Foreign Investment Negotiation Simulation - Final Report

International  Business Stephan Wolter  

  Final Paper - FINS Report 1 14 12  01

  Content  

Introduction   2

  FINS  3

  Features  3

  Players  3

  Foreign Market  4

  Product  4

  Strategy  5

  Goal/strategy/tactics-pyramid  5

  Global Strategy  5

  Negotiation History  6

  Progression  6

  Strategy changes  7

  Evaluation  8

  Progression and way of negotiation  8

  Agreements  9

  Future outlook  11

  Personal comments  11

  Learning experience  11

  Criticism  12

  Ending remarks  14

Appendix   15

  Strategy Paper  15

  Contract about a Joint Venture between Systrop S A. and Megatronics Inc. (Blueprint)  17

  Contract about a Joint Venture between ParaInfo S A. and Megatronics Inc. (Blueprint)  18

  Contract about a Joint Venture between Electro Paradys S A. and Megatronics Inc  

  (Blueprint)  19

  Literature  21

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Introduction

"WTO REACHED AGREEMENT for talks on a global trade deal.

A seven-year struggle ended in Qatar when delegates put together a trade-liberalization agenda to open markets between rich and poor nations. If ensuing negotiations are successful, companies from wealthy nations would get better access to markets in poor nations, which in turn would receive greater foreign investment….." 1

This and other articles with such a statement appear in great number in today's daily press. The trend is given by globalisation and free trade. The spread of market based economic systems ² , trade agreements like the General Agreement on Tariffs and Trade (GATT), institutions like the World Trade Organisation (WTO) and a better cultural understanding ³ , push the boundaries of bargaining and trading far beyond the borders of an individual country.

Multinational Companies (MNC) are dominating the Fortune and Global 500. Their economies are comparable to those of countries'. They offer thousands of workplaces and represent a phenomenon in strategy and structure, which is thoroughly investigated by economic and business researchers: Why do MNCs emerge? How do they go abroad? What strategies and structures can be found? In what way do MNCs differ to domestic firms? How can emerging complexity be handled? These are only some of the questions, which have to be answered.

The key point is to utilize the absolute advantages ⁴ , the comparative advantage ⁵ , or the 'diamond' ⁶ , which are offered by special countries, and thus gain competitive advantage for the company. The attractiveness of a country is determined by its market size, education and living standards, costs, political, legal and economical risks, long-run benefits, ethnical issues and cultural factors. It makes sense to disperse a firms value chain activities to those places where they can be performed most efficiency or where they have the greatest value for the company ⁷ . Therefore a company can go abroad to invest in foreign countries.

¹ Wall Street Journal Europe, 15.11.2001, emphasises added.

² For a further discussion see Hill A.C. (2002), chapter 2.

³ see e.g. Hofstede, G. (1983) "The Cultural Relativity of Organizational Practices and Theories", Journal of International Business Studies, Vol. 14, No. 2, pp. 75-89.

⁴ Smith, A. (1791), " An inquiry into the nature and causes of the wealth of nations ", Basil, Tourneisen and Legrand

⁵ Ricardo, D. (1967), "The Principles of Political Economy and Taxation", Homewood, IL, Irwin

⁶ Porter, M.E. (1990), "The competitive advantage of nations", New York, Free Press. Porter´s diamond consists of the 4 attributes that shape the environment of a country: factor endowments; demand conditions; relating and supporting industries; firm strategy, structure, and rivalry.

⁷ think e.g. of closeness to the customer.

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FINS Features

FINS - Foreign Investment Negotiation Simulation - tries to simulate such a foreign investment process between MNCs, the governments of two large emerging market countries and companies based in these countries, in which the negotiation and contract making is in focus of the exercise. "The goal … is to improve … [the] understanding of the interaction among the strategies of multinational firms, local companies and host country governments." ⁸ The negotiations are concerned with the development of a high technology manufacturing Microanalyzer industry.

My task was to lead the negotiations in the place of one of the MNCs: Megatronics Inc..

Players

To be able to follow the discussions below it is necessary to have an overview about the players in the game. In the Microanalyzer industries we find three dominating global players (MNCs). The size of the rectangles in the figure 1 represents the recent global market share.

Interesting is the constellation of the Microanalyzer branch: three MNCs with their headquarters located in very different national markets. Each of the MNCs dominates its own home market. Megatronics is the forerunner in the Microanalyzer technology. It could use the benefits of the first mover advantage ⁹ . Eurodata and Tanaka are technological follower.

⁸ FINS- Participant Manual, p.1.

⁹ for a further discussion see Hill, A.C. (2002), p. 66, 138.

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Figure 2 shows the domestic companies located in the two emerging market countries, Tropicalia and Paradiso. Tanaka and Eurodata had connections in the countries by mostly licensing agreements for distribution with some of these companies. The governments of Tropicalia and Exotica complete the list of the players.

Foreign Market

MNC are in business all over the world. The intention to invest in the emerging markets is in line with the product life cycle theory that proposes a moving production to foreign countries when the home market gets matured but the

figure 3 the situation for is shown.

The markets of Tropicalia and Paradiso are among the largest of the developing countries. They can be the future markets the more so as the Microanalyzer industry as a high technological one is welcomed in the countries. To invest in those includes some significant disadvantages. The most crucial point is economic as well as political uncertainty. Additional barriers are given by the high influence of the governments and their policies ¹¹ , the lack of financing opportunities, education standards and cultural differences. A deeper view in the Exotican market and comparison between Tropicalia and Paradiso particular for the strategy intentions of Megatronics was offered in the strategy paper.

Product

Microanalyzers consist of three different units, which have to be assembled in the end ¹² . Each unit as well as the assembly requires a separate plant. The technical core can be found in the Logic Unit. The other units and the final assembly require more labour force than know how.

¹⁰ think of the experience curve that refers to a systematic reductions of production costs when the accumulated output increases.

¹¹ e.g. tariffs and taxes, exchange controls, investment/ trade/ export/ technology transfer policy.

¹² see FINS- Participant Manual, p.16, table 3.

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Strategy Goal/strategy/tactics-pyramid

I would like to make a reference to the Megatronics Strategy paper. The goal/strategy/tacticspyramid in figure 4 was developed.

Global Strategy

This strategy point is the core in all actions of the company. Running a global strategy leads to efficiency and thus supports the overall goal of cost leadership. In accordance to Porter a company should follow only one of the two alternatives: cost leadership or differentiation to gain competitive advantage. Something in between is a "stuck in the middle" ¹³ . Thus the

¹³ see discussion in Porter, M.E. (1980) "Competitive Strategy", New York, Free Press.

¹⁴ see Hill, C.W. (2002), p.392 and Harzing, A.-W. (2000), "An empirical analysis and extension of the Bartlett and Ghoshal typology of MNCs", Journal of International Business Studies, 31,1: 101-120.

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