Foreign Market Entry and International Production

1. Foreign Market Entry and International Production CHAPTER 9

2. Introduction • A favorite Japanese motorcycle in Vietnam is the Honda Dream • Was unaffordable by many Vietnamese households • However, in late 1997, Honda began producing the Dream in Vietnam in order to serve the Vietnamese market—a form of international production • Ways in which a firm can serve a foreign market • Exports • Foreign direct investment (FDI) • Holding at least 10 to 25% (depending on the country) of the shares in a foreign productive enterprise—implies a degree of management control • Contracting a foreign firm to carry out production in that country

3. Foreign Market Entry • Many ways in which a firm in one country can interact with the world economy • Trade and foreign direct investment are two of the main types of international economic activity • To develop an understanding of this menu of options, need to cross over from the field of international economics into the field of international business • Issue of foreign market entry

4. Table 9.1 Foreign Market Entry of a Home-Country Firm into a Foreign Market

5. Foreign Market Entry • Consider Honda, the Japanese automotive and motorcycle firm and producer of the Dream motorcycle • Initially, suppose that Honda sells all of its motorcycle output domestically • Assume Honda eventually begins to contemplate exporting motorcycles to other countries but has little experience with and knowledge of international trade • Options for foreign market entry • Indirect trade mode • Relies on another firm such as an exporting house in Japan or an importing house in a foreign country such as Vietnam to complete the trade transaction • Might give Honda some expertise and confidence that inspires it to make a more firm commitment to exporting in a direct trademode • Undertakes the export/import transaction itself rather than relying on an export or import house • Takes on the research, marketing, and logistics requirements of the trade transaction

6. Foreign Market Entry • Produce abroad • Lack of experience in global production might make it wary of carrying out production itself in Vietnam • Would lead to contractual modes of foreign market entry • Sell a license to a Vietnamese firm to produce motorcycles • Franchising • More common in service and retail firms than in manufacturing • FDI • Greenfield FDI • Establish a brand-new production facility in Vietnam that it fully owns • Acquisition FDI • Buy all or part of the shares of an already-existing production facility in Vietnam • Must own enough shares to have corporate control • Otherwise the investment is classified as indirect or portfolio investment • Joint venture with a Vietnamese firm

7. Choosing a Method • What prompts a firm to choose one type of foreign market category over another? • Factors included in making foreign market entry decisions • Degree of control • Level of resource commitment • Degree of dissemination risk • Possibility of a foreign partner firm obtaining technology or other know-how from the home-country firm and exploiting it for its own commercial advantage • For example, Japanese companies quickly assimilated RCA’s color TV technology once RCA licensed it to a number of Japanese companies

8. Choosing a Method • If a firm’s most important concern was • Degree of control over the production and marketing process • Lead the firm towards an investment mode of foreign market entry based on a subsidiary obtained either through greenfield or acquisition investment • Limiting resource commitment to low levels • Consider either trade or contractual modes of foreign market entry • Low degree of dissemination risk • Either trade or investment via a subsidiary would be the preferred mode of entry • In most instances, firms have more than one primary concern

9. Table 9.2. Factors Influencing Choice of Foreign Market Entry Mode

10. Motivations for International Production • Dunning (1993) identified four motivations for international production • Resource seeking • Natural or human resources • Has been a gradual shift away from this • Market seeking • International production might be necessary to adopt and tailor products to local needs • International production might be required to effectively deliver a product, such as financial services • International production might be required for a firm supplying intermediate products to another firm opening up operations in a foreign country • Firms may locate where they expect demand to grow in the future • Efficiency seeking • Economies of scale • Economies of scope • Firm-level economies • Most important for large, mature MNEs with a great deal of international experience

11. Motivations for International Production • Strategic asset seeking • Acquiring productive assets as part of the strategic game among competitors in an industry may involve • Acquiring or collaborating with another to thwart a competitor from doing so • Merging with a foreign rivals to strengthen joint capabilities • Acquiring a group of suppliers to corner the market for a particular raw material • Gaining access over distribution outlets to better promote its own brand of products • Buying out a firm producing a complementary range of goods or services so it can offer its customers a more diversified range of products • Joining forces with a local firm in the belief that it is in a better position to secure contracts from the host government

12. The Rise of Multinational Enterprises and International Production • Early MNEs were part of the colonization efforts during the 16th and 17th centuries • Included state-supported trading companies such as the British East India Company, the Dutch East India Company, and the Royal African Company • Known as the age of merchant capitalism • Industrial revolution in the 19th century led to industrial capitalism • British-based MNEs operating in India, China, Latin America, and South Africa • Involved in mining, plantation agriculture, finance, and shipping • Japan became involved in MNE activity after the Meiji Restoration • Industrial groups known as zaibatsu • Associated with trading companies known as sogo shosha • Still exist in various forms today

13. The Rise of Multinational Enterprises and International Production • In the 20th century, industrial production grew more capital intensive • Role of the production line and associated economies of scale grew more important • Era of industrial capitalism gave way to managerial capitalism or Fordism • Center of innovative economic activity moved from Europe to the United States • Firm size increased • Business success became based on the ability to coordinate growing sets of complementary activities • Depression that began in 1929 and the Second World War hurt most forms of international economic activity • Post-war recovery further strengthened the role of US-based MNEs • Technological advantage of US-based MNEs during the early post-war period was the point of reference of the product life cycle theory • Production is confined to the home base MNE during the early phases of product life cycle • During later phases production can move to subsidiaries in foreign countries in order to take advantage of lower labor costs

14. Rise of Multinational Enterprises and International Production • The 1970s had the rise of industrial output in the newly industrializing countries (NICs) of East Asia • Especially Japan, Taiwan, and South Korea • Many see this as new economic era known as post-Fordism or, Toyotism • Economies of scale have been replaced by flexibility as the progressive element in manufacturing • Use of information technologies in machines and operations • Allow for more sophisticated control over the production process • Rise of industrial output was followed by a rise in FDI on the part of East-Asian based MNEs • Especially those based in Japan • In 1960 Japan accounted for less than one percent of global FDI • By 1975 Japan accounted for nearly six percent • By 1995, Japan accounted for eleven percent of global outward FDI

15. Table 9.3. Leading Sources of World Foreign Direct Investment (percent of global, outward FDI)

16. Rise of Third World Multinationals • Increasing FDI by MNEs with home bases in developing countries • Began in the mid-1980s • Developing countries began, at that time, to relax restrictions on FDI capital outflows