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Chapter II: Literature Review
2.1 International Business
When MNEs is thinking to serve foreign markets, different entry modes, such as franchising, export and Foreign Direct Investment (FDI) can be considered (Buckley and Casson, 1998). As Meijboom and Vos (1997) elaborated in their paper, companies should consider many “why”, “where” and “how” factors while making decisions for international expansion.
Take FDI activity for example, the firm must first did a lot researches beforehand about the business climate while making location decisions (where). The firm then decided to build its own facilities in host countries based on specific reasons (Why). At the same time, the firm should consider why choosing FDI instead of exporting or franchising (How)? These three questions correlate tightly with each other and cannot be thinking apart while making international manufacturing strategies (Meijboom and Vos, 1997).
As Dunning (1993) claimed in his Eclectic Paradigm of International Production, firms will engage in international activities on the basis of ownership-specific, location-specific advantages and internalization-incentive. Ownership-location-specific advantage can refer to intangible assets that give companies competitive advantages to make companies decide to stay or move. This advantage can be related to “Why” question in Meijboom and Vos’s theory (1997). Location advantage can be related to attractive inputs in terms of price or productivity (Where); while internalization incentive can be related to extending of value-added activities, such as know-how and managerial style (How). Dunning stated that these three dimensions should interrelate with each other when discussing new locations. The final decision on where a firm should locate its production will depend on the character of its ownership advantages and the extent to which one location helps to internalize its origin advantages better than another.
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2.2 Determinants of location strategy
As Enright (2009) mentioned, when features such as activities, nations and firms interacted with each other and jointly provide sources of advantage for MNEs, it would influence the making of location strategies for FDI activity and other foreign market entry strategies in different corporate activities.
Corporate activities, including sales, customer services, production, international corporate support, and R&D, are not only different from each other in functional sides, but also different in terms of position, scale sensitivity, knowledge and integration modes (as summarized in table 1).
Features that provided by host countries also related to FDI activities in three aspects:
demand, supply and institutional side. As summarized in table 2, each feature has its own connection with corporate activities: positive related, negative related or no relationship.
Table 2 Features that influence different corporate activities
Note: + : positive related; - : negative related; x : no related.
Source: Enright 2009
Demand-side features include market size, market growth and affluence. Market size has significant positive relationship with all kinds of corporate activities; while market growth has positive relationship with sales, customer services and product but no relationship with internal support and R&D department. Corporate support or R&D activities usually lag market development, market growth does not have obvious influence to them. Affluence
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usually has negative relationship with production activities since the higher level of development, the bigger possibility that wage rates would be higher.
Supply-side feature focus on local infrastructure and capabilities. Since qualified infrastructure should facilitate the conduction of business, infrastructure has positive relationship with all corporate activities. Local capabilities should be attractive to inward investment activities as well; such as technological capabilities would be a big incentive for knowledge-seeking activities.
Institutional features also influence FDI activities in host countries, including economic openness and tax rates. Openness of an economy usually is positively related with all investment activities except production. If a company decided to expand into a close economy, it should build its own production line inside the country. In other words, if a country has greater openness, it would have negative relationship with production activities since it is not necessary for company to invest in production in this country.
2.3 Performance Evaluation
After new location strategies have been adopted, companies should their own way to measure performances and make changes in timely manner. Performance is the proof if the firm reached its expected outcome or not (Kaufamn 1988).
Performance can be accessed in different perspective. Generally speaking, the evaluation of performances can be divided into two categories: subjective and objective (Bandura 1997). Subjective evaluation includes non-financial elements like quality of products or R&D capability, while objective evaluation includes financial assessment like R.O.I or cash flow. According to National Association of Accounting (NAA) (1986), the adoption of measuring methods, the most important, should be verified depending on environmental differences. NAA suggested companies should classify themselves into four different time periods while measuring performances: introduction, growth, maturity and decline. MNEs should have different way of measuring for different stages. During introduction period, the measuring of performance should depend on non-financial elements.
How to win market share by limited resources is more important than how much the cash flow is. During growth and maturity period, company should pay attention to long-term
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financial index, including R.O.I. and asset management efficiency. In this case, the firm can make sure income and spending are even and investors have coincidence to the company.
Then at the decline stage, cash flow is the most crucial element to the survival of the company.