DIRECT INVESTMENT
The ultimate form of foreign involvement is direct ownership of foreign-based as-
sembly or manufacturing facilities. The foreign company can buy part or full interest
in a local company or build its own facilities. If the foreign market appears large
enough, foreign production facilities offer distinct advantages. First, the firm secures
cost economies in the form of cheaper labor or raw materials, foreign-government in-
vestment incentives, and freight savings. Second, the firm strengthens its image in
the host country because it creates jobs. Third, the firm develops a deeper relation-
ship with government, customers, local suppliers, and distributors, enabling it to adapt
its products better to the local environment. Fourth, the firm retains full control over
its investment and therefore can develop manufacturing and marketing policies that
serve its long-term international objectives. Fifth, the firm assures itself access to the
market in case the host country starts insisting that locally purchased goods have do-
mestic content. Here is how one firm uses local relationships to advantage in its over-
seas plants.■ CPC Internationale CPC, manufacturer of such well-known food brands as
Hellmann’s Mayonnaise and the Knorr’s line of soups, prefers full-scale over-
seas manufacturing to either foreign product assembly or exporting. So far,
the company manufactures in 62 of the 110 countries in which it markets
its products. CPC uses local personnel and managers almost exclusively when
operating overseas, particularly people who understand the markets and who
can compete effectively within them. CPC also hands off marketing to local
managers, figuring that they know their own markets and how to compete
there better than the folks back at the Englewood Cliffs, New Jersey, head-
quarters do.^19The main disadvantage of direct investment is that the firm exposes a large in-
vestment to risks such as blocked or devalued currencies, worsening markets, or ex-
propriation. The firm will find it expensive to reduce or close down its operations,
because the host country might require substantial severance pay to the employees.THE INTERNALIZATION PROCESS
Most countries lament that too few of their companies participate in foreign trade.
This keeps the country from earning sufficient foreign exchange to pay for needed
imports. Many governments sponsor aggressive export-promotion programs to get
their companies to export. These programs require a deep understanding of how com-
panies become internationalized.
Johanson and Wiedersheim-Paul have studied the internationalization process
among Swedish companies.^20 They see firms moving through four stages:- No regular export activities
- Export via independent representatives (agents)
- Establishment of one or more sales subsidiaries
- Establishment of production facilities abroad
The first task is to get companies to move from stage 1 to stage 2. This move is helped
by studying how firms make their first export decisions.^21 Most firms work with an
independent agent and enter a nearby or similar country. A company then engages
further agents to enter additional countries. Later, it establishes an export department
to manage its agent relationships. Still later, the company replaces its agents with its
own sales subsidiaries in its larger export markets. This increases the company’s in-
vestment and risk but also its earning potential. To manage these subsidiaries, the
company replaces the export department with an international department. If certain
markets continue to be large and stable, or if the host country insists on local pro-
duction, the company takes the next step of locating production facilities in those
markets, representing a still larger commitment and still larger potential earnings. Bypart three
Developing
Marketing(^378) Strategies