Page 131 - DMGT545_INTERNATIONAL_BUSINESS

International Business

notes 7.2.3 implications of fDi

Firms for which licensing is not a good option tend to be clustered in three types of industries:
1. High-technology industries where protecting firm-specific expertise is of paramount
importance and licensing is hazardous.
2. Global oligopolies, where competitive interdependence requires that multinational firms
maintain tight control over foreign operations so that they have the ability to launch
coordinated attacks against their global competitors (as Kodak has done with Fuji).
3. Industries where intense cost pressures require that multinational firms maintain tight
control over foreign operations (so they can disperse manufacturing to locations around
the globe where factor costs are most favourable to minimize costs).
The majority of the limited evidence seems to support these conjectures. In addition, licensing is
not a good option if the competitive advantage of a firm is based upon managerial or marketing
knowledge that is embedded in the routines of the firm, and/or the skills of its managers, and is
difficult to codify in a “book of blueprints”. This would seem to be the case for firms based in a
fairly wide range of industries.
Firms for which licensing is a good option tend to be in industries whose conditions are opposite
to those specified above. Licensing tends to be more common (and more profitable) in fragmented,
low-technology industries in which globally dispersed manufacturing is not an option. Licensing
is also easier if the knowledge to be transferred is relatively easy to codify. A good example of an
industry where these conditions seem to exist is the fast food industry. McDonald’s has expanded
globally by using a franchising strategy. Franchising is essentially the service industry version
of licensing-although it normally involves much longer-term commitments than licensing. With
franchising, the firm licenses its brand name to a foreign firm in return for a percentage of the
franchisee’s profits. The franchising contract specifies the conditions that the franchisee must
fulfill if it is to use the franchisor’s brand name. Thus, McDonald’s allows foreign firms to use its
brand name as long as they agree to run their restaurants on exactly the same lines as McDonald’s
restaurants elsewhere in the world. This strategy makes sense for McDonald’s because:
1. Like many services, fast food cannot be exported,
2. Franchising economizes the costs and risks associated with opening foreign markets,
3. Unlike technological, brand names are easy to protect using a contract,
4. There is no compelling reason for McDonald’s to have tight control over franchisees, and

5. McDonald’s know-how, in terms of how to run a fast-food restaurant, is amenable to
being specified in a written contract (e.g. the contract specifies the details of how to run a
McDonald’s restaurant).

It may be noted that McDonald’s does undertake some FDI to establish ”master franchisors”
in each country in which it does business. These master franchisors are normally joint ventures
with local companies and their task is to manage McDonald’s franchisees within a particular
country.
In contrast to the market imperfections approach, the product life-cycle theory and Knickerbocker’s
theory of horizontal FDI tend to be less useful from a business perspective. These two theories are
descriptive rather than analytical. They do a good job of describing the historical pattern of FDI,
but they do a relatively poor job of identifying the factors that influence the relative profitability
of FDI, licensing and exporting. The issue of licensing as an alternative to FDI is ignored by both
these theories.
Finally, with regard to vertical FDI, both the market imperfections approach and the strategic
behaviour approach have some useful implications for business practice. The strategic behaviour

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