Foreign Market Entry and International Production

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Foreign Market Entry and International Production

• CHAPTER 9

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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
  marketa 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
  enterpriseimplies a degree of management control
• Contracting a foreign firm to carry out
  production in that country

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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

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Table 9.1 Foreign Market Entry of a Home-Country
Firm into a Foreign Market
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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 trade mode
• 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

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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

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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 RCAs color TV technology once RCA
  licensed it to a number of Japanese companies

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Choosing a Method

• If a firms 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

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Table 9.2. Factors Influencing Choice of Foreign
Market Entry Mode
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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

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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

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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

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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

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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

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