University of Sao Paulo, Brazil

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University of Sao Paulo, Brazil School of
Economics and Business Administration (FEA) April
2006 International Operations Management David
Bennett Aston Business School Aston University
Birmingham, UK
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• Presentation content- Some preliminaries
  (context, historical time-frame, strategies)
• Background and definitions
• Reasons for international manufacturing
• Location of international operations
• International operations, foreign investment and
  trade
• Modes of international operations
• A couple of mini cases

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Some background information putting
international operations into context
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The growth of foreign direct investment, world
exports and world production (from Hill CWL
International Business, London McGraw Hill,
2004)
1984 100
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A rough time-frame of international operations
(based on Flaherty T Global Operations
Management, McGraw-Hill, 1996)
Early international trade (before the late
1800s) - operations limited to logistics and
transportation of goods Early multinational
activity ( 1875 to 1938) - operations extended
to obtaining resources, market seeking and
proximity seeking Dominance by American
Multinationals (1945 to 1970) - expansion of
operations into (mainly) developed
countries Globalisation ( 1970 on) -
emergence of Japan, Europe and the NICs
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Four basic strategies(from Hill CWL
International Business, London McGraw Hill,
2004)
High
Global strategy
Transnational strategy
Cost pressures
International strategy
Multidomestic strategy
Low
Low Pressures for local responsiveness
High
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Some background information who are the big
players?
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(No Transcript)
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The largest transnational corporations ranked by
foreign assets 2002 (Source UNCTAD)
Foreign Assets (US mill) Total assets (US
mill) 1 General Electric (US) 229,001 575,244
2 Vodafone (UK) 207,622 232,870 3 Ford Motor
(US) 165,024 295,222 4 British Petroleum
(UK) 126,109 159,125 5 General Motors
(US) 107,926 370,782 6 Royal Dutch Shell
(UK/Netherlands) 94,402 145,392 7 Toyota Motor
(Japan) 79,433 167,270 8 Total Fina Elf
(France) 79,032 89,450 9 France Telecom
(France) 73,454 111,735 10 Exxon Mobil
(US) 60,802 94,940 11 Volkswagen
(Germany) 57,133 114,156 12 E.On
(Germany) 52,294 118,526 13 RWE Group
(Germany) 50,699 105,116 14 Vivendi Universal
(France) 49,667 72,682 15 Chevron Texaco
(US) 48,489 77,359 16 Hutchison Wampoa (Hong
Kong SAR) 48,014 63,284 17 Siemens
(Germany) 47,511 76,474 18 Electricité de
France (France) 47,385 151,835 19 Fiat
(Italy) 46,150 96,990 20 Honda Motor
(Japan) 43,641 63,755
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The largest transnational corporations ranked by
foreign employment 2002 (Source UNCTAD)

Foreign employees Total
employees 1 Wal-Mart (US) 300,000 1,400,000 2
Carrefour (France) 271,031 386,762 3 Siemens
(Germany) 251,340 426,000 4 McDonalds
(US) 237,269 413,000 5 Royal Ahold
(Netherlands) 236,698 341,909 6 Unilever
(UK/Netherlands) 193,000 258,000 7 Ford Motor
(US) 188,453 350,321 8 IBM (US) 178,602 3
15,889 9 Matsushita (Japan) 166,873 288,324 10
Volkswagen (Germany) 157,887 342,892 11
Nestlé (Switzerland) 150,232 254,199 12
General Electric (US) 150,000 315,000 13 Anglo
American (UK) 147,000 177,000 14 Philips
(Netherlands) 140,827 170,087 15 Suez
(France) 138,200 198,750 16 ABB
(Switzerland/Sweden) 131,321 139,051 17
Hutchison Whampoa (Hong Kong SAR) 124,000 154,81
3 18 St Gobain (France) 122,373 172,357 19
Deutsche Post (Germany 108,609 327,676 20
France Telecom (France) 102,016 243,573
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The largest transnational corporations from among
the top 100 that are based in developing
countries 2001 (Source UNCTAD)
Foreign Total Foreign
Total Foreign Total

assets assets sales sales
employ employ (US mill) (US
mill) Hutchison Whampoa (Hong Kong SAR) 40,989
55,281 6,092 11,415 53,478
77,253 Singtel (Singapore) 15,954 19,108
1,362 4,054 17,574 21,535 Cemex
(Mexico) 12,645 16,282 4,390 6,730
17,449 25,519 LG Electronica (Republic of
Korea) 11,561 20,304 10.009 22,528
21,017 42,512 Petroleos De Venezuela
(Venezuela) 7,964 57,542 19.801
46,250 5,480 46,425 Petronas
(Malaysia) 7,877 37,933 5,359 17,681
4,006 25,724 New World Development
(Hong Kong) 4,715 16,253
566 2,933 800 26,100 Neptune
Orient Lines (Singapore) 4,674
4,951 2,970 4,737 10,412
11,777 Citic Pacific (Hong Kong)
4,184 77,798 1,109
2,212 7,354 11,733 Jardine Matheson
(Hong Kong) 4,080
7,166 6,297 9,413 62,629
110,000 Samsung (Republic of Korea) 3,840
41,692 25,112 37,155 23,953 73,682
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Operations management management of business
activities that are concerned with the design,
planning and control of resources for the
production of goods and provision of services
(Bennett D, Lewis C Oakley M Operations
Management, Philip Allan, 1988)
Typically, operations management is concerned
with Operations strategy Product, service
and process design Resource and materials
planning and control Location and layout of
facilities Work and job design Quality
control and maintenance of facilities Management
of INTERNATIONAL operations considers all these
decision areas within the context of increasing
internationalisation (.. globalisation) of
businesses.
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Pause for thought. Within each of the
identified decision areas, what are the factors
you think distinguish the management of
international operations from managing purely
domestic operations?
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Why do firms have international manufacturing?
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1. Entry to foreign markets Because of -
trade barriers - constraints on output from
domestic operations - high transportation costs
of finished goods
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2. Access to foreign expertise About -
overseas markets - personnel management and
industrial organisation - technology
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3. Economic factors Access to low cost . -
labour - materials - overheads
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4. Financial and tax considerations The
attraction of .. - tax 'holidays' -
favourable rates of corporation (profit) taxes
- direct financial and tax incentives - soft
incentives
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Where should firms locate their international
operations?
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Market attractiveness
Growth in GNP per Capita ( pa)World Bank, World
Development Indicators, 1997
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Foreign Direct Investment (FDI) potential
country ranking 2000/2002 (World Investment
Report 2004)
1. United States 2. Norway 3. United Kingdom 4.
Singapore 5. Canada 6. Belgium/Luxembourg 7.
Ireland 8. Qatar 9. Germany 10. Sweden
16. Japan 18. S Korea 21 Taiwan 32. Malaysia 39.
China 50. Mexico 54. Thailand 137. Haiti 138.
Zimbabwe 139. Sierra Leone 140. Dem Rep of Congo
based on 12 economic and social variables, i.e.
real GDP growth GDP per capita total exports
telephone mainlines mobile telephones energy
use RD expenditures students at the tertiary
level country risk exports of natural
resources imports of parts / accessories of
electronics and automobiles inward FDI stock
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Table from Wall and Rees International
Business, Prentice Hall, 2004
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Pause for thought. We can see why businesses
extend their operations internationally and we
have highlighted the advantages. But what do you
think may be the problems and disadvantages?
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How does the management of international
operations relate to foreign investment and trade?
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Increasing levels of foreign investment
Increasing levels of foreign trade
Selling
Franchising
Contracting
Licensing
Co-production
Joint venture
Wholly-owned subsidiary
Increasing importance of control issues
Increasing importance of coordination issues
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Horizontal and Vertical FDI (from Hill CWL
International Business, London McGraw Hill,
2004)
Horizontal foreign direct investment - FDI in
the same industry abroad as the firm operates in
at home Vertical foreign direct investment -
FDI into a related industry within the firms
supply chain, i.e. 1. Backward FDI into an
industry abroad that provides inputs for a firms
domestic production processes 2. Forward FDI
into an industry that sells the outputs of a
firms domestic production processes
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What are the modes of international operations?
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1. International procurement - common among
OEMs (Original Equipment Manufacturers) - an
important activity in the case of high material
value products (i.e. value added in final
production is low) - requires close
relationships with foreign suppliers
(contractors) and setting-up of procurement
offices staffed by technical specialists
(including expatriates) - related to backward
FDI
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2. Local assembly - involves transportation of
materials to a foreign county for subsequent
assembly and sale to the local or regional market
- often a means of overcoming trade barriers -
can be assembly of CKD (complete knock down) or
SKD (semi knock down) kits with limited value
added or technology transfer - 'local content'
rules may often apply - involves horizontal FDI
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3. Offshore manufacturing - involves the
manufacture of products in a foreign country that
are not intended for the local market - often
restricted to assembly (little technology
transfer - screwdriver factories) - location
in 'free trade zones' (or export processing
zones) can overcome the problem of import
tariffs on materials - normally takes advantage
of lower labour costs but availability of
local talent or knowledge can also sometimes be
exploited - involves horizontal FDI
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4. Global operations - Perhaps the
distinguishing feature of "multinational" as
opposed to "international" companies -
operations are conducted without regard to
national boundaries - examples? IBM General
Motors Nestlé Glaxo Smith Kline - involves
horizontal and vertical FDI
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5. Technology transfer - localisation of home
country 'technology' (product/process) by sale,
licence or other type of agreement - may relate
to 'know how' rather than the products or
processes themselves - note the danger of a
buyer of technology subsequently moving into the
seller's market - may or may not involve FDI
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• 6. Internationalisation of services
• Service sector represents the majority of
  employment and GDP in developed countries (75 in
  the US) and approximately 50 in developing
  countries
• Many services have traditionally been excluded
  from trade liberalisation (especially
  accountancy and professional services etc)
• GATS (General Agreement on Trade in Services
  under WTO ) now provides a set of multilateral
  rules covering international trade in services

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• GATS defines four ways in which a service can be
  traded, known as "modes of supply"
• - Services supplied from one country to another
  (e.g. international telephone calls), officially
  known as "cross-border supply"
• - Consumers from one country making use of a
  service in another country (e.g. tourism),
  officially known as "consumption abroad" 
• - A company from one country setting up
  subsidiaries or branches to provide services in
  another country (e.g. a bank from one country
  setting up operations in another country),
  officially known as "commercial presence"
• Individuals travelling from their own country to
  supply services in another (e.g. an actress or
  construction worker), officially known as
  "movement of natural persons
• Governmental public services are not subject to
  the GATS

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Mini case 1. Dyson relocates production to
South-East Asia James Dyson, long associated
with manufacturing his innovative products in the
UK, announced in 2002 that he was to shift
production of his revolutionary vacuum cleaner to
Malaysia with the loss of over 800 jobs at his
factory in Wiltshire. He argued that the
globalisation of manufacturing industry had left
Dyson with two ways of surviving in the
cut-throat consumer market. The first is to
become a low-cost producer making a cheap product
that follows the rest of the market. The second
is to invest much more than its competitors in
technology, design and performance. He argues
that it is his determination to follow the second
approach that has led him to relocate production
to Malaysia. Dyson claims that the sums no
longer added up and the company faced going out
of business if it continued manufacturing its
product in the UK. The company argues that its
production costs will benefit from the much lower
wages in Malaysia, equivalent to 1.50 per hour
(despite its intention to pay twice the Malaysian
national average to its employees) as compared to
the then 4.10 per hour in the UK. The company
estimates that lower wages will reduce its unit
production costs by around 30 per cent, though
the added cost of transporting vacuum cleaners
back to European markets will almost wipe out any
cost savings. Nevertheless further cost savings
will come from now having most of its component
suppliers nearby.
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Mini case 2. Swedish business stakes its future
in Estonia Few acquisitions made by a West
European country in Eastern Europe have been as
bold as the 1995 purchase by Borås Wäfveri of
Sweden of Estonia's giant Krenholm textile plant.
For one thing, the sheer size of Krenholm - it
was Estonia's biggest private sector employer at
the time - dwarfed that of its purchaser. For
another, a huge investment and restructuring
programme has been needed to raise quality and
maintain price competitiveness in the face of a
fierce challenge from Asian textile companies.
Even nine years on, it is still not clear whether
it was a sensible purchase. Borås is struggling,
having made losses for the last three years. It
is renegotiating its financing with one of its
banks, having breached a key ratio at the end of
last year. Publication of its 2003 results has
been delayed. Borås wanted to buy the plant - it
cost 30m to take advantage of low Estonian
wages to retain its competitiveness. Even today,
the company estimates that a worker at Krenholm
costs just one eighth of an employee in Sweden,
once social security costs are included.
Competitiveness remains an issue. Employee costs
in Estonia may be much lower than in Sweden, but
workers in places like Pakistan and China cost
much less than Estonian ones. Ten years ago
Estonia was cheap. Today it is still cheap
compared with Sweden, the UK, or Germany. But if
you go to the Far East you find countries with
substantially lower wage costs and we have to
compete with them directly on the market.
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Dyson and Borås Wäfveri questions to consider
These two scenarios both provide examples of
West European firms that have responded to
pressure to reduce production costs by investing
in foreign operations. However, their approach
has been quite different and they also have
chosen very different countries. What are the
main differences between Dysons and Borås's mode
of entry into international operations and
ownership choice? Why do you think each company
took the decision it did and what are the
relative advantages and disadvantages of the two
choices?