Japan market Establishing A Foreign Subsidiary

Abstract

In establishing a foreign subsidiary there are many methods that are used in determining which mode to be used.  The main aim of having a foreign investment or international expansion is to increase profits for the said organization, it can take many forms all of them which are international growth.  But the most commonly known methods is establishing a subsidiary through foreign investment, mergers and take over.  Once such a venture has been taken profits increase[1].

Most firms’ especially reading multinationals have developed collaborations with foreign organizations in the form of mergers.  Collaboration has worked out well because it reduces the cost of labor raw materials, suppliers, increased market access, reduce infrastructure costs and government interventions[2].

As the world of business is in the midst of revolution, direct foreign investment is loosing support in the modern business today.  Mergers and acquisition are playing an important role since they support product differentiation, product renovation, and reduced costs of production[3].   It is common in our days for businesses to enter into merges and acquisitions to avoid interferences by foreign government for the purpose of strategic survival.  This has provided grounds for organizations to achieve many things such as having superior capabilities in the country of investment, increasing the market share and reducing cost[4].

Introduction

This research paper deals with methods of international expansion of mergers and foreign investment.  It explains various reasons why companies expand foreign markets and gives the ideal method for investment.  While all over the world companies are experiencing trends of geographical growth either through foreign direct investment or merges and acquisitions. This has lead to many benefits such as product differentiation, increased profits, and increased market share.  Whichever strategy is used by a firm the aim is to increase cooperate sustainability objectives and profitability maximization[5].

However of late international collaborations has been given majority support by most multinationals.  The decision to go international and the method to enter is majority determined by the management and trend in the international arena.  It has been common in the world today that majority of governments interfere with foreign businesses with the aim of protecting local businesses.  This calls for a new method that should be adopted to be used in the running of the business[6].

Statement of the problem

 Making a decision which expansion strategy to be adopted is the most difficult decisions most businesses face in the world today.  Conventional analysis of mergers and acquisition and foreign direct investment has to be looked especially at efficiency of the market as well as the efficiency of the firm.  If one has more benefits as compared to the other then the one with benefits will have to be taken[7].

Transactional costs analysis needs to be carried out to determine which among the two growth strategies should be adopted.  There should be also long term consideration in selecting the best method investment for a multinational.

Purpose of the research

• The main objective of this study is to provide strategies which companies reconsider while going international.
• We shall consider how mergers and acquisition affect the market share as well as foreign direct investment.
• Identify a range of possible strategies available for companies making foreign investments.
• Identify costs associated with each method of investment benefits that are a clued from both
• Explain why some types of foreign direct investment and related activities are integrated within a single company and are performed by different organizations.
• Identify the critical consideration pertinent to mergers acquisition or foreign direct investments and to which extent it affects the firm.

To achieve this objectives the research will go through the two methods of foreign investment, there benefits, and costs associated with them.

Objectives of the research paper

This research paper will be of great value to the future researchers management of multinational investors and academicians because:

• To highlight the importance of the role played by the two methods in the flow of capital between nations.
• It helps management select the best method to use while going international
• It will highlight how the two methods of expansion decisions are made and how they affect the market share of companies.

Research questions.

Which strategies are employed by multinationals that are succeeding in business today?

How to mergers and acquisitions affects the business?

What is the possible relationship among the two methods?

What growth strategy is appropriate for the companies?

Limitations of the study

This research paper is on the entire methods of research used, it does not involve the research on physical data collection, it release on the research carried out by other scholars and other writers in the subject matter.

The research paper assumes that effective and efficient management is applicable in decision making closing the eyes on directors’ conflict of interest.

Literature review

Mergers and Acquisition

Mergers and acquisition has many definitions but it can be simply be defined as a combination of two firms or more to form a single firm. In the business world many firms have merged in the recent times to form single businesses to help in doing business within or outside there country[8]. The companies merging must have equal or an equal size, the identity of the firms especially the bigger one is maintained, in this case a foreign investing company will maintain the assets of the other company which looses the identity and its called a holding company.  A holding company is a corporation having a controlling interest in one or more other corporations.  Having a controlling interest in large widely held companies generally required the ownership of between 10 and 25% of the outstanding stock[9].  A holding company must own enough shares to have voting control of the firms it holds.  The companies controlled by a holding company are normally referred to as subsidiaries.  A holding company obtains control of subsidiary by purchasing (generally for cash) a sufficient number of shares of its stock[10].

There are many motives for mergers and acquisitions by firms, some of the objectives that a clue from mergers includes maximization of the owners profit, synergy effects, fund raising, growth, tax considerations, increased owner liquidity and elimination of competition[11].

Growth

The main aim of a company going international or going to foreign market is to increase the growth of the firm in terms of size and range of product through product differentiation.  This is achieved when investing through mergers and acquisitions.  Mergers and acquisitions can take many forms, horizontal or vertical.  In international market where a firm will find it difficult to do business they will use mergers and acquisition to achieve objective of the growth. This may take a form of collaboration which reduces the cost of research and development since the partners in the other country will be used in carrying out some of the innovative capabilities in that country.  Companies have entered foreign markets such as China and they have succeeded in working through collaboration[12].

Synergies

Synergetic effects is felt by companies going international and this included certain economies resulting from lower firm overhead such as:- lower cost of labor, lower cost of materials, low cost of suppliers, increase in market access, improvement of supplier relationship, knowledge on government taxes, and many other factors associated with economies of scale[13].

Synergetic effects are realized through combinations of business firms when the overhead mentioned have been reduced thereby increasing earning of the company that has been combined as compared to the earnings of the two firms combined when working separately.  It may not be due to increased market share but due to increased managerial efficiency technical know how domain knowledge, and rabid access capabilities.  Some of the benefits due to economies of scale may arise redundancy of functions and staff who are an necessary. Synergetic effects come in when merges takes in a form of vertical integration.  That is a combination where there is an elimination of duplicated positions and department or functions[14].

Fundraising

Most firms combine due to the fact that they need funds for expansion within a country, this is so for a small firm faced with a stiff competition within a country and they need to survive.   They will look for a multinational to combine with for survival in the market.  The firm combined with will come in with funds for internal expansion and this will be helped to the company. The large organization comes in with assets which are used to increase the market share and reduced the financial riskiness.  This enables the small firm to raise funds from external sources at a favorable rate for long term benefits[15].

Increased Managerial Skills

Upon combinations new firms come with new managers with certain experience and knowledge which is not available within the firm in question.  Firms always fail because of managerial deficiency within the organization.  But combining institutions have different interest such as improvement of profitability and this plays an important role in determining the direction of the new combined firm to take[16].

A small firm may not be able to higher the best human resource due to financial constraints, the incoming firm may come in with good funds to higher the best human resources. This will improve the business performance in the market[17].

Tax Consideration

Tax consideration is one of the most important considerations before businesses make decision of merges. Tax benefit stems out of the fact that one of the firms has a tax loss carried forward at the same time one of firms has bigger knowledge of the tax laws of a country.  The loss that is carried forward can be applied against future incomes for a number of years and this will be a great benefit to the company.  This is utilized to minimize future tax payment.  In order for the company acquiring another company to boost there earning they will try to improve the profitability of the firm they have acquired and the firm’s profits will be high.  Tax benefits that a clue from mergers are on the basis of tax losses and on the basis of superior knowledge of government regulations where one is operating[18].

Increased Liquidity

Increase liquidity is one of the drivers that pushes companies to go into combinations because of the associated or benefits of economies of scale that are realized.  The mentioned economies of scale such as efficiency in management of marketing, production and distribution assist in increasing liquidity of the firm.  There is reduction in waste management of the liquid asset of the firm; this brings in the cost savings[19].

A new firm comes in with benefits of cash increasing the companies’ asset.

Earning Per Share

The effects of merger are the increase of earnings per share.  Earnings per share are increased to due desirable economies of scale.  Managers look at the variability of earnings per share and they will wish the earnings per share to be stabilized[20].

Market Share

The market share of merged firm’s increases due to maximization of benefits associated with merged and acquisition. A company may improve her profits through mergers and acquisitions

The Ethical And Cultural Issues Associated With Mergers.

A company may acquire another company in either the same country or from another foreign country. As much as there can be a difference in ethics and culture in another country the same exists within a given country. These ethical and cultural issues if not combated, may negatively affect the performance of the group of companies[21].

Companies coming from two different regions would obviously the faced with language problems.

Another cultural issue associated with acquisitions is the attitudes of the members of both the investor company and the acquired company. This can either be positive i.e. where the members value each other’s positions and roles or negative where members undermine each other’s significance in the group[22].

There is also differences in the way processing of information is done. Whereas one electricity company has been practicing a centralized information processing system, the other may be decentralizing this function. Companies from different nations may be observing different national holidays and how this will be reconciled after an acquisition is another cultural issue. It may also be the culture of one company that shareholders have to get high returns on their investment with or without profits. The other company’s focus would be on divestments retaining as much profits as possible[23].

Ethical issues associated with acquisitions are issues like competition. The two firms may be former competitors now joining forces and forgetting their rivalry. It would be quite interesting to see how the two former rivals would now be working together for a common objective[24].

There is also the issue of down sizing after an acquisition. The group may reduce its workforce for operational efficiency. They have to do this professionally to avoid confronting the legal issues and labor laws the wrong way[25].

After an acquisition has taken place, many changes follow and the group starts doing things in a different way. This may be in processing of electricity, marketing, recruitment and selection, to name just but a few. In adapting the above changes, the group must consider doing them ethically and professionally in a manner not likely to injure /harm other companies in the sector. They have to have a fair play as this would also safeguard them from unnecessary legal tussles[26].

Differences in both ethics are and the culture of two different companies can affect their performance after a merger. Reconciling these differences then by both management is inevitable

Foreign direct investment

Foreign direct investment may involve a number of ways of entering into international markets.  There are many ways that one can consider as a manager of international expansion. most firms enter to direct or indirect investments due to available opportunities in the international markets, this has many challenges which are hidden therefore a company planning to go international must recognize this especially those planning to put direct foreign investments. Direct foreign investment will involve opening as office or investing direct in the company, foreign direct investment has the following challenges[27]:-

1. Operating costs may be high, the costs that affect direct investment is such as opening an office or a branch which is more expensive as compared opening a branch in the home country. This may be because of the foreigners who will not take your business seriously.
2. Financial control problems:- foreign direct investment may have a problem in controlling the finances which may be due to stealing by the foreign employees or loss due to poor management because of the foreign employees. This is typical in all start up businesses including startup offices for expanding companies, this is because of employment of small team of employees, with mult-roles including handling clients, collection cash, and banking it. A loss may incur due to location costs, travels, meals, housing and new business development which will be higher. Some of this cost may be at the beginning of opening the new office. And if internal controls are not properly installed the open fraud, outlet theft and malpractices may drive the business out.
3. Compliance with statutory requirements in a foreign environment becomes a problem because of the laws applied are different from the home countries laws. For example a  company planning into a market such as  the Zimbabweans market where it seems there is no specific laws governing ownership of land apart from declaration of the president such environment will affect the business that tries to expand to it[28].

Methodology for the research

There are two methods of research/ data collection in research papers:  that is quantitative and qualitative. Quantitative method is applicable where the problem is known, the problem is based on theories and can be measured in numbers. The analysis can be done on tables, graphs, pie charts, gnat charts and other statistical theories and it relies on assumptions. There are a number of methods which are under quantitative methods. These include surveys, experiments and quasi experiment. Qualitative method is different from quantitative because it is used to measure human feelings, attitudes and perceptions.

In this research question both methods will be used. This is because most data will be collected from students who will go on homework fitness and other available research work carried out from somewhere else on the topic. The problem of this research question is how and which direction the research problem will take. There is always a connection between the research from the research question and the methods or the collection tools used, since it influences the conclusions and the recommendations. Qualitative method will be used to collect the student’s opinions, attitudes, perceptions and feelings on the homework fitness. Interviews will be carried out as well as observation will be done. Quantitative method will be used in collecting actual facts in numerical at the same time; analysis of the data will be done in the form of tables, graphs and other statistical tools.

The data for this research has been obtained from internet sources, books and journals. These two sources of data collections have weaknesses as described below

Sources of data

            The data that will be used in this research will be collected from: –

1. Books
2. Internet

Panera Bread Company and environmental analysis of Japan market

Panera is a company that is operating in the food industry engaged in the business of manufacture and business goods.  The expansion to Japan market will either take direct investment or mergers and acquisition.  Japan is a developed market with companies under stiff competition; the two strategies that should be adapted by the company will determine the value chain analysis and the market environment of Japan.

Pest analysis for the Japan bread market  

Political analysis: Japan is one of the most developed countries with a  stable political environment and bread industry is not affected by politics of the day, therefore when trying to invest Panera Bread Company  will not fear of politics of the day[29].

Economical analysis: The people of Japan have a superior income levels therefore, there purchasing power is not affected by other factors, and they are only affected by affluence shortage of the product and probably inflation.  Things like inflation and depression are not affecting the business at the moment in Japan and they have a good infrastructure of distribution of goods and services[30].

Social trends: The japans people have a strong culture of hones which affects there consumption patterns.  The growing population of the japans people value products which are homemade because they have so many companies.  They have developed a brotherhood which also affects the consumption of products such as bread[31].

Technological environment: Japan is one of the first growing technological country and technological innovations are bringing many benefits to the consumptions.  Bread companies operating in Japan have implemented technological innovations that use the cost of production.  Marketing involves through technology due to e-business[32].

Five porter’s analysis of the bread industry in Japan

Companies operating in the bread industry in Japan face the problem of buyers switching royalty from one bread to another.  Therefore for Panera bread to have advantage over the firms operating in that market they should think of vertical and backward integration.  Panera should enter into the market through the use of generic strategies such as cost leadership and product differentiation.

Suppliers of wheat sugar and other raw materials may also control the prices in the japans market although the market may be liberalized, therefore in order for Panera to curtail this form of price controls they should enter into strategic alliances with firms operating in that market.   The labor laws of the country are strict and the market for labor is not as cheap as other Asian countries.

The generic strategies that should be adopted by the company against the supplies of materials and labor is increasing the prices of there products to the level of what is offered in the market or adapt differentiation policy for there products.  This will give them a upper hand in the market.

Another force that will affect the market is entry of new company with similar products, more so superior products; Panera bread should adapt a cost leadership strategy that neutralizes this entry force.  This will be through increasing production, reducing production costs, increasing operational efficiency and even merging with companies from home country.

There is also a threat of the existing companies differentiating there products and taking up the market share.

Lastly other manufacturers with similar product to bread may lower there price increasing demand for those products as compared to bread.  This will affect the long term survival of panera Bread Company in the market.  To reduce this danger and increase strength for the company differentiation generic strategy framework should be adapted to ensure that the customers are loyal to the company products.

Conclusion

From the analysis carried out, Panera should adopt mergers later than direct foreign investment while entering the japans market.  This is because of the analysis about the market and the benefits associated with each method announced

Mergers and acquisitions have resulted in economies of scale and synergistic effects for many electricity companies. Increased market share, greater performance in the stock market and customer satisfaction are just but some of the benefits of such combinations.

However the mergers lead to loss of  jobs as compared to foreign direct investments. The firms should also focus on the importance of ethical and cultural fits between them as this may either make the acquisition/ merger successful or a complete failure.

References

De Oliveira, Ricardo Gorini and Mauricio Timono Tolmasquim (2004): ‘Regulatory Performance Analysis Case Study: Britain’s Electricity Industry’, Energy Policy,

Newbery, David M and Michael G Pollitt (1997): ‘The Restructuring and Privatization of the UK Electricity Supply-Was it Worth It?’, Public Policy for the Private Sector, No 124, World Bank.

Ansoff, H. I. (1965). Corporate Strategy: An Analytical Approach to Business Policy for Growth

and Expansion ; New York: McGraw-Hill.

Burgelman, R. A. (1983).corporate Entrepreneurship and strategic management: insights from a

process study. Management Science.

Grant, R. M. (1991). Contemporary Strategy Analysis: Concepts, Techniques, Application.

Cambridge, MA: Basil Blackwell.

Hofer, C. W. & Schendel, D. (1978). Strategy Formulation: Analytical Concepts. St. Paul, MN: West.

Johnson G, Scholes K and Whittington R; (2006); Exploring Corporate Strategy, Prentiance

Hall, 7 th Enhanced Media Edition,

Penrose, E. T. (1959). The Theory of the Growth of the Firm, New York: John Wiley.

[1] Johnson G, Scholes K and Whittington R; (2006); Exploring Corporate Strategy, Prentiance

Hall, 7 th Enhanced Media Edition,

[2] Ansoff, H. I. (1965). Corporate Strategy: An Analytical Approach to Business Policy for Growth

and Expansion ; New York: McGraw-Hill

[3] Grant, R. M. (1991). Contemporary Strategy Analysis: Concepts, Techniques, Application.

Cambridge, MA: Basil Blackwell.

[4] Newbery, David M and Michael G Pollitt (1997): ‘The Restructuring and Privatization of the UK Electricity Supply-Was it Worth It?’, Public Policy for the Private Sector, No 124, World Bank.

[5] Penrose, E. T. (1959). The Theory of the Growth of the Firm, New York: John Wiley.

[6] Burgelman, R. A. (1983).corporate Entrepreneurship and strategic management: insights from aprocess study. Management Science

[7] Hofer, C. W. & Schendel, D. (1978). Strategy Formulation: Analytical Concepts. St. Paul, MN: West.

[8] Newbery, David M and Michael G Pollitt (1997): ‘The Restructuring and Privatization of the UK Electricity Supply-Was it Worth It?’, Public Policy for the Private Sector, No 124, World Bank

[9] De Oliveira, Ricardo Gorini and Mauricio Timono Tolmasquim (2004): ‘Regulatory Performance Analysis Case Study: Britain’s Electricity Industry’, Energy Policy,

[10] Ansoff, H. I. (1965). Corporate Strategy: An Analytical Approach to Business Policy for Growth

and Expansion ; New York: McGraw-Hill.

[11] Grant, R. M. (1991). Contemporary Strategy Analysis: Concepts, Techniques, Application.

Cambridge, MA: Basil Blackwell

[12] Ansoff, H. I. (1965). Corporate Strategy: An Analytical Approach to Business Policy for Growth

and Expansion ; New York: McGraw-Hill.

[13] Penrose, E. T. (1959). The Theory of the Growth of the Firm, New York: John Wiley

[14] Johnson G, Scholes K and Whittington R; (2006); Exploring Corporate Strategy, Prentiance Hall, 7 th Enhanced Media Edition

[15] Ansoff, H. I. (1965). Corporate Strategy: An Analytical Approach to Business Policy for Growth  and Expansion ; New York: McGraw-Hill.

[16] Ansoff, H. I. (1965). Corporate Strategy: An Analytical Approach to Business Policy for Growth

and Expansion ; New York: McGraw-Hill.

[17] Penrose, E. T. (1959). The Theory of the Growth of the Firm, New York: John Wiley

[18] Penrose, E. T. (1959). The Theory of the Growth of the Firm, New York: John Wiley

[19] Johnson G, Scholes K and Whittington R; (2006); Exploring Corporate Strategy, Prentiance Hall, 7 th Enhanced Media Edition

[20] Hofer, C. W. & Schendel, D. (1978). Strategy Formulation: Analytical Concepts. St. Paul, MN: West.

[21] Ansoff, H. I. (1965). Corporate Strategy: An Analytical Approach to Business Policy for Growth

and Expansion ; New York: McGraw-Hill.

[22] Ansoff, H. I. (1965). Corporate Strategy: An Analytical Approach to Business Policy for Growth

and Expansion ; New York: McGraw-Hill.

[23] Grant, R. M. (1991). Contemporary Strategy Analysis: Concepts, Techniques, Application.Cambridge, MA: Basil Blackwell.

[24] Ansoff, H. I. (1965). Corporate Strategy: An Analytical Approach to Business Policy for Growth and Expansion ; New York: McGraw-Hill.

[25] De Oliveira, Ricardo Gorini and Mauricio Timono Tolmasquim (2004): ‘Regulatory Performance Analysis Case Study: Britain’s Electricity Industry’, Energy Policy,

[26] Johnson G, Scholes K and Whittington R; (2006); Exploring Corporate Strategy, Prentiance Hall, 7 th Enhanced Media Edition

[27] Johnson G, Scholes K and Whittington R; (2006); Exploring Corporate Strategy, Prentiance Hall, 7 th Enhanced Media Edition

[28] Ansoff, H. I. (1965). Corporate Strategy: An Analytical Approach to Business Policy for Growth and Expansion ; New York: McGraw-Hill.

[29] Burgelman, R. A. (1983).corporate Entrepreneurship and strategic management: insights from aprocess study. Management Science.

[30] Hofer, C. W. & Schendel, D. (1978). Strategy Formulation: Analytical Concepts. St. Paul, MN: West.

[31] Johnson G, Scholes K and Whittington R; (2006); Exploring Corporate Strategy, Prentiance Hall, 7 th Enhanced Media Edition

[32] Penrose, E. T. (1959). The Theory of the Growth of the Firm, New York: John Wiley