Most tangible Least tangible WHY MANUFACTURE ABROAD? (Ferdows) Reduce direct and indirect costs Reduce capital costs Reduce taxes Reduce logistics costs Overcome tariff barriers Provide better customer service Spread foreign exchange risks Build alternative supply sources Preempt potential competitors Learn from local suppliers Learn from foreign customers Learn from competitors Learn from foreign research centers Attract talent globally

Types of Overseas Investments market-oriented production –where? –Notion of typical evolutionary sequence

Supply-oriented production –natural resource industries cost-oriented production –a relatively recent category –encouraged by developments in transportation and production technology –increased attraction of other factors like labor

But, we need to remember differences in industry mix differences in labor productivity differences in labor militancy and controllability may be as important as costs

Erica Schoenberger American transnational production in Western Europe in 1970s and 1980s (high tech products) Alternative hypotheses

1. Cost-oriented production hypothesis Tariff barriers of 5-15% but: –production cost disadvantage of 17% or so –transportation costs not significant –product differentiation permits success despite tariff costs

2. Alternative hypothesis??? Practical advantages of a local presence these are heightened as distinction between product and service gets blurred

Organizational Structures and Networks of Relationship Organizational structures as a sequential process

Competitive Strategies

Locational needs and spatial patterns corporate and regional headquarters offices R & D facilities production units

Alternate ways of organizing production units

Ferdows’ thesis: Managing foreign plants according to traditional criteria is no longer enough Declining tariffs reduce advantages of traditional market-oriented factories growing sophistication of products and importance of having world class suppliers reduces traditional cost-oriented factories pressure to get new products to market quickly requires closer links between product development and production

The emerging trend is: Make foreign factories true sources of competitive advantage. Custodians of specialized product development and production for the entire company.

Site Competence Strategic reason for site Access to low cost production Access to skills and knowledge Proximity to market The Roles of Foreign Factories Offshore Contributor LeadSource Outpost Server

Example: Hewlett-Packard’s Singapore factory Offshore factory. Simple low-cost components. Why Singapore??? Investment in quality improvement leads to transfer of whole HP-35 calculator (1973) late 1970s. Makes keyboards, solid-state displays, integrated circuits all designed and first produced in U.S.

1983. Plant gains some product development and engineering functions R&D group of 35 people. Sole responsibility for developing and making all HP keyboards. Mid 1980s makes thermal inkjet printer within 4 months of intro. to American market. Mid 1990s. Lead plant for design, development and mfer. of HP’s portable printers.

Networks of external relationships Japanese keiretsu overseas Chinese family business network international strategic alliance –example of Nike