Awareness of Profitable Investments
Selecting a Mode of Entry
Auditing the Effectiveness of Entry Mode
Using Appropriate Evaluation Criteria
Estimating the longevity of a competitive
Q: What's the big trend in Asia?
A: Thirty-five years ago, companies thought of Asia as a
place to sell things manufactured in Europe. The next
phase was when manufacturing moved from Europe to
Asia. The phase [after that], in the last five years, was the
transfer of competencies from Europe and the U.S. into
Asia. That happened to Taiwan, Japan, Korea, and
Singapore. The shift now is that Philips is moving into
China with competencies, product-creation processes,
and development of new technologies.
Q: How important is China to Philips?
A: China will be the leading part of our Asia
strategy. That's why we moved from Singapore to
Hong Kong -- to be close to the driving force of
the electronics industry, which will be Northeast
Asia. And we believe that Greater China will be
the leader over time. The origins of initiatives in
the electronics sector will largely come out of
Q: What sort of R&D work is Philips doing in China?
A: The continuous discussion is what kind of technology we
want to develop. If you look at TV, the transfer has been
from Europe, 10 years back, to Singapore. Now Singapore
is transferring TV development to Suzhou [near Shanghai].
Basic research is in the Shanghai area. The global audio
division headquarters, which was in Hong Kong, is
moving to Shenzhen [across the border from Hong Kong].
The LCD division for cell phones was headquartered in
Hong Kong and has moved to Shanghai. We have no
choice, we must move [there] more and more.
• Q: Why?
• A: There's a tremendous pool of welltrained people in China, and that's where
the market is available.
Q: Philips has had its share of difficulties in China,
especially when it comes to getting Chinese
manufacturers of DVD players to pay royalties to
Philips and other companies that control the
intellectual-property rights. Are things getting better?
A: Philips had a lot of problems with the Chinese government
over royalties. But those differences have been resolved.
From a historic perspective on intellectual property [IP],
they didn't understand the need to respect IP and pay for IP.
With [Beijing's entry into] the WTO, this has been solved.
The [agreement with the government over DVD royalties]
has been the first real breakthrough showing that there's
an understanding of IP in China.
Q: How do you see other Asian countries
competing against China?
A: Taiwan is trying to achieve a fast change into a
knowledge economy, which is the only way they
can go. That's the same thing that Singapore is
doing, that Japan is doing, that Korea will be
doing. But the fact of life is that China is doing the
same thing as well.
Q: In that case, what's the Philips division of labor for
A: Our biggest [Asian center] is in Singapore. We have a
major operation in Bangalore, [India,] which is a major
part of Philips' software development. We have a big unit
in Taiwan for semiconductors and components. And
there's a new one in Shanghai, which started three or four
years ago, doing basic research. Shanghai also is for
product research: consumer electronics, a little bit of
Q: What's the impact on your R&D operations
A: We are refocusing our number of development spots in the
world, and Asia is the growing part of those activities. We
used to have, in Europe, God knows how many places.
Those days are over. We are centralizing development
activities into competence centers: Bangalore for
software, Singapore for consumer electronics, Taiwan for
semiconductors and components -- and Shanghai for all of
High transportation costs
Avoiding substantial set-up
costs in a host country
Problems with local
Achieving experience curve
and location economies
Inability to realize full sales
potential of the product
A project in which a firm agrees to set up
an operating plant for foreign client and
hand over the “key” when the plant is fully
Ability to earn returns from
process technology skills in
countries where FDI is
Selling the technology =
selling competitive advantage
Less risky than conventional
Lack of long-term market
Agreements where licensor grants the rights
to intangible property to another entity for
a specific period, and in return, the
licensor receives royalty fee from licensee.
Reduces development costs and
risks of establishing foreign
Lack capital for venture
Unfamiliar or politically volatile
Lack of control
Inability to involve into
global strategic coordination
Cross-border licensing may
Overcomes restrictive investment
Others can develop business
Creating a competitor
applications of intangible property
A specialized for of licensing in which the
franchiser not only sells intangible
property to the franchisee (normally a
trademark), but also insists that franchisee
agrees to abide by strict rules as to how it
does the business.
Reduces costs and risk of
Ability to build global
May prohibit movement
of profits from one
country to support
operations in another
A joint venture entails establishing a firm
that is jointly owned by two or more
otherwise independent firms
Access to local partners
Risk giving control of
technology to partner
Sharing development costs
Absence of tight control
Shared ownership can
lead to conflict
WHOLLY OWNED SUBSIDIARY
Protection of technology
High costs and risks
Ability to engage into global
Ability to realize location and
SELECTING AN ENTRY MODE
Wholly owned subsidiary, except:
1. Venture is structured to reduce risk of loss of technology
2. Technology advantage is transitory
Then licensing or joint venture OK
Franchising, subsidiaries (wholly owned or joint venture)
Pressure for Cost Reduction:
Combination of exporting and wholly owned subsidiary
Theories of the Multinational
Theory of Industrial Organization
Financial Market Imperfections
Strategic Behavior Theory (F.T. Knickerboker)
The Product Life Cycle Theory (R. Vernon)
Location-Specific Advantages Theory (J.Dunning)
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