The Effects of Different Structures on Ownership Decisions - Essay Example

The Effects of Different Structures on Ownership Decisions Dissertation proposal Background Globalization and internationalization has made the world market interdependent. The multinational firms can be based anywhere in the world and have assets and operations in the foreign markets. As per the international marketing theories, a manufacturer could adopt different methods to sell his products in the foreign market. Each marketing strategy has its own risks, advantages and disadvantages. While exports is the simplest form of entering an international market, other strategies that companies can consider are licensing, joint ventures and off-shore operations. Joint ventures have to be applied in countries where foreign ownership is restricted. Other forms of entry into overseas market are mergers and acquisitions. A merger occurs when an exporter merges with a local company and creates a new unit, while under acquisition the exporting company takes over a domestic company. This research aims to asses the effect of different structures on ownership decisions. Literature review According to Raff, Ryan and Stahler (2005), direct exports or Greenfield investment does not change the ownership as it relies on its own assets to produce goods. In the case of M&A the foreign firm acquires the assets of the local target firm and combines them with its own assets but in the case of joint ventures, even though the assets are shared, they continue to choose output independently. Thus the decision to invest in another country would depend upon the extent of investment that the host firm wants to make. This implies that the firm heterogeneity would determine the pattern of foreign direct investment. Research suggests that firms with least assets would not like to disturb the ownership and would prefer to directly export their goods. Firms with highest assets choose Greenfield or direct investment. Those with low assets prefer mergers and joint ventures. Kasuga (2003) clarifies that net worth plays an important role in determining structures and hence the ownership decisions. When the minimum efficient scale for foreign companies is too large, the host firm chooses joint ventures or equity participation rather than wholly owned subsidiaries. The ownership decisions are based on various micro and macro factors as it depends on the host country for support. When the parent firm needs the local partner’s assets, joint venture are preferred. The ownership shares and consequently the profits too get distributed in case of joint ventures. The ownership also affects the degree of technology transfer from the parent firm. Research also shows that the parent firm with strong technology can be the controlling shareholder even if it takes minority stakes in the joint venture. FDI allows direct control over intangible assets in the foreign firm and the government incentives do not influence the Spanish firms’ decision, say Galan and Gonsalez-Benito (2001). Thomson (1999) contends that transaction costs influence the ownership decision whether to opt for joint venture or take over. Governance difficulties may also arise when the joint venture own management develops sufficient autonomy to constitute another layer in the principal-agent problem between managers and the parent firms’ shareholders. Joint venture decisions would depend on the cost of acquisitions and the cost of absorbing and managing acquired assets. While Greenfield investments and acquisitions require high investments they also bring high returns but high risks have to be prepared for. Joint ventures on the other hand require low investment, shared risks and low returns. Acquisitions bring with them the least risk because they buy a set of assets that are already producing known revenue and have an existing profit stream. In acquisitions, the firm not just acquires the tangible resources but also intangible assets like the employees and technology, which largely minimizes the risk of operating in a foreign environment. Joint ventures require lesser resource assimilation than the other two modes of entry. The most important factor is that joint ventures have shared control between partners while in acquisition and Greenfield investments ownership provides structural control. 3. Research aim and objectives The existing literature discusses the type and size of firms that would decide on the structure when planning international market entry or planning manufacturing overseas. Knowledge is fragmented and disorganized. There is no strong empirical evidence to suggest the effect that different structures can have on ownership decisions. Studies do not highlight the overall impact on the organization. This research would attempt to determine the variables on which the firms base their decision for overseas market and the outcome of such decisions. The objective of the research is as follows: 1. To determine the types of industries that plan overseas sales 2. The type of industries that generally plan for overseas market 3. The size of the firm at the time of deciding to venture overseas 4. Whether this is the first venture abroad 5. What structure do they prefer and why 4. Research Methodology 4.1 Research Philosophy Research is basically a systematic method of investigation which increases knowledge. Research relies on facts and experience, data, concepts and constructs, hypotheses and conjectures, and principles and laws (Amaratunga, Baldry, Sarshar, & Newton, 2002). Research methodology is the procedural framework within which the research is conducted. The methodology would depend upon the topic to be researched and the specific research questions are the primary drivers. 4.2 Research Strategies Amaratunga et al., suggest that research strategy should be chosen as a function of the research situation. Each strategy has its own approach to collect and interpret data and hence its strategy has its own advantages and disadvantages. Some even suggest a mixed or balanced approach. As far as this research is concerned, the qualitative method or the inductive method of research is preferable because a lot of literature is available, with diverse opinions and it is essential to understand what is happening. Besides, topic, theory and methodology are closely interrelated. The deductive method would not bring to light the deeper, underlying meanings and explanations of the data collected. Taking large samples would be impractical and small studies over a period of time would help establish facts. It would enable to understand the totality of the situation and multiple methods can be used to establish different views of the phenomena. As studies can be conducted over a period of time, it would give a realistic view of the change process of over time. This makes it powerful for studying any process. This method has been established to be best strategy for discovery, exploring a new idea or developing hypothesis. The results would then help organizations adjust as the ideas from the research emerge. The final result would contribute to theory generation. 4.4 Data collection and analysis methods The most widely used data collection method for the inductive approach is interviews as it is a highly flexible method, can be used almost anywhere and has the potential to produce data of great depth. The research topic has to be seen from the perspective of the interviewee. The participants would have to be categorized into several divisions based on the type of structure they decided upon. Based on this further strategy would be developed - 1. The changes in the firms – whether they consider it successful or not 2. The period for which they have been operating overseas 3. Whether they consider having made the right choice in the decision of the structure. The data thus collected would have to be segregated. Since the parameters are varied samples across each variable cannot be large, which justifies the adoption of the inductive method of research. Analysis and interpretation is the major part of the research process. Data analysis can be done by the means of innovative software packages like Ethnograph, NUDIST and Metamorph (Carson, & Coviello, 1996). A combination of this software would help retrieve keywords, manage the text base, code and retrieve data, build theory and develop conceptual networks. These would also assist in coding, linking, search and retrieval, and development of data displays. 5. Contribution and expected outcomes This research will bring clarity to the existing knowledge or the body of literature that already exists. The existing literature gives details of rims which opted for a certain strategy but the reasons are not amply clear and evident. There can be no ideal solution which can be applied across organizations. This itself is a strategic decision and it would depend on various factors like the size of the firm, nature of work, competition and government regulations. 6. Limitations There is no unique research method and each method has its own difficulties. Qualitative research method is known to have constraints as it tends to neglect the social and cultural construction of the variables studied. The categories listed for research may not be comprehensive or may require further sub-categories. Besides, it is difficult to predict how many organizations would be willing to participate in the first place, and then how many would register true opinions. Very often, firms tend to conceal the true picture especially when their strategies fail. This research is proposed to be carried over a period of time and it is possible the same personnel may not be available for the second round of data collection thereby the opinions reflected may differ. People may not want to disagree with the top management and want to be seen as a part of the team. All the employees may not be able to be present at a time. References: Amaratunga, D., Baldry, D., Sarshar, M., & Newton, R., (2002), Quantitative and Qualitative Research in the built environment: application of mixed research approach, Work Study, Vol. 15 No. 1 2002, pp. 17-31 Carson, D., & Coviello, N., (1996), Qualitative research issues at the marketing/ entrepreneurship interface, Marketing Intelligence & Planning 14/6 [1996] 51– 58 Galan, J., & Gonsalez-Benito, J., (2001), Determinant factors of foreign direct investment: some empirical evidence, European Business Review, Vol. 13 No. 5 pp. 269-278 Kasuga, H., (2003), Capital Market Imperfections and Forms of Foreign Operations, 14 Feb 2007 Raff, H., Ryan, M., & Stahler, F., (2005), Mergers vs Joint Ventures vs Greenfield Investment: A Comprehensive Treatment of Foreign Direct Investment, 14 Feb 2007 Thompson, S., (1999), Takeovers, joint ventures and acquisition of resources for the acquisition of resources for diversification, Scottish Journal of Political Economy, Vol. 46 No. 3 pp. 303-318 Read More