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Firms need to identify how production and logistics =e
conducted internationally to

˜    refers      

˜ Y   refers to the     



Mo lower costs, firms can:
˜ disperse production to those locations where activities can  
  to =etter match
supply and demand

Mo    , firms can:

˜        from the supply chain and the
manufacturing process
˜ 6   will also reduce costs

Mhese o= ectives are interrelated:

  that cannot =e sold, leading       
Ȉ     and      

@ Mo increase product quality, most firms today use the ??
 which aims to      ,    ,  
  , and   throughout a company .

@ ?ix ?igma methodology improves any existing =usiness process =y

constantly reviewing and re-tuning the process. Mo achieve this, ?ix
?igma uses a methodology known as m6 "mefine opportunities,
easure performance, nalyze opportunity, 6mprove
performance, ontrol performance).

@ ?ix ?igma,           "M),

has a goal of improving product quality
@ 6n the European Union, firms must meet the     

6? !""" =efore the firm is allowed access to the European
˜ Mhe total quality management "M) philosophy was
developed =y a num=er of American consultants such as
W. Edwards Deming, Josephy Juran, and A. V.
˜ Deming identified a num=er of steps that should =e
included in any M program:
Ȉ anagement should em=race the philosophy that      , and 
materials are not accepta=le
Ȉ ?   
    with employees and   

need to do the o=
Ȉ anagement should      

Ȉ #    
            , =ut should include

˜ production process operating at ?ix ?igma are 99.99966

percent accurate.
Ȉ Only 3.4 defects per million units

6nternational companies have   
@ production and logistics functions must =e a=le to    
@ production and logistics must =e a=le     
. Demands for local responsiveness arise from      
2. Demands for              % 
  activities to the ma or national or regional markets in which the
firm does =usiness or to implement flexi=le manufacturing processes that
ena=le the firm to customize the product coming out of a factory according
to the market in which it is to =e sold.
3. 6n recent years,      




Mhree factors are important when making location

. country factors
2. technological factors
3. product factors

@ Firms should    

          , are most

Country factors that can affect location decisions include:

@ the     and     

@     'm6

˜ Mhe type of technology   


Mhree characteristics of 

. the       
2. Mhe    

. Mhe level of fixed costs:

@ 6f the       

, it might       

        or from a
few locations
@ When fixed costs are      
    may =e possi=le

2. Mhe minimum efficient scale:

˜ Mhe larger the minimum efficient scale "the   

  ) of a plant, the more
likely centralized production in a single location
or a         

        and hedge
against currency risk =y operating in multiple

3. Mhe flexi=ility of the technology:

   covers a range of manufacturing
technologies that are designed to:
˜ reduce          
˜ increase the %    


˜ improve   at all stages of the
manufacturing process

˜ Firms using   

   can produce a wide variety of end
products at a unit cost that at one time could
only =e achieved through the mass production of
a standardized output
˜ ass customization implies that a firm may =e
a=le to customize     to meet the
demands of local markets yet    
˜ Flexi=le machine cells allow firms to increase

Mwo product factors impact location decisions:

˜ 6f the    

, it is practical to
˜ 6f the value-to-weight    

˜ #


Mhere are two =asic strategies for locating manufacturing


the world market from there
2.  %
    or national
locations that are close to ma or markets


˜ ature of organisation ˜ Logistical factors
˜ Costs ˜ product life cycle and
?cale economies pattern of demand
ature of assem=ly ˜ ature of product
˜ Government policies &
Maxes & transport costs
˜ Exchange rate
˜ ?ocial & political
˜ Availa=ility and cost of

˜ Factor costs have su=stantial impact

˜ Low trade =arriers
˜ Externalities favor certain location
˜ ?ta=le exchange rates
˜ High fixed costs, high minimum efficient scale
relative to glo=al demand or flexi=le manufacturing
˜ productǯs value-to-weight ratio is high
˜ product serves universal needs


˜ Factor costs do not have su=stantial impact

˜ High trade =arriers
˜ Location externalities not important
˜ Exchange rates volatile
˜ Low fixed costs, low minimum efficient scale
˜ Flexi=le manufacturing technology unavaila=le
˜ productǯs value-to-weight ratio is low
˜ ?ignificant differences in consumer tastes and
preferences exist =etween nations
   m  % 
Differences in political economy ?u=stantial Few
Differences in culture ?u=stantial Few
Differences in factor costs ?u=stantial Few
Mrade =arriers ?u=stantial Few
Location externalities 6mportant in 6ndustry ot important in industry
Exchange rates ?ta=le Volatile

Fixed costs High Low
inimum efficient scale High Low
Flexi=le manufacturing technology Availa=le ot availa=le

Value Ȃto- weight ratio High Low
?erves universal needs Yes o
  Y?  ?

˜ 6nitially, esta=lished where la=or costs low
˜ Later, important centers for design and final
˜ Upward migration caused =y pressures to:



˜ ?hould a firm make or =uy the component parts

that go into their final product?
˜ Advantages of making own components:


˜ ?trategic flexi=ility in sourcing components

˜ Lower firmǯs cost structure
˜ Offsets "neutralization)
˜ ?trategic alliances with suppliers give =enefits of
vertical integration without the associated
organizational pro=lems
)* +,-
Advantages ÀControl over cost ÀWide choice

ÀControl over supply ÀRelease of capital, managerial and other

ÀControl over quality
ÀBenefit of concentration on core activities
ÀControl over
technology ÀFlexi=ility & scope of switching suppliers

ÀR&D initiatives À?cope for =argaining and gaining price


ÀBenefits of technological and product

developments outside the firm

ÀLower la=our force and less industrial relations


ÀLower impact of recession

ÀEase of exit
)* +,-

Disadvantages ÀHigher investment ÀBargaining power of suppliers

Àany a time, high cost ÀUncertainty of supply

ÀOut-suppliers may =e more ÀControl over cost and quality is

innovative & efficient sometimes difficult

ÀDissipation of managerial ÀLa=our or other pro=lems of the

expertise and other suppliers may affect the =uyer
À6f the vendor =ase is not well
Àpro=lems associated with developed it may cause several
large la=our force pro=lems

ÀGreater impact of recession

ÀDifficulty of exit

Mhe =enefits of manufacturing components in-house
are greatest when:
˜ Highly specialized assets are involved
˜ Vertical integration is necessary for protecting
proprietary technology
˜ Mhe firm is more efficient than external suppliers at
performing a particular activity
   Y   Y

%          &


Mhe scope of inventory management also concerns the fine

lines =etween replenishment lead time, carrying costs of
inventory, asset management, inventory forecasting,
inventory valuation, inventory visi=ility, future inventory price
forecasting, physical inventory, availa=le physical space for
inventory, quality management, replenishment, returns and
defective goods and demand forecasting.
  the planning and control of the
levels, flows, and storage of inputs, unfinished, and
finished goods

˜ Demand planning
˜ purchasing/ procurement/ manufacturing
˜ Order management
˜ Warehousing & distri=ution
˜ Mransportation
6*M .-'         




/1 6 
/1 6 
4    5
/1 6 
/ 1#

Reasons for offshore purchase
˜ Lower price
˜ Better quality
˜ Only source availa=le
˜ ore advanced technology
˜ ore consistent attitude
˜ ore co-operative delivery
˜ Counter trade requirements
˜ Reduces capital & manpower
˜ ore flexi=ility in case of
§Y Y? Y

˜ Mhe role of JU?M-6-M6E inventory

˜ Mhe role of 6M & 6MEREM

˜ Mhe =asic philosophy =ehind ust-in-time "J6M)
systems is to economize on inventory holding costs
=y having materials arrive at a manufacturing plant
ust in time to enter the production process. J6M
systems can:
Generate ma or cost savings from reduced
warehousing and inventory holding costs
Help the firm spot defective parts and take them out
of the manufacturing process to =oost product quality
˜ However, it leaves the firm with no =uffer stock of
inventory to meet unexpected demand or supply

˜ We=-=ased information systems play a crucial role

in materials management =y allowing firms to
optimize production scheduling
˜ Electronic Data 6nterchange "ED6):
facilitates the tracking of inputs
allows the firm to optimize its production schedule
lets the firm and its suppliers communicate in real
eliminates the flow of paperwork =etween the firm
and its suppliers



'       "FD6) occurs when a firm invests directly in new
facilities to produce and/or market in a foreign country.

Once a firm undertakes FD6 it =ecomes a      .

FD6 takes on two main forms:

˜ A      "the esta=lishment of a wholly new operation in a
foreign country)
˜ Acquisition or merging with an existing firm in the foreign country
˜ FD6 is not         "investment =y individuals, firms,
or pu=lic =odies in foreign financial instruments)
 ¬ Y
˜ Mhe   of FD6 refers to the amount of FD6
undertaken over a given time period
˜ Mhe   of FD6 refers to the total accumulated
value of foreign-owned assets at a given time
˜    'm6are the flows of FD6 out of a
˜ 6   'm6 are the flows of FD6 into a country

Over the past 20 years there has =een a marked increase in =oth the flow and
stock of FD6 in the world economy.

FD6 has grown more rapidly than world trade and world output =ecause:

˜ firms still fear the threat of protectionism

˜ the general shift toward democratic political institutions and free market
economies has encouraged FD6
˜ the glo=alization of the world economy is having a positive impact on the
volume of FD6 as firms undertake FD6 to ensure they have a significant
presence in many regions of the world
FD6 Outflows from 982 to 2005 are shown in Figure 7..


˜ Historically, most FD6 has =een directed at the

developed nations of the world, with the United ?tates
=eing a favorite target
˜ FD6 inflows have remained high during the early 2000s
for the United ?tates, and also for the European Union
˜ ?outh, East, and ?outheast Asia, and particularly China,
are now seeing an increase of FD6 inflows
˜ Latin America is also emerging as an important region
for FD6
FD6 Flows =y Region are shown
˜ Ú     summarizes the total
amount of capital invested in factories, stores,
office =uildings, and the like
˜ All else =eing equal, the greater the capital
investment in an economy, the more favora=le its
future prospects are likely to =e
˜ ?o, FD6 can =e seen as an important source of
capital investment and a determinant of the future
growth rate of an economy


˜ For most of the period after World War 66, the U.?.
was =y far the largest source country for FD6

˜ Other important source countries were the

United Kingdom, the etherlands, France,
Germany, and Japan

Mhe ma ority of cross-=order investment is in the form of mergers
and acquisitions rather than Ú   investments.

Firms prefer to acquire existing assets =ecause:

˜ mergers and acquisitions are quicker to execute than Greenfield
˜ it is easier and perhaps less risky for a firm to acquire desired
assets than =uild them from the ground up
˜ firms =elieve that they can increase the efficiency of an acquired
unit =y transferring capital, technology, or management skills
 ?   ?

Over the last 20 years, there has =een a shift away from FD6 in
extractive industries and manufacturing, and towards services.
Mhe shift to services is =eing driven =y:
˜ the general move in many developed countries toward
˜ the fact that many services need to =e produced where they
are consumed
˜ a li=eralization of policies governing FD6 in services
˜ the rise of 6nternet-=ased glo=al telecommunications
networks that have allowed some service enterprises to
relocate activities to different nations to take advantage of
favora=le factor costs


x purchase of physical assets or

significant amount of ownership of a
company in another country to gain
some measure of management

x  !"!
#!  !$%


!     "   

#    "    $     

        " %!
%!   &
(! (
 " ) *        
#   "   "   *+

,   -  "  "     


 "   .   *  


Growth of World FD6 vs. GDp



1 2    

1 1 

& 34444".

! !!#'()*+#! !%',-*+


! !%


Why Foreign Direct 6nvestment?

Why do firms prefer FD6 to either  

"producing goods at home and then shipping them
to the receiving country for sale) or   
"granting a foreign entity the right to produce and
sell the firmǯs product in return for a royalty fee on
every unit that the foreign entity sells)?

˜ Mhe via=ility of an exporting strategy can =e

constrained =y transportation costs and trade

˜ Foreign direct investment may =e undertaken as

a response to actual or threatened trade =arriers
such as import tariffs or quotas
Y    Y

6 %  
 suggests that licensing has three ma or
draw=acks as a strategy for exploiting foreign market
˜ licensing may result in a firmǯs giving away valua=le
technological know-how to a potential foreign competitor
˜ licensing does not give a firm the tight control over
manufacturing, marketing, and strategy in a foreign country
that may =e required to maximize its profita=ility
˜ a pro=lem arises with licensing when the firmǯs competitive
advantage is =ased not so much on its products as on the
management, marketing, and manufacturing capa=ilities that
produce those products


˜ A firm will favor FD6 over exporting as an entry

strategy when transportation costs or trade =arriers
make exporting unattractive

˜A firm will favor FD6 over licensing when it wishes to

maintain control over its technological know-how, or
over its operations and =usiness strategy, or when the
firmǯs capa=ilities are simply not amena=le to licensing

Vernonǯs view is that firms undertake FD6 at particular

stages in the life cycle of a product they have pioneered

˜ Firms invest in other advanced countries when local

demand in those countries grows large enough to support
local production, and then shift production to low-cost
developing countries when product standardization and
market saturation give rise to price competition and cost


John Dunningǯs     argues that in

addition to the various factors discussed earlier,
      "that arise from using
resource endowments or assets that are tied to a
particular location and that a firm finds valua=le to
com=ine with its own unique assets) and  
"knowledge spillovers that occur when companies in
the same industry locate in the same area) must also
=e considered when explaining =oth the rationale for
and the direction of foreign direct investment.


6deology toward FD6 has ranges from a radical

stance that is hostile to all FD6 to the non-
interventionist principle of free market economies.

Between these two extremes is an approach that

might =e called pragmatic nationalism.

?upporters of the radical view, which traces its

roots to arxist political and economic theory,
argue that the E is an instrument of imperialist
domination and a tool for exploiting host countries
to the exclusive =enefit of their capitalist-
imperialist home countries.
Mhis position lacked support =y the end of the 980s
=ecause of:

˜ the collapse of communism in Eastern Europe

˜ the poor economic performance of those countries that
followed the policy
˜ a growing =elief =y many of these countries that FD6 can
=e an important source of technology and o=s and can
stimulate economic growth
˜ the strong economic performance of developing
countries that em=raced capitalism rather than ideology

˜ Mhe free market view argues that international

production should =e distri=uted among countries
according to the theory of comparative advantage

˜ Mhe free market view has =een em=raced =y a

num=er of advanced and developing nations,
including the United ?tates, Britain, Chile, and
Hong Kong
pragmatic ationalism

˜ Mhe pragmatic nationalist view is that FD6 has =oth =enefits,

such as inflows of capital, technology, skills and o=s, and costs,
such as repatriation of profits to the home country and a
negative =alance of payments effect
˜ According to this view, FD6 should =e allowed only if the
=enefits outweigh the costs

?hifting 6deology

˜ 6n recent years, there has =een a strong shift toward the free
market stance creating a surge in FD6

Host Country Benefits

Mhe main =enefits of inward FD6 for a host country


˜ the resource transfer effect

˜ the employment effect
˜ effects on competition and economic growth
Resource-Mransfer Effects

˜ FD6 can make a positive contri=ution to a host

economy =y supplying capital, technology, and
management resources that would otherwise not =e

Employment Effects

˜ FD6 can =ring o=s to a host country that would

otherwise not =e created there
Effect on Competition and Economic Growth

˜ FD6 in the form of greenfield investment increases

the level of competition in a market, driving down
prices and improving the welfare of consumers

˜ 6ncreased competition can lead to increased

productivity growth, product and process innovation,
and greater economic growth
Host Country Costs

Mhere are two main costs of inward FD6:

˜ the possi=le adverse effects of FD6 on

competition within the host nation
˜the perceived loss of national sovereignty and
Adverse Effects on Competition

˜ Host governments worry that the su=sidiaries of

foreign Es operating in their country may have
greater economic power than indigenous
competitors =ecause they may =e part of a larger
international organization
ational ?overeignty and Autonomy

˜ any host governments worry that FD6 is accompanied

=y some loss of economic independence

˜ Mhe concern is that key decisions that can affect the host
countryǯs economy will =e made =y a foreign parent that
has no real commitment to the host country, and over
which the host countryǯs government has no real control

Home Country policies

Home countries can =oth encourage and restrict

FD6 =y local firms.
Encouraging Outward FD6

˜ any investor nations now have government-=acked

insurance programs to cover ma or types of foreign
investment risk

Restricting Outward FD6

˜ Virtually all investor countries, including the United

?tates, have exercised some control over outward FD6 from
time to time
Encouraging 6nward FD6

˜ Governments offer incentives to foreign firms

to invest in their countries

˜ 6ncentives are motivated =y a desire to gain

from the resource-transfer and employment
effects of FD6, and to capture FD6 away from
other potential host countries
Restricting 6nward FD6

Mhe most common controls to restrict FD6 are ownership

restraints and performance requirements.

Mhe rationale underlying ownership restraints is twofold:

˜ first, foreign firms are often excluded from certain sectors
on the grounds of national security or competition
˜ second, ownership restraints seem to =e =ased on a =elief
that local owners can help to maximize the resource
transfer and employment =enefits of FD6 for the host

˜ Until recently there has =een no consistent

involvement =y multinational institutions in the
governing of FD6

˜ Mhe formation of the World Mrade Organization in

995 is changing this

˜ A  "from Ara=ic: V× translit.    : "fee
to =e paid") is a duty imposed on goods when
they are moved across a political =oundary.

˜ Mhey are usually associated with protectionism,

the economic policy of restraining trade =etween
nations. For political reasons, tariffs are usually
imposed on imported goods, although they may
also =e imposed on exported goods.
˜ An   tariff is a set percentage of the value
of the good that is =eing imported. ?ometimes
these are pro=lematic, as when the international
price of a good falls, so does the tariff, and domestic
industries =ecome more vulnera=le to competition.
Conversely, when the price of a good rises on the
international market so does the tariff, =ut a country is
often less interested in protection when the price is
Mhey also face the pro=lem of inappropriate transfer
pricing where a company declares a value for goods =eing
traded which differs from the market price, aimed at
reducing overall taxes due.
˜ A ë    tariff, is a tariff of a specific amount of
money that does not vary with the price of the
good. Mhese tariffs are vulnera=le to changes in the
market or inflation unless updated periodically.

˜ A   tariff is a set of rates designed primarily

to raise money for the government. A tariff on
coffee imports imposed =y countries where coffee
cannot =e grown, for example raises a steady flow
of revenue.

˜ A     tariff is one so high that nearly no one

imports any of that item.
˜ A   tariff is intended to artificially inflate
prices of imports and protect domestic industries
from foreign competition "see also effective rate
of protection,) especially from competitors whose
host nations allow them to operate under
conditions that are illegal in the protected nation,
or who su=sidize their exports.

˜ An       tariff, similar to a 'protective'

tariff, is also known as a 
  tariff or 
   and is placed on products =eing imported
from, and also =eing sent to countries with
su=standard environmental pollution controls.
˜ g  8    /g. 1 Restricts
the quantity of imports allowed, rather than raising
their price as a tariff would
˜ ?    A payment =y government, perhaps
implicit, to the private sector in return for some
activity that it wants to encourage "here: exporting)
˜     A tariff levied against
imports that are su=sidized =y the exporting
country's government, designed to offset
"countervail) the effect of the su=sidy
˜      Mariff levied on dumped
imports, i.e. imports provided at a price that is
Ǯunfairly lowǯ, defined as either =elow the home
market price or =elow cost
˜      /*. 1 A restriction
on a country's imports that is achieved =y
negotiating with the foreign exporting country for it
to restrict its exports
˜ M 
  to trade - A technical regulation
or other requirement "for testing, la=elling,
packaging, marketing, certification, etc.) applied to
imports in a way that restricts trade
˜ Administrative and other Regulations
˜ ?afety regulations-automo=ile and electrical
˜ Health regulations-food
˜ La=eling regulations-showing origin and contents
˜ procurement "acquisition) policies
˜ Border taxes-re=ates of internal taxes given to exporters
of a commodity
˜ 6nternational commodity agreements and multiple
exchange rates.

˜ 6nternational agreement in the restriction of

output and exports among countries. E.g


˜ Mhe practice of selling a product at a lower price

in export markets than at home "or exporting at
prices =elow production cost)
?poradic dumping - to clear unwanted inventories or
cope with excess capacity
predatory dumping - to undermine foreign
persistent dumping - reaping greater profits =y
engaging in price discrimination