The Strategy of using Foreign Investors and Licensees: a Philippine Perspective • In a certain objectives, use foreign companies • Cooperation with a foreign company can provide a shortcut-attainment of certain goals at a lower cost and in much less time Certain risk or potential problem in cooperation with a foreign firm 1. Government’s approval be obtained 2. Satisfaction of the goals of the foreign company • The Philippine firm must examine the alternative strategies and choose what is the optimum from its point of view Evaluation of Foreign Investing In Philippine setting
Pre-Independence days Post-independence days At Present –There are a –foreign firmexport — Foreign Firms number of joint ventures its products through considered or managing agenciesalocal agent Manufacturing its products in the Phils. through partnership with a former importing agent Company Goals o Benefits a Philippine company could get 1. Philippine company may want access to the patent rights or manufacturing rights for a certain type of product a. A product might be manufactured in a number of different countries by several firms each having its own patents. . Easiest arrangement concerned isthrough cash purchase of the rights to manufacture c. Certain brand of a foreign product is selling very well in the local market-trademark • An arrangement must be reached with specific foreign company owner o They will not want their trademark used unless it has assurance that their quality standards can be maintained o They will insist more on a liscense agreement or equity participation with accompanying rights to inspect, as well as concurrent royalty payments • Patent- Trademark- 2. Philippinecompany may wish to start manufacturing a new product where technical assistance is required a. Technical services agreement accompany a liscense to manufacture i. Provisions of Technical Services Agreement 1. Help in the design of the plant 2. Provide training for he company’s skilled workers, technicians, engineers and managers 3. Help in product redesign 4. Help in technical advertising 5.
Provide full-time or part-time production engineers to help maintain quality and productivity 3. Philippine company feels that it needs to improve its management systems -sometimes the most efficient way of obtaining modern management know-how is to have management contract with a foreign manufacturing company Foreign company turn-key 1. Contract to design and build a plant 2. Train the necessary people 3. Supply some key technicians and managers 4.
Maintain full responsibility for the operating the plant until it has reached and sustained the designed and desired capacity • Foreign partner has no equity participation but charged with the full responsibility for total management of Philippine firm o Authority to hire and fire people o Sign contracts • The contract may asssign only for a certain aspect of management. (production management, marketing management etc. ) • Management contract may have no connection with the construction of a new plant it may simply be in connection with a manufacturing liscense agreement Ex.
Philippine firms-manufacture consumer products-actively exporting them o In US and European markets where goods have rapidly changing styles/designs, cooperation with a foreign company helps in obtaining advice on trends in styles plus assistance in marketing 4. Access to foreign marketing channels can be one of the most important factors in a firm’s profit potential, as well as in the Philippine’s overall economic development -foreign multi-national firms are to manufacture in a number of countries to: – diversify risk to seek new sources of production that offer cost or other advantages Key question:What type of arrangement between the multinational and the Philippine firm? Key variables:degree of equity participation by the foreign firm Quantity of exports which cn be promised 5. Easier access to local financial institutions a. A joint venture agreement may facilitate borrowing foreign international institution b. When a Philippine firm is planning to expand or diversify (where additional capital is required) usually securing equity participation from the foreign firm may be the very key 6.
Provide protection from nationalization o A government will usually hesitate to nationalize foreign assets because of potential repurcussions from the international financial community o A partnership with an interntional institution, ssuch as the international finance corporation(theindustrial investment subsidiary of the World bank ) is probably the best security because nationalization of such a company would jeopardize relations (the Worldbank) 7.
Philippine firm can benefit from joint venture and liscensing agreements with firms in asian and african countries whih are less industriaized o where the Philippine firm invests in a foreign joint venture or provides technical and managerial assistance to the foreign firm Potential problems o any type of arrangement with a foreign firm will incur some negative elements which at least partially, offset the benefits 1.
Loss in the degree of control by the Philippine owners -when a foreign partner hasno equity there is only a liscensing agreement or patent rights-there can beno loss of control – A joint venture with a foreign parnter haing managerial and equity control o the philippine owners need not agree to loss of control unless they feelthat it is to their best interest 2. Problem of control o Disagreements mayarisewith the foreign joint-venture over the percentage of profits (dividends), disagreements over te need for additional capital expansion 3.
Independence o The problem ultimately evolves into one wherein the philippine firm feeling that ithas gained all it can from the foreign firm Point of view of the foreign company 1. General concerns o Foreign company is not concerned about providing foreign aid One of the major goals: Reasonable Retrun on Investment Return on investment = invested capital and view of the risk involved Ex. Fear of nationalization -Payback period of 3-5 years ? Possibility ofdevaluation Or loss in terms of the foreign currency of the investor) o Will prompt the foreign investor to minimize his exposure to devaluation risks o Foreign company may minimize his investment through: ? Borrowing as much capital ? Capitalizing in the form of patents, trademark , manufacturing know-how etc. o Smaller foreign companies are more likely to be interested in aliscense agreement and minority position in a joint venture 2. Specific goals 1. Return on Investment 2. Foreign company may be to undertake local manufacturing so as to penetrate the local maket 3.
Set up a manufacturing base in the philippines in order to avail of low-cost labor or materials to produce- strategy for a large multinational firm 4. Take advantage of the low cost wages to produce certain parts 5. Establish a manufacturingbase in the philippines a. For the philippine market b. Access to other market areas for which the philippines offers peculiar advantages in view of international political reasons Factors in favor of licensing are that it permits the company: 1.
To obtain extraincome 2. To spread research and development cost 3. Retain established markets and reach new ones 4. Pave the way for future investment 5. Safeguard against infringement of patents in the philippines 6. To possibly acquire reciprocal benefits in technicalknow how from the philppine partner Foreign companies are againts licensing because: 1. They hase a traditional or policy of 100% or majority equity investments 2. They fear that they are helpng to establish a competitor and that they will lose the market entirely once the license expires 3.
They fear loss of goodwill if the licensee does not maintain quality standards 4. They feel that they have the organization and resources for a direct invesment Point of view of the government 1. Balance of payments effects o To what extent is foreign exchange earned or saved? o How much foreign capital is brougth in by the foreign partner? o How much foreign exchange is earned by exporting semi-finished goodswhich were not previously exported? o How much foreign exchange is expended and over what period? How much equipment must be imported? Is it newr used? o What credit terms are available to pay for it? o Can the equipment be paid for by company exports? o Will some parts have tob e imported for assembly in the Philippines? Will raw materials have to be imported? o What is the expected rateof outflow of dividends; royalties, and fees? 2. Economic development effects o Government will be concerned with the numberof jobs created in all categories. o Number of skilled and unskilled workers employed Training to increase skilled workers in the country (what and howmuch) o Plans for the gradual replacement from foreign to philippine managers o To what extent the company purchase raw materials o Purchase of raw materials to other local suppliers 3. Political effects o Government may have a policy of excluding or discouraging foreign investment in certain industries (e. g. military related or basic industries) The use of strategy In a real sense, it is not really exploitaion of the foreign firm because the foreign firm must also feel that the benefits it will gain from the agreement outweigh the costs.
All parties to the agrreements must have a sense if net gain. From the point of view of the philipppine firm the role of strategy then isto selectt the scheme which will, over the long term give itthe largest net gain while still giving the governmentand the foreign partnerr room tofeel that their minimum goals, at least, have been achieved. It is necesssary for managers to review the various strategies available to choose new goals which they may not otherwise have considered Types of strategies a. Strategy for type of partner 1. Product range Is it preferable to choose a company thathas a diversified range of products, or one which is highlyspecialized in the product in question? 2. Size o Should one choose as a partner a company which is large, has considrable financial, managerial, and technical resources, orone which is small but would be more respnsive to its relationship with the local firm? 3. Extent of international operation o A partner with no otherinternational interestsould be more responsive, but it will have less sophistictin in dealing with a foreign firm.
Also a large multinationalfirm would have an extensive international marketing network, making it easier for the products of the philippine company to be made available to foreign markets 4. Nationality o There has been an increase in collaboration between both private and public firmsin the developing countries with east-european enterprises, nearly all of which are in the form of technical collaboration agreements b. Ownership strategies Variations: 1. A joint venture majority ownership by the philippine firm 2. A joint venture with a 50-50 split on stock ownership 3.
A joint veture with minority philippine ownership 4. License agreements or management contracts with no foreign equity participation 5. A joint venture agreement with initial minority philippine ownership but with a provision that a certain percentage of the stock be sold to the philippie firmby the foreign artner each yearr, until the philippine firm acquires a certain majority percentage 6. A joint venture with a foreign company and the international finance corporation 7. A joint venture with a foreign company and local development bank etc 8.
Permitting the foreign partner to buy into the existing philippine firm, or,of establishing a new company to undertake the new type of production c. Control strategies o Control has a wide number f degrees of divisibility nd distribution, between paartners, as well as vis-a-vis the government. It depends upon the type of deision, thenature of the decision making process,and upon prior agreements on rights and responsibilities o Control may cover the following functions: i. Hiring, firing ii. New investment iii. Research and development iv. Pricing v. Dividends vi. Production level ii. Quality control viii. Marketing ix. Exports x. suppliers o maximum divorce of ownership from control (ex. Philippine firm hold 100% of the shares but enter into ong-tem mangement contract with a foreign company to which it gives full powers of management control) D. manufacturing strategies o Refers to the mix of: what portion will be manufactured by the firmin question andwhat would besubcontracted for manufacturing by other philippie firms o The core strategy lies in the philippine firm’s decision-made prior to entry into negotiations with foreign artnerr-on what combination is optimum for it. E. marketing strategies o Interelation between domestic versus export sales o Collaboration with a foreign partner cannot, like war, be a negative-sum game. All parties to the agreement, including the government, must feel that they are net gainers o The role of the strategy is to optimize the achievement of one’s goals whlepermitting the others to satisfy their minimum need ———————– “To a certain extent, the firms in the developing countries should think in terms of exploiting countries. ”