direct investments - joint venture - is a possibility to enter the foreign market and to succeed with this method you need some knowledge in various parts as the function in general, creating trust between two or more parties, managing the process and possesses management skills and so you are able to create a possible value through the international joint venture. These points below are analysed in detail in the theoretical background and the case study. (Kotler, 1988).

II Foreign Direct Investments (FDI)

The ultimate form of foreign involvement is investment in foreign based assembly or manufacturing facilities. As a company gains experience in export and if the foreign market appears large enough foreign production facilities offer distinct advantages. First the firm my secure cost economies in the form of cheaper labour or raw materials foreign government investment incentives, freight savings and so on. Second the firm will gain a better image in the host country because it creates jobs. Third the firm develops a deeper relationship with government, customers, local suppliers and distributors enabling it to adapt its products better the local marketing environment. Fourth the firm retains full control over the investment and therefore can develop manufacturing and marketing polices that serve its long term international objectives (Kotler, 1988).

The following graphic illustrates the increasing of foreign direct investments in US Dollars over the past 30 years in the world and the developed countries.

illustration not visible in this excerpt

Figure 1: FDIs over the last 30 years.

Foreign direct investments can be observed in different forms like acquisition, Greenfield investment and joint venture.

Acquisition enables a rapid entry and often provides access to distributors channels an existing customer base and in some cases established brand names or corporate reputations. In some cases too existing management remains providing a bridge to entry into the market and allowing the firm to acquire experience in dealing with the local market environment.

Greenfield leads to prefer to establish operations from the ground up especially where production logistics is key industry success factor and where no appropriate acquisition targets are available or they are too costly. The ability to integrate operations across countries and to determine the direction of future international expansion is often a key motivation to establish wholly owned operations even though it takes longer to build plants than to acquire them (Hollensen, 2001).

And if a company neither starts with an acquisition nor with a Greenfield investment it can provide a joint venture. A joint venture means a “foreign investor join with local investors to create a local business in which they share joint ownership and control” (Kotler, 1988, p. 392). The following section explains in detail this foreign direct investment method and especially this paper will deal with the duties and responsibilities of international joint ventures.

III International Joint Venture

This section deals with several aspects of Joint Ventures. Especially, what a company needs for an international joint venture. The points are a general overview about joint venture and the types. Further, how you can create trust in your international joint venture, manage international joint ventures and create an effective value through it for your company in a long term view.

1 General overview

A definition of International Joint Venture:

International joint ventures are one of a generic form of cooperative strategy involving two or more organizations. Cooperative strategies which also include alliances, partnerships, forms of contracting or cooperation, are becoming increasingly important as a means to control competitive forces or to enter into activities involving unacceptable risks as independent ventures. International joint ventures can also enable organizations to control or take advantage of regulatory constraints (Jaz et al., 1996).

1.1 Types of Joint Venture

Joint Venture agreements generally take one of the three forms:

- Contractual Joint Venture
- Corporate Joint Venture
- Partnership Joint Venture

In a “Contractual Joint Venture”, the terms, obligations, and liabilities of the parties are set forth in a written instrument signed by both parties. In a “Corporate Joint Venture”, the obligations, terms and liabilities are also set forth in a written agreement, however, this agreement is a much more extensive document in that it contemplates that the joint venture will be incorporated and become a separate legal entity. In the “Partnership joint venture”, the partners either form a general or limited partnership and the rights and obligations of the ventures are set forth in a partnership agreement. In a non-contractual joint venture, there is no written agreement, but the joint venture does business under a selected name and the conduct of the parties and the law establishes the liability and obligations of the ventures to third parties doing business with the joint venture (Valof, 2001).



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Lappeenranta University of Technology – Business Department
Foreign Direct Investment Managing International Joint Venture Case NAFTA Business Methods



Title: Foreign Direct Investment - Managing International Joint Venture - Case: NAFTA