Massachusetts Institute of Technology Cambridge, Massachusetts CURITIBA 2000 CAN SMALL FIRMS LEVERAGE GLOBAL COMPETITION ? Evidence from the Portuguese and Brazilian Automotive Supplier Industries F. Veloso, C. Henry, R. Roth

Massachusetts Institute of Technology Cambridge, Massachusetts FIRM DIRECT INVESTMENT ABROAD Research question: –What drives firm direct investment abroad? Prevailing view: –Firms invest abroad when they have established competitive advantages that can’t easily be replicated or transacted Extended perspective for traditional SMEs: –Firms invest abroad driven by survival, using short term context dependent advantages Case study: –Direct investment of Portuguese autoparts firms in Brazil

Massachusetts Institute of Technology Cambridge, Massachusetts An Evolving Auto Supply Industry Eighties: Automotive competition on regional basis Nineties: automotive sector evolved to become global industry –OEMs led the way –Large suppliers quickly followed Common aspects of auto components firms that led the way –Large –R&D intensive (over 5% of sales) –Working in complex systems and modules –Examples: Magna, Delphi, Valeo, Federal Mogul…

Massachusetts Institute of Technology Cambridge, Massachusetts Trend fits OLI theory Ownership –Firm has knowledge assets that give it a competitive edge over local competitors Location –The local market must have some advantage that attracts firm Internalization –Assets are Imperfectly tradable, so firm must invest instead of contracting out FDI happens to explore unique advantages in other markets

Massachusetts Institute of Technology Cambridge, Massachusetts The Small Autoparts Contrast New trend: SMEs in traditional sectors invest abroad –One third of Portuguese manufacturing investments Work in lower tech components –Simple Stampings and Injection Moldings Come from middle tech regions –Portugal, Spain, etc. Enter in less developed markets –Eastern Europe, Brazil, FIRMS DO NOT POSSESS UNIQUE KNOWLEDGE ASSETS SO WHY DO THEY INVEST?

Massachusetts Institute of Technology Cambridge, Massachusetts Case Study and Methodology Analyze competitiveness of Portuguese small auto suppliers –Stamping –Injection Molding Compare manufacturing cost between firms in Portugal and in regions with direct competitors –Understand threats and opportunities Used Technical Cost Modeling Methodology –Uses engineering and economic principles to measure cost –Based on plant level data –Developed at MSL/MIT in the eighties

Massachusetts Institute of Technology Cambridge, Massachusetts Cost Estimates by Country for Small Stamping

Massachusetts Institute of Technology Cambridge, Massachusetts Cost for Stamped Assembly Delivered to Germany

Massachusetts Institute of Technology Cambridge, Massachusetts Volume Sensitivity of Stamped Assembly Cost

Massachusetts Institute of Technology Cambridge, Massachusetts Manufacturing Cost for Injection Molded Part

Massachusetts Institute of Technology Cambridge, Massachusetts Total Injection Molding Assembly Costs by Country

Massachusetts Institute of Technology Cambridge, Massachusetts Cost of Injection Molded Assembly Delivered to Brazil

Massachusetts Institute of Technology Cambridge, Massachusetts Shipping from Portugal versus Brazilian operations Second line needed Produce in Brazil with imported capital Ship to Brazil From Portugal

Massachusetts Institute of Technology Cambridge, Massachusetts Conclusions and Implications Small Portuguese Autoparts firms invest abroad because: –They are threatened in their home market –Consider FDI the road for survival They are entering markets where: –Business environment provides context dependent advantages –They have no sustainable knowledge assets SME FDI seems to depend on trends of the macroeconomic environment and the industry where they act, which they do not control, not internal capabilities FDI theory ought to be extended to understand better the decisions of small and medium enterprises

Massachusetts Institute of Technology Cambridge, Massachusetts Acknowledgements IAPMEI – Instituto de Apoio as PMEs e ao Investimento 15 Autoparts Companies in Portugal INTELI – Inteligencia e Tecnologia para a Inovacao Praxis XXI