Английский язык. Практический курс для решения бизнес-задач - Нина Пусенкова

Production. There are two factors that determine an industry’s potential for disaggregating its value chain: relocationsensitivity and location-specific advantages.

To figure out your relocation sensitivity, consider metrics such as your typical bulk-to-value ratios, the ease with which your company can ensure quality standards remotely, the volatility of the demand for your service, and any sunk costs. Industries that make items that are hard to transport, such as steel or timber, may have little incentive to move their production processes. Companies that have already made huge capital investments in developed countries may not be able to justify shutting down factories even if the variable costs in developing countries are much lower.

To determine your location-specific advantages, look at variables including labor intensity, skill requirements, natural-resources intensity, and economies of scale and scope. Labor-intensive industries, such as apparel, have a greater incentive to move production to lower-wage countries. The exception would be a business whose workforce must possess specific skills that are not available outside a few countries. Industries that rely heavily on natural resources, such as the furniture sector, may find it advantageous to move to countries where those resources are plentiful and less expensive. Industries in which components are standardized, like consumer electronics, can take advantage of economies of scale in the production of individual components.

Regulatory. Host countries’ regulations can inhibit globalization in several ways. A country can impose tariffs, set import and export quotas, require foreign companies to enter into JVs with local companies, specify minimum local content, ban foreign investment outright, or fail to invest in regulatory infrastructures. Indeed, regulatory factors – particularly countries’ efforts to restrict imports or FDI – are among the biggest constraints to globalization in many industries today.

Organizational. Three organizational factors can limit globalization for a company or an industry: internal management structures, incentive systems, and unionization. For example, offshoring in many U.S. companies has been slowed by midlevel managers’ reluctance to give up some responsibility for the migrated positions. Companies must realign management incentives with global, not local, performance metrics, while still allowing for local innovation and risk taking.

Production, regulatory, and organizational forces evolve over time, and the full potential of globalization for companies and industries changes with the geopolitical and macroeconomic environment. The development of GATT and WTO has enabled rapid growth in global trade for most manufacturing products and, more recently, for services. The decline in cargo costs due to standardization of containers and more efficient transport service has encouraged more companies to ship bulky products globally. GPS technology has allowed some companies to closely monitor their road freight and achieve better logistics control, enabling them to disaggregate their value chains. And the improved quality and radically reduced costs of international telecommunications have created the offshoring opportunities.

Escalating competition, steady trade liberalization, and the continual introduction of new technologies will increase the pressure on companies to globalize. Businesses that view the status quo as fixed and neglect to capitalize on emerging global opportunities will be blindsided; those that find ways around the obstacles and prepare for the next stages in their industries will win out. IKEA has pushed the envelope by creating a new business around low transportation costs. The modular design of its furniture (customer assembly is required for nearly all items) means IKEA can transport its goods worldwide much more cost-effectively than traditional furniture manufacturers can.

Standardization is a critical part of globalization in many industries, but it has been resisted by some. Standards can penetrate an industry in two ways – companies can voluntarily adopt them, or governments can impose them. Consumer electronics was transformed when a critical mass of companies voluntarily embraced standards. By contrast, it’s been hard for manufacturers in the wireless handset business to achieve global economies of scale: Europe mandated the GSM standard, while Japan chose the PDC standard.

Source: Diana Farrel, «Beyond Offshoring:

Assess Your Company’s Global Potential»,

Harvard Business Review,

Vol. 82, No.12, December 2004 (excerpt)

Automotive MNCs in Russia

FDI in Russia by the automotive companies requires both the right business opportunities and economic conditions. Some of the right conditions required to attract FDI can be best expressed by the following formula:

FDIt = f (GRP(t-1), Wage(t-1), Education(t-1), Paved Roads(t-1), Openness to trade(t-1), Investment rating(t-1), Crime(t-1), Voter Participation(t-1))

MNCs need to weigh the risks of making substantial FDI versus the potential business returns. Hence, a country’s economic policies, political stability, legal system, infrastructure, and human resources all factor into the decision of if, when, and how an MNC should engage in FDI. Since opening its borders to foreign investment, Russia attracted FDI at a growing pace until its financial crisis in 1998. Inflows of FDI did not recover until mid 2002, at which point Russia’s FDI exceeded $20 billion, indicating foreign MNCs regained confidence in investing in Russia.

Initially, FDI in Russia had been focused on accessing natural resources; more recently investments are focused on both accessing new markets and seeking efficiencies through employing low-cost highly educated workers. FDI focused on developing new markets for products in Russia is limited by the growth of the economy and the low purchasing power of the Russian population. Efficiency-seeking FDI will be limited more by the availability of low-cost educated workers, supply chain capability, and infrastructure robustness.

Ford’s approach

Ford initially announced plans in 1997 to establish car production in Russia. A lengthy negotiation period and the 1998 financial crisis put Ford’s plans on hold until the opening of its St. Petersburg assembly plant in 2002. The St. Petersburg plant was to be wholly owned, a first for a foreign company in Russia. A key advantage of being wholly owned is having complete management control over all aspects of the assembly plants operation. Investing in state-of-the-art facilities, and hiring new workers permit Ford to more easily overcome quality and productivity issues that have been notoriously bad in Russian state-run companies.

Not having a local partner also helps Ford locate its facilities close to the market, rather than wherever the JV partner’s facilities are located. Locating the production facility in St. Petersburg was very important to Ford as 60% of the car market in Russia is currently in St. Petersburg and Moscow. Complete ownership also allows Ford more flexibility in deciding product mix and pricing. By not licensing to a local manufacture, Ford reduces the potential of creating future local competitors caused by technology transfer, and Ford can more effectively create brand awareness. Ford’s FDI in Russia is predominantly considered horizontal FDI because its production of vehicles targets the growing domestic market.

General Motor’s approach

GM had chosen to form a JV with the largest domestic car manufacturer in Russia: AvtoVAZ. Through it, GM gained access to the partner’s production facilities, supply chain, and sales network. Russia’s domestic car makers typically manufacture up to 80% of the components (versus 40% for European manufactures). Partnering with such a company could reduce time to market for new products.

GM will also be able to take advantage of their partner’s relationships with the government. Russia’s numerous government agencies are recognized for their ability to create endless red tape and demand kickbacks. A local partner could prove beneficial in overcoming bureaucratic hurdles. GM’s JV partner, however, also brings with it liabilities such as, until recently, being the largest single debtor to the state due to unpaid taxes. Also, AvtoVAZ had been the subject of an aggressive income tax evasion case by Russian tax authorities in 2000.

GM’s strategy is focused on exporting its vehicles manufactured in Russia; therefore, GM’s FDI can be considered vertical FDI. GM, like Ford, is interested in participating in Russia’s growing domestic car market and does sell a small amount of its production locally. GM, unlike Ford, attempts to both grow its market share within Russia and gain efficiencies via lower labor costs for its exports to other markets.

Summary and conclusions

The OLI theory suggests that when companies leverage Ownership specific advantages (O), Location advantages (L), and Internalization advantages (I) together they gain an advantage from FDI. Both Ford and GM, through whole ownership or JV partnerships, utilize their technology, process, and management capabilities to create a competitive advantage over domestic companies. Such MNCs still have to operate and compete within a business environment having market imperfections, caused in part, by the government’s attitude towards FDI. Many members of the Duma view FDI as an attempt by MNCs to rob Russia of its riches by transferring the wealth abroad.

Political mistrust causes delays in making legislative changes to both the legal and financial system considered necessary to make the market more efficient and attractive for FDI. Political concerns had a direct bearing on GM’s JV with AvtoVAZ, as the government had decided against the sales of shares of AvtoVAZ to a single outside investor. Hence, GM’s JV with AvtoVAZ is restricted to a 41.5% ownership stake, while AvtoVAZ is free to form additional partnerships with other automotive companies such as Korea’s Daewoo. In spite of market inefficiencies caused by inadequate infrastructure, a poorly functioning legal system, a criminalized business environment, and awesome bureaucracy, both Ford and GM view the business rewards for FDI outweighing the risks. While Russia continues to offer great potential for FDI, its internal market imperfections could be a key reason why it was able to only attract an estimated FDI inflow of $5.2 billion out of the global $653 billion FDI flows into major economies in 2003.

Source: J. Stodder, Rensselaer at Hartford, Spring 2005

Essential Vocabulary

1. relocation n – перемещение, передислокация (рабочей силы или производства)

relocate v – перемещать, передислоцировать

2. bulk-to-value ratio – отношение массы груза к его ценности

3. sunk costs – понесенные расходы, расходы прошлых периодов

4. variable costs – переменные затраты

5. labor intensity – трудоемкость

labor intensive – трудоемкий

6. natural-resources intensity – ресурсоемкость

natural-resources intensive – ресурсоемкий

7. consumer electronics – бытовые электронные приборы

8. economies of scope – экономия на масштабах маркетинга и сбыта

9. apparel industry – производство одежды

10. import quota – импортная квота

11. local content – использование местной рабочей силы и оборудования

12. midlevel manager – менеджер среднего звена

13. offshoring n – офшорная деятельность

offshore n – офшор

offshore a – офшорный

14. cargo n – груз

15. cost effective a – эффективный по издержкам

16. automotive company – автомобилестроительная компания

17. factor in(to) v – встраивать, учитывать

18. purchasing power – покупательная способность

19. state-of-the-art – самый современный на настоящий момент

20.licensing n – лицензирование

license n – лицензия

licensor n – лицензиар

licensee n – лицензиат

license v – разрешать, давать разрешение, выдавать лицензию

21. technology transfer – передача технологии

22. horizontal FDI – горизонтальные прямые иностранные инвестиции

23. red tape – бюрократизм

24. kickback n – «откат»

25. tax evasion – уклонение от уплаты налогов незаконными методами

26. vertical FDI – вертикальные прямые иностранные инвестиции

Exercise 1. Answer the following questions.

1. What are the determinants of the course of globalization in an industry or a company? 2. What production aspects determine an industry’s potential to globalize? 3. How can a host country’s regulations inhibit globalization? 4. What are the organizational constraints of globalization for a company or an industry? 5. What are the right conditions required to attract FDI? 6. What was the initial focus of MNCs in Russia? 7. What was Ford’s approach to doing business in Russia? 8. How did GM establish its presence in Russia? 9. What is the essence of the OLI theory?

Exercise 2. Explain the meaning of the following terms: «labor intensive», «energy intensive», «capital intensive», «knowledge intensive» and «natural resource intensive». Make sentences of your own with each term.