Foreign Market Entry in the Light of OLI Framework - Example

Foreign Market Entry in the light of OLI framework Table of Contents Introduction 3 of OLI framework 3 Overseas operations of Ford 4 Ownership 4 Location 4 Internalization 5 Overseas operations in other countries 5 Conclusion 6 References 8 Introduction Owing to the rapid growth of globalization and technological advancement, barrier to foreign market entry has greatly reduced thereby allowing firms to make global expansion. Moreover, in the recent years several developing countries have eased off their Foreign Direct Investment (FDI) regulations to attract multinational companies (MNCs) to their nations. The utility of foreign market entry has always been a debatable topic (Moran, 2005). However, firms get involved into foreign market entry mostly because they want to expand their business and cater to a larger number of customers, thereby increasing their revenue generation exponentially. The FDI activities not only help a firm to increase its sales, but in certain cases it also helps it to reduce its operational cost. Ford operates in six continents and runs its manufacturing plants in several countries like the US, UK, Mexico, Germany, Brazil, etc (Ford, 2015). The company holds the leading position in the global automobile industry. This is mostly accounted for the company’s global expansion and overseas business activities (Le, 2015). This paper is focused on the foreign market entry of Ford in light of OLI framework. Description of OLI framework Dunning (1977) introduced the OLI framework, also known as the “Eclectic” framework. He used the OLI framework to rationally describe the determinants of FDI and how they influence the FDI activities of a firm. The concept of FDI covers a wider spectrum of overseas activities, from Direct Investment to Foreign market entry. Although the OLI framework does not provide any quantitative formalization of the theory but it helps to categorize different FDI determinants and to analyze several empirical data. The OLI framework is based on three factors that prove to be advantageous for the firm entering into new host country. These factors are Ownership, Location and Internalization. The ownership advantage highlights the firm’s cost utility derived from the foreign market entry (Sun, Tong and Yu, 2002). This advantage is precise to the company’s business activities. The location advantage focuses on the choice of host country where the company has decided to expand its operations. Certain countries offer specific national comparative advantage that can be lucrative for the business activities of the firm. Thirdly, the Internalization focuses on the operational activities in the host country. It influences the decision of the company on the grounds of added advantage of FDI activities over export activities. Thus these three factors act as the primary determinant that a firm takes into consideration before taking the decision of foreign market entry (Alfaro, 2003). Overseas operations of Ford Ownership Ford is the world’s leading automotive company which operates in more than 100 countries. The FDI activity of Ford is prevalent in several countries but is mostly dominant in China. It has invested extensively in China so that it can expand its business operations (Ford, 2015). The FDI operations of Ford in China can be described in the light of OLI frame work. The company has chosen China for its business operations because of certain comparative advantages of the country. The products manufactured by Ford are mostly targeted at a wide customer segment belonging to several income groups. Therefore in order to increase its sales volume, the company needed to cater to a bigger customer base. This has been achieved by expanding its presence in overseas locations. Moreover, in order to compensate for the growing demand of the automobiles, the company needed to improve its production capacity. Therefore the company increased the number of its vehicle manufacturing plants by establishing new plants in new geographic locations. This as a result provided a homogenous distribution of production plants, thereby facilitating an environmentally sustainable production process. Increasing the production volume also requires an increased number of workers and employees. Expanding into a new host country also allows the company to gain access to new labour market. Ford leverages the availability of skilled labour in the global business market and efficiently increases its production capacity and runs its operational activities in a wider perspective (Pietrzykowski, 2005). Location The location advantage justifies the decision of the company for choosing its host countries. Ford has chosen its host countries based on several factors that complements and supports the business activities of the company. Before entering into a new foreign market, the company needs to thoroughly analyze the market environment of the company, which includes the economic structure, political scenario, technological availability, level of competition in the industry etc. The most of the dominant overseas activities of Ford are commenced in China. The economic condition of China is quite stable and is growing at a steady rate. The per capita GDP growth of China has increased drastically from $314 in 1990 to $6,807 in 2013 (The World Bank, 2014). This rapid growth suggests that the Chinese population has sufficient affordability to purchase Ford vehicles. The GDP growth also suggests that China’s economic condition is quite robust to support the manufacturing operations of the company. The level of innovation within a nation signifies its compatibility to technological advancement in context of global market place. China has shown a rapid growth in the technological field, which has attracted a lot of multinational firms such as Ford. The availability of latest technology has enabled Ford to increase the efficiency of its production process and to improve the product quality (Huang, 2003). China is known for its low cost labour market. Since, labour cost acts as a primary determinant of overseas expansion; China has attracted a lot of companies which outsources their manufacturing operations in the country. This also justifies Fords decision to Choose China for its overseas operations. The low labour cost allows Ford to manufacture its vehicles at a lower cost, thereby giving it a cost leadership position, decreasing its operating cost and increasing its profitability. Therefore, the low priced labour availability and the technological availability of China has allowed Ford to expand its business exponentially. This as a result has enabled Ford to build several manufacturing plants in China (Huang, 2003). Ford has decided to open a $760 million manufacturing plant in the country which will allow the firm to produce 250,000 more vehicles per years (Terlep and Ramsey, 2012). Internalization The internalization advantage of Ford can be explained by the fact that Ford has shifted all of its manufacturing operational activities in China. The concept of internalization suggests that a firm yields more advantage in internalizing the business processes rather than by going into any business partnership or joint venture (Pietrzykowski, 2005). This is mostly adopted when the cost of internalization is less than the cost of running a business in partnership. Kawasaki can be cited as an example in this regard. The company has successfully formed business collaboration with Bajaj and entered into the Indian market (Business Standard, 2004). However, Ford has decided to run its overseas business on its own without any business collaboration. This suggests that the cost of running a solo business yields more profit for Ford than by business operations. Moreover, internalization allows parent company to have a full control over its operations and it can freely take business related decisions. It also reduces the exit barrier, as business contracts with another company is mostly time bound and parent firm cannot get out of the contract at any desired point of time even if it is making losses. Overseas operations in other countries The overseas growth of Ford suggests that the company successfully chosen its host countries based on their comparative advantages. The company ensures that the location of its production sites are strategically positioned so that it gains efficiency in logistics and reduces operating costs. In order to ensure sustainable business operations, the company maintains its business activities in line with the development of the host countries. In the developing countries, the company makes sure that its business is helping to improve the socio economical structure of the country. This is mostly achieved by giving employment opportunities in the host countries thereby improving the social structure. The economy of the host countries are also improved as the companies pay substantial amount of taxes to the government of the host country. Ford has strategically designed its vehicles and maintained its standardization in such a way so that the internal parts manufactured in one country is compatible with the vehicles produced in another country. The Ford engines that are produced in Brazil are identical with the ones manufactured in Ohio. Therefore Ford’s overseas expansion has allowed it to increase its production efficiency at the same time maintaining its quality standards. In order to streamline its production operations, Ford has broken down its production process and distributed it to several host countries. For example, the company has allocated its South African production facility to manufacture engines only. This as a result has not only increased the production volume of the company but has also enabled the company to customize a particular plant to manufacture certain equipments only thereby increasing its efficiency (Huang, 2003). Russia has also been an attractive location for Ford. The availability of natural resources in Russia has made it an attractive location for foreign expansion, for multinational companies like Ford. Apart from the availability of natural resources, Ford also leverages the entry into the Russian market by catering to the existing automotive market. Moreover, the highly qualified low cost labours of Russia help Ford to produce vehicles in a more efficient manner (Pietrzykowski, 2005). However, creating a new market for Ford in Russia has not been as lucrative as that of in China. This can be justified by the fact that the Russian economy is characterized by slow growth and low affordability of the Russian population than the Chinese population. This can be discussed in the light of OLI framework. The location advantage of Russia is lower than that of China due to slow economic growth. However, the availability of high quality labour in Russia acts as a national competitive advantage for the country that has attracted companies like Ford. The location advantage is leveraged differently by different firms. General Motors, which is one of the rivals of Ford, has focused its FDI activities only on increasing its operational efficiency. On the other hand, Ford has focused on both penetrating into new markets as well as increases its production efficiency and reduces its operational costs. The entry into the Russian territory by Ford was first announced in 1997 (Pietrzykowski, 2005). The first manufacturing plant was established in Saint Petersburg, which was wholly owned by Ford. This as a result allowed the company to have a complete control over its operation in Russia (Pietrzykowski, 2005). This can be justified by the Internalization advantage described in the OLI framework. As opposed to the poorly managed state owned companies, the self own firm in Saint Petersburg allowed the company to make necessary amendments in the operational process that has increased the efficiency of the firm. Complete control over the management of the business activities in Russia allowed Ford to strategically locate its production plant that provided an added advantage to the company on the ground of efficient logistics. The FDI activities of Ford in Russia are mostly horizontal in nature as its focus is on the growing domestic market. Conclusion Entering into foreign market or involving in overseas business actives like FDI needs a thorough analysis of the key advantage factors of the proposed host country. These advantage factors mostly act as the determinants of FDI activities for a firm. The OLI framework highlights these advantage factors that can be used by firms to assess their decision of entering into particular foreign market. It indentifies the necessity and utility of moving a business across border and it also justifies the reason behind choosing a particular host country. The OLI framework highlights the comparative advantage of a geographic location, which is complementary to the business activities of a firm. Ford has expanded itself in a global perspective and its global expansion can be easily explained by the OLI framework. The major FDI activities of Ford is centred in China, which owing to its cheap labour market, high technological advancement and rapid economic growth has helped the company to expand its business and attain cost leadership position. The companies FDI activities in China are mostly focused on attaining operational efficiency and developing a new market. Therefore it can be stated that the foreign market entry by Ford has been successful owing to strategic choosing of FDI activities. References Alfaro, L. (2003). Foreign Direct Investment and Growth: Does the Sector Matter, Harvard Business School. April. Business Standard. (2004) Bajaj Auto rides high on Kawasaki deal. Retrieved from http://www.business-standard.com/article/markets/bajaj-auto-rides-high-on-kawasaki-deal-104122301075_1.html Dunning, J H. (1977). Trade, Location of Economic Activity and the MNE: A Search for an Eclectic Approach. London: Macmillan. Ford. (2015). Global Links. Retrieved from https://corporate.ford.com/global-links.html#s0f0 Huang, Y. (2003). Selling China: Foreign direct investment during the reform era. New Jersey: Penguin Group Le, V. (2015). Global 2000: The Worlds Largest Auto Companies Of 2014. Retrieved from http://www.forbes.com/sites/vannale/2014/05/07/global-2000-the-worlds-largest-auto-companies-of-2014/ Moran, T.H., (2005). How does FDI affect Host Country Development. Retrieved from http://www.petersoninstitute.org/publications/chapters_preview/3810/11iie3810.pdf Pietrzykowski, C. (2005). Ford and General Motors in Russia. Retrieved from http://www.ewp.rpi.edu/hartford/~stoddj/BE/FordGMRuss2.htm Sun, Q., Tong, W., and Yu, Q. (2002). Determinants of foreign direct investment across China. Journal of international money and finance, 21(1), 79-113. Terlep, S., and Ramsey, M. (2012). Ford Bets $5 Billion on Made in China. Retrieved from http://www.wsj.com/articles/SB10001424052702303425504577353031028357826 The World Bank. (2014). GDP per capita. Retrieved from http://data.worldbank.org/indicator/NY.GDP.PCAP.CD Read More