Foreign Investment Negotiation Simulation - Final Report

Term Paper (Advanced seminar), 2001

22 Pages, Grade: 1,0 (A)




Foreign Market

Global Strategy

Negotiation History
Strategy changes

Progression and way of negotiation
Future outlook

Personal comments
Learning experience

Ending remarks

Strategy Paper
Contract about a Joint Venture between Systrop S.A. and Megatronics Inc. (Blueprint)
Contract about a Joint Venture between ParaInfo S.A. and Megatronics Inc. (Blueprint)
Contract about a Joint Venture between Electro Paradys S.A. and Megatronics Inc. (Blueprint)



"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.



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..


illustration not visible in this excerpt

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.

illustration not visible in this excerpt

Figure 1: MNCs in FINS

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.

illustration not visible in this excerpt

Figure 2: the FINS- players in the foreign market

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

illustration not visible in this excerpt

when the home market gets matured but the demand in the foreign market increases. In the Microanalyzer industry this is the case. As argued in the strategy paper, it is useful and necessary to invest in the heavily growing emerging markets. With a higher market share the company gains economies of scale [10]. For

illustration not visible in this excerpt

Figure 3: Product life cycle

Source: based on Hill, A.C. (2002), p. 136.

Megatronics the situation is particularly critical, because the US-market grows less than the home markets of Eurodata and Tanaka. In

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.


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.



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

illustration not visible in this excerpt

Figure 4:Goal/strategy/tactics-pyramide for Megatronics in the FINS negotiations

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

the upper left corner in the model drawn in figure 5. Alternatively the cost axis can be labelled with integration or global advantage, the differentiation axis can be

illustration not visible in this excerpt

Figure 5: Basic Strategy for MNCs

Source: based on typology discussion in Harzing, A.-W. (2000), "An empirical analysis and extension of the Bartlett and Ghoshal typology of MNCs", Journal of International Business Studies, 31,1.

renamed with responsiveness

or localization[14]. The global

strategy requires a centralized organisational structure around the headquarter (HQ). In knowledge terms a subsidiary integrated in a global strategy can be called ' implementor'[15]. It has to implement the parent company's strategy by receiving knowledge produced by the HQ. The knowledge flow is unidirectional. Managing the global strategy in such a way gives the HQ tight control and can lead the integrated MNC as the whole to high cost efficiency. The Megatronics HQ uses managing mechanism like total cost control and wholly owned subsidiaries even in the selling function to run a strategy with the above described


The product allows the company to do that. It is useful to keep the core competence in form of the technology of the Logic Unit within the company. To give it away means to loose its competitive advantage. It is not really possible to differentiate the product to the competitive ones because of its characteristics. There is no need to consider e.g. special consumer tastes or preferences. One differentiation possibility could only be the service sector. All in all, the global strategy fits to the standardized product and to the company and the try to maintain it, is supported.

Obvious is the dilemma that emerges. Megatronics has to meet host government demands. This may necessitate local responsiveness. That do not really fit in Megatronics global strategy and can (and will) hinder to reach a cost efficiency maximum. But like argued above Megatronics in turn discovers new markets.

Here it becomes clear why some authors claim (against Porter's view) a more transnational view as 'standard' for a MNC, meaning that companies should move in direction to the upper right corner of the grid in figure 5 to achieve integrated efficiency, responsiveness and the ability to exploit learning[16] at the same time.

Negotiation History


Megatronics took a 'wait and see' position in the beginning. In a meeting with the government of Paradiso, the target country for Megatronics, it became clear that the developed strategy with insisting of a wholly owned manufacturing subsidiary is not realizable. Megatronics tried to approach all domestic companies with the offer to become its exclusive distributor. This


[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.

[8] FINS- Participant Manual, p.1.

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

[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.

[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.

[15] model by Gupta, A.K. and Govindarajan, V. (1991) “Knowledge flows and the structure of control within MNCs”, Academy of Management Review, Vol. 16, No. 4, pp. 768-792.

[16] Bartlett, C.A. & Ghoshal, S. (1987) “Managing Across Borders: New Strategic Requirements,” Sloan Management Review, Vol. 28, No. 4, pp.7-17 and Bartlett, C.A. & Ghoshal, S. (1987) “Managing Across Borders: New Organizational Responses, ” Sloan Management Review, Vol. 29, No. 1, pp. 43-53.

Excerpt out of 22 pages


Foreign Investment Negotiation Simulation - Final Report
Uppsala University  (Business Studies)
Managing of International Business
1,0 (A)
Catalog Number
ISBN (eBook)
File size
505 KB
Interkultur, Kommunination, Internationaler Handel, intercultural communication, internationalisierung, Auslandsinvestition, Internantionalisierungsstrategien
Quote paper
Stephan Wolter (Author), 2001, Foreign Investment Negotiation Simulation - Final Report, Munich, GRIN Verlag,


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