Lappeenranta University of Technology 
13.11.2003
Department of Industrial Engineering and Management
International Business Methods

Foreign Direct Investment
Managing International Joint Venture
Case: NAFTA

by

German Wehinger

Table of content

I Introduction 4

1.1 Objective of analysis 4
1.2 Analytical proceeding 4

II Foreign Direct Investments (FDI) 5

III International Joint Venture 7

1 General overview 7
1.1 Types of Joint Venture 7
1.2 Joint Venture System 8

2 Trust in international joint ventures (IJV) 8
2.1 Explaining trust 8
2.2 The role of trust in IJVs: a transaction cost approach 9
2.3 A process model of trust 10

3 Managing the international joint venture 10
3.1 Formation process 11
3.2 Boundary relationship 12
3.3 Operational management 12

4 Creating value in a IJV network 13
4.1 Transfer 14
4.2 Transformation 14
4.3 Harvesting 14

IV Case Study 15

1 The IJV Elsa 15
1.1 The customers 16
1.2 The managers 16
1.3 The structure of Elsa 16
1.4 Summary 17

2 The IJV Kenam 17
2.1 The design of the foundry 18
2.2 The partners 18
2.3 Summary 18

3 Conclusion 19

V Interpretation 20

VI References 22

VII Table of figures 23

VIII Table of tables 23

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.

Figure 1: FDIs over the last 30 years.

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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.

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