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Foreign Market Entry and International Production. CHAPTER 9. Introduction. A favorite Japanese motorcycle in Vietnam is the Honda Dream Was unaffordable by many Vietnamese households

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Foreign Market Entry and International Production

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  • 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
foreign market entry
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
foreign market entry5
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
foreign market entry6
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
choosing a method
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
choosing a method8
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
motivations for international production
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
motivations for international production11
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
the rise of multinational enterprises and international production
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
the rise of multinational enterprises and international production13
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
rise of multinational enterprises and international production
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
table 9 3 leading sources of world foreign direct investment percent of global outward fdi
Table 9.3. Leading Sources of World Foreign Direct Investment (percent of global, outward FDI)
rise of third world multinationals
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