DURHAM UNIVERSITY UNDERGRADUATE DISSERTATION 2010 Anonymous Code: Z0508507 10 th March 2010 Market Entry for International Manufacturing firms: An Evaluation of the Strategic Entry Options Available to BFG International for Entering China
D U R H A M U N I V E R S I T Y U N D E R G R A D U A T E D I S S E R T A T I O N 2 0 1 0
Anonymous Code: Z0508507
10th March 20100
Market Entry for International Manufacturing firms: An Evaluation of the Strategic Entry Options Available to BFG International for Entering China
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In the name of Allah, Most Gracious,
Most Merciful
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Declaration
“This dissertation is the result of my own work. Material from the published or
unpublished work of others, which is referred to in the dissertation, is credited to
the author in question in the text. The dissertation is 11,997 words in length.
Research ethics issues have been considered and handled appropriately within the
Durham Business School guidelines and procedures.”
CANDIDATE SIGNATURE
_____________________________________________________
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Executive Summary
The aim of this study was to find out, by the means of assessing micro and macro
factors, the ideal entry strategy for BFG International for entering China. The use
of interviews, existing market research and an observational study made the basis
for the argument. We are aware that the Chinese market is a significant market,
with a population of 1.3 million. However, these figures, and other factors of the
market, are only a quantifiable part of the entry in to China, and do not reflect
other concerns of the market. Although many firms succeed in their Chinese
operations, several have failed. Therefore, this study is largely based on
qualitative data in order to assess the firm-specific factors that essentially make
the basis for deciding upon a market entry mode.
The findings of this study were suggestive of a Foreign Direct Investment (FDI)
strategy to be applied by the company in to China. This will require higher levels
of resource and personnel commitment, nevertheless, the findings are suggestive
that it will also increase market share significantly. We found that by the means of
FDI, BFG International will enable itself to ideally obtain its forecasted turnovers.
Also, the FDI strategy will allow for not only revenue maximisation, but also cost
reduction in order to achieve the goals of the firm. On the other hand, an export
strategy may only provide an increase in revenue, and the findings are suggestive
of a market that presents a fairly difficult entry for exporters, with several
indigenous competitors. One major concern however, was the obtaining of
finance for an FDI project. Although this is outside the scope of this research, a
brief recommendation is made at the end.
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Table of Contents
1 Introduction...........................................................................................................6 1.1 Introduction to BFG International......................................................................7 1.2 Introduction to the Market for Composite Products ....................................8 1.3 Understanding the Research Problem ..............................................................8 1.4 Expected Contributions of this Study.................................................................9 1.5 Choice of Study ..........................................................................................................9
2 Literature Review ............................................................................................. 11 2.1 Modes of Entry........................................................................................................ 11 2.1.1 Proximity‐Concentration Trade Off.......................................................................12 2.1.2 Transaction Cost Approach.......................................................................................12 2.1.3 First Mover Advantage................................................................................................13 2.1.4 Taxation as a determining factor for location...................................................13
2.2 The Uppsala Internationalisation Model....................................................... 14 2.3 The Eclectic Paradigm.......................................................................................... 16 2.4 Network Theory (Guanxi)................................................................................... 19 2.5 Learning Theory .................................................................................................... 20 2.6 NonEquity Based Entry ...................................................................................... 21 2.6.1 Export Performance in Emerging Markets.........................................................23
2.7 Equity Based Entry................................................................................................ 23 2.8 Market Entry Motivations................................................................................... 25 2.8.1 Cost Reduction Model..................................................................................................26 2.8.2 Revenue Maximisation Approach...........................................................................27
2.9 Market Entry Concerns........................................................................................ 27 2.10 Discussion of Literature Review .................................................................... 29
3 Methodology ....................................................................................................... 30 3.1 Research Approach ............................................................................................... 30 3.1.1 Primary Sources of Information..............................................................................30 3.1.2 Secondary Sources of Information.........................................................................31
3.2 Data Collection ....................................................................................................... 31 3.3 Research Design..................................................................................................... 32
4 Findings and Data Analysis............................................................................ 35 4.1 Study of Foreign Activity ..................................................................................... 35 4.1.1 Distribution of Foreign Activity ..............................................................................36
4.2 Study of Market Potential ................................................................................... 38 4.3 Benefits and Costs of Exporting and FDI........................................................ 40 4.4 SWOT Analysis........................................................................................................ 42 4.4.1 Identifying the Strengths and Weaknesses ........................................................42 4.4.2 Identifying the Opportunities and Threats ........................................................44
5 Limitations .......................................................................................................... 46
6 Conclusion and Recommendations............................................................. 47
7 References ........................................................................................................... 50 8 Appendices .......................................................................................................... 56
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“To Evaluate the Strategic Entry Options available to BFG International
When Entering China”
1 Introduction
The purpose of this study is to evaluate and recommend the ideal mode of entry
into the Chinese fibreglass market for BFG International. BFG International is a
globally reputable company, based in Bahrain with a supply network spread
across five continents. The company is associated with the manufacturing of
composite products made primarily from fibreglass.
The entry of manufacturing firms into new international markets has been a vital
component of the globalised markets that we experience everyday. Firms of all
sizes are now looking at methods of entering new markets. The entry of new
markets has become a crucial factor for survival in the competitive marketplace.
Making the right entry choice for particular markets is an extremely important
decision for firms to make.
Often, it is developing countries such as China that firms first look at when
seeking new market entry. These markets display strong potentials for growth and
usually offer the right mix of costs reduction and revenue maximisation benefits
to firms that look to enter them. Nevertheless, these markets are also usually the
most complex, and thus entry must be well executed.
Firms must choose carefully which type of entry they should opt for. Differences
in entry strategy can be associated to the level of commitment that the firm aims
to give to a market, and the outcomes that are expected from entering the market.
The different types of entries can be associated with the following variables:
• High level of commitment for cost reduction (Wholly
owned facility)
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• High level of commitment to maximise revenue (Wholly
owned facility exporting to neighbouring markets)
• Low level of commitment to maximise revenue (Joint
venture or merger/acquisition)
• Low level of commitment to test new markets (Export)
The various options provide diverse types of opportunities for different scales of
businesses. Predictably, firms with high turnovers, yet low profitability may opt
for cost-cutting approaches in new markets. They are more concerned with the
markets opportunity for cost reduction rather than motivations of increased
turnover. Choosing the right strategy can make companies potentially more
profitable in the long run whilst achieving their growth targets.
As each market presents its own opportunities and threats, this study aims to
recommend BFG International the ideal method to entering the Chinese
Fibreglass Market. This investigates the following questions:
• What are the main choices available to BFG International to enter
China?
• Are there any trends that BFG International is following that
support its move in to China?
• What are the motivations and concerns behind the different entry
modes for BFG International
• And therefore, what is the most suitable entry strategy for BFG
International when entering China?
1.1 Introduction to BFG International
BFG International is a reputable member of the industry involved in the design
and manufacturing of composite products since 1975, giving it 35 years of
experience in the fibreglass field. It is engaged in various sects of the industry
ranging from architectural domes to train bathroom cabins. Over these years, BFG
has rapidly grown to become an internationally known supplier for various
multimillion-dollar projects, and has been a credible player in the market for its
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research breakthroughs and unique ideas. The timeline (appendix A) illustrates the
growth of BFG in international markets. The product portfolio (BFG International
website) shows the vast range of products that BFG International has supplied for
a variety of both national and international projects. Varying market entry
strategies were used to execute these tasks.
1.2 Introduction to the Market for Composite Products
The market for fibreglass has been rapidly growing amidst the new technologies
and applications for its use. Market research by Fredric Romier (2009) has shown
that the industry growth over the last 20 years has ranged between 4% and 10%
annually. He added that certain applications, such as wind energy, have seen
double-digit growth annually. In his book, A. Brent Strong (2008) discusses the
applications for composite. He identified land transportation methods such as
cars, trains, buses and trucks as a major market for fibreglass reinforced
composites. As early as 1953, when the Corvette® sports car was born, the use of
a fibreglass body made fibreglass a recognised and popular material for transport.
This brought the industry to a new beginning, where the properties of this material
were appreciated for several applications. Today, fibreglass is known to be the
efficient material for construction, marine, corrosion products, electrical, sports,
medical, energy generation, and aerospace amongst several other small and large
applications.
With the growth of the applications, there has been a tremendous increase in the
demand for composite products. This has led to an increase in the number of firms
in the market; however, the management at BFG International believe that there is
still a gap between the supply and demand for the products, especially in China.
1.3 Understanding the Research Problem
Although BFG International already has a presence in China, it is not entirely
satisfied with the outcomes and believes that in order to achieve its forecasted
turnovers for the upcoming years a new strategy to enter China in a more suitable
manner is required. Currently BFG International has a joint venture with Chinese
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Railway General Company (CRGC), a state-owned subsidiary of Chinese
Railways. The standing issue is that although the technologies and funding were
mutual, the terms and conditions state that BFG cannot use this facility for any
activities outside the needs of Chinese Railways. This restricts BFG International
from achieving total exposure to the Chinese market to reach its full potential.
BFG International has seen a large scope for potential business opportunities in
China, and believes that it is an ideal location for Chinese manufactured fibreglass
goods to be exported to other countries such as South Korea, Japan and even
Australia, where BFG has secured a large-scale project very recently.
In contrast to this, BFG has underlined the concerns of entering a competitive
market such as China with such high commitment. Therefore, the alternative
solution would be a low commitment, low return approach. This would mean that
instead of setting up a new factory in China that can cater to China as well as
neighbouring countries, it would apply an export strategy to enter China. This
strategy may be executed by using its existing facilities in Bahrain, India and the
Philippines.
1.4 Expected Contributions of this Study
By conducting extensive research about the concerns that surround BFG
International’s entry into the Chinese market and comparing this with the motives,
strengths and weaknesses that the company possesses, we aim to suggest the most
suitable strategy to BFG International to enter China. This study will go beyond
the basic principals of market entry, and will make use of several models,
thoughts, and approaches to find the ideal solution for the growth of the company
in terms of its current state to determine whether a high or low commitment
should be made to the market.
1.5 Choice of Study This study is of particular interest to me as BFG International is a family-owned
business, which I intend to join upon completion of my education. I believe that
the Chinese market is one that no business aiming to become a market leader can
ignore simply because of the potential power of this market. I deem that the
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advantages of entering China go beyond the revenue maximisation and cost
reduction potential of China and that the Chinese market offers the ability for
firms to learn from the fast pace and efficient business culture. China prevails far
ahead of any nation in its exports, imports and its ability to attract foreign
investment. China boasts a trade surplus, whereas other developed nations such as
the USA and the UK are in a trade deficit, and therefore strongly promotes
exporting firm to enter China.
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2 Literature Review This section will identify current ideologies in regards to the topic ‘entry
strategies’ and simultaneously identify the gaps in the current research. Firstly,
two key theories of market entry will be discussed which look at the process and
motivations of internationalisation. The modes of entry will also be reviewed, with
an attempt to keep relevance to manufacturing firms. However there seems to be a
lack of pertinent information specific to the industry in question. To conclude, the
motivations and concerns will be outlined as perceived by existing research.
2.1 Modes of Entry
Entry strategies for multi-national companies entering new markets such as China
are vast; however, each method has its benefits and costs. The four main entry
strategies that the company may consider for international growth are the
following:
1. Exporting using a distributor in China,
2. Setting up with a joint venture in China,
3. Merging with an already established manufacturer and
4. Setting up a wholly owned facility in China (FDI)
Each provides different motivations, and could have diverse implications for firms
of varying sizes and distinct styles of management.
There are several methods of operation for new market entry (Asmussen, Benito
and Petersen, 2009) that have been identified as being dependent on a variation of
factors such as taxation (Mutti and Grubert, 2004), availability of internal finance
(Quer, Claver and Andreu, 2007) and competition intensity (Eicher and Kang,
2005), however, the critical motives for new market entry are innate within the
firm-specific advantages such as ownership, locational and internalisation
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advantages (Dunning, 1988) and the firms Knowledge ( Johanson and Vahlne,
1988)
2.1.1 Proximity‐Concentration Trade Off Helpman, Melitz and Yeaple (2004) recognises the aforementioned methods of
entry as providing firms in varying industries with different outcomes. Their
model focuses on the motives and concerns of distinct strategies that may be used
for new market entry. The model confirms the existence of the ‘proximity-
concentration trade-off’, which is the key concern for firms when choosing the
mode of entry. Their findings suggest that close proximity to markets may be a
vital component to choosing an export strategy rather than FDI (FDI) due to the
reduced transport costs enabling them to stay competitive in the market without
the need to place significant resources. Nevertheless studies of proximity have
confirmed that closer proximity to foreign markets may encourage firms to
indulge in FDI, as market proximity can often be contradictory with concerns of
cultural and language barriers that tend to widen as proximity decreases (Kevin
Zhang, 2005). The study of firms from Hong Kong and Taiwan investing in China
by Zhang suggests that proximity may increase the comfort for firms to invest
abroad.
2.1.2 Transaction Cost Approach
The transaction cost model suggests that entry decisions are based on the level of
resources that the firm will require for foreign entry (Anderson and Gatignon,
1986). Although most studies consider the transaction costs of the entry, they do
not relate this to performance. The study of Brouthers (2002), looked at the firms
entry and performance in light of the transaction cost approach. Their findings
were consistent with the hypotheses that the firms that chose entry modes that
were part of the extended transaction cost model had reported ‘significantly better
performance’ (Brouthers, 2002, Pp. 215). Their study confirms the relationship
between higher resource commitment and performance, which enlightens the
importance of the Transaction Cost Model.
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2.1.3 First Mover Advantage
Porter’s (1986) view suggests that first movers into a market are often the
eventual leaders. However, in a contrasting view, many scholars (Crain, 1966;
Walker 1969, Cited in Mascarenhas, 1992) have suggested that the success of new
entrants into a market is based not only on timing, but also on political,
technological and environmental decisions. Essentially, early entrants to a market
may have preliminary success, but would not benefit from the newest and most
efficient technologies and government schemes, thus giving some ability for
future entrants to perform competitively.
Nevertheless, in support of Porter, Caves (1982) and Root‘s (1987) (cited in
Chang and Rosenweig, 2001) findings went on to suggest that within the
international markets, new goods must be introduced ahead of the competitors to
large markets with potential growth opportunities. Mascarenhas’ (1992) findings
supported also supported these findings, concluding that the surviving first
entrants of a market maintained higher long-term market share followed
respectively by early followers and late entrants. However, he added that in
markets with localisation pressures, first entrants and late entrants survived longer
than early followers. Nevertheless, late entrants still have a small share of the
market only, and therefore must enhance their competitiveness with other means,
such as financial resources and scale of marketing expertise.
2.1.4 Taxation as a determining factor for location
The choice of entry strategy and location for a firm may be associated to the
taxation policy of the market they intend to enter (Hortsman and Markusen, 1992,
Cited In: Devereux and Griffith, 1998). Devereux and Griffith (1998) associated
taxation to be a key concern for US firms entering Europe. Their findings were
suggestive of taxation having an impact on the entry mode decision. However, it
was discovered that taxation only had a ‘quantitatively significant’ role in choice
of location and that this was not the single defying factor in the choice of entry, or
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size of entry. The study of Andreas Haufler and Ian Wooton (1998) added that the
country size also impacted the choice of entry and location. Therefore, a larger
country could attract investment or trade despite having slightly higher taxation as
it provides the ability to enter a greater market.
2.2 The Uppsala Internationalisation Model
The Uppsala Internationalisation Model (Johanson & Vahlne, 1977) is one of the
pioneering models of internationalisation that seeks look at the process by which
the enterprise obtains gradual global presence. The model makes a distinction
between ‘state and change’. State aspects are market commitment and market
share whereas the change aspects are considered to be current business activity
and commitment decisions.
Market knowledge and market commitment are thought to have an effect on the
decision made regarding the level of contribution of a firms resources and the
manner in which current activities are conducted by the firm. The two knowledge
types that are outlined are objective knowledge and experiential knowledge.
Johanson and Vahlnes’ model implies that experiential knowledge is the ‘primary
way of reducing marketing uncertainty.’ This means that a company can make a
more fertile commitment of resources as it gains experience from its activities in
the new market. This will in turn place more of the firm’s resources within the
market.
A key characteristic of this model is that it strongly emphasizes that firms enter
new markets facing many opportunities and problems, but will find solutions to
the problems by the knowledge it gains, and thus promote their solution within the
market to take advantage of the opportunities.
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In effect, Johanson and Vahlnes’ model ‘expects that the internationalisation
process, once it has started, will tend to proceed regardless of whether strategic
decisions in that direction are made or not.’( Johanson and Vahlne, 1977)
Figure 2.1 below illustrates the internationalisation process of firms as seen by
the Uppsala model.
Johanson and Vahlne’s model has rooted from empirical research based on
Swedish firms that compete internationally (Carlson, 1966,1975: Cited from
Johanson & Vahlne 1977). Although Johanson and Vahlne have questioned their
own models validity as being ‘limited to countries like Sweden which are rather
small and highly industrialized’ (Johanson and Vahlne, 1977), follow up
empirical studies of many researchers including some from the US, Japan, Turkey
and Hawaii have shown consistency in their findings that show that the
commitment levels and decisions are based on current activities and market
knowledge (Bilkey, 1978; Bilkey and Tesar, 1977; Karafakioglu, 1986, Hook &
Czinkota, 1988, Cited From Johanson and Vahlne, 1977).
Adapted From Otto Andersen (1993)
Figure 2.1: The Internationalisation Process of the Firm
Market
Knowledge
Current Activities
Market
Commitment
Commitment Decisions
State aspects Change aspects
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The Uppsala Model may however be disregarded for having an optimistic
approach, which generalizes the idea that all new entrants will stay in the market
upon gaining experience. It does not look at the concept of exiting risky markets
that may not provide future prospects. In addition, the model ignores individual
behaviours by different firms; whereas firms that have limited liability may be
less risk averse than those firms with full liability. This is consistent with the view
of Gollier, Koehl and Rochet, 1997).
The Network Model of Internationalisation and Experiential Knowledge (Richard
Hadley and Heather Wilson, 2003) revisits the Uppsala Model. Their study tests
the links between experiential knowledge, the firm’s degree of internationalisation
and the markets degree of internationalisation. The study found significant
support between the firms internationalisation knowledge and its relation to
market diversity. It went on to suggest that market diversity was a key aspect for a
firm, and that the exposure to culturally differing markets facilitated the firm’s
capabilities for conducting international business.
2.3 The Eclectic Paradigm
The Eclectic Paradigm (Dunning, 1976) offers a ‘holistic framework’ that can be
used to identify and assess the ‘significance of the factors influencing both the
initial act of foreign production by enterprises and the growth of such production’
(Dunning, 1988, P.1). As the Eclectic Paradigm was first introduced in a seminar
in 1976, the best source available is based on Dunning (1988). Unlike the Uppsala
Model of Internationalisation whereby national firms are ‘transformed’ into
multinational firms, the Eclectic Paradigm is the most widely appreciated
framework of the direct investment theory.
The Eclectic Paradigm according to Dunning aims to explain ‘the extent, form
and pattern of international production.’ It looks at three key sets of advantages
that a firm would like to possess when seeking international growth and face the
challenge of competing with local firms. The first set is ownership-specific
advantages, such as technological superiority within the industry, or lower
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transactional costs that are often associated with multinational organizations. The
second requirement for international production is ability to transfer the
ownership-specific advantages across national borders (Dunning, 1988).
However, this must be internal within the company rather than be sold to other
foreign-based enterprises. The theory of imperfect markets can be used to explain
why the company chooses to exploit its technological base, using it as a resource
for its own foreign operations rather than selling the license to use its technology
to a local rival firm within the same market. Locational advantages are the third
set of advantages that a firm would like to possess. These would consider the
attraction of a certain location for foreign production and are ‘the gist of the
eclectic paradigm of international production’ (Dunning, 1988, P.5).
However, in Dunning’s (1995) reappraisal of the Eclectic Paradigm, he noted that
‘over the last decade or so, a number of events have occurred that, viewed
collectively, suggest that the world economy may be entering a new phase of
market-based capitalism’ (Dunning, 1995, P. 3). In an attempt to update and make
his idea more relevant, he understood that two types of capitalism, hierarchical
and alliance, have led to certain implications on the determinants of Multi-
National Enterprise (MNE) activity.
Dunning (1998) has identified that the early explanations of locational advantages
‘need to be modified as firm-specific assets have become mobile across natural
boundaries’ (Dunning, 1998, P. 45). He suggested that there were 5 different
types of FDI. These were resource seeking, market seeking, efficiency seeking
and strategic asset seeking. Within this, he identified several variables that would
have changed since his earlier studies in 1988 and 1995. These essential changes
have been identified in table 2.1 on the following page.
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Source: John H. Dunning, 1998: Page 53
In its most recent test of the application of Dunnings Eclectic and Envelope
Paradigm, John Dunning, Yong Suhk Pak and Sam Beldona (2007) conducted a
study to assess the foreign ownership strategies of franchisors from the UK and
the USA. Their findings confirmed the relevance of the Eclectic Paradigm, and
ownership, locational and internalisation (OLI) motives for international firms in
today’s market. Their 8 hypotheses were based on the findings of research studies
on nationality, ownership structure, competitive gains, demand and supply,
learning, penetration and control. These hypotheses all make part of the Envelope
Paradigm, and are relevant to the OLI factors of the Eclectic Paradigm. The
Type of FDI
In the 1970’s In the 1990’s
Resource Seeking
1. Availability, price and quality of natural resources
2. Infrastructure to enable resources to be exploited, and products arising from them to be exported
3. Government restrictions on FDI and/or on capital and dividend remissions
4. Investment incentives e.g. tax holidays
1. As in the 1970’s, but local opportunities for upgrading the quality of resources and the processing and transportation of their output is a more important locational incentive.
2. Availability of local partners to jointly promote knowledge and/or capital‐intensive resource exploitation
Market Seeking
1. Mainly domestic and occasionally adjacent regional markets
2. Real wage costs; material costs 3. Transport costs; tariff and non‐tariff
barriers 4. Privileged access to import licenses
1. Mostly large growing domestic markets, and adjacent regional markets
2. Availability and price of skilled and professional labour 3. Presence and competitiveness of related firms, e.g. leading
industrial suppliers 4. Quality of national and local infrastructure, and institutional
competence 5. Less spatially related market distortions, but increased role of
agglomerative spatial economies and local service support facilities.
6. Macroeconomic and macro‐organisational policies as pursued by host governments
7. Increased need for presence close to users in knowledge‐intensive sectors
8. Growing importance of promotional activities by regional or local development agencies.
Efficiency Seeking
1. Mainly production cost related (e.g. labour, material, machinery etc.)
2. Freedom to engage in trade in intermediate and final products
3. Presence of agglomerative economies e.g. export processing zone
4. Investment incentives, e.g. tax breaks, accelerated depreciation, grants, subsidized land
1. As in the 1970’s, but more emphasis placed on market seeking motives 2, 3,4,5,6 and 7 for 1990’s, especially for knowledge‐intensive and integrated MNE activities, e.g. R&D and some office functions
2. Increased role of governments in removing obstacles to restructuring economic activity and facilitating the upgrade of human resource by appropriate educational and training programs
3. Availability of specialised spatial clusters e.g. science and industrial parks; and of specialised factor inputs. Opportunities for new initiatives by investing firms: an entrepreneurial environment and one which encourages competitiveness enhancing cooperation within and between firms
Strategic Asset Seeking
1. Availability of knowledge‐related assets and markets necessary to protect or enhance ownership specific advantages of investing firms‐ and at the right price
2. Institutional and other variables influencing ease or difficulty at which such assets can be acquired by foreign firms.
1. As in the 1970’s but growing geographic dispersion of knowledge‐based assets, and need of firms to harness such assets from foreign locations makes this a more important motive for FDI.
2. The price and availability of synergistic assets to foreign investors
3. Opportunities offered for exchange of localised tacit knowledge, ideas and interactive learning
4. Access to different cultures, institutions and systems; and different consumer demands and preferences
Some variables influencing the Location of Value Added Activities by MNE’s in the 1970’s and 1980’s
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results of their study concluded that there seems to be a correlation between the
mode of entry; equity and non-equity based and the 8 hypothesised variables. This
led to the assumption that foreign firms that possessed different objectives for
new market entry would have differing strategies for entry.
2.4 Network Theory (Guanxi)
‘Guanxi’ is the Chinese word for social networking. It is a popular procedure of
Chinese culture when engaging in business. Within China, the concept of Guanxi
has been given importance in a number of journals. The study of Gordan Chu and
Yanan Ju displays the importance of Guanxi in Chinese society. Their findings
suggest that 92.4 % of their 2000 participants acknowledged the importance of
Guanxi in their daily lives. Moreover, 71.7 % of their participants preferred using
Guanxi connections to ‘get things done’ to the regular bureaucratic processes.
However, the study of Chu and Ju was conducted using only small business
owners who may only represent a particular segment of the market as a whole.
Especially in an industrialised economy such as China, small businesses may feel
that they are disadvantaged by bigger businesses due to Guanxi, yet it may just be
the size of the business that is impacting their success.
In contrast to this Yeung and Tung (1996) discussed in their study ‘Achieving
business success in Confucian society’ that despite the importance given to
Guanxi, the relation it has to business success has not been verified. As the
Chinese government has supported an open door policy for over three decades,
the influx of foreign firms could have had an impact on the regular market
practices, thus reducing the importance of Guanxi as a whole. Nevertheless,
although this may be true, aspects of Guanxi may still be found in the market
place.
Guanxi can be seen as a benefit for the local Chinese society, and may be a hefty
cost for new international businesses positioning their growth in the Chinese
markets. Despite the lack of interest in the ethical perspective of Guanxi within
the locals, the influx of foreign investors has brought some issues to light.
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In terms of Foreign Investors, John Pearce and Richard Robinson discussed in
their study ‘Cultivating Guanxi as a Foreign Investor Strategy’ that Guanxi was
‘the most striking feature and the one most likely to undermine the efforts of
foreign managers.’ This may be seen as a direct threat to the foreign investors,
and may bring the question ‘how is FDI so popular in the Chinese market?’ The
answer as seen by Pearce and Robinson is Joint Ventures.
Most Literature on Guanxi gives an insight only based on the functions and
benefits of Guanxi in Chinese society, and misses out the importance of foreign
concerns or ethical issues that are raised such as corruption and barriers to entry
for foreign investors.
2.5 Learning Theory
A study by Bilkey and Tesar (1977) looked at a selection of small and medium
firms within several industries to investigate the process by which firms enter new
markets. Their findings clearly suggested that the learning theory could be applied
to the export development process of these companies. The research methodology
was to send out questionnaires to 816 firms sampled randomly from a list of 4,701
listings in the classifieds directory. A total of 423 fully answered questionnaires
were returned, representing 52% of the sample. Using an analytical methodology,
each stage of the export development process, being the dependent variable, was
analysed by the multiple regression equation.
Bilkey and Tesars’ findings were a clear representation of the export behaviour of
several firms at different stages of developing (learning) their export strategies.
Interestingly, one of their key findings suggested that as firms developed to
further export stages, they perceived more barriers to entry. Although this seems
like a disagreement to the concept of learning theory (Autio, Sapienza and
Almeida, 2000), the implication of it can be derived from the Uppsala Model,
which suggests that as firms become more and more engaged in exports, they will
face larger challenges. However they will be able to cope with the challenges
based on their experience and knowledge of the markets to which they are
exporting. The study also found that the single determinant factor for exports for
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almost 60% of the firms was based on receiving an unsolicited initial export
order.
On the contrary, the study of Bilkey and Tesar lacks the ability to be generalised
to other countries as it is based on manufacturing firms in Wisconsin only.
Wisconsin is a highly industrialised state, notably due to its richness of natural
resources such as iron ore and lumber. Moreover, Wisconsin provides a strategic
location for export firms due to its close proximity to shipping ports at
Milwaukee, thus enabling firms to find exporting as a convenient source for
business growth and revenue maximisation. For industries that are not ideally
located with access to ports and natural resources, the scenario may differ. The
costs associated with exporting may be a lot higher. Competing with local firms
may only consequently be based on quality only, not price. Therefore, such
barriers to entry may not be tackled only by just experiential knowledge as
suggested by Johanson and Vahlne (1977).
2.6 Non‐Equity Based Entry
Exporting may be done in numerous ways. Agents, representatives, licensing and
franchising are some of the methods commonly used for exports. Exporting
allows companies to have a presence in markets that they plan to enter without the
need for large investments and commitment. Although there are numerous studies
that disregard exporting as a method of obtaining new market entry and
promoting business growth, many findings have supported this concept.
Traditionally, the first step towards entering a new market for most firms is
through exporting. This serves as a platform for future development and
exploitation of the new markets (Kogut & Chang, 1996). Exports have been
encouraged by many governments in order to reduce the trade deficits that most
countries face. However, others have argued that exporting is not the most
effective way of entering new markets. Whilst exporting could provide a fast low-
cost low-risk approach of entering new markets, it can be a weak strategy to use
which lacks control and prospects of gaining in depth market knowledge (Zahra et
al., 1997).
22
There is however a strong critical view that exporting activities may not provide
the same sort of returns for different sized businesses, and that large corporations
can in effect obtain greater benefits in the export market, which pushes out
smaller businesses by creating barriers to entry (Mayer and Ottaviano, 2008).
Other aspects that may create barriers to entry are the indigenous firms, which
restrict foreign competitors from exploiting their local market by being able to sell
at lower prices, thus placing foreign firms in a geographical disadvantage (Limão
and Venables, 2001). Nevertheless, the decline in transport costs over the years
has decreased the effects of geographical disadvantage (Hummels, 1999).
Michael R. Czinkota and Wesley J. Johnston (1983) conducted a study on the
scope of exports for small and medium enterprises (SME) using a sample from
three different industries regarding the implications of exports in relation to sales
volumes. The study looked at the effects of firm size on exporting activities for
industries that are not tied down by location restrictions due to the nature of their
business and thus had the option of moving to different territories. The study
noted the attitudes of the firm’s management in regards to export activities. The
information was compared between firms that had annual sales volumes of less
than $5 million and those that had annual sales volumes of between $5 million an
$50 million. Using a Likert-Type Scale of 1-5 with 5 being strongly agree and 1
being strongly disagree, managers ranked several questions such as “exporting is
a desirable task for my firm” and “profits from exports have fully met my
expectations.” The findings suggested that almost all managers answered a mean
answer of above 3. This suggested that all managers were quite satisfied with their
exporting activities. They also found that there was no significant difference
between the responses for small and medium sized businesses. Moreover, in
general, the response of medium sized businesses tended to be slightly higher for
almost all questions.
However, Czinkota and Johnston had a few drawbacks to their study. Their
criteria for small and medium businesses may have been slightly overrated with
small businesses being listed as businesses with annual sales of less than $5
million and medium businesses as having annual sales of between $5 million and
$50 million. Another key criticism to their findings was that they only sampled
23
firms from three different industries, out of a possibility of hundreds. This reduces
the reliability and the application of their findings to any other industry.
Nevertheless, the study does provide basic information on the growth opportunity
that exports provide for different sizes of operations, not specifically small or
medium enterprises and therefore it may be relevant in a wider context than
aimed.
2.6.1 Export Performance in Emerging Markets International firms in emerging markets are often characterised as being small
compared to the international firms in developed economies (Deeksha Singh,
2009, Pp. 324). Firms in emerging markets carry out international growth using
export strategies, which are based on low commitment, whereas the firms in
developed economies tend to opt for high commitment strategies such as FDI to
expand to new markets (Singh, 2009).
The export performance of firms in emerging markets has been studied by
Deeksha Singh (2009). Singh focused his study of export performance on the
resource-based view to identify the factors that affect the exporting performance
of international firms from emerging markets. His findings identified that research
and development expenditure had a positive correlation to export sales. Similarly,
group association also showed an increase in export sales. However, interestingly,
Advertising efforts had a negative impact on export sales. This may be due to the
fact that advertising is often targeted to the home market, especially in emerging
markets where generalisation is that firms do not have large advertising budgets.
2.7 Equity Based Entry
Equity based entry methods involve methods associated with higher levels of
commitment and risk as compared to non-equity based entry. Key methods
include joint ventures, mergers and acquisitions and the setting up of a wholly
owned facility in a country other than that of the company’s origin by Greenfield
investments or otherwise. FDI enables the firm to capture as much as 100%
control over its activities, and depending on the mode of FDI chosen, the need to
24
transfer technologies and share key knowledge and expert skills can be reduced,
and sometimes even eliminated.
FDI can be explained by using the final stage of the Uppsala Model of
Internationalisation (1977), which associates FDI as being based on high
commitment to the market after several steps of learning about the target market
through exporting. This model is based on the learning theory and explains that
firms can engage most efficiently in FDI by gaining experiential and objective
knowledge, which in effect would decrease the risks and uncertainties involved
with high commitment entry strategies.
Minj-Je Tang and Chwo-Ming Joseph Yu (1990) did one particular study that
looked at the different production based entry strategies available. Whereas many
past studies examined the cost reduction approach to foreign production, this
study focuses on the revenue maximisation approach. In their empirical study,
they compared the different modes of entry such as FDI, licensing, joint venture
and a combination of licensing and joint venture (JVL) to assess which strategy
was the optimal strategy for foreign market entry. Their findings suggested that
having a wholly owned subsidiary is the optimal strategy for foreign entry. They
noted that this was due to the higher level of economic profit that it yields due to
the increased activity in a new market compared to the other strategies. Moreover,
their conclusions showed that FDI provides the firm with the ability to ‘control
the know-how indefinitely’. They associated the higher profitability in wholly
owned subsidiaries to inefficient downstream operations. High profits in FDI are
noted to be ‘mainly due to the fact that transfer prices in other entry strategies are
higher than marginal costs’.
Nevertheless, their study may provide only a general perspective of the actual
costs that are incurred for different modes of entry. Whereas entering markets
with minimal barriers to entry may be associated with lower costs of market entry,
entry to highly competitive markets may increase the market entry costs.
Moreover, it would be fair to criticise that as the study is based on the revenue
maximisation approach, higher costs of entry could certainly be associated with
such an approach. Revenue maximisation in the long run may involve highly
25
automated production methods, a capital intensive approach to production,
whereas cost reduction approaches may be more labour intensive, reducing the
initial set up costs considerably. In order to compare different modes of entry, it is
therefore important to consider the market scenario. Also, firms that seek solely
revenue maximisation may only consider approaches that do not involve
commitment and merely provide increase in sales, whereas companies looking for
cost reduction may consider high commitment approaches, which may not
increase sales, but will certainly obtain reduced costs in the long run.
2.8 Market Entry Motivations
Firms are often indulging in measures to globalise their presence, thus they tend
to enter new markets for purely sales, purely production or both, depending on
their perception of the market, and the characteristics of the business. But what
may be the reasons behind this?
The reasons for market entry are synchronised for most parts; however particular
features of a market may attract one type of firm more than another. There have
been several studies in the past looking at the reasons behind market entry. In
consistency with Dunning’s (1995) view, homogenous firms would like to have
basic ownership advantages such as control, and would like to possess
competitive advantages such as technological advantages and informational
advantages when considering new market entry (Porter, 1985). These can be
labelled as tangible and intangible assets.
A vital motivator for many firms is the opportunity to be the first, or at least an
early entrant with a new product into the market. Having a competitive advantage
of a unique product, or one that is more developed than that of any rival can
arguably provide a similar motivation. This correlates with Porter’s (1986) view
that early entry leads to the company becoming the market leader. On the
contrary, early market entry with a new product would also implicate a lack of
market knowledge and thus increase the risk of entering fresh markets.
26
2.8.1 Cost Reduction Model Another noted motive for firms to enter is based on the cost reduction model.
Most studies regarding entry strategies assume that firms are seeking cost
reductions from their foreign activities. In a fairly recent literature, Kevin Zhang
(2005) suggested that FDI from neighbouring countries Taiwan and Hong Kong
made up a major percentage of the total pool of FDI in Mainland China. The
motives that Zhang hypothesised were:
• China’s export promotion FDI Strategies
• Hong Kong and Taiwan’s specific advantages in export-
oriented FDI
• Unique links with China (Chinese Connections)
• China’s large pool of cheap labour
The empirical findings of Zhang found that the primary motivator for FDI from
Hong Kong and Taiwan was based on the ability to exploit cheap labour. This
clearly suggests that the motives of foreign investment are largely explained by
cost reduction theories. Keeping in mind that 50.32% of realised FDI in China
comes from Hong Kong (Zhang, 2005), the implications of Zhang’s findings can
be praised for providing a fairly sampled result. Nevertheless, it must be noted
that between 1960 and 1970, during the rapid economic growth within Taiwan
and Hong Kong, the cost of labour drove labour intensive manufacturers out of
the competition, thus leaving them with no option but to exploit the cheap labour
availability in China.
A report by Eghbal (2008) suggested that although the labour was cheap, the
availability was not as wide as Zhang implicated He found that the ease of
employing workers ranking by the World Bank ranked China 88 out of 178, far
behind Hong Kong and Thailand. In addition, it suggested that non-wage labour
costs, which took into account social security payments and payroll taxes were
significantly high standing at 44% of the salary, compared to Hong Kong at only
5%. The study concluded to suggest that foreign firms were therefore finding it
27
less attractive to invest in China. This can be supported by the decrease in FDI in
2007
2.8.2 Revenue Maximisation Approach
Alternatively, the study of Tang and Yu (1990) as reviewed earlier perceived
market entry from the revenue maximisation approach. This meant that whilst
firms indulged in foreign activity, their motivation was based on increased sales
revenue rather than reducing costs. The study compared several modes of entry to
find which provided the best profits for its investors. Although their study
provided an insight into the profitability of different methods, it gives no
importance to the costs that are incurred by different entry strategies.
Therefore, A gap in research can be identified where research is focused on either
a revenue maximisation or cost reduction approach, and the application of both
has not been considered as a joint motive for market entry, which may be the case
for most firms.
2.9 Market Entry Concerns
Whereas entering new markets has largely been credited with success and growth
in the literatures above, there are certain issues, such as Guanxi and the
communist culture, which may be case specific for firms entering the Confucian
business society. However, there is a lack of knowledge on these issues as such
concerns are invisible and unknown until one enters the market. The Chinese
business ethics, although have been largely praised for being efficiency based and
have been the essence of the development of the booming Chinese economy, do
have some concerns and that prevents the successful development of foreign firms
in the domestic market. It can be said that due to these factors, indigenous firms in
China may have a competitive advantage that foreign firms will need to
strategically tackle.
Michael Porter (1979) discussed the importance of strategy formation in order to
undertake competitive forces. Competition is generally viewed as a major threat
to market entrants; however Porter discussed that whereas competitive forces may
28
be a threat, they do provide certain benefits to new entrants. He suggested that
price breaks, promotions and intense selling and marketing methods must be used
to overcome the barriers of entry. The limitation of wholesale channels will thus
make market entry more difficult. Porter suggested that sometimes when barriers
of entry are very high, firms could resort to creating their own distribution
channels. In criticism to this, it can be said that the relevance of distribution
would only be restricted to ‘on the shelf’ goods, and thus would not be as relevant
when studying manufacturing suppliers. As manufacturing suppliers generally
have pre-agreed terms of sale, competition within the market could be considered
to be less of a concern.
In addition to this, the transfer of production methods, skills and technology could
create a potential threat for businesses. It can lead to ‘copycats’ within the market,
seeking to bench on future contracts, thus becoming a direct competitor within the
field. In relation to this, Dunning (1995), in his updated Eclectic Paradigm,
mentioned the motivations of integration. He outlined that a key advantage of
integration is the ability to share resources, knowledge and technology. Although
this does seem beneficial, the need to secure the technologies and resource
advantage that a firm possesses may be more vital for the sake of competitive
advantage.
A study on the impact of FDI on innovation activity in Chinese stated owned
Enterprises (Girma, Gong and Görg, 2009) showed that the association between
foreign investment in state owned enterprises and innovation was positive.
Alternatively, the findings showed that there was a negative association between
the inward FDI and innovative activity in state owned enterprises. However, a
further finding showed that the association was positively correlated for state
owned enterprises that were involved in exports, invested in human capital or had
experience in research and development previously.
29
2.10 Discussion of Literature Review
We have seen throughout the review of literature that the past studies on market
entry techniques and surrounding issues are based on the external environment
and its effects on the firms’ decision of entry strategy. For the context of our study
however, we will consider the internal environment as being an important factor
of strategic decision making for foreign activity. Nevertheless, the key models
such as the Uppsala Internationalisation model and frameworks such as the
Eclectic Paradigm must still be considered, as they are relevant in order to assess
the internal scenario of the firm in terms of market entry. These key theories will
form the basis of the discussion, and will be used to compare our results against in
order to make a significant conclusion.
30
3 Methodology
This Chapter discusses the set of methodologies that will be used to obtain the
information required for the research question. By looking at the appropriateness
of different methodologies, the first section aims to decide which method is the
most effective to help answer the research problem.
As seen in the previous chapter, several different methods of research have been
applied to determine the implications of market entry methods. However, there is
a lack of information available that is firm specific. Therefore, to help answer the
research question, we will first evaluate the research methods available to us.
3.1 Research Approach
There is a variety of options available that may provide similar feedback for our
research purpose. Whereas many researches have been industry specific, or
country specific, this research consists of a far more constrained condition that is
to be assessed. In order to make the right choice for our firm specific research
scenario, a high degree of precision and reliability is required. Therefore, a
mixture of primary and secondary sources must be used to provide precise
qualitative and quantitative data.
3.1.1 Primary Sources of Information
Primary data is the data that is observed or collected directly from a process of
direct interaction with the source of information. Primary sources of information
include, but are not limited to questionnaires, focus groups, interviews and
observational studies. Expert informants are often a reliable and essential source
of information for industrial marketing research. Ideally, the consumer marketing
research model would require a large sample; however in the case of industrial
marketing research, a fairly small sample size may be adequate, depending on the
expertise and knowledge of the participant as well as the researcher. A trend of
consistent information may be identified early, thus the need to conduct repetitive
queries is not be necessary. This will assist in reducing the costs that are
31
associated with our primary research. The use of questionnaires may be relevant
in the broader context, however may not provide sufficient qualitative data
regarding the firm specific factors that are to be assessed in this study.
3.1.2 Secondary Sources of Information
Secondary sources of information consist of data that already exists. This data
may have been gathered for different purposes, by different organisations yet may
still be relevant to solve current research problems. Commonly used sources of
secondary information are the Internet, books and journals. The use of readily
available information can reduce the costs and time often associated with
conducting field research. However, drawbacks of secondary information are
noted to be the lack of reliability and relevance. As secondary data contains
information gathered for a research problem other than the one being studied, it
may not serve the purpose as accurately as the research problem may require.
Nevertheless, secondary sources do provide a source of comparison and contrast
for our primary research. It also facilitates the understanding of the research
problem. Therefore, the use of a wide range of secondary sources is vital in the
context of this study.
3.2 Data Collection
Data collection is done using primary and secondary sources of information. This
study requires the use of primary information in order to obtain firm-specific
information regarding its prospects and plans of growth, and obtaining more
specific information in order to align and update the current scenario of the firm
with that of this study. In order to gain an insight into some of the aspects
regarding the competitive advantages that BFG International possesses, it is
essential to conduct an interview with the directors of the company. Moreover,
this will provide feedback regarding the scope of entry that BFG International is
looking for. In addition to this, information regarding their motives to enter may
also be revealed, allowing us to determine whether entry reasons are based on cost
reduction, revenue maximisation, or both.
32
Secondary sources will be used to provide quantitative and qualitative data of firm
specific as well as industry specific information. An analysis of the current
activities and turnover allocations of BFG International will be done to provide in
depth information on the size of entry that is needed. Newspapers and Internet
articles will be used to analyse the broader context of the government policies and
industry performance.
3.3 Research Design
In order to analyse and suggest the best entry strategy available to BFG
International for entering China, a mixture of primary and secondary research to
provide qualitative and quantitative information was acquired using various
sources.
For our primary sources of information, the below methods were used:
• Observational Study
An observational study involving a factory tour was conducted at the
headquarters of BFG International in Bahrain. This tour enabled a better
understanding of the manufacturing process as well as technologies
involved in the company. In addition, it provided an insight into the extent
of labour and capital-intensive production methods used in the designing
and manufacturing of finished goods.
• Interviews
(1) A formal interview with the corporate director of BFG International
and Chairman of ATMC France, Mr. Mohammed Usman was conducted
(Appendix B) in London to acquire expert information and personal
opinions of the firm’s strengths, weaknesses, opportunities and threats.
This was then compiled into an analysis of the strengths and weaknesses
that was used to assist in choosing the right strategy for entry. The
33
interview provided qualitative information with regards to the needs of
BFG International.
(2) A second discussion based telephone interview with Mr. Jeetinder
Chopra, the global manufacturing manager based at the Bahrain
headquarters was conducted (Appendix C) to provide specific information
regarding the process of international integration that is used at BFG
International. The opportunities and threats were then assessed and some
feedback was provided relevant to the entry into the Chinese market.
Additional information regarding logistics was also gathered using the
interview allowing the assessment of costs of exports to and from China.
(3) A third interview with the Business Development Manager, Mr. Majdi
James (Appendix F) was conducted over the telephone in order to
understand the needs and the size of the market in China. Mr. James was
selected as he is based in China, and has up to date information and hands
on experience with the Chinese market. This helped in gaining information
about the current market requirements, as well as possible future products
that can be provided to this market. Furthermore, using a Likert-Scale, Mr.
James was asked to rank the advantages and disadvantages of both an
export and FDI strategy.
In order to increase the reliability and validity of the interview results, the
interviewee’s were asked to go through the notes in order to verify whether their
comments were accurately recorded. Some minor changes were made
accordingly.
For our secondary sources of information, the below methods were used:
• Internet Article and Websites
Using Internet articles and websites, a thorough study was conducted to
outline the benefits and costs of (1) exporting to China from Bahrain and
(2) setting up a factory in China. Additional information was acquired
34
using the Internet on labour costs and market size. Also, Internet magazine
publications and online newspaper articles were used to determine the
potential growth and requirements of the market. This was done in order to
see whether or not the market requirements were sufficient for FDI or
whether an export strategy could be feasibly carried out.
• Review of BFG Internationals Foreign Activities
A review of the international activities of the company was conducted by
looking at data provided by them regarding sales volume of export; export
destinations and the scope for future export. This allowed for the
assessment of the feasibility of foreign business for BFG International in
order to make relevant strategic decisions based on the location of their
trade. An analytical comparison between the SWOT factors and the
models such as the Eclectic Paradigm, and the Uppsala
Internationalisation model was drawn up to compare and contrast the
consistency of our findings with the models of internationalisation.
The secondary data was gathered using the most reliable sources accessible.
Moreover, firm specific secondary data can be classified as both reliable and
applicable as the company provided it to us.
35
4 Findings and Data Analysis
After the collection and studying of all data, the findings have been analysed and
represented using various methods for classification. The relevancy to different
strategies has been noted throughout the analysis in order to allow for a
conclusion to be drawn. It must be noted that parts of the analysis are based on
the observations that part of the observational study (Appendix F).
4.1 Study of Foreign Activity
The study of BFG Internationals foreign activity has shown a key significance in
the European market. The turnover allocation has been represented in Figure 4.1
below.
Figure 4.1
By looking at the chart above, we can see that USD 32M of the turnover of BFG
International comes from its customers based in France. This alone represents
55% of the total turnover. Moreover, USD 7M comes from Germany, and USD
2M from the UK and Denmark each. Therefore, it is safe to say that the current
business activities are significantly focused towards the European market, which
represents 74% of the business turnover for 2009.
Source: BFG International, 2010
36
In the context of China, the figures suggest that USD 10M worth of the total
turnover come from within China. This contribution comes from the current joint
venture of BFG in China, and all the needs for the Chinese market are met within
China. We must also note that the operations in China, due to the nature of the
joint venture are all focused on one project, catering to a very small part of a very
large, and to some extent, veiled market for BFG International.
4.1.1 Distribution of Foreign Activity
We will now analyse the distribution of manufacturing in terms of the turnover
that each country represents. By doing so, we aim to identify any possible cuts in
transaction costs that are possible by using existing facilities to export to China.
Table 4.1 on the following page is a representation of this data.
Table 4.1
Turnover Allocation (in Million USD)
LOCATION
(Floor
space)
France Germany Denmark India UK China Japan USA
Bahrain
(20,000 sqm) 30 7 2 0 1 0 0 0
Philippines
(18,000 sqm) 2 0 0 0 0 5(P) 5 0
India
(6000 sqm) 0 0 0 0 1 0 0 0
France (ATMC)
(no data) 0 0 0 0 0 0 0 0
China
(5000 sqm) 0 0 0 0 0 10 0 0
USA
(4000 sqm) 0 0 0 0 0 0 0 0
(P) Suggests projected figures for 2010
Source: BFG International, 2010
37
We can see that the majority of the business for Europe is based on exports from
Bahrain. The figures also show that there is a projected USD 5M worth of
business for China that will be handled by the manufacturing facility in the
Philippines. This business is based on a new development that will not be part of
the joint venture contract in China, and thus will be carried out using BFG
Internationals wholly owned facility in the Philippines. The possibility of
exporting to China using the facility in India is outlined.
An important observation to be made is the usage of the facility in France. The
figures suggest that currently this facility is not being used. This is due to the fact
that this facility was acquired only last month, and is currently in the handover
phase. It is crucial to take note that the Bahrain facility, which is the biggest single
facility that BFG International operates, is highly involved in mainly the French
and the rest of the European market.
In order to see the real impact of the opening of the French facility (ATMC), an
interview with Mr. Mohammed Usman, Corporate director of BFG International
and Chairman of ATMC France revealed that although ATMC will be used to
cater for the European market, the facility is not large enough to provide a holistic
solution to the French market. Therefore, it will merely remove some of the
burden that is being faced at the facility in Bahrain, which is, based on the
observational study, currently running at full capacity, and is desperately in need
of expansion. ATMC will be used for only those projects that are capital
intensive, rather than labour intensive, whilst Bahrain, which has a labour force of
500, may carry out labour intensive tasks. This shows BFG Internationals clear
intent to keep Europe based business in Bahrain.
The implications of this are that, if BFG International were to enter China by
export, the only possible option would be the Indian factory, which would ideally
provide close proximity to India, thus reducing logistic costs, enabling BFG
International to stay competitive whilst using an export strategy. This is consistant
with the proximity-concentration trade off (Helpman, Melitz and Yeaple, 2004).
38
In the interview, Mr. Usman also added that the Chinese market was one of great
potential, and that specifically the Southern parts of China provided great
incentives for FDI. He added that the tax return incentives, and export benefits
such as the duty drawback were also great benefits not only for the local market,
but encouraged exports too.
An interview with Mr. Chopra, the supply chain manager based in the
headquarters, discussed the opportunities and threats seen in the Chinese market.
He stated that the Chinese market was one that was by large untapped to its full
potential, adding that BFG realises the need to unveil this market in order to meet
its projected turnover targets. In addition to this, BFG needs to look at Japan,
South Korea and to some extent Australia for additional business growth.
Therefore, China, due to its location advantage would provide an ideal solution.
However, it was pointed out that the company was not interested in expanding its
current joint venture with its Chinese alliance due to ‘commercial problems’ that
had occurred in the past. Therefore, the company’s internationalisation strategy
was largely focused on the retention of ‘maximum business in BFG
International’s own facilities rather than with a Joint Venture’ (Appendix D).
When questioned on the restrictions that were perceived by BFG in setting up a
wholly owned company in China, he commented that although China itself is a
vast market, many of the contracts came with strong localisation requirements.
The reason for this was that many of the government projects that form a large
part of the market in China were based on the concept of 100% domestic
production.
4.2 Study of Market Potential
A third interview, with the business development manager, Mr. Majdi James,
showed the vast opportunities that were available in China. He stated that China
was looking into wind power generation at a large scale, and that the properties of
fibreglass made it an ideal material for this use. He added that BFG International
has previously worked with Hitachi-Subaru on the wind turbines for Japan. This
project was carried out in the Bahrain facility, and an export strategy was applied.
39
Moreover, in discussing the market growth of fibreglass in China, he added that
the housing market in China has been a major market for exploitation. He stated
however that a key barrier to entry was price, and therefore only a large-scale
investment in China in setting up a factory could allow entry into this market.
The study of Frederic Romier (2009) that looked into the application, location and
process of fibreglass shows a contrary implication, finding that Asia was the
smallest market for fibreglass products, with only 26% of the market, whereas
Europe held 30% and America held 44% of the market. Although this could seem
like a drawback, it can in fact be a motivation for BFG International to focus on
the Asian market. We previously noted that Europe was currently the biggest
market for BFG, and that operations in the USA were to start very soon. If BFG
focused more on the Asian market, by entering China, it could strategically
become a competitive global player in the fibreglass industry.
In a comparison of magazine and newspaper reports, there was a clear underlying
suggestion of substantial growth in the market for fibreglass in China and the Asia
Pacific. One article found that Akzo Nobel, a Dutch multinational producer of
fibreglass doubled their sales figures in the five years of Chinese market entry.
Chinese operations for Akzo Nobel started with five representative offices in
China, and have now grown to 20 offices, employing 3000 people (Reinforced
Plastics, 2004). The strategy that they have used can support the successful use of
a learning theory for market entry.
Within the same article, Gerber, an American company has identified the market
gap in China, and seen great success. They have reported a growth of 50% in the
number of employees over the first 12 months of market entry.
In agreement to the above, Owens Corning, a multinational giant in the fibreglass
industry has reported in a press report an average growth rate for the industry of
between 5 to 7% per year across the world, and has mentioned that developing
countries such as China and Russia may have even faster growth.
40
The fore-mentioned studies show that firms in China are seeking revenue
maximisation, rather than cost reductions as implicated by Zhang (2005).
4.3 Benefits and Costs of Exporting and FDI
Figure 4.2 below looks at the benefits and costs of exporting to China, and ranks
them in order of importance to BFG international from the point of view of the
Business Development Manager. The scoring was done using a Likert-scale, with
1 being least important and 5 being very important.
Figure 4.2: Benefits and Costs of Export
Benefits Score Costs Score
Less investment required 5 Inability to grow with
market requirements 4
Avoid communication and
management barriers 3
Lack of control over
export agents 3
Avoid rapid changes in
Chinese market 2
High transportation costs
(cross country & inland) 4
Fewer facilities, increasing
control 3
Localisation
Requirements for State
projects
5
Running current facilities to
full capacity 1
Inability to cater to
neighbouring countries 4
TOTAL 14 20
Remarks
• Investment is difficult to obtain in times of recession
• State projects make up a significant size of the total market
• Cross country transport costs are only a concern if exporting from
Bahrain, using Philippines and India will significantly reduce these costs.
Inland transport in Philippines however is very high as the factory is
located far from the nearest port (Costs 800 USD / 40 ft. Container).
41
Figure 4.3 below looks at the benefits and costs of FDI in China. The points used
are those that were found throughout the study from Internet articles, newspapers
and interviews.
Figure 4.3: Benefits and Costs of FDI
Benefits Score Costs Score
Wide availability of raw
material 4 Local market forces 3
Cost effective labour
resources 5
VAT on domestic
purchase (i.e. raw
material)
3
15% tax rebate on exports 4 Barriers to entry 2
Key location to serve
several markets 4 “Guanxi” Culture 2
Increase total capacity 5 High costs setting up 5
TOTAL 22 15
Remarks
• Wide availability of material coincides with VAT on domestic purchase.
• 15% tax rebate is only offered on exports when operating from certain
zones such as those located in Export Processing Zone
• Manual labour is available and calculated at the highest provincial
minimum wage of ¥780 (USD 114) per month. China also has very high
non-wage labour costs at 44% (World Bank, adapted from Euromonitor
Achieve, 2008)
• Market forces include language barriers, cultural restrictions, Chinese
business culture and local competition.
A comparison between figure 4.2 and figure 4.3 clearly shows that BFG
International’s needs are far more suitably met by FDI rather than an export
strategy. Although there are some concerns with the costs of setting up and
42
financing the project in a period of recession, where banks have stepped down on
lending, the benefits of FDI overpower the costs, whereas the costs of export
overpower the benefits. Looking at these results shows clearly that the
implications of FDI are beneficial to the company.
Nevertheless, it must be considered that the price of labour is increasing, which is
one of the essential benefits that BFG seeks. Media Eghbal (2008) reported that
due to the increasing price of commodities, a rise in the cost of living has driven
up the acceptable minimum wage for unskilled labour. There seems to however be
a lack of study on the effects of labour rate on entry strategies.
Moreover, the company may also realise that the 15% tax rebate on exports may
be slightly offset by the VAT on domestic purchase, rather than providing a direct
15% margin. Taxation has been a key concern for new market entry (Singh, 2009)
and thus this may be an alarming factor for BFG International.
4.4 SWOT Analysis The SWOT analysis framework has been used to identify and explain the key
strengths, weaknesses, opportunities and threats that are faced by BFG
International in the move to enter China.
4.4.1 Identifying the Strengths and Weaknesses
The interview with Mr. Mohammed Usman outlines the key strengths and
weaknesses as portrayed by him for BFG International. The following strengths
and weaknesses may be noted:
A. BFG International currently has vast experience in global markets
(appendix A), which attends to its experiential knowledge of global
competition and market needs. This, according to Johanson & Vahlnes
(1977) allows the company to prevail into higher commitment into new
markets.
B. BFG International holds key market technologies and is a key player in the
industry for research & development. This may be regarded as intangible
43
assets, a key feature of the ownership-specific advantages that a firm may
wish to possess when entering new markets (Dunning, 1988)
C. Prior market existence in China, as well as existing relations with Chinese
raw material suppliers may assist in achieving successful margins of
economy.
D. The company is already CCC certified, which is an essential certification
for importing goods into China.
E. BFG International does not currently have a logistic platform in Asia apart
from the one in Bahrain. This will drastically drive up the costs of
logistics in both scenarios – FDI or exporting to China.
F. BFG International has recently acquired several loans to cover its global
expansion plans for projects in India, France and the USA, therefore
securing finance for large investments may be difficult.
G. BFG has its key experience in a very tight range of products. Whereas the
demands for the Chinese market may require BFG to look at a wider range
of differentiated products suited for the local market. These include the
use of fibreglass panels to insulate homes (Reinforced Plastics, 2006)
The interview breakdown shows that the key concern again is the financing that is
required for setting up a wholly owned company in China. However, in a brief
discussion after the interview, Mr. Usman has said that although securing
financing may be difficult, it is not impossible. He added that the company
possesses strong relationships with several large banks, and that the banks were
keen on investing in Industries rather than real estate after the current global
crisis.
Moreover, by looking at the strengths of the company, we can see that BFG is in a
strong position to efficiently cope with competitive forces, both internal and
external. The vast experience of the company in international markets, as outlined
in appendix A is a vital strength that the company possesses. Its key knowledge,
and research and development resources, along with its team of experienced
managers, many of whom have been with the company for 10 or more years
(appendix B), can be considered as intangible assets for new market entry. These
factors are clearly suggestive of an FDI strategy rather than an export strategy.
44
Many of the company’s strengths are in line with the OLI paradigm (Dunning,
1995) and with regards to the Uppsala Model of Internationalisation (Johanson
and Vahlne, 1977), are suggestive of the company’s opportunity to engage in
higher commitment to the new market.
4.4.2 Identifying the Opportunities and Threats
The interviews with Mr. Jeetinder Chopra and Mr. Majdi James, as well as the use
of other secondary sources have outlined the opportunities and threats that BFG
International, or a company in a similar position may perceive in entering the
Chinese market. The following opportunities and threats may be noted:
A. The large size of the market, and the developing state of the economy
clearly provides plenty of opportunity for growth in the short and long
term.
B. Neighbouring countries are also very large perceived markets. This
gives the opportunity to not only contain its activities within China,
but also across borders throughout Pacific Asia.
C. Exporting to China can provide the opportunity of low risk market
entry, however entry may not be sufficient and feasible in terms of
exporting costs.
D. The opportunity to manufacture in China for the new contract in
Australia can significantly increase profitability, as costs of labour as
well as logistics will reduce. This may be considered a locational
advantage.
E. BFG International can increase its capacity significantly, and thus
allow for future growth prospects.
F. The Chinese market is highly competitive, and both local and foreign
competition is very tough. The competition is largely based on price,
rather than quality, and therefore companies will strive to survive
without performing efficiently. As a new entrant, it is very difficult to
survive the early stages of entry and may be faced with ‘price wars’.
G. China’s state owned companies are involved in similar businesses, and
therefore may restrict entry to the market.
45
H. The future is unknown, and if taxation policies and rebates are
removed, the entry strategy may fail.
I. BFG International is a late entrant to the market, and is faced by local
competition of 3500 small, medium and large businesses working
within the same industry in China.
Outlining the opportunities and threats shows that there are many perceived
opportunities for a company to enter the fibreglass market in China. There are
several reports on the vast growth and requirements of the fibreglass market,
which will be outlined in the next section. Moreover, the information is
suggestive of a FDI strategy, which may provide the ability to fully achieve the
available opportunities. An export strategy may be not be able to overcome the
perceived threats, such as points F and G. Merely exporting will not allow for the
same economies of scale to be achieved, and when considering the impact of price
wars, exporting costs may only increase the risk of being forces out of the market.
However, certain threats, such as point H, may be contradictory to the findings of
Porter (1979), who characterised early entry as being an essential component to
achieving market leadership in the long term. Nevertheless, consistently with
Dunning (1995), the locational advantages that are obtained by FDI in China may
outweigh the late entry, as the company can be positioned to cater to more than
just one market.
46
5 Limitations
The limitations of this study are that it restricts itself to qualitative data, and does
not consider the impact of the different strategies on firms already within the
Industry. The use of questionnaires to record feedback on the successful firms that
either export to or have FDI in China could have provided quantitative data to
note any trends of market entry and may also have provided an idea of the best
operations strategy rather than just entry strategy. Moreover, the scope of this
study limits itself to the broader aspect of entry and has mainly focused on firm-
specific factors. A clearer understanding of the external environment may help
provide a more extensive and thus accurate judgement. However, due to the high
costs of such extensive study, it was not possible without sponsorship.
47
6 Conclusion and Recommendations
The purpose of the study was to identify the most suitable entry strategy for BFG
International to enter the Chinese market. Having noted that BFG required 100%
control of its operations, we have discussed the implications of export and FDI
strategies for BFG International to enter China. The data analysis has shown a
consistent need for FDI by BFG International in China. Clearly, there are several
motivations and competitive advantages that are held by the company that are
blatantly suggestive of FDI being the dominant and most suitable strategy for
BFG International to adopt in order to meet its forecasted turnovers.
Moreover, the company has shown keen interest in the Chinese market for its
large size and the potential of its neighbouring countries. These locational
advantages are ideal for BFG International, especially when considering the
export benefits that the Chinese trade zones boast. This again supports the concept
of FDI for the company in question.
When considering the capacity perspective, we can see that all the current
operating factories are working at full capacity, and concerns of safety and quality
may arise unless a solution is found. This immediately dismantles the export
strategy for Chinese market entry as BFG International simply does not have the
capacity to cater to such a vast market.
BFG International can use the FDI strategy not only to cater to the Chinese
market, but also to explore new markets, and cater for existing markets more
efficiently. Strong trade routes, especially from the south coast of China provide
ideal road and sea links to Myanmar, Thailand, Malaysia, Singapore, Indonesia
and even Australia. It may however be argued that the Philippines factory, as
mentioned in Appendix D, should be catering to these markets. In defence to this,
we can see that the Philippines facility is working at its full capacity, and thus, the
requirement for FDI in China is once again deemed necessary.
48
Nevertheless, our findings shun light on a key concern that is beyond the scope of
this study, but must be stated. Due to the current economic climate, BFG
International has shown deep concern on the financing of a new facility in China.
The findings have suggested that the company is currently highly indulged in
borrowing, and therefore further borrowing may be difficult to obtain from
conventional sources of finance such as commercial banks. Here, several
suggestions can be made. Firstly, it may be in the interest of the business to
involve investment banks to finance the project. However, the concern with
investment banks is that often, they require a percentage share as a ‘sleeping
partner’. Although BFG International has shown concern over joint venture
strategies, the idea of a sleeping partner may be well suited to their needs.
Secondly, the raising of internal financing by selling off some of its less
productive assets, and/or raising capital amongst the few shareholders may
provide a second solution for finance. Nevertheless, this would significantly
increase the risks that have been associated with FDI, and the liability of the
shareholders will therefore be unlimited. Ideally however, a mixed financing
strategy using internal and external financing may make it easier to obtain
financing than simply using an external source.
A third option would be to sell their existing share with CRGC to another
company, or to CRGC itself, and use the money to re invest in their own facility.
This will provide not only the finance required, but will also allow a smooth exit
from the existing troublesome joint venture.
The study has also identified that several of the benefits that BFG International is
seeking from its foreign production are outdated. Most the outlined benefits that
are being sought after do not consider the synergies that may be achieved by
increasing its foreign capacity. Moreover, in relation to Dunning, 1998 (see table
2.1), the motives that are mentioned correlate more with the ones that Dunning
had outlined in 1970, rather than the updated 1990’s motives. Based on Dunning’s
study, we can see that BFG Internationals need for a FDI strategy can be
identified as mainly market seeking. However, a mixture of cost reduction and
49
revenue maximisation benefits are being seeked by BFG International, which can
be achieved by efficiency in the new market.
Finally, despite the concerns that were beyond the scope of this study, we can
conclude that the best strategy for BFG International to implement in entering
China would be FDI. This will provide the company with a fruitful mix of several
factors such as increased revenue, decreased costs, and the ability to enter new
markets. Therefore, BFG International can assume a successful outcome from its
FDI operation in China. However, they must not only base this decision on the
motive suggested above, and must also keep in mind that the Chinese market is
highly restrictive for foreign competitors, and therefore BFG International must
perform efficiently, and market their products throughout Pacific Asia and
Australia on the basis of a mixture between quality and price. Moreover, BFG
International needs to seek a mixture of the four key motives of FDI, which are
market share, efficiency, resource, and strategic assets (Dunning, 1998). By
applying a fruitful mix of the above, it can be stated that BFG International can
make the most out of its FDI operation in China, gaining efficiency, revenue and
therefore profits.
50
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55
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56
BFG International Timeline
1975- Bahrain Fibre Glass (Bahrain)
BFG first started in 1975 with the name Bahrain Fibre Glass and was mainly engaged in
civil works within the local Bahrain market.
1991- BFG International wholly owned factory set up (Philippines)
First international division was set up in Philippines with an experienced management
team from Bahrain. The purpose of this was to increase production as well as reduce
costs
1997- CDT wholly owned factory set up (Philippines)
The Success of BFG International in Philippines led to growth in the Philippines,
Singapore and Japan and a new factory was set up to cater to the growing business.
2005- BFG International Joint Venture with CRGC (Changchun, China)
BFG formed its first Joint Venture with the Chinese Government owned CRGC to
manufacture train sets for the Chinese Railway. BFG International sold technology rights
to CRGC. BFG International lacks control over this venture, with the management mainly
being in the hands of the Chinese partners.
2009- BFG Chennai wholly owned factory set up (Chennai, India)
BFG secures Delhi Metro project. In order to cope with the size of the project, BFG
International sets up a factory in India to help increase its capacity. Once again,
experienced management from Bahrain headquarters are placed in India.
2009 – Acquisition of ATMC (France)
BFG International finds growing demand for their products in the European market, and
has in the past suffered due to lack of after sales service in Europe. Acquisition of ATMC
goes ahead with a partnership with Bahrain based Investment Bank. ATMC is involved in
a very similar line of business, and brings with it a portfolio of customers.
2010 – Work on new BFG International Factory Begins Whilst new corporate
headquarter is handed over (Bahrain)
BFG establishes a new headquarter in Bahrain. The updated facility increases current
capacity on the shop floor as well as office space. However, the need for a further site is
still required. BFG chooses Bahrain Investment Wharf as an ideal location to promote
exports.
8 Appendices Appendix A
57
Appendix B
Interview with Mr. Mohammed Usman
As you know, as part of my BA Undergraduate Business Degree at Durham
University, I have chosen to do a dissertation to evaluate the entry strategies
available to BFG International when entering China. For this, I will require to
conduct an interview with yourself, as well as two other members of your team.
Brief: The focus of my dissertation is to evaluate the entry strategies available to
BFG International when entering China. I have outlined that there are two types
of market entries that a firm considers. One is an export strategy, and the other is
FDI. Your response to the following questions will be largely appreciated.
1. What are the key strengths of BFG for international growth in China?
• Key technologies and skills • Experience of over 30 years • Low staff turnover with many staff members serving for
over 10 years. • R&D and Quality
2. What are the weaknesses of BFG for international growth in
China? • No logistics platform in Asia • High debt/equity ratio • High amounts of borrowing from banks (project funding
etc.) • Expertise are currently mainly focused on tight group of
products
3. Does BFG require full control of its foreign operations? • Recent experience in China with JV was below expectations • 100% ownership is preferred, although sleeping partners
such as investment banks can be considered
4. Has BFG got any previous experience in the Chinese market? • China JV with CRGC • Odd jobs in China for airport project. Exported from
Philippines
5. Which foreign markets does BFG currently operate in? • Vast range of projects for many countries. However,
customers are mainly multinational companies based in
58
France, Germany, Denmark, Japan and Australia amongst several others.
6. Does BFG hold any technological advantages over local competitors?
• BFG has several technologies that have been patented or have been licensed off other companies. Many of these technologies reduce the costs of production; others provide key benefits to end‐users. I.E. speaker sound technology, anti‐graffiti technology. First user of RTM technology in Asia.
7. What intangible resources does BFG have which may provide
it with a competitive advantage over local Chinese manufacturers?
• Customer relations • Supplier relations • Expertise of staff and directors
8. What benefits is BFG looking to acquire from its Chinese
operations? • Large market – increase revenue • Low manufacturing costs – increase competitiveness • Growth into pacific Asian market • Increase capacity
9. What future growth prospects do you see for the fibreglass
industry as a whole? • Large scope for industry • Many new applications • Market is growing rapidly, exhibitions such as JEC have
encouraged strong growth • Overall, market is steeply growing, and next 10 years look
fruitful
10. Is the Asia Pacific market a key market for BFG? • Pacific Asia is a very large market • Many benefits within the market
11. Does BFG aim to export its manufactured goods from China?
• Initially focus should be on local market • To cover up utilisation in start up, projects can be offloaded
to Chinese facility for first year or two • Export benefits make it ideal for exporting
Thank you very much for your time and I hope that this dissertation will be able to
benefit the company in the near future.
59
Appendix C
Notes Gathered from discussion based telephonic interview with Mr.
Jeetinder Chopra:
1. What do you see as the main opportunities for BFG in China?
• Large Potential market
• Locational advantage based on future prospects of BFG
(Australia project)
• Opportunity to increase capacity. Current facilities are over
worked. China is ideal for low cost in comparison to other
countries.
2. What do you see as the main threats for BFG in China?
• Chinese business culture is very different from Bahrain
• Tough competition from local firms
• Competition based on price, BFG associates itself with quality
3. Do you think that the Chinese market is highly competitive, fairly
competitive or not competitive at all?
• China is a highly competitive market, with many large firms
already in the market
• There is local and international competition
4. Do you think China is an important market?
• China is a very large and rapidly growing market. BFG needs
to enter this market in order to achieve its forecasted
turnovers.
5. What is the allocated turnover for each of your markets?
Other comments that were kindly sent by Mr. Jeetinder Chopra along
with the allocated turnover data and forecasted turnovers is attached
as appendix D and E below:
60
Appendix D Email from Mr. Jeetinder Chopra providing some key points. Hello Uzair, Please find attached my inputs on the information requested by you. To summarize: a) The cummulative turnover figures do not include the revenues generated from JV facilities as they are independent entities. b) As a strategy, it will be our intention to keep maximum business in BFG's 100% own facilities rather than JV. This is based on our recent experiences wherein we found that allocating any project to JV leads to commercial issues. c) Projected turnover figures of Bahrain include the revenues generated from Bahrain directly and from other new facilities (100% owned that may come up in future) d) We recognize the fact that by focusing only on European market will not meet the projected turnover targets. Maximum growth potential lies in the Fareast market (China,Japan,Korea and to some extent Australia) which is as of now largely untapped to the correct potential by BFG. e) China itself is a huge market but with very strong localization requirements specified in the contracts. f) South of China is a potential area that can be considered for setting up of a new entity, which can cater to Chinese market and potentially Japanese markets. g) Philippines should ideally be serving Japanese,Austrlian and to some extent European projects(which are labour intensive). Please let me know if you any more queries regarding this. Best Regards, Jeetinder
61
Appendix E
Files sent by Mr. Jeetinder Chopra regarding BFG performance, turnover
allocation and projected sales revenue. Some information regarding floor
space and labour utility is also provided.
Along with the data, Mr. Chopra added the following notes:
1. As a strategy operations in Bahrain will mainly focus on European markets
2. Chinese market is huge but there are strong localization requirements. The projected increase in Bahrain revenues will mainly come from markets in China and Fareast.
3. The JV sales do not show an increase because as of now our strategy on China is to keep limited business in JV and look for other opportunities by exporting or setting up our own facility in China.
4. The projected turnover consists of revenues from 100% own facilities and does not include the JV figures
62
Appendix F
Interview with Business Development Manager, Mr. Majdi James
1. What are they key features of the Chinese market?
• Large local market with a population of 1.3 Billion people
• Cheap resources such as labour
• Availability of labour
2. What benefits can BFG gain from entering China?
• Increased sales
• Reduced costs
• Entry to neighbouring countries
3. Are there any concerns with entry to China?
• Chinese business culture is very different from Bahrain
• Strong competition in China with many medium and large
sized businesses within the same industry
• Most state projects require 100% Chinese production
4. What are the implications of exporting to China?
• Exporting to China is a safe way of entering, however it is
very difficult to capture significant market share
• Costs of exports may make it difficult for BFG to be
competitive on price
5. What are the implications of FDI in China?
• FDI in China will allow increase in production
• This production will be based on low costs and will also
maximise sales in Asia
• Exporting from China has many benefits due to the trade
surplus currently faced in China
63
Appendix F
Pictures from Observational Study