Use of Multiple Production Locations by MNEs in Asia

1. Briefly explain the reasons why many multinational enterprises in Asia utilise multiple production locations located in a number of countries for production of parts and components and assembly of final goods.

Globalisation facilitates dramatically in the past and progressed by modern transportation, communication and improved legal rules and regulations to open markets to international trade and finance. The companies also contributed by internationalise their products all over the world. Without the facilitating character of globalisation, it is impossible for multinational which own or control production or service facilities outside the country in which they are based; exhibit a degree of trans-nationality. Most companies become multinationals because of some form of foreign direct investment (FDI) that spreads their geographic activities.

The multinational firm is one of the most pervasive types of firms in the global economy. Multinational firms exist because certain economic conditions make it possible for a firm to profitably undertake production of a good or service in a foreign location. The 500 largest multinationals account for about 25 per cent of world product, and nearly half of total world trade. (https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CB8QFjAA&url=https%3A%2F%2Fwww.business.illinois.edu%2Faguilera%2FTeaching%2FMNEConcept%2520calculation%2520guillen.doc&ei=Iro2VMKyMMuGuASt3oCYBQ&usg=AFQjCNGECOek5OVjlpTQFYr6QF-u9qBLug). Multinationals are becoming more important relevant to the size of the global economy which is about three times as prominent today as twenty years ago. Trade in intermediate inputs associated with the fragmentation of production across national borders is an increasingly important feature of global economic integration. Production has become a multinational process in which different stages are carried out in specialized plants around the globe for some goods. Materials and components produced in one country may pass through a numbers of other countries that each adds value through fabrication, assembly or other processing before final goods is delivered to customers.

This paper is to outline the reasons why many multinational enterprises in Asia utilise multiple production locations located in a number of countries for production of parts and components and assembly of final goods.

International production networks play an important role in East Asian economies. Most industrial production in East Asia where production is divided into several stages and then conducted in various countries is according to their comparative advantages. One of the reasons is result from market-driven forces such as vertical specialization and higher production costs in the home countries and institutional-led reasons such as free trade agreements. International fragmentation of production, the splitting of production process into discrete activities which are then allocated across countries, has been an increasingly important facet of economic globalization over the past three decades.

Whenever a firm undertakes a transaction with a customer or supplier, it incurs transaction costs in addition to the price paid for goods or services. http://www.ekf.tuke.sk/files/TUKE%20Lectures%202011-12.pdf

The transaction costs included the legal costs of drafting a contract, the costs of going out to tender, searching for information on potential suppliers and the cost of currency exchange or hedging. The transaction costs included exporting cost would be able to avoid if multinational enterprise has their full ownership of production industry in that countries. The company could produce the products into the final goods and sell it to the country where it produced instead of exporting from the home country.

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It is often for multinational firms find it cheaper to produce goods in foreign countries. Employees in foreign countries are willing to accept lower salary than domestic employees. This help to minimise the labour cost of production of the multinational companies. In addition, foreign countries have different rules and regulations for labour, business and the environment, which can potentially reduce expenses. http://yourbusiness.azcentral.com/multinational-company-benefits-drawbacks-21554.html Companies can become more competitive and increase their profits with lower production costs.

In conclusion, there are several benefits for multinational enterprise in Asia utilise multiple production locations located in a number of countries for production of parts and components and assembly of final goods. The multinational companies can enjoy the benefits of inflow of income from overseas profits by lower the wages, jobs and career opportunities at home and abroad in connection with overseas opportunities and greater availability of products for local consumers and consumers in overseas which at the same time can increase their visibility of the brand to all over the world.

2. Using two case studies of firms headquartered in two different countries, show how the growth of trade and investment links among several Asian economies is related to the strategic production and location decisions of firms.

Describe and explain the main considerations of these two firms in determining where to locate specific activities.

To be able to show that intra-Asian trade and investment links arise from operations by firms you need to choose firms so that there are inter-Asian investment links due to firm operations and also intra-Asian investment links due to firm operations.

This can happen if thetwo firms are headquartered outside Asia but have production bases in severalAsian countries, with linkages through intra-firm trade in parts and components etc. OR they areheadquartered in two Asian countries with production bases in one or more other Asian countries with there being trade in parts and components etc among the various Asian production bases.

So choose firms to ensure you can illustrate how intra-Asiantrade and investment links arise from such multinational firms.

Market seeking is one of the reasons that multinational companies invests overseas. The companies may enter foreign markets to find new buyers for their goods and services. The owners of a company may find out that their product is unique or superior to the competition in foreign markets and want to take advantage of this opportunity. The company may also believe investment overseas will bring higher returns of profits when producers have saturated sales in their home markets.

Apple Incorporation is an American multinational corporation headquartered in Cupertino, California, that designs, develops, and sells consumer electronics, computer software, online services, and personal computers. Apple skyrocketed to the top of our annual Asia 200 survey this year, and was ranked by readers as the region’s most admired multinational company. Apple opened its first company-owned Apple retail store in Asia last year. (http://online.wsj.com/articles/SB125259938989400063) China’s economy is having some of its best years ever due to the rising world demand for consumer electronics, much of which is manufactured in China’s monstrous city-factories. The average Chinese citizen is more flush with cash than ever before and ready to spend it on what would previously be deemed as unaffordable luxury. (http://thenextweb.com/apple/2011/09/05/how-apple-has-found-success-in-china-and-why-its-just-the-beginning/) One of the reasons that Apple would success trading in Asia is because of the cultural such as modern Chinese culture of wealth and status. According to the news, Apple holds a unique position among foreign brands in China as its products are highly polished, appealing to the young and wealthy elite and valuable as gifts given to those with whom a Chinese consumer might seek a better relationship. (http://thenextweb.com/apple/2011/09/05/how-apple-has-found-success-in-china-and-why-its-just-the-beginning/) Lam Nguyen, Ho Chi Minh City-based country director at International Data Corp predicts that iPhone sales in Vietnam will increase 56 percent to about 12 million units in 2014 as consumers seems iPhone as a relatively affordable status symbol. (http://www.bloomberg.com/news/2014-07-15/apple-looks-to-status-hungry-vietnam-for-growth-southeast-asia.html)

Most of the components of iPhones are now manufactured in China is because China’s factories are bigger than those in United States and there are tens thousands of workers practically overnight and able to press them into service at a moment’s notice. Workers can change production practices and speeds extremely rapidly.

China currently has bigger supply of appropriately-qualified engineers than the U.S. does. Lastly, China’s workforce is much hungrier and more frugal than many of their counterparts in the United States. (http://www.businessinsider.com/you-simply-must-read-this-article-that-explains-why-apple-makes-iphones-in-china-and-why-the-us-is-screwed-2012-1?IR=T&)

Another case study is about Nike Incorporations which headquarter located in Beaverton, Oregon, NW USA. Nike is an American multinational corporation that is engaged in the design, development, manufacturing and worldwide marketing and selling of footwear, apparel, equipment, accessories and services. China boasts the largest number of Nike contract factories which are124 in total. About 620,000 people currently work in contract factories around the world producing Nike branded footwear, apparel and clothing, the majority of which are women under the age of 25. More than 75% of these work in Asia, predominantly in China, Thailand, Indonesia, Vietnam, Korea and Malaysia.

The managers of Nike justify their expansion on why they globalise their products. Nike aims to buy their raw material at a lower price as more profits would be made. Nike would be able to access new markets by selling their shoes in other countries. This allows them to increase their global sales and hence the profits increase. One of the crucial inputs used in the production of Nike shoes is rubber which is not produced in the United States. Nike would need to access the resources by finding in other countries. Lastly, Nike would like to minimise their transport costs and expand customer base at the same time. In order to achieve both motive, the production has been centralise in certain countries and able to achieve economies of large scale production.

However, produce at a lower cost is not the only reason should be considered to boost the profits. Multinational companies also invest in source technologies, high-quality people, and ideas. For example, Nissan invested in lower cost England and Spain but also in expensive Germany. Although labour costs in Germany were very high, the high productivity of the labours made setting up shop there efficient. Thus, Japanese firms are able to learn new ideas and technologies from some of the most sophisticated companies in the world.

In conclusion, the multinational company will choose to allocate their production based and also invest in the Asia countries due to the cultural of the Asia that are different with Western countries. Invest in Asia countries would be able to bring a large amount of revenues to multinational countries based on the chosen firms of the case studies above.

http://www.adbi.org/files/2013.02.21.wp409.impact.asean.production.networks.pdf

http://www1.doshisha.ac.jp/~ccas/japanese/seminars/2007-11b.pdf

http://www.bea.gov/papers/pdf/intrafirmtradejanuary04.pdf

http://www.globalization101.org/why-do-companies-invest-overseas/