Page 105 - Introduction to Business

CHAPTER 2 The Environment of Business 79

receive quality of product and service comparable to that they would receive in the
United States, France, or Singapore. Along with the spread of MTV culture, fast-food
and related franchises have spread all over the world. For example, Yum! Brands
(www.yum.com/about/default.htm), which is based in Louisville, Kentucky, is
organized around its five core constituents, KFC, Pizza Hut, Taco Bell, A&W All
American Food Restaurants, and Long John Silver’s. International profits have been
the key to Yum! Brands’ success. For example, profits in 2001 grew by 39 percent
in China, 33 percent in the United Kingdom, and 20 percent in South Korea.
In 2001, Yum! Brands added more than 1000 new outlets internationally
(www.yum.com/international/default.htm), mostly with franchisees. That’s al-
most three new restaurants being opened somewhere outside the United States
every day of the year. China is Yum! Brands’ fastest-growing and most profitable
market (outside the United States); 500 KFC and 60 Pizza Hut restaurants were
opened there in 2001.

International Joint Ventures and Strategic Alliances
When firms find the domestic market saturated (reflected by the high degree of
domestic competition and low profit margins) and opportunities for sales and
profits overseas are significant, some of these firms may consider making major
investments abroad in order to expand their business. Since the profit potential is
significant, these firms may be willing to take on more financial risk to reap
greater profits. Yet, these firms may not quite be willing to take on the risk of com-
pletely owning and operating a plant overseas. They may prefer to share the risk
as well as the return with another corporate entity. That’s what joint ventures are
all about. An international joint venture is a business that is jointly owned international joint venture A business
(implies shared equity) and operated by two or more firms (usually one from the that is jointly owned (implies shared
equity) and operated by two or more
host country and the other from another country) that pool their resources (labor,
firms (usually one from the host country
capital, technology, and management) to penetrate host country markets, gener- and the other from another country) that
ate (and share) profits, and share the commercial risk. For example, several oil pool their resources (capital,
companies that compete in their respective domestic markets may form a joint technology, and management) to
penetrate host country markets,
venture together with the Saudis to explore for oil and gas in Saudi Arabia in order generate (and share) profits, and share
to set up a gas-gathering system that would produce petrochemicals and also the commercial risk
generate electricity for the Saudis. The formation of a joint venture would make
sense because the investment needs will be so huge (billions of dollars) that no sin-
gle company in the joint venture would be willing to come up with all the needed
funds. Furthermore, even if one company had the capital to invest, it would be
unwilling to risk all its capital in one venture; that is, firms will want to diversify
to reduce risk. Furthermore, international joint ventures enable each partner to
utilize its comparative advantage for the betterment of the joint operation. In
most cases, international joint ventures will include at least one local firm (a firm
that resides in the foreign country). The reason is simple. The local partner will be
most knowledgeable about the domestic economic, cultural, and political envi-
ronment. Hence, the local partner will be able to “get things done” overseas in an
efficient manner. International joint ventures with local firms often lead to the
transfer of management and technical expertise in the long run. In addition,
some of the corporate profits generated there will remain in the domestic econ-
omy. The automobile industry, which is highly capital intensive, is an excellent
example of an international joint venture. DaimlerChrysler, for example, has a
joint venture operation with Mitsubishi Motors of Japan in order to gain a
foothold in Japan. Some of the Daimler Benz engines will be shipped and used in
Mitsubishi cars. Similarly, DaimlerChrysler has a joint venture with Hyundai

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