Direct Investment and Collaborative Strategies - Case Study Example

STUDENT NAME: STUDENT NUMBER: COURSE: TOPIC: DIRECT INVESTMENTS AND COLLABORATIVE STRATEGIES AVAILABLE TO TRANSNATIONAL CORPORATIONS INSTRUCTOR NAME: INSTITUTION: DATE: INTRODUCTION Over the last couple of years, the concept of collaborative strategies and the role played by these strategies to achieve organization’s goal has been integrated by many organizations into their overall strategies. Fernando (2010) explains that whole idea of collaborative strategies revolves around the working of a variety of groups towards one common objective through their own individual strategies. It is important to note that the collaborative strategies are all in association and completely in tandem with one another (Fernando, 2010). Falzoni (2000) has defined direct investment as “the sum of equity capital, reinvested earnings, and inter-company debt transactions.” In addition, Falzoni explains, “that the foreign direct investment is the value of the share of capital and reserves (including retained profits) attributable to the parent enterprise, plus the net indebtedness of affiliates to the parent enterprises.” Current trends in most businesses have internalized collaborative strategies to enhance business ventures that exist between them and their partners in their commercial activities. The demand and quality of the products of the business, prices of shares, and company rankings are enhanced by individual strategies that modern businesses have adopted today. In the last few years, a number of tools have supported both the collaborative strategies and the direct investments. Content related tools, emails and conference tools are the main tools that have continued to support the businesses as explained above (Fernando, 2010). Direct Investments can be either inward or outward depending on the flow of such investment. An inward form of investment concerns investment that are within the operating economy for a business, while outward investments, as the name suggests, refers to those direct investments that are made abroad or outside the operating economy. Outward direct investments are the most appropriate forms of direct investments that are suitable for transnational companies or businesses because of the face of their objectives and goals. It is essential for a transnational company to engage in direct investments and specifically the foreign direct investments in order to diversify its objectives and to stimulate growth by reducing risk (Falzoni, 2000). In order to achieve collaborative strategies, transnational corporations should adopt a number of principles on which the collaborative strategies’ concept is based. It is important to note that without adhering to these principles then the concept of collaborative strategies may not perform successfully as expected. Three strategies exist for transnational corporations and they are goal-sharing principle, confidence sharing principle, and the competent efforts (Fernando, 2010). The goal-sharing principle holds the fact that the ultimate goal of every corporation is to achieve a common goal together with its partners and this principle inspires the spirit of a common goal (Fernando, 2010). It is important that partners uphold a high degree of integrity given the fact that each one of them operates in different locations across the continents and this fact is inspired by the confidence sharing principle. The competent efforts principle holds on the fact that the transnational businesses usually involve big investments, which calls for competent efforts to ensure success in these competitive markets (Fernando, 2010). DIRECT INVESTMENT STRATEGIES AVAILABLE TO TNCs Direct investment strategies adopted by TNC differ depending to the extent of which they allocate responsibilities to different associates and decide their value chain position globally. Currently, with the marketing policy liberation and rapid technological changes, many transnational corporations are changing their strategies since much of this is usually outside the influence of the host government where the TNCs are located. However, the host government can influence the strategies adopted by TNCs by taking various measures that affect TNCs activities in the host country such as, inducing improvement by specific tools and incentives, targeting investors and improving local factors and institutions. Transnational corporations therefore need to have a clear understanding of the regulations and measures that are taken by the host governments as they evolve from time to time so that they can be able to formulate effective strategies for investment in foreign countries. According to a study conducted by the United Nations in 1993, there are three types of corporate strategies adopted or rather available to TNCs. Corporate strategies adopted by TNCs have the capability of becoming multifocal when they meet the specific requirements for direct investment and achieve high levels of scale and scope economies (United Nations, 2004). Stand-alone strategies are one of direct investment strategies adopted by TNCs as they undertake to invest in foreign countries (Bora, 2002). Stand-alone strategies are applicable in situations where high local market accessibility is required. Need for high local market accessibility may arise due to presence of certain factors such as natural or political barriers that hinder or reduces accessibility of the market. Natural factors may include, high transport cost due to inaccessibility of the location and presence of specific customer demands that are usually affected by their culture. Political factors that affect market responsiveness include presence of trade barriers such as tariffs, quota and trade embargoes, and local content requirement. Under this strategy, the foreign unit interested in making a direct investment is likely to undertake a stand-alone production unit servicing the host market. This means that there is no form of integration between the TNC and local firms or other multinational corporations present in the host country. Therefore, no form of coordination is required in stand-alone strategies and if any is required, it is kept to the minimum. The TNC therefore undertakes to reap the benefits by manufacturing and selling in the protected market. Production is done within a local unit and the investing corporation makes use of the parent’s technology in its undertakings. This form of strategy gives TNCs an optimal way of combining ownership and gaining locational advantages. Where internalization advantages exist in the host government, then the TNC establishes a local unit through foreign direct investment (Morsink, 1998). Simple affiliate integration direct investments strategies are yet other forms of strategies that can be pursued by TNCs when undertaking direct investments (Bora, 2002). This is usually possible where there exists some form of economic integration between the host and the home country that can either be in form of open trade or foreign direct investment. High level of coordination is required as compared to the situation of stand-alone strategies as the transnational corporation may require outsourcing some economic activities for its production unit in the foreign country. However, full integration is not possible under these strategies since some economic activities may still have barriers imposed on them. TNCs undertaking this form of strategy seek to create additional ownership advantages by benefiting from scale economies resulting from integration of certain economic activities (Bora, 2002). In situations where full and/or well advanced economic and political integration between home and host country, are present complex international direct investment strategies are used (Bora, 2002). Responsiveness of economic activities maybe either multifocal or global depending on the extent of integration in market demand. Coordination is very important in production as activities dispensed over locations in the home country and in the host country are integrated into one network of economic activities. Transnational corporations under this form of strategy are able to allocate their activities every time most favorable combinations of ownership and locational advantages occur (Morsink, 1999). COLLABORATIVE STRATEGIES AVAILABLE TO TNCs There are various collaborative strategies that transnational corporations can make use of to reap great benefits from. These collaborative strategies are in the form of business alliances adopted by transnational corporation to access new markets. Business alliances assists transnational corporations get the most out of technology and increasing earnings using collective resources. A firm that shares resources creates better efficiencies and is more profitable compared to one that does not. Increased synergies and prevention of risks when firms are working together are experienced at the same time allowing firms to work together towards attainment of a common goal as they maintain their independence (Harbut, 2010). There are different types of business alliances and each is unique in its own way. A firm assesses its asset both tangible and intangible, to find out whether if the business possesses something unique such that when leveraged with another business, it/they can unlock potentials for both businesses. Alliances are developed with sellers/merchants, buyers/clients/customers, investors and financiers, corresponding businesses and friendly competitor. Some of them can be natural matches while others are born out of creative thinking (Harbut, 2010). Joint venture is one form of collaborative strategies adopted by transnational corporation. Joint venture involve making a contractual agreement where by an independent joint entity is formed to carry out business on its own separate from the center businesses that established it (Kupper, 2009). A large multinational firm or rather a transnational corporation, may decide to form a joint venture with a local firm in a different country in order to gain access to market its products or services and also gain access to resources which would otherwise been hard to obtain. Firms producing identical goods can also join forces to break through markets that they could not have otherwise penetrated without great investment in resources. An example of a joint venture is where a transnational corporation has developed a product and wants to distribute it to a country where it does not have a distribution outlet. This corporation can form a joint venture with a local firm in the given country that has a strong distribution system and manufactures and/or sell similar or almost similar goods. Then, through the joint venture, all the products of the two firms; the local firm and the transnational firm can be jointly promoted and distributed. This is a win-win strategy, as the multinational firm seeking joint venture does not have to incur huge expenses to reach for potential customers, while the local firm gets an opportunity to expand its value and products without having to fund extensive research and development for the new product (Harbut, 2010). Transnational corporations can also form strategic alliances with other firms that are located in countries where the products of the multinational corporation have a market potential9Kupper, 2009). A strategic alliance is an agreement where no separate entity is created, instead the participants engage in joint activities without establishing an entity to perform business on its own. Partners in strategic alliances provide resources like supply channels, manufacturing potential, equipments, knowledge and each partner in the agreement maintains its independence (Culpan, 2003). For example, a transnational corporation dealing with offering consultation services may want to form a strategic alliance with another local consulting firm in a given country where it has its operations. A strategic alliance arise where the transnational corporation want to capture increasing demand for business consultation, say in HR and yet it does not want to hire additional staff to offer these services. It then forms a strategic alliance with a local firm engaged in HR consultancy and they both agree to work together when opportunity arises. A certain percentage of the profits earned from such alliances to be given to each firm are then agreed. Another form of collaborative strategy is marketing alliance. This involves sharing of marketing costs and marketing resources between two or more firms in order to promote each of the firm within the alliance (Culpan, 2003). Market alliance can be either formal or informal and their broad markets usually share like characteristics. A group of transnational corporation with branches in one given country may decide to form a marketing alliance to promote their products or services as a bid to stand out against the national corporations within that country that produces the same goods or services or their close substitutes. All the corporations in the marketing alliance contribute to a common pool to run advertisements and produce direct mail guides to promote their products and services. (Harbut, 2010). In order for TNC to be able to manage collaborative strategies in the form of business alliances, each firm in the alliance should bring in a balanced set of strengths into the alliance and all parties must manage the alliance in order to bring success to each firm. For a successful alliance to exist there should exist the support and commitment from the business owner who acts as the decision makers. Goals and objectives of the alliance should be clearly communicated at the foundation stage of the alliance. In addition, metrics to measure the performance of each firm in the alliance should be developed, allocation of the alliance resources should be done at the beginning of the alliance, and employees from all firms should be included into the alliance. This can be achieved through a buy-in strategy for employees (Harbut, 2010). Collaborative strategies adopted by transnational corporations in marketing helps create alliances between executives of contending multinational businesses and the local business entrepreneurs in combining together to create enormous wealth, decrease risks, and create a win-win business growth strategy. This is achieved by sharing what one has with the others, for example, databases, trustworthiness, products, and proceeds. Learning about collaborative strategies such as joint ventures helps corporations to progress, mature, stay safe and generate profits without requiring banks credit or loan to cover competitive selling overheads. Joint ventures will soon be the fastest growing forms of collaborative strategies especially in marketing. Sharing databases, which are valuable assets, helps to extend the clientele of the businesses without spending any money on it (Chan & Justis, 2003). Mutual benefits stand to be reaped by both the transnational corporations and firms in emerging markets (which are firms in the host countries). The benefits are said to be mutual since all the parties involved in the strategies stands to benefit from the activities of each other. The United Nations have strict guidelines that are adhered by transnational corporations concerning direct investments especially in developing countries. These guidelines are set to ensure that direct investments result into mutual benefits by the home and host countries. Transnational corporations are known to make enormous contributions in host countries through poverty eradication, generating employment, developing human resources, taking account of important national policies and developing infrastructures (United Nations, 2004). All these are directed towards enhancement of people’s live in the host countries while at the same time, the home countries reap great returns from their investment. As a result, all parties concerned experience mutual benefits. As firms undertake collaborative strategies, they embark on sharing their valuable resources to realize synergies. Synergies are benefits that are felt when efforts of different companies are combined together to realize common objectives. Companies collaborate with their suppliers, customers, vendors, partners, and others to build necessary synergies for growing their businesses. As synergies are built, all parties involved in the collaborative strategies benefit mutually. Customers tend to benefit from quality, cheap and easily accessible good as the sellers benefit from increased sales and increased market share. Example is where the Indian telecom giant, Bharti Airtel, collaborated with vendors of mobile consumer electronics such as IBM, Nokia, and Ericsson. Bharti Airtel was able to achieve phenomenal growth by expanding its market share in the whole of India while the vendors were able to increase their revenues through increased sales. Therefore, all parties concerned in collaborative strategies be it joint venture, strategic alliances, or marketing alliances benefit mutually from the activities of each other (Chan & Justis, 2003). CONCLUSION Direct investment strategies adopted by transnational corporation include stand-alone direct investment strategies, simple affiliate integration direct investment strategies and complex international direct investment strategies. The type of strategy adopted by TNC depends on the situation in the country where the direct investment is to be undertaken. Collaborative strategies include joint ventures, strategic alliances, marketing alliances, and business alliances. Joint ventures are the most common form of collaborative strategies adopted by TNC where by a new organization separate from the TNCs, that formed it is formed. Through joint ventures, TNC are able to market their goods in new markets and in foreign markets where they would not be able to access individually. There are various mutual benefits that reaped from the various direct investment strategies and collaborative strategies adopted by TNCs. There are referred to as mutual since all the parties involved gain from the strategies undertaken. REFERENCES Bora, B. 2002. Foreign Direct Investment . In Research Issues (pp. 337-339). Routledge. Chan, P, & Justis, R. 2003. Developing a Global Business Strategy Vision for the Next Decade and Beyond. Journal of Management Development , Vol. 10 (Iss. 2), 38-45. Culpan, R. 1993. In Multinational Strategic Alliances (pp. 1-3). Routledge. Falzoni, A. 2000. In Statistcs of Foreign Direct Investment and Multinational Corporations. 1-35. Farnendo, A. 2010. The Multiple Benefits of Collaborative Strategies. Retrieved November 10, 2010, from ezine articles: http://ezinearticles.com/?The-Multiple-Benefits-of-Collaborative-Strategies&id=4371559 Harbut, D. 2010. Business Alliances - Strategy For Small Business Growth. Retrieved November 10, 2010, from enzine articles: http://ezinearticles.com/?Business-Alliances---Strategy-For-Small-Business-Growth&id=4182239 Küpper, V. 2009. In The Use of Joint Ventures as a Strategic Tool for Multinational Companies (pp. 14-16). GRIN Verlag. Morsink, R. L. 1998. Foreign Direct Investment and Corporate Networking. In R. L. Morsink, A Framework for Spatial Analysis of Investment Conditions (pp. 28-29). Edward Elgar Publishin. Nations, U. 2004. Propsects of Foreign Direct Investments and Strategies of Transnational Corporations. 1-66. Read More