Exporting and Trading info

Case: Electrolux acquisitions Electrolux, the world's largest manufacturer of electrical household appliances, once pioneered the marketing of vacuum cleaners. However, not all products bearing the Electrolux name have always been controlled by the Swedish firm. For example, Electrolux vacuum cleaners were independently sold and manufactured in the United States from the 1960s until 1987. The Swedish firm also manufactures Eureka vacuum cleaners. Electrolux pursued its early international expansion largely to gain economies of scale through additional sales. The Swedish market was too small to absorb fixed costs as much as the home markets for competitive firms from larger countries. When additional sales were not possible by exporting, Electrolux still was able to gain certain scale economies through the establishment of foreign production. Research and development expenditures and certain administrative costs thus could be spread out over the additional sales made possible b...

Summary of Foreign Direct Investment ■ Direct investment is the control of a company in one country by an organi- zation based in another country. Because control is difficult to define, arbitrary minimum ownership of the voting stock is used to define direct investment. ■ Governments are concerned about who controls enterprises within their confines for fear that decisions will be made contrary to the national interest. ? Firms often prefer to control foreign production facilities because (1) the transfer of certain assets to a noncontrolled entity might undermine their competitive position, and (2) there are economies of buying and selling with a controlled entity. ? Although a direct investment usually is acquired by transferring capital from one country to another, capital is not usually the only contribution made by the investor or the only means of gaining equity. The investing firm may supply technology, personnel, and markets in exchange for an interest in a firm loca...

Advantages after Direct Investment In order to support large-scale expenditures (such as expenditures for R&D) that are necessary to maintain a domestic competitive viability, companies frequently must sell on a global basis. To do this, they often must establish direct investments abroad. The advantage accruing to more internationally oriented firms by spreading out some of the costs of product differentiation, R&D, and advertising is apparent in a comparison of their profitability with that of other firms. Among industry groups and groups of similar size that spent comparable amounts on advertising and R&D and had similar capital intensity, the more internationally oriented firms in almost every case earned more than the other firms.38 Economies in different countries are in different stages of the business cycle at different times. Companies that operate in these different economies are known to be able to reduce fluctuations in year-to-year sales and earnings mor...

ADVANTAGES OF DIRECT INVESTORS Are companies big because they are multinational or are they multinational because they are big? Such a "chicken-and-egg" type question has hounded direct investment theorists: On one hand, there is evidence that very successful domestic firms are most likely to commit resources to direct investments; on the other hand, ownership of foreign direct investment appears to make firms more successful domestically.34 Monopoly Advantages Prior to Direct Investment One explanation for direct investment is that investors perceive a monopoly advantage over similar companies in the countries to which they go. The advantage is due to the ownership of some resource that is unavailable at the same price or terms to the local firm. The resource may be in the form of access to markets, patents, product differentiation, management skills, or the like. Because of the greater cost usually incurred by transferring resources abroad and the perceived greater ...

BUY-VERSUS-BUILD DECISION There are advantages and disadvantages to the alternatives of acquiring an interest in an existing operation or constructing new facilities. The MNE must consider the alternatives carefully. Reasons for Buying     A major motive for seeking acquisitions is the difficulty of transferring some resource to a foreign operation or acquiring that resource locally for a new facility. One particularly difficult resource is personnel, especially if the local labor market is tight. Instead of paying higher compensation rates than competitors to entice employees away from their old jobs, the buy-in approach gains not only labor and management but also a whole organizational structure through which these personnel may interact. Acquisitions also may be a means of gaining the goodwill and brand identification important for mass consumer products, especially if the cost and risk of breaking in a new brand are high. If a company must depend substantially on l...

MULTIPLE MOTIVES Although previous discussions within this chapter have categorized investments by separate motives, in reality most decisions to invest abroad, such as the Bridgestone case at the beginning of the chapter, are based on multiple motives. Another such combination of influences may be illustrated by Brazilian automobile investments. As the automobile became a mature product, there were many opportunities for saving labor costs by moving operations to a country with cheap labor, such as Brazil. One problem, however, is that economies of large-scale operations are needed to reduce the total cost of the vehicles. As long as car imports were permitted by Brazil, the U.S. and European producers could serve the Brazilian market more cheaply by exporting than by manufacturing a low volume in Brazil for that market. To move all operations to Brazil would be too costly and would so disrupt domestic operations that the imposition of some type of home-government sanctions would...

RESOURCE-SEEKING INVESTMENTS There is a cartoon showing Santa Claus speaking to his elves. The caption reads, "I'm sorry to report that after the first, I'll be moving operations to Taiwan."21 This cartoon is consistent with the popular image of direct investments motivated by cheap foreign labor used to make imported products. While this does take place, the explanation overlooks some of the costs of producing abroad. For example, Lionel Trains moved from the United States to Mexico but had so many problems with training and communications that it moved back home after a few years. Furthermore, there are cost advantages from direct investment that are not fully encompassed in the popular labor-oriented image. Vertical integration Vertical integration involves the control of different stages as a product moves from raw materials through production to its final distribution. As products and their marketing become more complicated, there is a greater need to com...

Changes in Comparative Costs A company may export successfully because its home country has a cost advantage. The home-country cost advantage depends on the price of the individual factors of production, the size of operations, transportation of finished goods, and the productivity of the combined production factors. None of these conditions affecting cost is static; consequently, the least-cost location may change over time. Recall in the opening case that a factor affecting Bridgestone's decision to locate in the United States was the fact that Japanese costs (measured in dollars) grew much faster than those in the United States, owing largely to a rise in the value of the yen relative to the dollar. The concept of shifts in comparative costs of production is closely related to that of resource-seeking investments. A firm may establish a direct investment to serve a foreign market but eventually import into the home country from the ...

Following Competitors Within oligopoly industries (those with few sellers), several investors often establish facilities in a given country within a fairly short time period. Much of this concentration may be explained by internal or external changes, which would affect most oligopolists within an industry at approximately the same time. For example, in many industries, capacity-expansion cycles are similar for most firms. Thus the firms would logically consider a foreign investment at approximately the same time because their domestic capacity would be approached at approximately the same time. Externally, they might all be faced with changes in import restrictions or market conditions that indicate a move to direct investment in order to serve consumers in a given country. In spite of the prevalence of these motivators, much of the movement by oligopolists seems better explained by defensive motives. Much of the research done in game the...

Following Customers     There are many examples of companies that sell abroad indirectly: That is,they sellpro(mcts components, or services domestically that become embodied in a product or service that their domestic customer then exports. Bridge stone, for example, sold tires to Toyota and Honda, which in turn exported fully assembled cars (including the tires) to foreign markets. In these situations the indirect exporters commonly follow their customers when those customers make direct investments. Bridgestone's decision to make automobile tires in the United States was based partially on a desire to continue selling to Honda and Toyota once those companies initiated U.S. production. Bridgestone's truck-tire investment was in turn instrumental in Yasuda Fire & Marine Insurance Co.'s decision to establish a U.S. investment in order to provide workman's compensation insurance to Bridgestone's operations in the Unit...

Consumer-Imposed Restrictions Government-imposed legal measures are not the only trade barriers to otherwise competitive goods: Consumer desires also may dictate limitations. For example, consumers may prefer buying domestically made goods, even though they are more expensive. They also may demand that merchandise be altered so substantially that scale economies from exporting are infeasible. The reasons for preferring domestically made products may include nationalism, a belief that foreign-made goods are inferior, or a fear that service and spare parts will not be easily obtainable for imported wares. Nationalism  The impact of nationalistic sentiments on investment movements is not assessed easily; however, some evidence does exist. There have been active campaigns at times in many countries to persuade people to buy locally produced goods. In the United States, for instance, attempts have been made to boycott Polish hams, Japanese Christmas ornaments, and French wines. S...

Trade Restrictions     We have shown that for various reasons there are numerous ways in which a government can make it impractical for a firm to reach its market potential through exportation alone. The firm may find that it must produce in a foreign country if it is to sell there. For example, Mexico announced that within five  years locally produced microcomputers would have to comprise 70 percent  of the market- Although many producers questioned whether the same prices and quality could be maintained as when they exported, they nevertheless were reluctant to abandon a growing market.13 Such governmental pronouncements are not unusual. They undoubtedly favor large companies that can afford to commit large amounts of resources abroad and make foreign competitiveness more difficult for the smaller firms, which can afford only exportation as a means of serving foreign markets. How prevalent are trade restrictions as an enticement for making direct inves...

MARKET-EXPANSION INVESTMENTS Transportation Early trade theorists usually ignored the cost of transporting goods from one place to another. More recently, location theorists have considered total landed cost (cost of production plus shipping) to be a more meaningful way of comparing where production should be situated. When transportation is added to production costs, some products become impractical to ship over a great distance. In the opening case, we showed that one of the factors influencing Bridgestone's decision to invest in the United States was the high cost of transporting tires relative to the production price of tires. Numerous other products that are impractical to ship great distances without a very large escalation in the price quickly come to mind: A few of these products and their investing companies include newspapers (Thompson Newspapers, Canadian), margarine (Unilever, British-Dutch), dynamite (Nobel, Swedish), and soft drinks (PepsiCo, U.S.). For these fir...

DIRECT INVESTMENT MOTIVATION The reasons that firms engage in direct investment ownership are no different from the reasons for their pursuit of international trade. They are: 1. to expand markets by selling abroad, and 2. to acquire foreign resources (e.g., raw materials, production efficiency, knowledge). When governments are involved in direct investment, an additional motive may be to attain some political advantage. These three objectives in turn may be pursued by any one of three forms of foreign involvement. One of these, the sale of services (e.g., licensing or management contracts), often is avoided either for fear of loss of control of key competitive assets or because of greater economies from self-ownership of production. The following discussion will concentrate on the remaining two forms: trade and direct investment. We will emphasize why direct investment is chosen in spite of the fact that most firms consider it riskier to operate a facility abroad than at home....

Complementarity of Trade and Direct Investment In spite of the increase in direct investments to produce goods for re-import, firms usually export substantially to their foreign facilities; thus FDI is not usually a substitute for exports.8 Many of these exports would not occur if overseas investments did not exist. In these cases, factor movements stimulate rather than substitute for trade. One reason for this phenomenon is that domestic operating units may ship materials and components to their foreign facilities for use in a finished product. For example, the Mexican government has required that automobiles sold in Mexico be assembled there. Chrysler therefore put an investment in Mexico to which parts are shipped from the United States. Yet the quantity of parts from the United States has varied as Mexico has changed requirements for local parts.9 The foreign subsidiaries or affiliates also may buy capital equipment or supplies from home-country firms because of their confidenc...

Substitution Whenever the factor proportions vary widely among countries, there are pressures for the most abundant factors to move to countries of greater scarcity so that they can command a better return. Thus in countries with an abundance of labor relative to land and capital, there is a tendency for laborers in that country to be unemployed or poorly paid; if permitted, these workers will gravitate to countries with relatively full employment and higher wages. Likewise, capital will tend to move away from countries where it is abundant to those where it is scarce. Mexico is thus a net recipient of capital from the United States, and the United States is a net recipient of labor from Mexico. If finished goods and production factors were both completely free to move internationally, then the comparative costs of transferring goods and factors would determine the location of production. A hypothetical example as shown in Fig. 6.1 should illustrate the substitutability of trade an...

THE RELATIONSHIP OF TRADE AND FACTOR MOBILITY Whether capital or some other asset is transferred abroad initially to acquire a direct investment, the asset is a type of production factor. Eventually, the direct investment usually involves the movement of various types of production factors as investors infuse capital, technology, personnel, raw materials, or components into their operating facilities abroad. Therefore, it is useful to examine the relationship of trade theory to the movement of production factors. The Trade and Factor Mobility Theory Chapter 4 explained that trade often occurs because of differences in factor endowments among countries. A country such as Canada, with abundant arable land relative to its small but educated labor force, may cultivate wheat in a highly mechanized manner. This wheat may be exchanged for handmade sweaters from Hong Kong, which require abundant semiskilled labor and little land. Historical treatises on trade assumed that the factors ...

Methods of Acquisition  Direct investment has traditionally been considered an international capital  movement that crosses borders when the anticipated return (accounting for the risk factor and the cost of transfer) is higher overseas than at home. Although most direct investments involve some type of international capital movement, an investor may transfer many other types of assets. Such organizations as Westin Hotels have transferred very little capital to foreign countries. Instead, Westin has transferred managers, hotel cost controls, and reservations capabilities in exchange for equity in foreign hotels. An example of a direct investment made completely by transferring nonfinancial resources instead of capital was the Plessey (British) acquisition of Airborne Accessories Corporation in the United States. Plessey had two assets that were vital to Airborne Accessories: technology and established sales capabilities outside the United States. Plessey offered the owners...

The Concern over Control Governmental Concern Why should anyone care whether an investment is controlled from abroad? Many critics are concerned that the national interest will not be best served if a multinational firm makes decisions from afar on the basis of its own global or national objectives. For example, General Motors (GM) owns 100 percent interest in Vauxhall Motors in the United Kingdom. The control of Vauxhall by GM in this direct investment means that GM's corporate management in the United States is concerned directly with and makes decisions about personnel staffing, export prices, and the retention versus payout of profits in Vauxhall. The British public also is concerned in this case because decisions that directly affect the British economy are being made (or at least can be made) in the United States. The British government, on the other hand, owns slightly less than 1 percent of GM. Since this is not enough for control, the British government does not expen...

THE MEANING OF FOREIGN DIRECT INVESTMENT The Concept of Control In Chapter 1 we saw that for direct investment to take place, control must follow the investment. The amount of ownership share necessary for control is not clear-cut. If stock ownership is widely dispersed, then a small percentage of the holdings may be sufficient to establish control in managerial decision making. On the other hand, even a 100 percent share does not guarantee control. If a government dictates whom a firm hires, what the firm must sell at a specified price, and how earnings will be distributed, then one could say that control has passed to the government. These are all decisions that governments frequently do impose on foreign or domestic investors operating within their confines. But it is not only governments that may jeopardize the stockholders' control. If some resource needed for the firm to operate is not regulated by the firm's owners, then those who control the resource may exert subs...