Market Entry Mode

OUTLINE ▪ Introduction ▪ Swot analysis ▪ What are the factors that Catexhaust should consider in opening a plant in Thailand? ▪ What are the reasons for FDI market entry mode? ▪ Should Catexhaust Company establish a plant in Indonesia? ▪ What are the cultural differences to put into consideration when investing outside Europe? ▪ Conclusion ▪ References

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__________ INTRODUCTION
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“The classical economic theory states that globalization relies on competition to drive down prices and increase product and service quality” (Lamb, Hair & McDaniel 2008). The country that operates more efficiently and has the technology to produce what is needed is likely to attract more investment than a country that does not (Lamb, Hair & McDaniel 2008). Most firms prefer to invest in countries where they can access cheap labor, advanced technology, stable economic climate, and good infrastructure among other factors facilitating effective performance of a business (Lamb, Hair & McDaniel 2008). Globalization consequently expands economic freedom, spurs competition and raises competition for international companies and offers access to foreign capital, global export markets and advanced technology while breaking the monopoly of often inefficient and protected domestic producers (Lamb, Hair & McDaniel 2009). A Consequent move by Catexhaust to establish a new plant in the Asian region requires the firm to evaluate the effectiveness with reference to its resources as well as the advantages and costs that it would incur on undertaking to open a plant in this region.
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SWOT ANALYSIS
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Catexhaust Company benefits from Germany’s impressive economic performance evident from its total GDP in 2008 of $ 3649 billion making it the fourth highest country in the world (The Economist 2010). The company stands to gain access to a larger market base resulting from its investment in foreign regions (Standard Bank n d). However, the company is likely to face the challenges prevalent in the automotive industry such as the industry’s expensive fixed costs as well as huge volumes of investment and the high cost required to train and retain skilled labor in the company. In addition, the company faces threat of competition from other more efficient companies as well as the fluctuating prices of raw materials.
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WHY CATEXHAUST SHOULD OPEN A PLANT IN THAILAND
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Geographically, Thailand is well endowed with natural beauty, favorable tropical climate and consists of a friendly and hospitable population which makes the region generally accommodative and favorable for doing business (Communicaid 2009). The country holds a population over sixty million people has its capital city at Bangkok which is the key economic and political city (Communicaid 2009). In terms of economic compatibility, Thailand’s economy is in the process of growth and heavily relies on exports trade with the major markets situated in the North America Japan and Europe (Communicaid 2009). Thailand enjoyed economic boom in late 80s and early 90s but in 1997, the country was highly influenced by economic crisis that hit various countries of Southern Asia nation substantially discouraging FDI in the country (Communicaid 2009). However, the current Thailand market is vibrant with economic activities of both large and small nature which has played a major role in ensuring that the economy is dominated by increased competition which prompts international and local corporations to exploit the benefits provided by the market (Standard Bank n d). Catexhaust Company can borrow from Thailand’s technology and skills consequently reaching higher levels of output (Standard Bank n d). Further, establishment of a new plant in the region would significantly reduce transportation cost for inputs allowing the firm to produce at efficient levels. Based on the performance of the automotive industry in Germany, Catexhaust should consider the overall performance of the Thailand’s automotive industry. Thailand’s automotive industry is among the largest automotive market and assembler in the Asian region (Runckel 2005). The country’s automotive industry generates considerably large export revenue and the domestic demand for automobiles is relatively high due to widespread credit availability as well as excise tax reduction in certain automobiles which reduces overall prices (Runckel 2005). Further, double digit export growth achieved over the recent past is a clear indication of Thailand’s impressive performance as the regional automotive manufacturer and supplier (Runckel 2005). This serves to promote efficient performance of the new industry in the region. This would be highly facilitated by free trade agreements that Thailand has signed with such countries as Australia, China, and India among others as well as the marketing opportunities emerging in the Southern Eastern Asia facilitated by Asia free trade agreement (Runckel 2005). Thailand is friendly to its investors and has developed well outlined investment policies which aim at market liberalization and promotion of free trade (Thailand Board of Investment 2004).The government of Thailand promotes foreign investment through provision of a business environment that eases the process of doing business in the country as well as offering attractive investment locations in the region (Thailand Board of Investment 2004). Through the country’s board of investment, the government offers tax incentives support systems, duty exemptions and reductions especially to foreign companies that contribute to development of skills, technology and innovations to Thailand economy (Thailand Board of Investment 2004). The country’s attitude and treatment of foreign investment provides a condusive environment for Catexhaust to establish its plant in the region and exploit the incentives provided by the government to promote its performance in the industry. Catexhaust’s plant is therefore likely to receive considerable incentives from the government of Thailand if it decides to establish its plant in the region which improves overall business performance. In terms of infrastructure, Thailand has modernized and highly advanced transportation facilities as well as upgraded communication and information technology networks which promote efficiency in business and improve overall living conditions in the region (Thailand Board of Investment 2004). This would facilitate effective transportation of the plant’s raw materials and finished products which would promote efficiency and lead to increased profitability. In 1997, when the Asian currency crisis occurred, the government embarked on implementing measures geared towards attracting foreign investment which had drastically fallen at the time (Jetro 1999)
Net FDI inflow in Thailand on balance of payment basis [pic] Prepared by JETRO from Bank of Thailand statistics. Source: http://training.itcilo.it/actrav_cdrom1/english/global/jetro2/inv1-2.html The graph above shows the amount of FDI in Thailand in the period between 1995 and1998. There is a sharp decrease in FDI evident between 1997 and 1998. The yellow portion represents the total fraction of Japan’s investment in Thailand which is one of the major foreign investor in the country.
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REASONS FOR FDI MARKET ENTRY MODE
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In direct foreign investment, the company stands to gain the highest rewards or incur the highest potential risk (McDaniel 2008). Catexhaust may choose this market entry mode due to lack of suitable investors to engage in joint venture or primarily to avoid communication problems and conflicts of interest prevalent in joint ventures (McDaniel 2008). Further through establishment of a plant in Thailand, the company is able to directly control the activities of the plant in line with its policy which may not be possible under other market entry modes such as joint venture (McDaniel 2008). In addition, through establishment of its own plant in Thailand, Catexhaust is able to reduce the risks of merger failures common in joint ventures and it is therefore the preferred mode of entry into the Thailand market. On the other hand, Catexhaust may choose to engage in a joint venture where the company seeks to buy a part of Thailand’s company consequently merging into one entity (McDaniel 2008). Although this market entry mode consumes relatively less time and resources to access the global market, it is a very risky endeavor and if it is not approached carefully it can lead to devastating effects to the new entity such as bankruptcy or business failure.
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__________SHOULD CATEXHAUST ESTABLISH A PLANT IN INDONESIA
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The country of Indonesia is located at the crossroads of the Indian and Pacific oceans and it is among the highly populated countries of the world with the largest number of Muslims (Communicaid 2009). The country has an authoritarian system of governance and is constantly dominated by widespread political instability emanating from corruption, terrorism as well as wide spread civil unrests (Communicaid 2009). These factors have negatively impacted on the country’s development consequently slowing down economic progress efforts as well as discouraging foreign investors from venturing in the region (Communicaid 2009). Although major political reforms have taken place in the recent parts, the country still has untapped potential which hinders growth in the economic sector (Communicaid 2009).Indonesia was among the top 20 recipients of inward direct investment in the 1990s (Pecotich 2006) The country further lags behind other major Asian countries in manufacturing production which would negatively impact on establishment of the new plant in the region (OECD 1999). The export platform in the country is growing but at a slow rate and foreign investors still perceives the region as an export location further limiting the overall market potential (OECD 1999). Further, the government of Indonesia still retains a considerable discretion to reject foreign investment despite the liberalization of investment regime in the region and foreign investment approvals involve numerous procedures which are blurred with irregularities and discriminatory behavior against foreign candidates (OECD 1999). This cumbersome process discourages the company from establishing a plant in the region. Moreover, the government tightened restrictions on market access in the automotive sector leading to lack of consistency in the industry which sends confusing signals to potential foreign investors consequently discouraging the German company from establishing its plants in the region (OECD 1999). The automotive industry in the region has also faced great difficulties through out its development and Indonesian automotive manufacturers are constantly facing difficulties brought about by the effects of globalization of manufacturing production and liberalization (Setiono n d). The financial crisis as well as the ensuing IMF- led manufacturing programme impacted great pressure on domestic market rapidly leading to flooding of the domestic market with imported goods and this further limit the market for investors (Setiono n d). Indonesia was also adversely affected by the Asian crisis of 1997 and also implemented measures such as easing the restrictions in mergers and acquisitions by foreign firms and foreign equity ownership since the investment levels had fallen by 29.7 during the period (Jetro 1999). The graph below represents the trend of foreign direct investment in Indonesia in 1996 and 1997. It indicates the fall in the amount of FDI from the first quarter of 1997 with the third and the fourth quarter recording negative balance of payment.
Net FDI Inflow to Indonesia on balance of payment basis
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Prepared by JETRO from Bank of Indonesia statistics Source: http://training.itcilo.it/actrav_cdrom1/english/global/jetro2/inv1-2.html It is clear that Indonesia’s investment climate and competitiveness is poor relative to the emerging regional economies though the country has achieved remarkable improvement since 2000 (Brondolo et al 2008) In fact, in 2007, Indonesia outranked Thailand and Philippines in terms of investment volumes (Brondolo et al 2008). However, business surveys indicate that the prevalent macro economic instability as well as economic and regulatory policy uncertainty is a major hindrance to foreign investment and is followed by corruption, labor issues , infrastructural hindrances among other issues (Brondolo et al 2007). Consequently, Thailand is the most suitable location for the German company to set up its plant since it provides a condusive economic environment for its business to thrive. Since Indonesia is characterized by political and economic instabilities which are likely to affect the overall performance of the company, Catexhaust should establish its plant in Thailand since it is the location that maximizes returns for FDI. However, clear lines of management control are essential to ensure successful establishment and maintenance of the new plant (Weigel 1997).
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_________KEY CULTURAL DIFFERENCES A GERMAN MANUFACTURER SHOULD BE CONSIDERING WHEN INVESTING OUTSIDE EUROPE
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Every society has its set rules and values which are shared among the citizen and defines the society’s social orientations (McDaniel 2008). The culture of a particular society underlies the family set up, prevalent education systems, religion as well as the social class systems (McDaniel 2008). The German investors must ensure that they uphold these values in their business and marketing strategy of the foreign regions in which it wants to expand its market since they have tremendous effect on consumer preferences (McDaniel 2008). Countries outside Europe have their own customs and traditions that dictate the way they conduct business and this considerably varies from the German business culture (McDaniel 2008). Catexhaust should therefore take into considerations such factors as holiday periods observed in the regions they are investing in, personal and business relationships dominant in these region as well as general attitude of the people towards the products that the company is offering (McDaniel 2008). Failure to put these factors into consideration may result in culture clash which may lead to poor performance of the business in the region.

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__________ CONCLUSION
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As a result of globalization, investing in foreign markets is a commonly preferred means of penetrating markets in the global economy. Companies’ prefer to invest in foreign regions in order to expand their output and consequently benefit from economies of scale. It is therefore important for Catexhaust to establish a plant in Thailand in order to reap the benefits associated with globalization.

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__________ REFERENCE LIST
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Brondolo, J., & Bosch, F. International Monetary Fund, Fiscal affairs Dept, Silvani, C, Le 2008, Tax Administration Reform And Fiscal Adjustment: The Case Of Indonesia 2001-2007, IMF.

Communicaid, 2009. Doing Business in Thailand-Thai Social and Business [Online]. Available at: http://www.communicaid.com/access/pdf/library/culture/doing-business-in/Doing%20Business%20in%20Thailand/.pdf [Accessed11th November 2010]

Jetro 1999. White Paper on Foreign Direct Investment; Crisis Hit Countries Deregulate to Attract Foreign Capital. Tokyo, Japan external trade organization.

Lamb, C.W., Hair, F J., McDaniel C, 2008. Essentials of Marketing, NY: Cengage learning.

McDaniel, C., Gitman, J, L, 2008. The Future of Business: the Essentials, NY: Cengage learning.

OECD. 1999. Foreign Direct Investment and Recovery in Southeast Asia. London, OECD publishing.

Pecotich, A, 2006. Handbook of Markets and Economies; East Asia, Southeast Asia, Australia, and New Zealand, NY: M.E. Sharpe.

Runckel, W. C, 2005. Thailand Automotive Industry Update 2005, Runckel & Associates [Online]. Available at: http://www.business-in-asia.com/auto_article2.html [Accessed 11th November 2010]

Setiono, M, not dated. Indonesia: Current Situation in the Auto Industry and Its Trade Potential [Online]. Available at: http://www.unescap.org/tid/publication/part_two2223_indo.pdf [Accessed 11th November 2010]

Standard Bank, not dated. Organization; Growing a Business [Online]. Available at: http://tutor2u.net/business/gcse/organisation_growing_a_business.htm [Accessed 11th November 2010]

Thailand board of investment, 2004. Thailand’s Advantages; The Board of Investment of Thailand [Online]. Available at: http://www.boi.go.th/english/why/thailand_advantages.asp [Accessed 11th November 2010]

The Economist, 2010. Pocket World in Figures, 2011 edition, London: profile book ltd.
Weigel, R. D, 1997. Foreign Direct Investment. London, World Bank publications.

References: ____________________________________________________________ In direct foreign investment, the company stands to gain the highest rewards or incur the highest potential risk (McDaniel 2008) ____________________________________________________________ Every society has its set rules and values which are shared among the citizen and defines the society’s social orientations (McDaniel 2008) Communicaid, 2009. Doing Business in Thailand-Thai Social and Business [Online]. Available at: http://www.communicaid.com/access/pdf/library/culture/doing-business-in/Doing%20Business%20in%20Thailand/.pdf [Accessed11th November 2010] Lamb, C.W., Hair, F J., McDaniel C, 2008. Essentials of Marketing, NY: Cengage learning. McDaniel, C., Gitman, J, L, 2008. The Future of Business: the Essentials, NY: Cengage learning. OECD. 1999. Foreign Direct Investment and Recovery in Southeast Asia. London, OECD publishing. Pecotich, A, 2006. Handbook of Markets and Economies; East Asia, Southeast Asia, Australia, and New Zealand, NY: M.E. Sharpe. Runckel, W. C, 2005. Thailand Automotive Industry Update 2005, Runckel & Associates [Online]. Available at: http://www.business-in-asia.com/auto_article2.html [Accessed 11th November 2010] Setiono, M, not dated