Factors Affecting Foreign Direct Investment - Case Study Example

International Business Name Tutor Unit Code Introduction In the past two decades, the global economy has experienced major transformations. In particular, the nature of competition has changed driven by key developments in technology and globalisation. Globalisation has integrated the global economy and opened up the previously protected regions, following the massive liberalisation in the late 1990s and onwards. Companies have had to respond to these changes, mainly be venturing into new regions to gain competitive advantage, cut down costs or boost demand for their produce. Within this time the number of multinational companies has increased exponentially (Ichijo, 2005). The automotive industry has undergone major transformations all through this time. In the 1990s the global motor industry was dominated by seven players who controlled around 80 per cent of the global vehicle production. However, in the midst of the globalisation process and internationalisation, the same 80 per cent is today controlled by around 11 players. The automotive industry has, therefore, expanded and the number of players have increased as well. This paper examines the internalisation process of Toyota Motor Company, the largest vehicle producer in Asia and second globally. Specific focus will be on the mode of entry of TMC in Russia. The country has shown a steady rise in global vehicle production and sales (Gounet, 1998). Toyota Motor Company Toyota Motor Company (TMC) was started by a Japanese businessman called Kiichiro Toyoda. Kiichiro was inspired by his father’s, Sakichi Toyoda, work in automobiles. Sakichi manufactured the first model under Toyota, the G1 in 1935. Sakichi supported Kiichiro to establish the TMC, as a separate entity. TMC started its first manufacturing operations on 28 November, 1937. Following the success of its operations at home, TMC set its eyes on the global market. In 1957, TMC started to export the Crown to the United States of America. In 1959, TMC built its first plant outside Japan in Sao Paulo, Brazil that handled both production and design operations. The first Toyota model to be produced in Brazil was the Land Cruiser FJ-251. The TMC set up another company, the Toyota Motor Sales (TMS) to handle export activities. TMC has another subsidiary, the Toyota Financial Services, which handles financial services. In 1963, TMC entered Denmark through a distributor agreement, as a gateway to the broad European market, including Russia. In 1985, TMC branched into Canada through its subsidiary Toyota Motor Canada (Toyota-Global, 2015). Today, TMC is a leading global multinational corporations with operations on every continent of the earth, in North America, Africa, Latin America, Europe, Asia, the Caribbean and Oceania. Through its internationalisation strategy, TMC now has car assembly and manufacturing plants in 170 countries for the local markets. According to the Fortune Global 500 (2014), TMC is 8th largest company all over the world by sales. In the automotive industry, TMC is the second largest company after General Motors. In 2014, TMC reported total sales revenue of $256.45 billion. Even though the sales revenue went down by 3.5 per cent, the net profits surged by 57 per cent to $18.2 billion from $11.6 billion in 2013. In 2013 TMC sold 10.1 million units counter to 9.7 million units sold in 2012. In December 2013, TMC hit another, 4th, milestone in its 78 years history by cumulatively producing over 150 million vehicles in Japan. At present, TMC employs about 330,000 people all over the world (Toyota-Global, 2015). Toyota produces and sales a very much diversified range of vehicles in its global markets including cars, SUVs, vans, trucks, and hybrids. TMC aims to meet varying customer preferences in different market segments in order to guarantee customer satisfaction. Its Lexus brand has been the most successful brand for the company. The brand (Lexus international) is managed as one of the four TMC’s business units. The other three business units are Toyota Number 1, Toyota Number 2, and Unit Centres. The four units were set up in 2013 to improve management efficiency and facilitate speedy decision-making process so as to sufficiently address today’s individual customer needs. Toyota vehicles are considered to be of high quality and come at a cheaper price. TMC also sells used vehicles at a discount but with guaranteed high quality and the same warranty benefits as its new vehicles (Toyota-Global, 2015). The company’s overall mission is to “Achieve Sustainable Growth and to Bring Smiles”. Through its global vision, Toyota aspires to make even better vehicles “based on mutual values and the spirit of monozukuri (careful manufacturing)”. The company also seeks to observe environmental guidelines and boost sustainability of its business through improvements in hybrid technology and manufacture of eco-cars (Toyota-Global, 2015). Internationalisation Process and TMC Entry Mode in Russia Internationalisation is a gradual and multi-faceted process that calls for articulate consideration. Despite of plenty of works during the process of internationalization, choosing a suitable entry mode with an appropriate company structure to transfer resources, is one of the most crucial tasks that a firm must fulfil. Therefore, being such an important tasks in the internationalization process, entry mode already studied by the experts and economists for a long time. The correct entry mode gives a company better development prospects as well as the required experience and confidence (Cufari & D’Orio, 2004). Firms can use different modes to entre target markets, such as exporting, licensing, franchising, joint ventures, or wholly owned subsidiary. According to Hollensen (2001), entry modes can be broadly grouped into three categories: Table 1: Entry Mode Categories Hierarchical modes (Internal) Intermediate modes Export modes (External) Domestic-based sales representatives Regional centres Acquisitions Contract manufacturing Licensing Franchising Joint venture (JV) Indirect exporting Direct exporting Export marketing groups Greenfield investment Brownfield investment Source: Hollensen (2001). Then again each entry mode has its benefits and limitations, that’s why managers are supposed to think judiciously before settling on the mode to use. Root (1998) claims that choosing an entry mode is a very vital strategic decision for the internationalisation process. Upon embarking on international operations, a multi-national corporation is disposed to step by step modify its entry mode choices in a rather predictable way. That is, as the company seizes control of a market, it changes from a low risk entry mode to a high risk entry mode. The Uppsala model depicts the manner in which a company’s entry mode decision evolves. The model captures two aspects, each with two parts. The first aspect is called the state aspect. It has two parts: market knowledge and market commitment. The other aspect is the change aspect. It also has two parts: commitment decisions and current activities. The four parts of the Uppsala model are closely associated. Market knowledge and market commitment are made-up to sway the commitment decisions and current activities, which in-turn also affect the market knowledge and commitment (Ojala, 2008). Essentially, the Uppsala model is assumes that the biggest challenge a company faces in internationalisation is the lack of appropriate facts regarding a foreign market. And so, the current activities and commitment decision offer key suitable means for the company to get hold of the required market knowledge. In some way, the market knowledge a company gains from the current activities and commitment decision, set the proper bearing for the market commitment. This guides the company to higher level to acquire much more fresh knowledge. This gives a clear connection between market knowledge and market commitment. Emes (2003), states that healthier market knowledge is more prised are and is an important resource through which to reinforce the commitment to the market. The Uppsala model manifests a circular action by which a local firm grows step by step to rise its international participation, and lastly come to be a multi-national corporation. The entry mode in influenced by a number of factors. Kumar and Subramaniam (1997) identifies more than 100 factors the influence the choice of the entry mode. The main factors include firm size, proficiency and know-how, economic status, required technology, market size, cultural distance, top-management and leadership, nature of business, environmental uncertainty, time, as well as tariff barriers. Root (1998) indicates that several factors influence a particular entry mode in a specific market. Root argues that no single factor can apply for all entry modes. For example, a small market size favours particular entry modes such as licensing, exporting, and contractual agreements. On the other side, a big market size favours entry modes such as wholly owned subsidiaries, and joint ventures (Dunning, 1998). The factors can generally be divided into external factors, internal factors, transition specific factors, and desired mode characteristics. Figure 1 shows how the factors influence the choice of entry mode: Figure 1: Factors Affecting Choice of Entry Mode Product Complexity Internal Factors External Factors Desired Mode Characteristics Transition Specific Factors Product Complexity + Internal Factors + Country Risk - Risk Averse - Tacit Nature of Know-How + Product Differentiation Advantage + International Experience + Market Size and Growth + Control + Transition Frequency Opportunistic Behaviour Transition Costs Direct and Indirect Trade Barriers + Flexibility - Asset Specificity Intensity of Competition -/+ Uncertainty Few Relevant Export Intermediaries Available + Social-Cultural Differences between Home and Host Country - + Entry Mode +(Increasing Internationalisation), -(Decreasing Internationalisation) Hierarchical Mode, Intermediate Mode Export Mode Source: Hollensen (2001) TMC’s entry into the European market was through Denmark where it first established relations with a distributor in 1963. Denmark was considered to be a vital entry point because it provided easy access to other European markets such as Netherlands, Finland, Belgium Switzerland, France, Italy, United Kingdom, among others. The company had to compete with established European car manufacturers from France, Italy, and Germany. The company’s strategy was based on forming partnerships with distributors. The strategy worked and TMC ended up opening production facilities in several European countries (Emes, 2003). However, there was need to spread to Eastern Europe, mainly Russia. TMC’s presence in Eastern Europe started in the 1990s when TMC established service centres in the then Soviet Union in 1990. TMC was among the first automotive companies to enter the Soviet market. It was the fourth automotive assembly company in Russia as Ford, General Motors and Renault had previously been selling cars in Russia. In 1998, TMC contracted a direct-sales representative in Moscow mainly to assess the market situation and stimulate sales increase. Partnerships were created with trading companies and a network of dealers in the elementary regions of Russia (Meyer, 2001). Following the dynamic developments in the automobile market, TMC was granted the opportunity to create a national company in Russia. The company would be responsible for marketing and sales of TMC vehicles. In 2005 TMC commenced the construction of an assembly and manufacturing plant in Shushary district, St. Petersburg. The plant is a strategic base of TMC and plays an important role in enhancing vehicle sales and sales of auto parts for both Toyota and Lexus models. Also, as part of the New Global Business Plan, TMC opened the Toyota Motor Manufacturing plant in Russia (TMMR) in 2007. The plant was mainly purposed to produce Toyota Camry, a mainstream seller in Russia, and afford a more or less full-scale vehicle production, together with the production of standardised spare parts, welding, sand pressing and painting of steel body. Since then TMMR has started to produce other Toyota models including Corolla, Aventis, Coaster, Land Cruiser Prado & 100, RAV4, and Hiace. Lexus was introduced to compete with BMW, Mercedes-Benz, and Audi. The brand has so far competed successfully with constantly growing demand for Lexus ATVs and SUVs. The plant situated on an approximately 220 hectares of land produces around 50,000 units and is expected to increase to about 200,000 units a year. The units are majorly sold in Russia. The total outlay took $1 billion from TMC, local authorities, and main suppliers (Emes, 2003). TMC has continued to gain more ground in Russia, and has about 27 official dealers across Russia today. All the dealers sell vehicles, spare parts and provide services in line with TMC’S standards and guidelines as outlined in the Toyota Way 2001 blueprint. One key guideline renowned with TMC is the kaizen principle that means continuous improvement. TMC involves its entire staff to make work easier and more enjoyable. Under the principle of genchi genbutsu, TMC drives the desire to appreciate and respect views of on-site individuals and people with wide applicable knowledge (Liker, 2003). Through the Toyota Production System (TPS) principle, TMC supports total elimination on anomalies, waste, overstretching from the production process. Also for TMC to continue offering high quality and competitive products, the company nurtures a corporate culture based on utmost value on productivity, quality and cost effectiveness. The dealers are also required to conform to the concept of three S lays: S – Showroom: own motor show; S - Service Shop: manifestation of up-to-date service station; S - Spare Parts Shop: existence of a spare parts warehouse (Toyota-Global, 2015). Reflection One of the key reasons as to why I took a course unit in International Business is to understand the process by which small local firms transform into big multi-national conglomerates. This process, internationalisation, is gradual and requires sufficient market knowledge, market commitment, commitment decisions, and current activities as depicted by the Uppsala Model. The process has much to do with the globalisation process and technological advancements that have dominated the global arena in the past three decades. Globalisation and technological advancements have opened up previously closed economies and paved way for the entry of foreign firms. Therefore, the level of local competition has gone up and companies have had to leverage themselves by venturing into other markets to grow their competitive advantage, increase market share and sales revenue. In the current world where the world (Rodrıguez, 2002). I learnt that in the present day, entry of firms in foreign countries is not an easy exercise. It calls for a detailed external and internal environment analysis including core competences and capabilities. Many researchers have studied different modes through which firms can enter a foreign country. The models are classified into hierarchical modes, export modes and intermediate modes. The entry modes vary because they are influenced by a number of factors. According to Kumar and Subramaniam (1997), the main factors include firm size, proficiency and know-how, economic status, required technology, market size, cultural distance, top-management and leadership, nature of business, environmental uncertainty, time, as well as tariff barriers. Root (1998) indicates that several factors influence a particular entry mode in a specific market. However, no single factor can apply for all entry modes. In general, the factors can be divided into external factors, internal factors, transition specific factors, and desired mode characteristics. I also understood the internationalisation process of Toyota Motor Company and entry into the Russian market. The process has been gradual since 1990 when the company established a service centre, a low risk entry mode. As the company gained more market knowledge and experience in Russia, it established a manufacturing plant in 2001 in St. Petersburg, which is a more risky entry mode. In 2007 TMC established the Toyota Motor Manufacturing plant in Russia (TMMR) to officially start the production of motor vehicles for the local market. TMC has continued to gain more ground in Russia, and has about 27 official dealers across Russia today. All the dealers are required to act in accordance with TMC’S standards and guidelines. These guidelines have given the company a competitive edge on quality that has continued to attract increasing sales. TMC is renowned by its kaizen principle (continuous improvement), genchi genbutsu principle (appreciate and respect views of on-site individuals and people with wide applicable knowledge), Toyota Production System (TPS) principle (total elimination on anomalies, waste, overstretching from the production process), and a corporate culture based on utmost value on productivity, quality and cost effectiveness (Toyota-Global, 2015). References Cufari A.T., D’Orio G. (2004). Factors Affecting Foreign Direct Investment in Russia. Corporate and ownership Control, 1 (2), pp. 71-81. Dunning J.H. (1998), Location and the Multinational Enterprise: A Neglected Factor? Journal of International Business Studies, vol. 29/1. Emes J. (2003). Market Entry Strategies and Competitive Advantages in Poland. Gounet T., (1998). The Toyota Way of Increasing Exploitation in the Car Industry. Workers’ Party of Belgium Hollensen S., (2001). Global Marketing: A market-responsive approach, 2nd edition, Prentice Hall. Ichijo K. (2005). Rapid Penetration into the Emerging Markets – The Toyota Way. Critical Eye. Kumar, V. and Subramaniam V. (1997). A Contingency Framework for the Mode of. Entry Decision, Journal of World Business vol.32, no.1, pp.53 - 72. Liker J., (2003). The Toyota Way: 14 Management Principles from the World's Greatest Manufacturer. McGraw-Hill; 1 edition Meyer K., (2001). Institutions, Transaction Costs, and Entry Mode Choice in Eastern Europe. Journal of International Business Studies, vol 32, 2, pp. 357-367. Ojala, A. (2008). Entry in a psychically distant market: Finnish small and mediumsized software firms in Japan, European Management Journal, vol.26, pp.135-144. Rodrıguez, A. R. (2002). Determining factors in entry choice for international expansion, Tourism Management, vol. 23, pp. 597–607. Root, F.R., (1998). Entry strategies for international markets, Jossey-Bass, San Francisco. Toyota-Global, (2015). 2014 Annual Report, Accessed from < http://www.toyota-global.com/investors/ir_library/annual/pdf/2014/ar14_e.pdf>. Read More