4.2.4 reasons for global mergers and joint ventures

Question 1

reasons for global mergers and joint ventures

Answer 1

Spreading risk over different countries/regions
Entering new markets/trade blocs
Acquiring national/international brand names/patents
Securing resources/supplies
Maintaining/increasing global competitiveness

Question 2

describe global merger

Answer 2

A global merger occurs when two businesses join together beyond the boundaries of a specific country. They will be MNCs and these types of merger are likely to increase the power of the new business.

Question 3

describe joint venture

Answer 3

A joint venture occurs when two or more business agree to act collectively to set up a new business venture with all parties contributing equity to fund the set up and purchase of assets.

Question 4

describe Spreading risk over different countries/regions

Answer 4

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.
A variety of other reasons will impact on the firm e.g. changes in fashion in one country not reflected in another.

Question 5

describe Entering new markets/trade blocs

Answer 5

Saturated markets and heavy competition in the domestic market mean less opportunities for businesses.
This leads them to undertake new market development. In particular, developing countries can provide future opportunities for new sources of revenue.
Gaining access to trade 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.

Question 6

describe Acquiring national/international brand names/patents

Answer 6

Taking over a variety of brand names and patents allows a business to market its range of products in many different countries around the world.
Marketing economies of scale allow the business to lower unit costs. Branding is expensive. A global brand effectively reduces the need to have a local variation of the brand.
By using global advertising and social media campaigns the business is getting more advertising at a lower unit cost.
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.

Question 7

describe Securing resources/supplies

Answer 7

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 payment. 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.

Question 8

describe Maintaining/increasing global competitiveness

Answer 8

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.
Supply chain management becomes easier and cheaper when it can be sourced in the geographic area.