Pacific Rim Development

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Pacific Rim Development

• Strategy Management in the Asian Corporation
• Week 2

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Cross-border expansion

• Firms seek cross-border expansion
• Driven by
• Profit motive
• Access to scarce resources
• Technology
• Capital

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Guides to strategy

• Is strategy entirely company centred?
• Role of politics
• Applicability of certain industry sectors
• China limits expansion primarily to
• Petroleum
• Chemicals
• Engineering
• Electrical Appliances
• IT

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Expansion Strategies Motivation

• Expansion strategies
• Horizontal
• Vertical
• Conglomerate
• Strategic motivation
• Resources
• Technology
• Market
• Brand sharing

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West-East Investment

• Tahir Larimo (2004) analyse investment in
  terms of Dunnings strategic reasons for FDI
• Market seeking
• Efficiency seeking
• Risk-reduction seeking

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Findings of study

• Conclude
• Large target market
• Low cultural distance
• Low wage rate
• Low taxation
• Enhances market efficiency seeking FDI
• Low inflation rates
• Low risk levels
• High exchange rate fluctuations
• Enhances risk reduction seeking FDI

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Additional questions

• Also mention potential drivers for investment as
• Free trade zones
• Labour unionization
• Transportation costs
• And whether industry sector could have a bearing
  on decisions

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A unique Asian factor

• Unique East-West driver in recent years
• Asian Financial Crisis
• From Eastern perspective crisis represents
  environmental jolt
• Consider corporate strategic options under jolt
  conditions

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The effect on manufacturing

• Tan See (2004) studied strategic reactions to
  the crisis in Singapore manufacturing companies
• Identified 2 strategies
• offensive strategic reorientation
• defensive strategic shift

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Offensive Strategic Reorientation

• Encompasses managements implementation of
  strategic actions that
• are expansionary
• which lie outside the firms current domain of
  operations
• High risk strategy

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Defensive Strategic Shift

• Involves actions aimed at increasing efficiency
  of firms.
• Actions are contractionary
• Considered more conservative as firms confine
  themselves to their normal domain of operations
  to improve the situation
• Lower risk strategy
• Continue to do the same but do it better on a
  smaller scale
• Exhibits threat-rigidity

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What causes firms to adopt which strategy?

• Firms attributing decline to controllable reasons
  are more likely to adopt
• Offensive Strategic Reorientation
• Study found little evidence of adoption of this
  strategy
• Partly related to prevailing business environment
• Singapore has very stable business background
• Close government ties to commerce
• Operating in a stable environment may have
  inculcated a culture among organizations that
  restricts flexibility and hostility when
  implementing change

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What causes firms to adopt which strategy?

• Firms attributing decline to uncontrollable
  reasons are more likely to adopt
• Defensive Strategic Shift.
• Level of strategy adopted is linked to
• severity of decline
• level of potential slacks available
• firm size
• Also firms attributing decline to shrinking
  market niche would undertake less strategic
  defensive shift

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In Summary

• General business background closeness of
  state can determine strategic orientation in
  conditions of shock
• Likely reactive strategy is defensive
• Are there other factors to explain strategic
  choice?

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Extrinsic global factors

• Wade (2003) examines the reducing development
  space available to developing economies as a
  result of (western initiated) trade regulations.
• The Agreement on Trade-related Aspects of
  Intellectual Property Rights
• (TRIPS)
• The Agreement on Trade-related Investment
  Measures (TRIMS)
• limit the authority of developing country
  governments to constrain the choices of companies
  operating in their territory
• The General Agreement on Trade in Services (GATS)
• requires the governments to enforce rigorous
  property rights of foreign (generally Western)
  firms

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Effects on potential strategy

• Together the agreements make comprehensively
  illegal many of the industrial policy instruments
  used in the successful East Asian developers to
  nurture their own industrial and technological
  capacities and are likely to lock in the position
  of Western countries at the top of the world
  hierarchy of wealth

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Asian Effect

• Strategic choice and policy is the product of
• home environment
• western-determined international trade
  regulations
• moulded by the experience of 1997
• Note the effects of 1997 were variable across the
  region

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Internationalisation by tranches

• Dunning, Hoesel and Narula (1998)
• Found that third world MNEs development falls
  into 2 waves
• The second wave occurring in the 1990s and
• consisting mainly of East Asian NICs

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General positioning of Asian MNEs

• The MNEs from these countries have
• improved and augmented ownership advantages
  (e.g., innovatory capabilities)
• made more strategic seeking FDI (for technology
  and marketing) in advanced industrial countries
• via higher equity and control modes (e.g., MA)
• Outward investment activities enhanced by
• economic liberalization and restructuring in the
  country
• greater export orientation
• shift towards more global markets
• the supportive role of governments

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Reasons for Tan Sees findings?

• Of course 1997 crisis falls in this second wave
• But findings suggest pre-conditions for post 97
  defensive strategy

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Uppsala model

• Model of gradual incremental steps to
  international business expansion
• Based on a series of incremental decisions
• Successive steps of increasingly higher
  commitments are based on knowledge acquisition
  and learning about the foreign market

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Uppsala model

• Progressive development steps
• export to a country via independent
  representative/agent
• establishment of sales subsidiary
• eventual production in the host country
• The internationalization of the firm across many
  foreign markets is related to psychic distance
• initial entry is to a foreign market that is
  closer in terms of psychic distance
• followed by subsequent entries in markets with
  greater psychic distances

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The same but different

• Sim and Pandian (2003)
• Considered 12 textiles and electronics firms in
  Singapore and Taiwan
• Post crisis strategic options were uniformly
  rationalisation and consolidation
• China featured prominently in the plans of
  Taiwanese firms to
• enhance their competitive cost advantage
• tap the domestic Chinese market
• The Singaporean firms placed less emphasis on
  China but more on developed markets

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Similar root strategies

• The internationalization strategies of both were
• founded on cost-based competencies and other
  location-based advantages
• brought together by an extensive web of ethnic
  networks
• aided by government encouragement and
  institutional framework

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Similar root strategies

• Firms were extending beyond their current
  competitive advantages to those which capitalise
  on differentiation benefits
• technology
• innovative product features
• value
• Some of the sample moved outside their Asian
  bases to North America and Europe to
  strategically position themselves for new markets
  and technologies in the 21st century

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Cultural uniqueness

• The need to develop existing capabilities and to
  accumulate new knowledge is becoming critical for
  Asian MNEs in an increasingly global market
• There are observable differences between our
  sample Asian firms and Western MNEs
• In particular our findings indicate the key role
  ethnic network and relationships played in their
  internationalization
• These elements have been neglected in
  conventional MNE theories
• Our findings here reinforce the basic proposition
  that the social and institutional framework is a
  distinguishing feature of our firms as well as
  other Asian MNEs

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Success in electronics

• Chen Wong (2003) considered the linkages
  between successful marketing strategies and
  organisational structure of East Asian companies
  operating in Europe.
• Electronics sector.
• Firms saw European integration as opening up
  greater market opportunities
• All firms exhibit strategic intent obsessed
  with winning

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Chen WongConclusions of the study

• Successful firms were found to be more proactive
  in seeking growth opportunities and were more
  committed to their markets
• They had
• more aggressive market share objectives
• more informal structures
• introduced more products into their target
  markets
• Successful firms had
• closer relationships with their parent companies
• greater autonomy in strategy and pricing
  decisions
• The products of successful firms were also more
  standardised

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Suggestions for strategy

• This suggests successful Asian internationalisatio
  n strategy in Europe replicates western TNC
  practice.
• Firms adopt western strategic options in terms
  of products and autonomous adaptation to local
  markets
• But retain close links to parent company
• Effective cultural adaptation to global stage
• Traditional Asian networks cannot be used to gain
  competitive advantage in Europe
• Therefore adapt to meet like with like

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Proof of the proposition?

• Mitchell and Shaver (2002) studied the role of
  acquisitions in Asian firms global strategies in
  US medical sector.
• Overall, the analysis points to the existence of
  common causal threads in the fabric of business
  strategy
• While some differences in the strategies of firms
  based on different continents are apparent, the
  similarities are more striking
• The results suggest that firms that compete in
  common market environments tend to converge
  toward similar strategies

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Back to the cultural root

• Li and Karakowsky (2002)
• Considers the relationship between
• government policy
• national culture
• firm behaviour

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Same culture different government

• Taking firms in Hong Kong, Taiwan and Singapore
• Corporate strategy should be similar due to
  similar (Chinese) cultural backgrounds
• Found that
• HK Taiwanese firms adopted aggressive
  expansionist policy (particularly in Chinese
  market)
• Singapore firms exhibited low levels of
  entrepreneurial spirit

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Reasons

• They argue that HK Taiwan government are less
  paternalistic
• Singapore governments have developed culture of
  dependence on the state
• Outcomes
• erosion of traditional networks
• Singapore Chinese are less Chinese
• ethnic background traits are shaped by
  government/state policies
• knock-on effect into business culture and
• therefore on way firms develop their strategies

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Implications for strategy studies

• This would argue
• That there can be no Asian Corporate Strategy
• But does it answer why Asian firms were so
  successful pre-1997?
• Is the strategic options of typical Asian firms
  limited by industry
• Specifically key industries
• Asian corporate success is based on particular
  responses and choice limitations caused by
  emergent industrialisation
• Certain industry types are so strong that
  environmental jolts do not seriously affect them

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Semi-conductor industry in Korea and Taiwan

• Keller Pauly (2000)
• Investigated rise and strategic orientation of
  this industry
• This represents a champion industry in both
  countries
• Effects of 1997 did not
• force fundamental change in competitive
  strategies designed around a vision of low-cost,
  high-quality production in commodity-like markets

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Reasons

• The essential gamble behind such a strategy is
  that underlying technologies are stabilizing
• Even if revolutionary innovations arise, the bet
  is that successful commercialization will lie far
  enough in the future to permit the Korean
  industry to absorb new technologies and adjust
  its production-centred corporate structures

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General framework - 1

• Asian Strategy up to 1997
• Characterised by 2-wave process
• Early export-oriented trade strategy
• Later quality/strategic investment policy
• Environmental jolt (if affected) led to
• re-evaluation of strategic options
• expansionary/contractionary
• Partly dictated by cultural/state environment

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General framework - 2

• 1997 was not only extrinsic factor
• Growth in international trade regulations created
  contraction of development space
• Fractured state-corporate bond which was key to
  progressing industrialisation

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General framework - 3

• General cultural traits do not necessarily
  reflect strategic choice
• Although traditional networks provide advantage
• Strategy seems to be location-influenced
• Firms adapt regional strategy to fit regional
  conditions
• Industry/product type has strong bearing
• in effects on cross-border expansion
• on reactions to jolts or
• If affected by jolts at all
• strategy is affected by industry/product level of
  development at initial entry