Greenfield Investment, Acquisition, or Joint Venture
A greenfield investment (GI) is a cross border investment where the parent firm builds from scratch and fully owns its subsidiary. It involves the transfer of competences and value chain activities.The reasons why you would consider GI as a manager are:
1. Internalisation advantages, you are able to minimize transaction costs (Coase, 1937),increase efficiency, enhance coordination, avoiding a great deal of time lag resulting from external market dealings.
2. GIs minimize buyer uncertainty as the buyer and seller are found within the organisation as compared to an acquisition, where there is a need for proper integration in order to accrue cost synergies.
3. Ownership advantages – your company is endowed with certain advantages due to product differentiation, brand names, superior technology, differential access to capital markets, and you want to exploit that advantage fully.
4. Locational advantages can be created as it is entirely up to the parent firm to select the place of the plant. For e.g., Jap investors in US have been fairly careful to pick investment sites away from traditionally unionized regions (eg preferring Tennessee to Michigan) to ensure the docility of the new labour force.
5. No historical or cultural baggage that will lead to unproductive labour.
6. Able to start small before expanding further, according to Vernon’s Product Life Cycle Theory. When the demand for the product increases, more competitors will be attracted into the industry and as exports from the parent company declines, eventually it will import from this wholly owned subsidiary. E.g. Japanese car manufacturers initially built manufacturing plants in Thailand to cater to the market there but gradually now as the production costs are lower in Thailand as compared to Japan, Japan is now importing cars from Thailand back into Japan.
7. The problems with GIs include high risks as the financial burden is borne by the parent company. This is especially true in countries with political risks and a history of expropriation like Russia, Mexico. With political interference, the subsidiary may also be faced with the situation that it is unable to repatriate capital back to the parent firm. This is not to mention the inflexibility in capacity once you decides on it and cultural issues that you have to face when dealing with locals directly.
Acquisitions
An acquisition is an opportunistic behaviour to accrue ownership advantage and gain quick market share (speed to market). By acquiring Optus of Australia, Singtel was able to immediately take a huge share in the Australian market. Other advantages include:
1. It allows for a shorter lead time and a quick payback period,
2. It helps to overcome FDI barriers.
3. To top it off, besides overcoming barriers to entry, with the technology of the newly acquired firm, cost of R&D of the existing products can be shaved off and economies of scale and scope can be exploited.
Naturally, it would be easier to acquire than to do a GI for obvious reasons stated above. The Singapore government has been taking stake in companies all over the world, and spearheading acquisition of Chinese companies. Temasek Holdings had recently taken a 40% stake in Danamon bank in Indonesia. Yahoo recently acquired Tumblr which gives it greater web content presence.
Problems with acquisition
Ability to exploit cost synergies through integration thereafter, which is typically a primary justification. Tata Steel had the issue of trying to exploit cost synergies when it acquired Corus. However, corporate history shows us that there are quite a number of companies who have failed in this aspect.Some cultures find it distasteful, and it limits options. E.g. Japan,never experienced a hostile takeover bid. Just as Difficult for Jap companies to buy non-Jap companies on world markets. Where they have done so, e.g. Bridgestone acquisition of Firestone, and Sony’s investments in Hollywood, management has had bad experiences.
Xenophobia. Failure of Dubai Ports deal in US which was out of fear of Arab Sovereign Wealth fund gaining access of entry into US.
However, confident MNCs still proceed with such acquisitions. E.g. Nestlé on Rowntree. While others hold back, e,g. Honda allowed Rover to be taken over by BMW because they believed that British would not accept Rover as 100% Japanese owned.
Solution to GI and Acquisitions: Joint Venture
If a company does not want GI or Acquisitions it can opt for Joint ventures (JVs). JVs are attractive to management for a number of reasons:Firstly, compared to a GI or an acquisition, JVs involve less investment and managerial attention, thereby reducing risk exposure.
Secondly, “strategic industries” such as petroleum, broadcasting, telecommunications, etc. have national regulations that prevent foreign companies from taking full control of local companies. As such, JVs are used. However, even in cases where full ownership is allowed and the local company is seen as a national asset, it would be difficult for an acquisition to be accepted on the grounds of public opinion. This is where a JV would be better, in that in a politically complex setting, the local partner provides political acceptance.
For e.g., the Symantec-Huawei joint venture was dissolved because of Symantec was concerned that its links with Huawei would jeopardise its position as a digital security company since the US government would be concerned about whether its classified information would be leaked to Huawei as part of the JV relationship.
The disadvantages of JVs as compared to GIs and acquisitions include firstly, instability of JVs. With time, the relative power relationship of the JV partners change as interests shift and the so does the perception of fairness of the deal. As such, one partner may feel disadvantaged by their share of the pie.
For e.g., Although Nokia and Siemens have had a good six-year JV relationship, their recent talks seem to signal an end to this JV. Siemens, which has only a non-controlling stake in the JV is seeking to shed off non-core assets and will likely take the route of reducing its stake or exiting the JV. Nokia, on the other hand, has 34% of its value contributed by this JV and would like to keep the relationship going. It is likely that terms of the JV will change in the favour of Siemens in Nokia’s attempt to keep the relationship.
Difficulties in making changes to share of power once the JV is on track. For e.g., despite the low bargaining power of the local partner, the overseas MNE may not be able to impose organisational changes to ensure the success of the JV because of legal issues.
Thirdly, a great deal of management attention and energy is required to attend to the JV when something goes awry.
The Kinetic-Honda JV had problems from the beginning. There were differences over issues like introduction of new models and marketing strategies which affected the profitability of the venture. Under the agreement, both companies could only manufacture their own products. Kinetic could only manufacture mopeds and scooters but Honda could only manufacture motorcycles. This was not in Kinetic’s favour because the moped market had declined drastically. A great deal of attention was spent on both sides on a bitter negotiations that led in an eventual split.
