Global Business Strategy: Location Choice Strategy PDF

C H A P T MGT 489 E Strategic R Management 7 Global Business Strategy: Location Choice Strategy Dr. Jeongho J. Choi Objectives  Evaluate location-specific advantages: Where to locate production and R&D activities - Location-specific advantages...

C H A P T MGT 489 E Strategic R Management 7 Global Business Strategy: Location Choice Strategy Dr. Jeongho J. Choi Objectives  Evaluate location-specific advantages: Where to locate production and R&D activities - Location-specific advantages for Production vs. R&D activities - Manufacturing location in the case of global outsourcing - Determinants of the competitiveness of a nation (i.e., location- specific advantages); Endogenous vs. Exogenous location- specific advantages Location Choice Strategy  Globalization of Value creation activities Product and process Low-cost product Distribute those products innovation Various products quickly and globally Marketi Custom R&D Producti ng & er on Sales Service Lower production cost Pricing strategy Different tastes Product development Product differentiation Different design technology  Globalization of R&D vs. Production activities  Then, question is where to locate firms’ production and R&D activities ?  There is no one-size-fits-all location for all companies because of - National differences (i.e., liabilities of foreignness) ; economic, institutional and cultural Location Choice Strategy  Top 20 countries for FDI: 2008~ 2010 (unit: billion) Rank 2008 2009 2010 1 United States 316 United States 153 United States 228 2 Belgium 110 China 95 China 106 HongKong, 3 China 108 France 60 69 China 4 United Kingdom 91 HongKong, China 48 Belgium 62 5 Russia 75 United Kingdom 46 Brazil 48 6 Spain 73 Russia 39 Germany 46 7 France 62 Germany 36 United Kingdom 46 8 HongKong, China 60 Saudi Arabia 36 Russia 41 9 Canada 55 India 35 Singapore 39 10 Australia 47 Belgium 34 France 34 11 Brazil 45 Italy 31 Australia 32 British Virgin 12 45 Luxemborug 27 Saudi Arabia 28 Islands 13 India 40 Netherlands 27 Ireland 26 14 Saudi Arabia 38 Brazil 26 India 25 British Virgin 15 Germany 24 25 Spain 25 Islands 16 Italy 17 Ireland 25 Canada 23 17 Singapore 11 Australia 23 Luxembourg 20 18 Luxemborug 9 Canada 19 Mexico 19 19 Ireland Singapore 17 Chile 15 UNCTAD 20 data Netherlands Spain 15 Indonesia 13 The Nature of Foreign Direct Investment FDI Trend (cont’d) Top Destinations for FDI: 2011 ~ 2014 (Unit: million) Rank 2011 2012 2013 2014 1 United States 229,862 United States 169,680 United States 230,768 China 128,500 China, 2 China 123,985 China 121,080 China 123,911 Hong Kong SAR 103,254 China, 3 Hong Kong SAR 96,581 Luxembourg 79,645 British Virgin Islands 92,300 United States 92,397 China, China, 4 Belgium 78,258 Hong Kong SAR 70,180 Hong Kong SAR 74,294 United Kingdom 72,241 5 Germany 67,515 British Virgin Islands 67,973 Canada 70,565 Singapore 67,523 6 Brazil 66,660 Brazil 65,272 Russian Federation 69,219 Brazil 62,495 7 British Virgin Islands 57,695 United Kingdom 59,375 Singapore 64,793 British Virgin Islands 56,541 8 Australia 57,050 Singapore 56,659 Brazil 63,996 Canada 53,864 9 Russian Federation 55,084 Australia 55,802 Australia 54,239 Australia 51,854 10 Singapore 48,002 Russian Federation 50,588 United Kingdom 47,675 India 34,417 11 United Kingdom 41,803 Ireland 45,207 Mexico 44,627 Netherlands 30,253 12 Canada 39,669 Canada 39,266 France 42,892 Chile 22,949 13 India 36,190 Spain 25,696 Spain 41,733 Spain 22,904 14 Italy 34,324 Chile 25,021 Ireland 37,033 Mexico 22,795 15 France 31,642 India 24,196 Netherlands 32,039 Indonesia 22,580 16 Spain 28,379 Germany 20,316 India 28,199 Switzerland 21,914 17 Switzerland 28,309 Indonesia 19,138 Italy 25,004 Russian Federation 20,958 18 Netherlands 24,369 Mexico 18,951 Belgium 23,396 Finland 18,625 19 Ireland 23,545 Norway 18,774 Luxembourg 23,248 Cayman Islands 18,553 20 Mexico 23,376 Netherlands 17,655 Indonesia 18,817 Colombia 16,054 Updated on 08/01/2016  The Nature of Foreign Direct Investment FDI Trend (cont’d) Top Destinations for FDI: 2015 ~ 2021 (Unit: million) Region/economy 2015 Region/economy 2016 Region/economy 2017 Region/economy 2018 Region/economy 2019 Region/economy 2020 United States 467 625.0 United States 459 419.0 United States 308 956.0 United States 203 234.0 United States 225 108.0 United States 150 828.0 Ireland 217 868.6 United Kingdom 258 698.7 China 136 315.0 China 138 305.0 Ireland 149 433.1 China 149 342.0 Hong Kong, China 174 352.9 Switzerland 150 241.2 Switzerland 111 200.6 Hong Kong, China 104 245.7 China 141 225.0 Hong Kong, China 134 709.9 Netherlands 163 397.0 China 133 711.0 Hong Kong, China 110 684.5 United Kingdom 87 837.5 Singapore 106 323.2 Luxembourg 102 268.9 China 135 577.0 Hong Kong, China 117 387.0 United Kingdom 96 353.8 Netherlands 87 633.3 Hong Kong, China 73 714.0 Ireland 80 870.9 Switzerland 84 319.6 Singapore 67 502.0 Singapore 82 482.5 Singapore 73 932.0 Brazil 65 386.0 Singapore 75 436.7 Cayman Islands 80 501.5 Belgium 59 242.7 Brazil 66 584.9 Germany 72 098.0 Germany 52 665.2 Germany 64 589.3 British Virgin Islands 66 712.7 Cayman Islands 58 815.6 Ireland 52 834.9 Australia 68 322.0 India 50 558.3 India 64 072.2 Singapore 59 700.1 Netherlands 55 124.4 Germany 48 641.4 Brazil 59 802.4 Canada 50 149.5 British Virgin Islands 39 619.6 Brazil 49 961.4 Brazil 53 700.4 Australia 46 114.2 Spain 57 462.9 United Kingdom 45 454.4 Brazil 28 318.5 Luxembourg 45 432.2 British Virgin Islands 49 022.9 Spain 41 966.3 India 42 156.2 Australia 39 406.1 Mexico 27 933.6 France 45 364.7 Australia 48 401.4 India 39 903.8 France 41 833.0 British Virgin Islands 39 103.4 Israel 24 283.4 India 44 064.1 India 44 480.6 British Virgin Islands 39 610.0 Italy 37 681.9 Mexico 34 411.3 Cayman Islands 23 621.0 Canada 43 836.0 Ireland 39 413.6 Mexico 34 130.9 Canada 37 661.9 Cyprus 34 362.2 Canada 23 175.6 United Kingdom 39 185.7 Russian Federation 37 175.8 Russian Federation 25 953.5 Belgium 35 713.3 Russian Federation 32 075.6 United Arab Emirates 19 884.5 Mexico 35 517.3 Canada 36 055.9 France 24 832.5 British Virgin Islands 34 389.7 France 28 363.0 Sweden 18 803.5 Germany 30 540.9 Spain 31 568.9 Italy 24 047.1 Mexico 34 090.4 Cayman Islands 28 165.1 Indonesia 18 591.0 Australia 29 580.3 Mexico 31 172.9 Canada 22 766.8 Israel 21 514.6 Indonesia 23 883.3 United Kingdom 18 193.6 Belgium 28 331.3 Italy 28 468.5 Indonesia 20 579.2 Cayman Islands 20 680.8 Italy 18 145.6 Australia 16 726.5 Cyprus 23 945.6 France 23 077.2 Korea, Republic of 17 912.9 Indonesia 20 563.5 United Arab Emirates 17 874.7 Viet Nam 15 800.0 Updated 2023 Location-Specific Advantages  Why U.S., and why BRIC countries?  Income level comparison (Averaged GDP ppp/ capita and Averaged GDP growth rate%) Country GDP ppp Per Capita GDP Growth rate% New Zealand 27,287 2.167836141 Australia 37,126 3.029071698 Norway 52,645 2.313868992 Austria 36,628 2.760450073 Portugal 23,029 1.228110538 Belgium 34,479 2.312040808 Spain 30,175 3.058009966 Canada 36,652 2.370163056 Sweden 36,029 2.878730977 Chile 13,882 5.468092507 Switzerland 41,858 2.975523796 Czech Republic 23,589 5.469910991 Turkey 12,962 5.997066522 Denmark 36,218 1.787151045 United Kingdom 34,343 2.189524382 Finland 33,906 3.416063764 United States 44,240 2.152528752 France 31,700 1.808515892 China 5,163 11.5737345 Germany 33,768 1.979606928 India 2,677 8.468029008 Greece 26,915 3.095309275 Indonesia 3,586 5.71662434 Hungary 18,507 2.731775338 Russian Federation 15,420 7.097720398 Israel 24,484 5.12453112 South Africa 9,401 4.921047601 Italy 30,632 1.077537494 Japan 31,772 1.30138254 World Bank: 2004~2009 Korea 24,721 4.231814429 Mexico 13,637 3.396988448 Netherlands 38,498 2.680371772  FDI in Emerging Economies  Income level comparison (world bank 2010 ~ 2015 averaged) GDP Korea, Rep. 32,441 3.058043273 GDP PPP Per Country Growth Mexico 16,255 1.788063992 Capita Rate % Netherlands 47,046 0.345311229 Australia 43,409 0.978054176 Norway 63,490 0.289322839 Austria 45,787 0.642085319 Portugal 27,817 -0.105867648 Belgium 42,084 0.474685724 Russian 23,933 1.339823378 Canada 42,899 1.204133648 Federation Chile 20,962 3.050555945 South Africa 12,645 0.661807206 China 11,741 7.754144035 Spain 33,022 -0.135329559 Czech Republic 29,633 1.32780971 Sweden 44,447 1.767708279 Denmark 44,618 0.358718983 Switzerland 57,089 0.598998834 Finland 40,210 0.095377892 Turkey 18,411 3.491984174 France 38,113 0.500257635 United 38,449 1.244524214 Germany 43,872 2.066188654 Kingdom Greece 26,969 -3.693693708 United States 52,081 1.325951747 Hungary 23,593 1.854467216 Updated on 08/01/2016 India 5,150 5.963533305 Indonesia 9,703 4.285211827 Israel 32,331 1.70926232 Italy 35,585 -0.783072303 Japan 35,725 1.442767401  FDI in Emerging Economies  Income level comparison (world bank 2016 ~ 2022 averaged) GDP PPP Per GDP Growth Country Name Capita Rate % India 6,509.77 3.48 Algeria 11,864.32 -1.00 Ireland 87,128.52 6.25 Israel 40,069.41 2.06 Australia 51,127.99 0.76 Italy 43,291.98 0.80 Austria 56,684.25 0.45 Japan 41,687.24 0.18 Belgium 53,483.11 0.81 Cambodia 4,324.41 3.46 Brazil 14,963.46 -0.43 Korea, Rep. 43,095.72 2.21 Canada 49,086.90 0.18 Luxembourg 119,630.45 0.39 Switzerland 71,948.28 0.71 Mexico 19,737.64 -0.31 Chile 25,398.79 0.80 Malaysia 27,215.60 1.52 China 16,067.01 5.73 Netherlands 58,206.41 1.15 Czechia 41,446.94 2.07 Norway 67,793.42 0.71 Germany 55,068.36 0.67 New Zealand 43,827.10 0.78 Denmark 58,425.99 1.56 Pakistan 5,210.42 2.38 Poland 33,094.16 4.00 Dominican Updated 2023 Republic 17,904.12 3.67 Evaluate location-specific advantages  Manufacturing location - Apple Inc. : Designed in California, R&D in Israel, and Assembled in China Why China? - IBM: The manufacturing of IBM’s Power system, Pure system (Big data storage), and PureFlex system in Mexico Why Mexico? Evaluate location-specific advantages  U.S. vs. Mexico FTA (Free Trade Agreement) US Mexico Australia US Bahrain Canada Canada Costa Rica Chile Nicaragua Colombia Chile Costa Rica EU Dominican Republic Israel El Salvador El Salvador Guatemala Guatemala Honduras Honduras Israel Uruguay Jordan Japan Korea Colombia Mexico Peru Morocco Nicaragua Oman Panama Peru Singapore Source: USTR.gov Evaluate location-specific advantages  Apple’s supplier location (2013) Source: www.chinafile.com or www.ibtimes.com Evaluate location-specific advantages Evaluate location-specific advantages Evaluate location-specific advantages Wharton Business School Publishing, 2013 Determinants of Manufacturing Location  Manufacturing location choice strategy Single (concentrated) location or geographically diversified locations ?  At least two factors should be considered (1) The level of fixed cost - If fixed costs are high, produce in a single location or a few locations - when fixed costs are low, multiple production plants may be possible (2) Product factors - The product's value-to-weight ratio > If the value-to-weight ratio is high, produce the product in a single location and export to other parts of the world > If the value-to-weight ratio is low, there is greater pressure to manufacture the product in multiple locations across the world - Whether the product serves universal needs > If it is a standardized product, manufacturing in a single or few locations makes sense Determinants of Manufacturing Location  Ford Motors- Global Assembly Plants Summary  Location-specific advantages for manufacturing activities - Favorable factor conditions - Close location to major markets - Favorable trade policy - Manufacturing presence of global MNCs (e.g., collaboration network) - The level of fixed cost (e.g., real estate price) - Product value-to-weight ratio What is R (Research) and D (Development)?  Computer Science Research Field (Harvard Business Publishing-NEC case) Evaluate location-specific advantages  R&D location - Apple R&D center in Israel in 2013 , Microsoft R&D center in Israel, 1991 - IBM Research center in India in 1998 and 2005 Country GDP ppp Per Capita GDP Growth rate% New Zealand 27,287 2.167836141 Australia 37,126 3.029071698 Norway 52,645 2.313868992 Austria 36,628 2.760450073 Portugal 23,029 1.228110538 Belgium 34,479 2.312040808 Spain 30,175 3.058009966 Canada 36,652 2.370163056 Sweden 36,029 2.878730977 Chile 13,882 5.468092507 Switzerland 41,858 2.975523796 Czech Republic 23,589 5.469910991 Turkey 12,962 5.997066522 Denmark 36,218 1.787151045 United Kingdom 34,343 2.189524382 Finland 33,906 3.416063764 United States 44,240 2.152528752 France 31,700 1.808515892 China 5,163 11.5737345 Germany 33,768 1.979606928 India 2,677 8.468029008 Greece 26,915 3.095309275 Indonesia 3,586 5.71662434 Hungary 18,507 2.731775338 Russian Federation 15,420 7.097720398 Israel 24,484 5.12453112 South Africa 9,401 4.921047601 Italy 30,632 1.077537494 Japan 31,772 1.30138254 Korea 24,721 4.231814429 Mexico 13,637 3.396988448 Netherlands 38,498 2.680371772 Evaluate location-specific advantages  R&D location (cont’d)  Level of Education (Human resource availability) Country # of people Japan 3,976,560.55 Argentina 2,147,227.00 Korea, Rep. 3,191,608.27 Australia 1,043,418.18 Malaysia 765,371.91 Austria 265,419.00 Mexico 2,386,680.55 Belgium 390,225.27 New Zealand 224,333.00 Brazil 4,622,978.10 Netherlands 562,276.55 Canada 1,212,161.00 Pakistan 758,086.25 Chile 686,881.60 Philippines 2,488,870.63 China 19,865,977.36 Russian Czech Republic 335,310.64 Federation 8,449,586.60 Denmark 217,765.73 Singapore 198,569.00 Finland 296,289.82 Sweden 407,232.73 France 2,136,935.82 Switzerland 199,695.64 Germany 2,204,126.00 Thailand 2,280,317.36 Greece 575,683.82 Hungary 391,933.27 Turkey 2,306,561.90 India 13,550,632.36 United Kingdom 2,279,801.91 Indonesia 3,792,624.91 United States 16,957,787.73 Ireland 181,042.64 Israel 309,593.55 Average 2,877,967.78 Source: World Italy Bank Database, 2000~2010 1,947,273.36  Evaluate location-specific advantages  R&D location (cont’d)  R&D Expenditure (Level of technological activity) Gross Domestic Expenditure on R&D (million current ppp $) Country GDERD % of GDP % of GDP Japan 125,398.97 3.25 3.23 Australia 14,116.05 1.89 1.94 Korea 33,119.65 2.91 4.17 Austria 6,854.53 2.38 3.03 Luxembourg 563.91 1.62 1.23 Belgium 6,697.97 1.93 2.62 Mexico 5,309.22 0.40 0.38 Brazil 17,175.11 1.04 1.21 Netherlands 10,986.24 1.87 2.12 Canada 22,082.46 1.99 1.73 New Zealand 1,275.49 1.18 1.27 Chile 1,090.84 0.38 0.36 Norway 3,671.98 1.61 1.92 China 83,309.88 1.30 2.08 Poland 3,394.72 0.60 1.04 Czech Republic 2,996.57 1.33 1.83 Portugal 2,457.04 1.03 1.37 Denmark 5,087.89 2.65 2.97 Russian Federation 21,550.58 1.15 1.06 Estonia 237.33 1.01 1.64 Slovak Republic 494.25 0.54 0.86 Finland 5,905.12 3.53 3.02 Slovenia 740.34 1.55 2.21 France 41,172.98 2.17 2.23 Spain 14,316.88 1.15 1.27 Germany 67,565.25 2.58 2.97 Sweden 11,558.05 3.65 3.28 Greece 1,564.40 0.58 1.02 Singapore 4,369.42 2.16 1.98 Hungary 1,709.48 0.98 1.36 Switzerland 7,919.95 2.72 3.02 Iceland 290.53 2.84 2.13 Turkey 5,307.85 0.62 0.92 Ireland 2,100.42 1.30 1.33 United Kingdom 34,422.32 1.77 1.64 Israel 7,615.48 4.49 4.52 United States 335,708.55 2.71 2.90 India 16,766.82 0.74 0.66 Source: OECD STAT, 2000~2010 and 2011~2021 Average 24,669.04 1.81 1.96 Evaluate location-specific advantages  R&D location (cont’d)  R&D network (as a global innovation hub): Presence of global companies  India: Nokia, Microsoft, Cisco, Ericsson, and Intel  Is the location attractive enough for IBM ?  Israel IT sector: HP, Samsung, Google, Microsoft, IBM, Intel, Oracle, Dell, and AMD (source: State of Israel- Ministry of Industry, Trade & Labor)  Apple’s acquisition of Anobit (Memory Signal Processing Tech.) in 2012  Good enough for Apple ? Determinants of R&D Location  Location-specific advantages for R&D activities - Major source of industry innovation (i.e., level of technology development, and high R&D intensity) - Presence of highly skilled and/or low-cost R&D workers - Highly demanding customers - Presence of global companies; collaboration network - Government supports ; Central government spending (funding) on R&D U.S. approximately 12% during 2000~2010 India 57.5% during the same time period Location Choice Strategy  What R&D activities should a firm focus on in a foreign R&D center? Core Research or Peripheral activities ?  Disadvantages of doing core R&D activities in China and India - Weak IPP regime - Relatively low level of knowledge spillover effects  However, recently, many companies have increasingly performed core research activities in those emerging countries such as India and Israel - IBM R&D in Japan vs. IBM R&D in India (focus little more on telecom tech. research) - Microsoft US vs. Microsoft Israel