Chapter 6 Outline Electrolux's Global Investment Strategy Introduction Foreign Direct Investment in the World Economy

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Chapter 6 Outline
Electrolux's Global Investment Strategy
Introduction
Foreign Direct Investment in the World Economy
The Growth of FDI
The Direction of FDI
The Source of FDI
Horizontal Foreign Direct Investment
Transportation Costs
Market Imperfections 
(Internalization Theory)
Strategic Behavior
The Product Life Cycle
Location-Specific Advantages
Vertical Foreign Direct Investment
Strategic Behavior
Market Imperfections
Implications for Business
Chapter Summary
Critical Discussion Questions
Honda in North America
Notes
Electrolux's Global Investment Strategy
With 1998 sales of over SKr110 billion ($14 billion), Electrolux is the world's largest manufacturer of household appliances (washing machines, dishwashers, refrigerators, vacuum cleaners, and so on). A Swedish company with a small home market, Electrolux has always had to look to other markets for its growth. By 1997, the company was generating over 85 percent of its sales outside of Sweden. A little over 52 percent of sales are in Western Europe, with another 27 percent in North America. In recent years, the most rapid growth has come from Asia (which accounted for 5.1 percent of 1997 revenues), Eastern Europe (7 percent of revenues), and Latin America (6.4 percent of revenues). As of early 1998, the company employed over 100,000 people worldwide, had 150 factories and 300 warehouses located in 60 countries, and sold about 55 million products per year in 150 countries. Electrolux's expansion into Asia, Eastern Europe, and Latin America dates from an early 1990s planning review, which concluded that demand for household appliances was mature in Western Europe and North America. The company conjectured that growth in these regions would be limited to replacement demand and the growth in population, and would be unlikely to exceed 2 to 3 percent annually. Leif Johansson, then the CEO of Electrolux, decided the company was too dependent on these mature markets. He reasoned that the company would have to expand aggressively into the emerging markets of the developing world if it was to maintain its historic growth rate. The company estimated that demand for household appliances in Asia, Eastern Europe, and Latin America could grow at 20 percent annually for at least the next decade, and probably beyond. In 1994, he set an ambitious goal for Electrolux; the company would have to double its sales in these emerging markets from the $1.35 billion it achieved in 1994 to $2.7 billion by 1997 (this target was exceeded). As an additional goal, he stated that Electrolux should become one of the top three suppliers of household goods in Southeast Asia by the year 2000. In addition to the obvious growth potential, another consideration for Electrolux was that its main global competitors, General Electric and Whirlpool of the United States and Germany's Bosch-Siemans, had recently announced similar plans. Electrolux felt that it better move quickly so as not to be left out in the race to profit from these emerging markets. Having committed itself to expansion, Electrolux had to decide how to achieve its ambitious goals. A combination of cost considerations and import barriers made direct exporting from its Western European and North American plants uneconomical. Instead, various approaches were adopted for different regions and countries. Acquisitions of going concerns, green-field developments, joint ventures, and enhanced marketing were all considered. Electrolux stated that it was prepared to spend $200 million per year to increase its presence in these emerging markets. Electrolux made its first move into Eastern Europe in 1991 when it acquired Lehel, Hungary's largest manufacturer of household appliances. In addition, Electrolux decided to establish wholly owned operating companies in Russia, Poland, and the Czech Republic. Each of these operating subsidiaries was a green-field development. Asia demands a much greater need to adapt to local conditions....
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