Foreign Market Entry and International Production CHAPTER 9
Introduction <ul><li>A favorite Japanese motorcycle in Vietnam is the Honda Dream </li></ul><ul><ul><li>Was unaffordable b...
Foreign Market Entry <ul><li>Many ways in which a firm in one country can interact with the world economy  </li></ul><ul><...
Table 9.1 Foreign Market Entry of a Home-Country Firm into a Foreign Market
Foreign Market Entry <ul><li>Consider Honda, the Japanese automotive and motorcycle firm and producer of the Dream motorcy...
Foreign Market Entry <ul><ul><ul><li>Produce abroad </li></ul></ul></ul><ul><ul><ul><ul><li>Lack of experience in global p...
Choosing a Method <ul><li>What prompts a firm to choose one type of foreign market category over another?  </li></ul><ul><...
Choosing a Method <ul><li>If a firm’s most important concern was </li></ul><ul><ul><li>Degree of control over the producti...
Table 9.2. Factors Influencing Choice of Foreign Market Entry Mode
Motivations for International Production <ul><li>Dunning (1993) identified four motivations for international production <...
Motivations for International Production <ul><ul><li>Strategic asset seeking </li></ul></ul><ul><ul><ul><li>Acquiring prod...
The Rise of Multinational Enterprises and International Production <ul><li>Early MNEs were part of the colonization effort...
The Rise of Multinational Enterprises and International Production <ul><li>In the 20 th  century, industrial production gr...
Rise of Multinational Enterprises and International Production  <ul><li>The 1970s had the rise of industrial output in the...
Table 9.3.  Leading Sources of World Foreign Direct Investment (percent of global, outward FDI)
Rise of Third World Multinationals <ul><li>Increasing FDI by MNEs with home bases in developing countries </li></ul><ul><l...
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Reinert/Windows on the World Economy, 2005

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Reinert/Windows on the World Economy, 2005

  1. 1. Foreign Market Entry and International Production CHAPTER 9
  2. 2. Introduction <ul><li>A favorite Japanese motorcycle in Vietnam is the Honda Dream </li></ul><ul><ul><li>Was unaffordable by many Vietnamese households </li></ul></ul><ul><ul><li>However, in late 1997, Honda began producing the Dream in Vietnam in order to serve the Vietnamese market—a form of international production </li></ul></ul><ul><li>Ways in which a firm can serve a foreign market </li></ul><ul><ul><li>Exports </li></ul></ul><ul><ul><li>Foreign direct investment (FDI) </li></ul></ul><ul><ul><ul><li>Holding at least 10 to 25% (depending on the country) of the shares in a foreign productive enterprise — implies a degree of management control </li></ul></ul></ul><ul><ul><li>Contracting a foreign firm to carry out production in that country </li></ul></ul>
  3. 3. Foreign Market Entry <ul><li>Many ways in which a firm in one country can interact with the world economy </li></ul><ul><ul><li>Trade and foreign direct investment are two of the main types of international economic activity </li></ul></ul><ul><ul><li>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 </li></ul></ul><ul><ul><ul><li>Issue of foreign market entry </li></ul></ul></ul>
  4. 4. Table 9.1 Foreign Market Entry of a Home-Country Firm into a Foreign Market
  5. 5. Foreign Market Entry <ul><li>Consider Honda, the Japanese automotive and motorcycle firm and producer of the Dream motorcycle </li></ul><ul><ul><li>Initially, suppose that Honda sells all of its motorcycle output domestically </li></ul></ul><ul><ul><li>Assume Honda eventually begins to contemplate exporting motorcycles to other countries but has little experience with and knowledge of international trade </li></ul></ul><ul><ul><li>Options for foreign market entry </li></ul></ul><ul><ul><ul><li>Indirect trade mode </li></ul></ul></ul><ul><ul><ul><ul><li>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 </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Might give Honda some expertise and confidence that inspires it to make a more firm commitment to exporting in a direct trade mode </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Undertakes the export/import transaction itself rather than relying on an export or import house </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Takes on the research, marketing, and logistics requirements of the trade transaction </li></ul></ul></ul></ul></ul>
  6. 6. Foreign Market Entry <ul><ul><ul><li>Produce abroad </li></ul></ul></ul><ul><ul><ul><ul><li>Lack of experience in global production might make it wary of carrying out production itself in Vietnam </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Would lead to contractual modes of foreign market entry </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Sell a license to a Vietnamese firm to produce motorcycles </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Franchising </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>More common in service and retail firms than in manufacturing </li></ul></ul></ul></ul></ul><ul><ul><ul><li>FDI </li></ul></ul></ul><ul><ul><ul><ul><li>Greenfield FDI </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Establish a brand-new production facility in Vietnam that it fully owns </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Acquisition FDI </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Buy all or part of the shares of an already-existing production facility in Vietnam </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Must own enough shares to have corporate control </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Otherwise the investment is classified as indirect or portfolio investment </li></ul></ul></ul></ul></ul><ul><ul><ul><li>Joint venture with a Vietnamese firm </li></ul></ul></ul>
  7. 7. Choosing a Method <ul><li>What prompts a firm to choose one type of foreign market category over another? </li></ul><ul><ul><li>Factors included in making foreign market entry decisions </li></ul></ul><ul><ul><ul><li>Degree of control </li></ul></ul></ul><ul><ul><ul><li>Level of resource commitment </li></ul></ul></ul><ul><ul><ul><li>Degree of dissemination risk </li></ul></ul></ul><ul><ul><ul><ul><li>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 </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>For example, Japanese companies quickly assimilated RCA’s color TV technology once RCA licensed it to a number of Japanese companies </li></ul></ul></ul></ul></ul>
  8. 8. Choosing a Method <ul><li>If a firm’s most important concern was </li></ul><ul><ul><li>Degree of control over the production and marketing process </li></ul></ul><ul><ul><ul><li>Lead the firm towards an investment mode of foreign market entry based on a subsidiary obtained either through greenfield or acquisition investment </li></ul></ul></ul><ul><ul><li>Limiting resource commitment to low levels </li></ul></ul><ul><ul><ul><li>Consider either trade or contractual modes of foreign market entry </li></ul></ul></ul><ul><ul><li>Low degree of dissemination risk </li></ul></ul><ul><ul><ul><li>Either trade or investment via a subsidiary would be the preferred mode of entry </li></ul></ul></ul><ul><li>In most instances, firms have more than one primary concern </li></ul>
  9. 9. Table 9.2. Factors Influencing Choice of Foreign Market Entry Mode
  10. 10. Motivations for International Production <ul><li>Dunning (1993) identified four motivations for international production </li></ul><ul><ul><li>Resource seeking </li></ul></ul><ul><ul><ul><li>Natural or human resources </li></ul></ul></ul><ul><ul><ul><ul><li>Has been a gradual shift away from this </li></ul></ul></ul></ul><ul><ul><li>Market seeking </li></ul></ul><ul><ul><ul><li>International production might be necessary to adopt and tailor products to local needs </li></ul></ul></ul><ul><ul><ul><li>International production might be required to effectively deliver a product, such as financial services </li></ul></ul></ul><ul><ul><ul><li>International production might be required for a firm supplying intermediate products to another firm opening up operations in a foreign country </li></ul></ul></ul><ul><ul><ul><li>Firms may locate where they expect demand to grow in the future </li></ul></ul></ul><ul><ul><li>Efficiency seeking </li></ul></ul><ul><ul><ul><li>Economies of scale </li></ul></ul></ul><ul><ul><ul><li>Economies of scope </li></ul></ul></ul><ul><ul><ul><li>Firm-level economies </li></ul></ul></ul><ul><ul><ul><li>Most important for large, mature MNEs with a great deal of international experience </li></ul></ul></ul>
  11. 11. Motivations for International Production <ul><ul><li>Strategic asset seeking </li></ul></ul><ul><ul><ul><li>Acquiring productive assets as part of the strategic game among competitors in an industry may involve </li></ul></ul></ul><ul><ul><ul><ul><li>Acquiring or collaborating with another to thwart a competitor from doing so </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Merging with a foreign rivals to strengthen joint capabilities </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Acquiring a group of suppliers to corner the market for a particular raw material </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Gaining access over distribution outlets to better promote its own brand of products </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Buying out a firm producing a complementary range of goods or services so it can offer its customers a more diversified range of products </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Joining forces with a local firm in the belief that it is in a better position to secure contracts from the host government </li></ul></ul></ul></ul>
  12. 12. The Rise of Multinational Enterprises and International Production <ul><li>Early MNEs were part of the colonization efforts during the 16 th and 17 th centuries </li></ul><ul><ul><li>Included state-supported trading companies such as the British East India Company, the Dutch East India Company, and the Royal African Company </li></ul></ul><ul><ul><li>Known as the age of merchant capitalism </li></ul></ul><ul><li>Industrial revolution in the 19 th century led to industrial capitalism </li></ul><ul><ul><li>British-based MNEs operating in India, China, Latin America, and South Africa </li></ul></ul><ul><ul><ul><li>Involved in mining, plantation agriculture, finance, and shipping </li></ul></ul></ul><ul><ul><li>Japan became involved in MNE activity after the Meiji Restoration </li></ul></ul><ul><ul><ul><li>Industrial groups known as zaibatsu </li></ul></ul></ul><ul><ul><ul><ul><li>Associated with trading companies known as sogo shosha </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Still exist in various forms today </li></ul></ul></ul></ul></ul>
  13. 13. The Rise of Multinational Enterprises and International Production <ul><li>In the 20 th century, industrial production grew more capital intensive </li></ul><ul><ul><li>Role of the production line and associated economies of scale grew more important </li></ul></ul><ul><li>Era of industrial capitalism gave way to managerial capitalism or Fordism </li></ul><ul><ul><li>Center of innovative economic activity moved from Europe to the United States </li></ul></ul><ul><ul><li>Firm size increased </li></ul></ul><ul><ul><li>Business success became based on the ability to coordinate growing sets of complementary activities </li></ul></ul><ul><li>Depression that began in 1929 and the Second World War hurt most forms of international economic activity </li></ul><ul><li>Post-war recovery further strengthened the role of US-based MNEs </li></ul><ul><ul><li>Technological advantage of US-based MNEs during the early post-war period was the point of reference of the product life cycle theory </li></ul></ul><ul><ul><ul><li>Production is confined to the home base MNE during the early phases of product life cycle </li></ul></ul></ul><ul><ul><ul><li>During later phases production can move to subsidiaries in foreign countries in order to take advantage of lower labor costs </li></ul></ul></ul>
  14. 14. Rise of Multinational Enterprises and International Production <ul><li>The 1970s had the rise of industrial output in the newly industrializing countries (NICs) of East Asia </li></ul><ul><ul><li>Especially Japan, Taiwan, and South Korea </li></ul></ul><ul><ul><li>Many see this as new economic era known as post-Fordism or, Toyotism </li></ul></ul><ul><ul><ul><li>Economies of scale have been replaced by flexibility as the progressive element in manufacturing </li></ul></ul></ul><ul><ul><ul><ul><li>Use of information technologies in machines and operations </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Allow for more sophisticated control over the production process </li></ul></ul></ul></ul></ul><ul><li>Rise of industrial output was followed by a rise in FDI on the part of East-Asian based MNEs </li></ul><ul><ul><li>Especially those based in Japan </li></ul></ul><ul><ul><ul><li>In 1960 Japan accounted for less than one percent of global FDI </li></ul></ul></ul><ul><ul><ul><li>By 1975 Japan accounted for nearly six percent </li></ul></ul></ul><ul><ul><ul><li>By 1995, Japan accounted for eleven percent of global outward FDI </li></ul></ul></ul>
  15. 15. Table 9.3. Leading Sources of World Foreign Direct Investment (percent of global, outward FDI)
  16. 16. Rise of Third World Multinationals <ul><li>Increasing FDI by MNEs with home bases in developing countries </li></ul><ul><li>Began in the mid-1980s </li></ul><ul><ul><li>Developing countries began, at that time, to relax restrictions on FDI capital outflows </li></ul></ul>

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