External Growth Strategies

The external growth strategies can be broadly divided into three groups:-

(A) Collaborations or joint ventures.

(B) Mergers and amalgamations.
(C) Takeovers and acquisitions.
(A) Collaborations: - Collaboration may take place between two or more firms
either from the same country or from different countries. Business firms
collaborate for mutual help and benefit. Collaborations agreements are popular in
international business. Foreign collaborations are joint ventures between two or
more companies belonging to different countries.
Importance of foreign collaboration:
I.
To the domestic company:
1. Capital: - The domestic company can avail of capital resources from the
foreign collaborators. The capital can be utilized for expansion and
modernization.
2. Skills development: - The foreign partner may provide training to the
employees of the domestic company. Training helps to improve knowledge,
attitudes, skills and social behavior. Training leads to higher efficiency and
productivity.
3. Technology transfer: - The foreign firm may transfer advanced technology
to the domestic firm. The advanced technology brings certain benefits such
as quality improvement and cost reduction.
4. Competitive advantage: - the domestic firm may improve in the domestic
market as well as in the foreign market. Especially in the foreign markets,
the image of the local firm may improve on account of the goodwill of the
foreign collaborator.
5. Corporate image: - the image of the domestic firm may improve in the
domestic market as well as in the foreign markets. Especially in the foreign

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II.
1.

2.

3.

4.

5.

6.

markets, the image of the local firm may improve on account of the
goodwill of the foreign collaborator.
Economies of scale: - the domestic firm may gain economies of large scale
on account of higher demand for goods and services. Increase in demand
may lead to higher production and distribution. The increase in production
and distribution brings economies of scale to the local firm.
To the foreign collaborator: Expansion of business: - Foreign collaboration helps the foreign firm to
expand its business worldwide. Foreign collaboration agreement such as
franchising agreement enables the foreign collaborator to expand the
business in several countries. For instance, McDonalds has entered into
franchising agreements worldwide.
Recovery of R&D expenses: - The foreign firm can recover its R&D expenses
by entering into foreign collaboration agreements with firms in other
countries. This is because foreign firms can get royalty from its partners in
other countries for the use of its technology or R&D efforts/innovation.
Goodwill in foreign markets: - The foreign firm can earn goodwill in another
country where it has a tie up. For instance, prudential of UK has a joint
venture with ICICI Bank of India in the life insurance sector. Therefore,
prudential enjoys goodwill in the Indian market as well.
Inputs at lower prices: - At times, there may be an agreement between the
foreign firm and another firm in another country. Whereby the latter may
supply inputs as they are cheaply available. Also, the foreign firm may set
up a production base jointly with another firm in another country to get
inputs and labour at cheaper rates.
Incentives: - Some developing countries give special incentives to foreign
firms if they have a tie up with domestic firms. For instance, they may give
tax holiday or inputs at subsidized rates. Therefore the overall production
cost for the foreign collaborator may fall.
Higher returns: - The foreign firms can enjoy higher returns from the
collaboration. For instance, it may get royalty for transfer of brand names,
trademarks, technology, etc. they may also get a share of profits from the
company with whom they have a tie up.

(C) Takeover and acquisitions

Acquisitions are a method of growth in which a strong company acquires all
the assets and liabilities of another company. Acquisitions are made for
specific objectives like capital investment, corporate growth, market coverage,
new products or technology transfer
Take over is a form of acquisition, and can be done by buying shares from
market and taking over the control with or without the consent of the owners.
In a hostile takeover the owners lose their ownership/control of the company
against their wishes.
Takeover can take place in three forms:
1) Negotiated takeover, where both the parties mutually settle the terms and
conditions of the takeover.
2) Open market or hostile takeover, where the acquiring firm buys shares of
the other firm from the open market normally at a higher price than the
marketing price.
3) Bailout, where a profit making firm takes over a sick or weak firm, so as to
bail it out from financial crisis.
The corporate takeovers in the country are governed primarily by the listing
agreement with stock exchanges and SEBIs takeover code.
Advantages of takeover:
1) Easy entry in overseas markets: - Takeover enables business firms to gain
easy entry in overseas market. For instance, the takeover of JLR by Tata
Motors has enabled the Tata Motors to gain recognition in European
markets.
2) Growth and expansion: - Takeover enables a business firm to expand its
operation in the domestic and overseas markets. Most of the international
takeovers facilitate growth and expansion of the business in the domestic
market as well as in the overseas markets.

3) Helps to face competition: - Takeover also helps to face competition in the

markets. For instance, in 1993, Coco cola took over Parle breweries brands
of Thums up, limca, Mazza, etc., in order to consolidate in the Indian
market, and to overcome the problem of competition from Parle breweries.
4) Market share: - takeover helps to increase the market share. For instance,
TCS has takeover 15 companies between 2001 and 2013. The taken over
firms are from different countries including India, UK, Australia, Sweden,
Switzerland, Chile, and France. The takeover of 15 companies has enabled
TCS to increase its market share in the world markets.
5) Goodwill: - Takeover gains a good amount of goodwill in the market. At
times, takeover increases the confidence in the shareholders of the
company. Customers may also develop a good image of the company,
especially when the takeover is reputed firm.
6) Economies of scale: - Takeover enables a firm to gain economies of scale. A
firm can use the production facilities and other resources for manufacturing
and/or distribution operations. Large scale operations provide economies
of scale, which in turn improves the profits of the firm.
7) Tax benefits: - At times, takeover helps a firm to gain substantial tax
benefits. For instance, if a firm can claim tax benefits. Also, a foreign firm
acquiring a domestic loss making company, then it can claim tax benefits in
certain countries.
8) Financial resources: - the combined entity(after takeover) can generate
huge financial resources. For instance, Tata Group could raise billions of
dollars from international financial institutions to finance the buyout of
Corus Steel and other takeovers. The combined assets and goodwill
enhances the credit worthiness of the firm in the financial markets.