In a business alliance, two or more firms jointly cooperate for mutual gain. Each partner in an alliance brings knowledge or resources to the partnership. In the long run, alliance partners can learn from each other and develop new core competencies that help increase the firm’s strategic competitiveness. In joint ventures which are a special type of strategic alliance, a company shares costs and risks with another firm, typically in the host country to develop new products, build a manufacturing facility or set up a sales and distribution network. Some of the commonly cited advantages of joint venture arrangements (whether it is an equity venture, which involves a financial investment by the MNC in a business enterprise with a local partner or a non-equity venture, where one group offers services to another) include the following:
The creation of a joint venture can help the partners achieve greater economies of scale and scope, something which can be difficult to accomplish by one firm operating alone. Additionally, the partners can spread the risks among themselves and profit from the synergies which arise from the combination of their resources
In joint ventures each partner has access to the knowledge and skills of the others. So one partner may bring financial and technological resources to the ventures while another will bring knowledge of the customer and market channels.
A local partner can be very helpful in dealing with political risk factors such as a hostile government and /or restrictive legislation.
Joint ventures can help partners overcome the effects of local collusion or limits that are being put on foreign competition. By becoming part of an insider group, foreign partners manage to cross their barriers.
Business alliances are not easy to manage. Partners could disagree on various aspects; one partner might want to reinvest earnings for growth, and the other partner might want to take home more in the form of dividends. There is no guarantee that the shared knowledge or skills would remain within the four walls of the factory. The MNC having skills knowledge expertise at its command runs the risk of giving the partner(s) more insight into its knowledge base than intended. Alliances can often make a firm too dependent on its partner. Also when partners do not agree on a common set of values, operating procedures etc. the cost of coordination might escalate.
- Know your partners well before an alliance is formed.
- Expect differences in alliance objectives among potential partners, headquartered in different countries.
- Realize that having the desired resource profile does not guarantee that they are complementary to your firm’s resources.
- Be sensitive to your alliance partner’s needs.
Direct investment occurs when an MNC headquartered in one country builds or purchases operating facilities or subsidiaries in a foreign country. The foreign operations then become wholly owned subsidiaries of the firm. A wholly owned subsidiary, thus, is an overseas operation that is totally owned and controlled by an MNC. Where the market is fairly large, direct investment could bring in distinct advantages:
The firm could benefit from the availability of cheap labour or raw materials, incentives offered by foreign government to attract direct investment. The firm can create more jobs in the host country and improve its image. The firms could move closer to the hearts of customers, local suppliers and distributors, develop good relations with government there, adapt products to suit local tastes etc., and grow very quickly.
The firm is in full control of the whole show and so can pursue its manufacturing and marketing policies in line with its global ambitions. The firm now has an assured market. So even if the local government insists on complete localization of operations it can still hold the ground on its own.
Finally, direct investment is the most satisfactory choice of many MNCs because managerial control is complete and profits do not have to be shared with anyone (as they are done in joint ventures). The main disadvantage of direct investment is that the firm exposes a large investment to risks such as blocked or devalued currencies worsening markets or expropriation. Many host countries do not look at MNCs in a positive way, especially the way the MNCs begin and earn huge profits.
MNCs are the real destroyers of unions etc. In the end the firm may find it expensive to reduce or lose down its operations, because the host country may impose several penalties and taxes to please the local customer suppliers, unions and employees.
Thus to enter a global market, a firm may select an entry mode that is best suited to its resource base and competency levels. In some cases the various options listed above may be adopted sequentially – beginning with exporting and ending with direct investment. In other instances, the firm may use several but not all of the different entry modes, each in different markets. The decision regarding the entry mode to be followed is basically an outcome of the industry’s competitive conditions, the country’s situation, government policies and the firm’s unique set of resources capabilities and core competencies.