Page 269 - DMGT545_INTERNATIONAL_BUSINESS

International Business

notes 14.1.3 strategic role of foreign factories

Rationale behind establishing a foreign manufacturing facility evolves over time. Initially many
foreign factories are established where labour costs are low. Their strategic role typically is to
produce labour-intensive products at low cost as possible. For example beginning of 1970, many
US firms in the computer and telecommunication equipment business established factories across
Southeast Asia as Malaysia, Thailand and Singapore since these countries offered an attractive
combination of low labour costs, adequate infrastructure and a favourable tax and trade regime.
Initially the components produced by these factories were designed elsewhere and the final
product would be assembled elsewhere. Overtime, however the strategic role of some factories
have expanded, they have become important centres for the design and final assembly of products
for the global marketplace. An example is Hewlett-Packard’s operation in Singapore.
Such upward migration in the strategic role of foreign factories arises because many foreign
factories upgrade their own capabilities. This improvement comes from two sources. First,
pressure from the centre to improve a factory’s cost structure and/or customize a product to
the demands of customers in a particular nation can start a chain of events that ultimately leads
to development of additional capabilities at that factory. Second, source of improvement to the
capabilities of a foreign factory can be the increasing abundance of advanced factors of production
in the nation in which the factory is located. Many nations that were considered economic
backwaters a generation ago have been experiencing rapid economic development during the
1980s and 1990s. Their communication and transportation infrastructures and education level of
the population have improved. While these countries once lacked the advanced infrastructure
required to support sophisticated design, development and manufacturing operations, this is no
longer the case.
self assessment

5. An efficient manufacturing and .................. functions can improve an international
business’s competitive position.
6. The appropriate .................. choice is determined by the various country, technological and
product factors
7. Rationale behind establishing a foreign manufacturing facility evolves over .................. .

8. Initially many foreign factories are established where labour costs are .................. .
9. Upward migration in the strategic role of foreign factories arises because many foreign
factories .................. their own capabilities.

14.1.4 make-or-buy Decisions

International businesses frequently face sourcing decisions:

l z Decisions about whether they should make, or
l z Buy the component parts that go into the final part.
l z For example, in the automobile industry, the typical car contains more than 10,000
components, so automobile constantly face make or buy decisions.

l z Make-or-buy decisions pose plenty of problems for purely domestic businesses but even
more problems for international business.

264 lovely Professional university