Reasons for global mergers or joint ventures - 4.2.4

Global merger - is an agreement between two companies from different countries to join forces permenantly. They will become a MNC and these types of merger are likely to increase the power of the new business.

Joint Venture - a separate business entity created by two or more parties acting as a collective tp set up a new business venture, involving shared ownerships, returns and risks.

Patents - a government authority or licence conferring a right or title for a set period, especially the sole right to exclude others from making, using, or selling an invention.

Reasons for a global merger or joint venture;

1. Spreading risk
2. Entering new market/trade bloc
3. Acquiring national/international brand name/patents
4. Securing resources/supplies
5. Maintaining/increasing global competitiveness.

SPREADING RISK OVER DIFFERENT COUNTRIES/REGIONS

By operating in a number of countries, a business reduces the risk associated with one individual country. This is because all countries will be at different stages of the business cycle. If one country is in recession, impacting on sales revenue, another might be undergoing economic growth, countering this. Profits in one geographical area can sustain business elsewhere to overcome short term downturns in the economy. 

Additionally, setup costs are shared by the joint venture or the newly merged company, as well as expertise which again lowers the risk in different global markets. Mergers help increase growth quickly for a business, which may be particularly important in emerging economies, where size may help toensure success.

ENTERING NEW MARKETS/TRADE BLOCS

Saturated markets and heavy competition in the domestic market mean less opportunities for businesses. Therefore, this leads to them wanting to undertake market development in particular with developing countries which can provide them with futur opportunities for new sources of revenue. 

This can be achived in three ways; Organic growth through starting from scratch, through merger or takeover or through a joint venture.

In trade blocs such as the EU, all three options are usually possible. However, in emerging economies, businesses from foreign countries are often allowed to enter a market as apart of a joint venture only. For example, in China not only are joint ventures more likely to gain government approval than a merger, but they also bring knowledge and experience of a local partner. Joint ventures exploit the market knowledge, win preferential treatment and manufacturing capability, and acquire the general business know-how. Joint ventures are also allowed to buy and own land, which is more difficult for merged companies, or MNCs that want to set up from scratch. 

Gaining access to tarde blocs can allow a business to develop a presence that creates an opening to a large geographical area with free movement of capital and few or no import taxes. 

ACQUIRING NATIONAL/INTERNATIONAL BRAND NAMES/PATENTS

This is an important thing to consider as it is important to global success for MNC, as acquiring national brands can provide instant marker share. The right brand might also provide an entry point to more markets globally. For example, Tata from India has acquired Jaguar Land Rover, which has seen growth in emerging markets such as China. 

Marketing economies of scale allow the business to lower unit costs. Branding is expensive and so a global brand effectively reduces the need to have a local variation of the brand (glocalisation). By using global advertising and social media campaigns the business is getting more advertising at a lower unit cost.                   

Joint ventures and mergers can often help a MNC protect global revenue through the use of national law as well as being able to acquire technical expertise that can be used in other markets. 

In the same way, taking control of patents on a global basis allows businesses to produce in low cost locations but charge high prices because of global monopoly power. This can be done effectively as the patent will last for a number of years, restricting competition. This allows the business to recoup heavy research and development costs.

SECURING RESOURCES/SUPPLIES

Supply chain management is enhanced if a business operates in the country where it secures its resources or supplies. Many MNCs have grown as a result of the natural resources that they sell. To do this effectively they have had to produce in the country where the resource originates. This reduces costs because the business does not have to deal with an intermediate that would cut profit margins as they would require payments. By removing the middle man the business operates more effectively. As the business has its own source of supplies it means that there is unlikely to be any shock to its supplies, allowing it to plan ahead with confidence.

Where a business is accessing resources that are obtained unethically, a business may need to take over the supplier in order to maintain the business's reputation and customer loyalty. 

MAINTAINING/INCREASING GLOBAL COMPETITIVENESS

This means a business's ability to compete with others in the international market. All firms in the same market are chasing the same thing, so the concept of competitiveness is a moving target. Increasing global presence is more likely to allow businesses to enter markets more effectively. It is likely to lead to better customer service as this can be undertaken at source, in the geographic location. A local presence allows for local knowledge. Products can be adapted for local needs: "glocalisation" with global products having a local flavour.