International Growth Strategies: Purposes, Motives and Risks

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INTRODUCTION

International growth strategies are equity-based expansions by corporations to acquire ownership in foreign firms that can be used to further the corporate goals. These equity based strategies are also referred to as direct investments where the parent multinational corporation (MNC) acquires sufficient equity in an existing or newly established foreign company, to incorporate the affiliate within the parent MNC's global strategies (Griffin and Pustay, 1999). International growth can be accomplished by means of new start-ups, expansion of existing affiliates, partial or complete acquisitions, mergers with other companies, or joint ventures. This archival-based study examines US companies' equity-based international growth strategies, motives and risks. (1)

TRENDS AND VOLUME

In the 25 years following 1970, the world GDP grew by about 200%, and merchandise exports by fewer than 400%, but international direct investments grew by over 700%. The U.S. numbers are equally impressive. International mergers and acquisitions by U.S. corporations rose from $3.27 billion in 1980 to $410 billion in 1997, which is close to half the total mergers and acquisitions announced by corporate America in 1997. This trend of international growth has led to a significant rise in the foreign share of U.S. companies' total revenues, which more than doubled from 11% in 1985 to 23% in 1997 for the median S&P 500 company. The foreign share of total sales for S&P 500 companies has grown to an impressive 34%. This growth has been brought about by sales of worldwide affiliates of U.S. MNCs more so than exports of U.S. made products.

The growth has resulted in impressive presence by some U.S. companies abroad. For instance, General Electric became the largest private employer in Singapore, employing over 100,000 Singaporeans. General Motors, through its over 50 affiliates in Mexico, has become the largest private employer in Mexico, employing 85,000 full time workers. The growth has not been confined to industrial companies, but extends to services as well. Merrill Lynch's $4.6 billion acquisition of Britain's Mercury Asset Management in 1997 is viewed as an example of the rapid and substantial international growth by the U.S. financial services industry.. Another service industry that has been experiencing significant international expansion is the managed health- care industry. Major U.S. health-care insurance companies are investing in health-care companies around the world. Latin America has more health maintenance organizations than the U.S. and an estimated 60 million enrollees. Managed-care companies like Cigna and Aetna have been investing hundreds of millions of dollars in health-care companies in Latin America and elsewhere.

Even world-class companies that have maintained a tradition of not partnering with foreign affiliates have come to change their mind, Bechtel Group, Inc., has recently diversified into new markets and found it necessary to partner with foreign and other international companies experienced in these new services. According to a senior executive in Bechtel, "ten or 15 years ago, we would never have used a local partner, but today it is absolutely imperative."

STRATEGIC PURPOSES

While the ultimate purpose for a corporate growth strategy is long-term strength and performance, the specific goals may vary depending on the company, industry, customers and suppliers, domestic market, and production technology. The following is a discussion of some of the goals.

Pursuing Growing Markets

U.S. companies seek new markets in emerging economies and recently privatized industries. ICN Pharmaceuticals has been pursuing a vigorous growth strategy by acquiring 60 to 100% equity in pharmaceutical plants in the growing markets of East European countries. In 1997, Eastern European sales accounted for 58% of ICN's revenues. In the financial service industry, Mellon Bank made a 75% acquisition of Newton Management in the United Kingdom to match its rival Fidelity Investments in Europe and to take advantage of the promising market for asset management in the privatized European pension system. …

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