2Internationalization Theories

2.1The International Product Life-Cycle Theory

2.1.1Market entry according to the product life-cycle phase

The international product life-cycle theory developed by Vernon was introduced in 1966 (Vernon, 1966). Based on panel research of enterprises from the United States of America, Vernon’s product life-cycle explanations further developed the existing trade theories introduced by Heckscher-Ohlin and Leontief (Vernon, 1972: 4–6). Vernon assumed that the flow of information across national borders would be restricted and that products undergo predictable changes that have an impact on the firm’s internationalization strategies. The product life-cycle model was developed on these assumptions: the production process is characterized by economies of scale, the cycle changes over time, and tastes differ in diverse countries (i.e., each product does not account for a fixed proportion of expenditure for buyers at different income levels). Because information does not flow freely across national boundaries, three important conclusions follow.

The international product life-cycle theory claims that the market entry of a product is carried out in a foreign market depending on the position of the product in its country-specific product life-cycle curve. In the 1950s and 1960s, United States products led in the worldwide markets in many industries, while Europe and Japan required time to build up their own industries and infrastructures after World War II. Consequently, Vernon assumed that the United States served as a truly innovative market with customers with high purchasing power compared to other countries.

As illustrated in Figure 4, Vernon claimed that, for a certain time period, producers based in the U.S. are likely to have a virtual monopoly on the manufacturing of new products introduced in the U.S. An innovative product at its growth phase is produced inland and sold at relatively high prices. The output volume increases in the course of the market penetration inland, and experience curve effects appear. Due to the product’s attractive market growth forecasts, the number of enterprises that produce this product increases in the home country. As a result, standardization and product cost aspects become important in connection with the necessity for mass production outputs. At later stages in the growth phase of the product life-cycle, some foreigners start to demand the new and innovative product; and U.S. exports begin (Vernon, 1972: 12).

While the growth rates decline during the maturity stage of the product life-cycle in the U.S. home market, export activities to other countries increase. As foreigners’ incomes grow and lower income consumers abroad begin to buy the mature product, prices begin to fall, while, in parallel, U.S. exports further increase. As the product sales continue and market volumes increase in foreign markets, it becomes economically desirable for U.S. firms to establish foreign production. The time it takes until foreign production begins is dependent on the economies of scale, tariffs, transportation costs, income elasticity of demand, and the income level and size of the foreign market. At the end of the product life-cycle, manufacturing and sales in the U.S. market become more and more unimportant. As a result, local manufacturing runs out due to the relatively high production costs in comparison to foreign countries. The remaining market volume during the decline phase of the product life-cycle is completely imported from abroad, while, at the same time, U.S. firms introduce new and highly innovative products that launch the next product life-cycle (Vernon, 1972: 13).

2.1.2Review of Vernon’s model

To sum up, a firm’s market entry activities depend on the product’s position in the corresponding life-cycle. At first, the new innovative product is developed, produced, and sold in the U.S. home market. In the second phase, product exports start; and while this product becomes mature, direct investments abroad begin. Finally, import from abroad increases, production is discontinued in the home market, and the demand is completely supplied by foreign countries. At this stage, the product has reached the decline phase of its life-cycle.

Vernon’s approach has made an essential contribution to the internationalization concept disciplines. The product life-cycle model provides a useful framework for explaining the post-World War II expansion of U.S. manufacturing and investment activities. However, its explanatory power has waned with changes in the international environment (Robock & Simmonds, 1989: 47). Holding an innovative market leadership position does not necessarily last. For example, Japanese consumer electronics firms such as Sony started to replace previously leading consumer electronics firms in the U.S. during the 1960s. At the beginning of the 21st century, Japanese consumer electronics firms suffer from competition from South Korean, Chinese, and Taiwanese firms, which took market share from the Japanese in various fields.

The model can be criticized in general because it assumes an ideal product life-cycle with coherent foreign activities. The theory is limited by the assumption that there is an attractive U.S. home market from which U.S. firms start their global activities. This model assumption is, from the 1960s perspective, substantiated for many industries where the U.S. was ahead of Europe and Japan. It is true that large home markets provide the best prerequisites for experience curve effects and economies of scale. However, the general model validity is hard to test empirically due to the complexity of the product life-cycle. Industry-specific factors, such as tariff and non-tariff trade barriers, behavior preferences of the management, and investment incentives that significantly influence manufacturing costs, as well as cross-border trade and capital flows are not considered by the model (Luostarinen, 1980: 77). Vernon’s model is focused on manufacturing industries rather than on services industries.

Today, due to globalized trade patterns and intensified competition, technology and product life-cycles are shorter, while, in parallel, investments in R&D, operations and marketing, and so forth are increasing. Consequently, firms are often under pressure to sell their products globally – right from the beginning of the product life-cycle – in order to realize early economies of scale effects. Moreover, multinational firms often maintain different market entry concepts, such as export and foreign direct investment, in parallel. Nowadays, the customers’ purchasing power does not differ significantly in many industrially developed countries. (Vernon correctly assumed a U.S. consumer’s higher purchasing power relative to the rest of the world in the 1950s and 1960s.) Moreover, customers’ expectations concerning the technical and quality performance of a product and service have become similar in many countries worldwide. As a result, the segmentation of the product life-cycle phases and corresponding conclusions for local sales, export, foreign direct investment, and import, according to the model, is rather arbitrary (Tesch, 1980: 164–167).

As a result of increased global business dynamics in recent years, there are cases of innovative firms that were unknown a couple of years ago. Meanwhile, some of these firms are playing a significant role in the international market (e.g., Lenovo from China). Interestingly, taking the case of the online-based business concept of the Chinese Alibaba.com, we can deduce some minor similarities with Vernon’s approach. Alibaba’s global success at the beginning of the 21st century is based, among other reasons, on its quasi-monopoly positioning in its huge Chinese home market. Alibaba.com currently takes advantage of economies of scale and experience curve effects in China similar to those Vernon indicated as an advantage for U.S. manufacturing industries in the post-war period.

Around a decade after its first publication in 1979,Vernon retracted the life-cycle model and agreed that there were fewer differences among countries in factor costs and market conditions (Barkema, Bell, & Pennings, 1996: 152). From today’s view, after decades of major economic and political progress in world trade, the international product life-cycle theory has lost much of its validity. Consequently, further internationalization models have been developed, which are described in the following sections of this chapter.

Chapter review questions

1. Following Vernon’s model assumptions, describe reasons for differentiated international market entry modes based on a product’s life-cycle position.
2. Compare today’s global business environment framework with the 1950s and 60s, and describe why the international product life-cycle theory lost much of its validity. Summarize the conceptual weaknesses of Vernon’s product life-cycle theory.

2.2Location Concepts

2.2.1Historical foundations

The location discussion in connection with international trade theories has a long history. The mercantile doctrine, the major economic theory from the 16th to the 18th century, claims that the prosperity of a country (accumulated in gold or other precious metals) should be increased by high exports and low imports. The more one country wins from bilateral trade through the trade surplus accumulated in the national treasury, the more the other country loses (Robock & Simmonds, 1989: 140). The mercantile doctrine was replaced by Adam Smith’s ‘theory of absolute advantage’ published in The Wealth of Nations in 1776. Smith, who was ahead of his time when he supported liberalized trade systems, argued that countries differ in their manufacturing performance (absolute cost advantage). If one country specializing in a particular product exports the product to a country from which it imports another product the trade partner specializes in, all participating countries will benefit from international trade. Import restrictions such as customs duties reduce the gains from specialization and cause a nation to lose wealth (Hill, 2005: 147–151; Parkin, Powell, & Matthews, 2000: 914).

David Ricardo further developed Smith’s idea regarding comparative cost advantage as discussed in On the Principles of Economy and Taxation, published in 1817. He claimed that countries should focus on items they can manufacture most efficiently in comparison to other nations. Consequently, countries should export those goods where they have a comparative advantage and import other products where the trade partner country has an advantage. Thus, differences in productivity among countries initiate trade ambitions and result in a higher standard of living for the participating states (Hill, 2005: 150 –151; Mankiw, 2007: 223).

During the post-World War II period, location concepts with regards to firms’ internationalization strategies attracted attention. Issues such as where it is most profitable to locate a firm’s production with regards to local market imperfections (compare transaction cost theory), transportation, plant size, advantages of monopolistic competition, and incorporation of technology became the center of interest (Churchill, 1967: 86–87). Swedish economists Heckscher and Ohlin claimed that countries differ in their factor endowments, such as ground, labor, and financial capital. These differences cause divergent competitive advantages among nations. In addition, countries have comparative advantages in those goods for which the necessary factors of manufacture are comparatively abundant locally, which causes the price of goods to be lower because their corresponding input costs are lower. Thus, a country should manufacture and export those products that use factors that are abundant at home. At the same time, nations that have a comparative disadvantage tend to import those goods whose production requires the factors that are relatively scarce in their country (Brakman, Garretsen, Van Marrewijk, & Van Witteloostuijn, 2006: 119; Robock & Simmonds, 1989: 36).

Location Models

Location concepts focus on the access and optimal allocation of the input variables needed for efficient and innovative manufacturing and service output (Rasmussen, Jensen, & Servais, 2008: 72). In general, it is claimed that country- and industry-specific factor endowments influence a firm’s innovation, business orientation, and performance: for example, whether firms rather focus on home markets or international markets. For foreign firms, as a consequence, the strategic decision for market entry primarily depends on the location factors of the target country (Pan & Tse, 2000: 540; Tesch, 1980: 132–138).

Two central categories of location factors can be distinguished: the category of the macro environment and, taking a more narrow perspective, the category of the firm’s industry environment. These categories will be introduced and discussed in the following sections.

2.2.2Location factors

2.2.2.1The macro environment

The discussion about a firm’s resources, structures, and strategies, as well as its interface with its market environment is also found in the literature within the category of ‘institutional theories of organizations’. The institutional theory serves as a framework for identifying and analyzing the factors that support the viability and legitimacy of organizations. In general, these factors include societal, economic, and political-legal regulations, as well as an organization’s tradition and history (Bruton, Ahlstrom, & Li, 2010: 422; Glover et al., 2014: 104). These factors have a direct impact on the strategies and organizational decisions of firms (North, 1990: 6–10). With the aim of improving their position and legitimacy, firms should adhere to rules such as regulatory structures and practices (Glover et al., 2014: 104).

Contextual risks are a result of the external uncertainties embodied in the macro environment of the firm’s international target market. For example, political-legal uncertainties arise from instability in the political system or from policies of the local government, such as those concerning private ownership (e.g., expropriation and intervention), operational risk (e.g., price control and local content requirements), and transfer risk (currency inconvertibility and remittance) (Pan & Tse, 2000: 540).

Aspects of the institutional environment can have a direct effect on a firm’s market entry strategy in a foreign target market. For example, legal restrictions on foreign ownership of domestic enterprises, as for example seen in India, establish definite limits on foreign equity holdings. Country uncertainties regarding the protection of intellectual property rights further contribute to environmental risks and can result in a firm’s reduced investment activity (Delios & Beamish, 1999: 917). Demographic characteristics can result not only in lower demand for a technology but also in modification and adaptation of existing technologies (Davidson & McFertidge, 1985: 9).

A well-known tool for scanning macro-environmental factors for a firm is PEST (political, economic, social, technology) analysis. In some sources, PEST is supplemented by ecological and legal factors, thus the acronym becomes PESTEL or PESTLE (Koumparoulis, 2013: 33–34). Drawbacks of PEST analysis are that originally less attention was paid to ecological issues. However, ecology has become an increasing challenge related to the global pollution of water and air as well as exploitation of natural resources. Current global business behavior should be viewed in light of, hopefully, an increasing public awareness regarding ecological challenges. S.E.E.L.E. (society, ecology, economy, law, expertise) emphasizes societal (not narrowly ‘social’ according to PESTEL) and ecological issues and better considers modern service-industry driven societies. Important elements of the macro-environmental scan when applying S. E.E.L.E. are the following:

The study of market entry abroad necessarily assumes the recognition and understanding of the respective environmental macro structures. A firm that plans business activities in a foreign country needs to collect and evaluate necessary information based on the S. E.E.L.E. elements and their interconnections. In general, the educational system (as a fragment of ‘society’) established by the national government should attempt to provide qualified and ethically responsible people for the firms and organizations. At the same time, firms should be aware of their social responsibility. A ‘hire and fire’ policy that aims to exploit the employees for short-term objectives or, alternatively, internally developing and improving the qualifications of the firm’s personnel reveal different behavioral and ethical aspects of a firm’s culture. These examples of diverse firm policies necessarily suggest positive or negative consequences for its national environments.

When local governments in a foreign market set new legal standards in order to reduce environmental damage (e.g., product labels that show the electricity consumption of an apparatus), the new standards hopefully cause a change in customer needs and preferences (e.g., product purchases with reduced power utilization). Consequently, such standards influence the destiny of a manufacturing firm and the sales potential of the products. If the firm has reliable, sophisticated market research and forecasting, it is better able to forecast new political and technological trends and appropriately focus the corresponding R&D activities. Suppose an enterprise performs well; its business will result in a higher number of employees. If not, employees need to be released; and the firm may face bankruptcy, which contributes to an economy’s higher unemployment rate (negative impact on its macro-environment).

A firm that targets foreign direct investment and compares different potential target markets may raise, among others, questions such as the following: How will costs and earnings develop in the respective regions in the future? Are the factor costs in countries with relatively low wage levels associated with lower educational levels that result in lower productivity and employees that are less conscious of quality? How much training is necessary for the work force? Do the work ethics and the loyalty of the staff differ culturally from the atmosphere at home? (Meyer, 2006: 37). Because factors of the macro environment vary from country to country, they provide the basis of diversified opportunities and threats for the international business activity of the firm. An opportunity is a condition in the macro environment that, if properly utilized, helps a firm achieve a competitive advantage, while a threat may hinder a company’s efforts to attain strategic competitiveness in global business (Hitt, Ireland, & Hoskisson, 2015: 40–41).

As is clear from the arguments and examples mentioned above, there are various linkages between the macro and the industry environments. These elements continuously evolve. Changes lead to modifications in the cost and revenue structure, which may be favorable or unfavorable to the firm (Rasmussen et al., 2008: 73). Thus, a continuous and permanent scan of the firm’s macro-environment, usually carried out by the firm’s marketing department, is of vital importance to the company.

2.2.2.2The industry environment

Industry groups consist of firms with similar missions, organizational structures, value added activities, and strategies related to their products and services (Wheelen & Hunger, 2010: 162–163). The industry or task environment is a set of industry-specific location factors that directly influence a firm in its competitive position relative to local rivals and, logically speaking, its market entry and penetration strategy abroad. The best-known representative of industry analysis (‘five forces model’), which is thematically similar to the market-based view, is M.E. Porter (compare: Porter, 1980; 2003; Porter & Fuller, 1986; Porter & van der Linde, 1995). In contrast to the resource-based view (competitive advantages depend on the firm’s resources), the market-based view claims that sustainable competitive advantage and superior returns depend on the management’s recognition and utilization of the market and the influencing industry forces (Peters et al., 2011: 877).

According to Porter (1990: 34), two central concerns underlie the choice of a competitive strategy. The first is the industry structure in which the firm competes. Industries differ widely in the nature of competition, and not all industries offer equal opportunities for sustained profitability. The average profitability in pharmaceuticals is high, for example, while this is not the case in consumer electronics. The second central concern in a competitive strategy is positioning within an industry.

In each industry, the nature of competition depends on five competitive forces:

(1)the threat of new market entrants,

(2)the threat of substitute products or services,

(3)the bargaining power of suppliers,

(4)the bargaining power of buyers, and

(5)the rivalry among the existing competitors.

A firm’s performance is limited by these specific industry properties. The appearance and the strength of the five forces vary from industry to industry and determine long-term industry profitability. These factors influence the attractiveness of the industry and the corresponding profits of the engaged firms (Porter, 1990: 35). According to the market-based view, the sources of value for the firm are embedded in the competitive situation characterizing its external product markets. Interaction among competitive industry forces, such as the bargaining power of suppliers and buyers, influences a firm’s profitability in the foreign target market (Hitt et al., 2015: 39; Müller-Stewens & Lechner, 2011: 173; Wheelen & Hunger, 2010: 158–159). For example, a higher bargaining power for a firm in comparison to the bargaining power of the suppliers suggests that a firm might achieve higher performance because the existing suppliers have fewer alternatives within the industry.

Competitive dynamics are also influenced by barriers to entry resulting from the structure of the market (Grant, 1991b: 117–118; Makhija, 2003: 437). An industry environment that has high entry barriers is attractive to enter and provides, at least temporarily, higher returns for the existing companies, which take advantage of limited (foreign) competition (Peters, Siller, & Matzler, 2011: 878–879). Transactional risks related to market entry in foreign target markets arise as a result of the behavior of local firms, which may take action to maintain or increase entry barriers through offensive price strategies or lobbying their local governments (Pan & Tse, 2000: 540).

In the course of the development of industry analysis, the importance of the regional industry cluster (e.g., supplier-customer inter-firm relations; supporting service providers such as logistics, information technology, etc.) gained increased attention in location theories (McCann & Sheppard, 2003: 650 –651). For example, for a firm considering a market entry through foreign direct investment, it tends to be more efficient to locate its production site close to existing local industry networks with access to an existing supplier instead of operating from a distance.

Firms considering international market entry activities can evaluate and compare different industry clusters according to the following questions, among others: Are there any component supplier clusters available or under development in this region? Is the location an attractive one for competitors to initiate foreign direct investment activities? What infrastructure is available? How far away from the industry cluster are the major markets? How will the freight rates develop, which depends on the number of logistics firms that offer services in that region? (Meyer, 2006: 37). The rationale of the ‘incubator’ hypothesis is that a newly established industrialized area (industry cluster) offers firms attractive conditions for investment. In addition, enterprises usually benefit, at least temporarily, from tax incentives and reasonable prices for real estate. Through concentration in a cluster, firms create economies of scope by sharing storage facilities as well as transportation, which facilitates exports and imports. Especially with regard to technology-oriented complexes, for example science parks or economic development zones, the ‘incubator hypothesis’ has been useful (Rasmussen et al., 2008: 73).

2.2.2.3The case study of Sharp (Japan): Leader in liquid crystal display technology – and then?

At the beginning of the 21st century, Sharp continued efforts to expand its research and development as well as its manufacturing capacities of technologically advanced displays. In order to strengthen its competitive position in selected business segments, Sharp created network relations through bilateral relationships with other firms that usually had their origin in Japan. For example, in 2000, Sharp and Pioneer entered into a technological collaboration for next-generation digital products. In 2001, Sharp established ELDis Inc., a joint company with Tohoku Pioneer Corporation and Semiconductor Energy Laboratory Co., Ltd., to manufacture and market substrates for organic displays. In the same year, Sanyo Electric Co., Ltd., and Sharp agreed on a global collaboration for the development of home appliances. In 2002, Sharp started the construction of a 776,000 square meter Kameyama Plant in Japan, which was designed for state-of-the-art integrated production of LCD TVs, ranging from manufacture of LCD panels to final assembly of finished LCD TV sets (Sharp, 2007a, 2008b).

At that time, Sharp’s factory was the world’s first vertically integrated production facility, carrying out the complete range, from manufacture of LCD panels to final assembly of television sets. The fusion of liquid crystal technologies and television audio-visual technologies resulted in high-quality LCD television sets and accelerated the transition from cathode ray tubes to LCDs in the global markets. The Kameyama Plant was not far from other previously established Sharp LCD plants, such as the Tenri Plant. Numerous companies in the flat-panel-display industry moved to the area, enabling Sharp to deepen its networks with related companies, which supported Sharp’s continued LCD component and product developments (Sharp, 2008b).

In February 2005, Sharp Corporation and Fujitsu Limited announced they had entered into an agreement regarding the transfer of Fujitsu’s LCD operations to Sharp. Fujitsu had been producing high-resolution, high-image-quality LCD displays primarily for use in computer monitors. In particular, Fujitsu’s original technology for large-screen LCDs, requiring superior image quality, became the industry standard; and the company had leveraged that technological leadership in developing its LCD business. Fujitsu determined that the best way to realize the full potential of this business was by transferring it to the leading company in the LCD business, Sharp (Fujitsu, 2005).

The agreement called for Fujitsu to transfer to Sharp the LCD research and development, manufacturing, and sales operations of its consolidated subsidiary, Fujitsu Display Technologies Corporation (FDTC), along with the related Fujitsu Laboratories Ltd. research center. As a result of the transfer, Sharp took over FDTC’s personnel at the Yonago plant as well as ‘Fujitsu Laboratories’ personnel involved in FDTC-related research and corresponding intellectual property rights held by the Fujitsu Group (Fujitsu, 2005). The transfer expanded Sharp’s development and production capabilities in the small and mid-size LCD segment. In addition, by enhancing its ties with Fujitsu as a supplier of key components, Sharp further reinforced its LCD business foundation (Fujitsu, 2005).

In December 2007, Sharp Corporation and Toshiba Corporation announced that the two companies had agreed to collaborate closely in the LCD business, a move that was expected to enhance the companies’ corporate value, profitability, and global competitiveness. The alliance allowed each company to make full and effective use of its resource strength, particularly Sharp’s capabilities in LCDs and Toshiba’s expertise in advanced semiconductors. Sharp and Toshiba initiated the collaborative partnership in 2008, starting with an expansion of reciprocal procurement – Sharp’s procurement of system components for LCDs from Toshiba and Toshiba’s procurement of Sharp’s LCD modules for television sets of 32 inches and larger. Through the alliance agreement, Sharp aimed to satisfy about 50 percent of its total demand for LCD system components for its television sets in 2010, while Toshiba targeted meeting 40 percent of its demand for LCD modules in the same year (Sharp, 2008c).

Around 2005, the global market for LCD TVs was growing; and this trend was expected to continue in the coming years. While various types of displays were brought to market, Sharp was channelling its resources into developing LCD TVs characterized by thin lines, light weight, high resolution images, and a long lifetime and also into achieving progressive advances in reducing power consumption. Large-scale integrated circuit (LSI) systems for TVs were increasingly required to support advanced functions and higher levels of performance alongside their core role of image processing. As television sets shifted to higher levels of resolution, Toshiba’s system LSIs for TVs supplied Sharp with advanced expertise and achievements in image processing in products that met the most exacting requirements of major television set manufacturers. By bringing together such technologies, Sharp and Toshiba promoted business advances through development of differentiated products. Each company aimed to secure a leading position in the LCD TV market and reinforce its capabilities in LCDs and semiconductors by overcoming increasingly intense global competition (Sharp, 2008c).

In February 2008, Sony and Sharp announced they would establish a joint venture to build a generation 10 TFT LCD plant targeting large-size LCD TV panels of 40 inches and larger. Sony and Sharp invested USD around 3.56 billion respectively. Sony held a 34 percent share of the new company, and Sharp held 66 percent. (DisplaySearch, 2008a). The joint venture for the development and manufacture of LCD panels was seen as a symbol of continuation of a long-term relationship between the two Japanese firms because already, by 1996, Sharp and Sony had agreed on the joint development of large-screen flat display panels.

For Sharp, because the firm could not rely on its own brand strength to sell its huge panel manufacturing capacities in the markets, the partnership with Sony also served as a means of targeting higher price segments traditionally hold by Sony. It was anticipated that Sharp would be able to sell a considerable part of its panel manufacturing output capacities through Sony TV products and Sony’s worldwide distribution channels. Sharp adjusted its policy to retain more than 30 percent of its panel output for its own LCD TV assembly; thus far, the ratio had been only 10 to 15 percent, with other LCD TV makers procuring the rest. Sharp shipped 8 million LCD television sets in 2007, less than Sony’s 9.5 million and Samsung’s 13.4 million units. The continued necessity of feeding the production lines emerged at a time when Sharp was facing competitive pressure from other less-known brands. With ‘everybody buying panels and components from everybody’, the Sony and Sharp joint venture serves as an illustrative example of the industry relationships and mutual procurement policies of Japanese firms (DisplaySearch, 2008a).

Sharp aimed to become an innovative pioneer instead of following the mass market trend as the case of solar cells used for alternative energy generation illustrates. (Solar cell manufacturing has similarities to LCD display manufacturing.) However, despite all its efforts, Sharp continued to face drawbacks in creating the reputable and powerful image abroad that it had in its home country. Obviously, the marketing and communication policy outside Japan needed to be better adjusted to the behavioral attitudes of Western customers such as those in Europe. Investment in the traditional, premium brand company ‘Loewe AG’ was apparently an opportunity for Sharp to gain access to exclusive European distribution channels.

2.2.2.3.3The development of Sharp’s operations in Europe

In 2007, Sharp started the manufacture of LCD modules in a newly established facility near the city of Torun. Torun is located in the Pomeranian ‘special economic zone’ (WarsawVoice, 2006: 2). The Polish government established various so-called economic zones, of which each has various sub-zones. Tax exemptions and other incentives available to investors are among the main advantages of the zone. A multinational firm such as Sharp benefits from corporate tax reductions on income from its activities in the Pomeranian special economic zone, which reaches up to 50 percent of Sharp’s invested capital there (PolandBusiness, 2007a, b).

According to Hans Kleis, CEO of Sharp Electronics Europe, the LCD TV market, from a 2006 perspective, was supposed to grow continuously in Europe. Hans Kleis further forecasted that countries such as Poland, the Czech Republic, Hungary, and Slovakia would become increasingly important for LCD TV sales. Investments in regional manufacturing capacities seemed the logical conclusion. For Sharp, the location of Torun offered an excellent connection to already booming LCD television markets in Western Europe, particularly Germany. Therefore, Sharp planned an expansion of production capacities in order to be able to manufacture complete LCD TVs in Torun (bfai, 2007; Moschek, 2007: 1).

Japanese companies such as Sharp differentiate strategic suppliers (kankei kaisha) that belong to the keiretsu conglomerate from independent suppliers (dokuritsu kaisha) that do not belong directly to the keiretsu. In utilizing both types of supply sources, Japanese companies are able to achieve economies of scale and gain access to their suppliers’ capabilities for strategic inputs by using strategic partnerships. It is this unique combination of the firms’ and suppliers’ know-how in producing differentiated components for a product that can provide an organization with sustainable competitive advantage (Kotabe & Murray, 2004: 10). As a part of Sharp’s keiretsu network, the Polish factory in Torun holds the position of a European strategic component manufacturer (kankei kaisha) that supplies its modules for the final assembly of television sets at Sharp Electronica Spain S.A. (an example of Sharp’s vertical integration) (Moschek, 2007: 1).

Sharp attracted further investors to Poland, such as the Japanese TV set assembler Orion TV, which chose Lysomice as a future location for its LCD TV assembly. Orion used Sharp’s display panels in its LCD television sets. Besides Orion TV, several Japanese subcontractors and component suppliers that do not belong directly to Sharp’s keiretsu network decided to establish their plants near the Sharp facilities in Poland. Among them were enterprises such as Tensho, a producer of plastic elements; Nitto Denko Corporation (polarizing films); Sumika Electronic Materials (polarizing films and light diffusion panels); Toland Tokai Okaya Manufacturing (metal frames); Kimoto Co. Crystal Logistics, which will invest in warehouse buildings; and NYK Logistics, which will lease magazine surface for Sharp and its subcontractors (Olsson, 2007: 1). Some of Sharp’s main suppliers and logistic firms ‘followed its customer Sharp to Poland. The narrowly knit market entry network around Sharp and the position of the firms in the vertically integrated industry chain in Europe is illustrated in the figure below.

Sharp’s local partner, the US-based firm Jabil Circuit, Inc., invested Euro 13 million in a new factory in Kwidzyn, which is located in the economic zone as well. The factory was established in 1994 by Philips, which sold it to Jabil at a price of Euro 12 million in December 2004 (Philips, 2004: 28, 107). A major part of the LCD flat panel display production was reserved for the German-based Loewe AG (Moschek, 2007: 1). Why Loewe?

While Sharp was well known for innovative and quality products in Japan, the firm was confronted with rather weak brand recognition in Europe. Therefore, in 2002, Sharp’s management decided, in order to overcome the brand weakness within a relatively short time, to invest in the reputable Loewe AG. Loewe’s television set products were located in the premium price segments and were known for their superior design and quality. The agreement stipulated that Sharp would supply LCD modules to Loewe. Sharp agreed to subscribe up to 2.3 million shares in 2002. Two years later, Loewe had slipped into financial difficulties due to upcoming flat panel television technologies. The risk of technological substitution from conventional to flat screen had been ignored for too long by the German premium assembler. This development caused severe consequences because Loewe had positioned its marketing focus on providing leading technology linked with premium prices but kept running its set manufacturing based on bulky cathode ray tube technologies. In 2004, Sharp increased its stake in Loewe from the previous 8.9 percent to up to 28.8 percent (Sharp, 2004). Sharp’s additional investment equalled EUR 15 million, made the Japanese firm Loewe’s most important strategic shareholder, and helped the traditional German manufacturer survive. In the same year, another traditional well-known German consumer electronics assembler Grundig went bankrupt.

From January 2005 onwards, Sharp and Loewe launched a so-called Joint European Development Center in Kronach (Germany) in order to develop a completely digital electronics platform for LCD TVs and peripheral devices. The research and development concentrated on the European broadcasting standard for digital television (DVB). Toshishige Hamano, corporate senior executive director with responsibility for the international business of the Sharp Corporation, commented as follows:

As an established manufacturer of high-quality televisions, Loewe is the ideal partner for us in Europe. We are convinced that our strategic cooperation will strengthen both corporations, especially in the rapid development of the dynamically expanding LCD TV market (Sharp, 2004).

According to Chang (1995: 384), Japanese companies make rather frequent small initial investments in their core business and expand their operations if this investment performs well. Later, they diversify into new business areas through foreign market entry. This process takes a comparatively longer period of time than in the case of Western companies, which tend to prefer large investments linked with an expectation of early return on investments. Sharp’s financial engagement at Loewe AG and its incremental increase of shares from 8.9 to 28.8 percent during the period from 2002 to 2004 underlines Sharp’s careful and long-term oriented investment policy. There is nothing wrong with it except for the risk that, meanwhile, product and technology life cycles become much shorter in high-technology industries, where Sharp was competing against aggressive market penetrating Chinese and Korean companies.

Sharp maintained its European research activities at Sharp Laboratories of Europe, Ltd., located in Oxford, the United Kingdom. As per 2008, Sharp kept running manufacturing capacities for consumer electronics products at Sharp Electronica España S.A., Barcelona, and Sharp Electronics Ltd., Middlesex, the United Kingdom. Further manufacturing locations outside Europe and Japan were in China, Taiwan, Malaysia, Indonesia, the Philippines, and the USA, where Sharp also established local research and development activities at Sharp Laboratories of America, Inc., in Washington (Sharp, 2008a).

In 2007, the London-based investment firm EQMC acquired 10.13 percent of Loewe shares and became the second largest investor after Sharp. Obviously, the management of Sharp hesitated to greatly increase its financial engagement at Loewe. History has proved that the management of Sharp was right. In 2014, Loewe AG declared bankruptcy and was taken over by a German-based investor called Stargate. The reasons for Loewe’s failure were its limited product portfolio, concentrating on television sets of larger scale at a price level of Euro 3000 and more per TV unit. At that time, the competition in the global LCD markets had become intense and economies of scale effects reached increasing importance. Loewe was comparatively too small and less known outside European countries such as Austria; Switzerland; and its own base, Germany. Due to the bankruptcy of Loewe and its re-establishment with a modified shareholder structure, Sharp’s capital participation at Loewe has been reduced to 4.19 percent since July 31, 2014, which has caused a worsening market position for Sharp (Loewe_AG, 2014).

However, the problems of Sharp were not limited to the Loewe case. For a long time, Sharp followed a concentration strategy based on its LCD technology expertise, which was applied in television sets and solar photovoltaic models. In order to further expand its LCD business, which developed well until 2007, Sharp mainly concentrated on other Japanese partners targeting similar expertise—for example, Fujitsu, Sanyo, and Sony. Simultaneously, Samsung and LG Electronics from South Korea as well as Foxconn (Taiwan) developed more progressively than most of the Japanese firms. In 2012 and 2013, Sharp accumulated losses of more than 9 billion US dollars (Sharp, 2015a, b).

Sharp vertically integrated its value added activities within the industry chain of component supply, manufacture, and sales of LCD television sets, along with a network of external supporting firms. This caused an increased dependency on LCD display technology and limited its flexibility. Price competition, particularly in the field of LCD television sets, which is the core of Sharp’s business, had increased over the years. In 2012, the LCD display manufacturing joint venture with Sony – which, meanwhile, also slipped into severe financial difficulties – was terminated (Sony, 2012b).

In parallel, Sharp failed to successfully enter new upcoming business fields, such as smartphones, tablets, and navigation systems, where the Japanese firm could use its own LCD technology, thus combining its product portfolio (Tabuchi, 2012b). At the same time, global competition in the solar module segment became intense, which caused solar photovoltaic manufacturers to reduce their orders to Sharp or even to enter bankruptcy (Bilby, 2013; Chaffin, 2013; SolarOne, 2010). All in all, the solar photovoltaic business developed far below expectations for Sharp.

In 2014, due to the accumulating losses of Sharp Group, which was searching for cash revenues, Sharp withdrew its activities from Poland and sold its LCD factory (including its AQUOS brand) to the Slovakian-based company Universal Media Corporation (UMC) (Sharp, 2015b). In August 2015, Sharp started negotiating with Hon Hai Precision Industry (Foxconn), seeking to transfer its LCD display panel business to an international joint venture. Under the proposed plan, Hon Hai and possibly other parties, including Japan’s state-controlled Innovation Network Corporation, would make investments in the newly independent LCD firm. In July 2015, Sharp’s CEO, Kozo Takahashi, said he would be open to restructuring both the display and consumer product sides of the company in light of declining revenues. Sharp and Foxconn currently operate a large-scale LCD plant in Osaka as a joint venture. Both firms are key suppliers to Apple (Roger, 2015).

The question is what Sharp’s management is going to do in the future if its core business, LCD, is outsourced to a joint venture with Foxconn, one of the fastest learners and most aggressive firms in the electronics business.

Chapter review questions

1. Applying a macro and an industry analysis, what factors led to the severe losses of Sharp in 2012 and 2013?
2. Taking the perspective of Sharp’s management, describe the firm’s current situation and develop a sustainable strategic concept for the firm’s future. Provide reasonable arguments in support of the strategy.

2.2.3The Diamond Model

About a decade after categorizing the factors that affect competitive industry forces, Porter expanded the ‘competitiveness discussion’ to country levels in what is known as the ‘diamond model’. At the national level, location effects are what Porter describes as the competitive advantage of nations. The domestic environment provides the best prerequisites for firms to initiate foreign business engagements (Porter, 1990: 14; Rasmussen et al., 2008: 75–76). According to Porter, competition in many industries has internationalized not only in manufacturing but increasingly in services. Firms compete with truly global strategies involving selling worldwide, sourcing components and materials worldwide, and locating activities in many nations to take advantage of national divergent resource endowments. Porter’s diamond approach of internationalization is based on his empirical observation, which concludes that enterprises that are successful worldwide (‘global champions’) frequently originate in one country. His observation leads to the thesis that those enterprises, due to their industry environment, enjoy particularly favorable conditions, which make it possible for them to become internationally active and to attain a competitive advantage in other countries relative to the resident enterprises. Porter distinguishes four central factors and two supplementary factors that influence gaining a competitive advantage in foreign markets (Porter, 1990: 14, 73–99).

Central factor 1: production factor conditions

Human resources refer to the quantity, skill, and cost of personnel and management, taking into account standard working hours and the work ethic. In connection with this, the so-called progressive factors attain special importance. Progressive factors are, for instance, the education and qualifications of the population, the potential for generating high innovation, efficient use and combination of human resources, and continuous adaptation to the requirements of (foreign) markets.

Physical resources refer to the availability and cost of a nation’s land, natural resources, infrastructure, country location, and geographic size.

Knowledge resources refer to the nation’s stock of scientific, technical, and market knowledge concerning goods and services. Knowledge resources reside in universities, government research institutes, private research facilities, government statistical agencies, business and scientific literature, market research and databases, trade associations, and other sources.

Capital resources are the amount and cost of capital available to finance industry. Capital is not homogeneous, but comes in various forms, such as secured and unsecured debt. The total stock of capital resources in a country and the forms in which it is deployed are influenced by the national rate of savings and by the structure of national capital markets, both of which vary widely among nations.

Infrastructure is the type, quality, and user cost of infrastructure available that affects competition, including road systems, logistics, communications systems, payments, or funds transfer. Infrastructure also includes health care, housing stock, and cultural institutions, which affect the quality of life and the attractiveness of a nation as a place to live and work.

The quality of the production factors is more important to Porter than the quantity. Unlike the classical trade theories of Ricardo or Heckscher-Ohlin, Porter claims that it is advantageous for a country if physical resources (e.g., natural raw materials) are rare since the waste of resources is avoided through alternative innovative technologies that finally help to spare the environment (Porter, 1990: 75–76). The case of Russia, a country rich in natural resources but comparatively weak in modern and technologically driven industries such as electronics, automotive, chemical, and others, supports Porter’s thesis. Finally, physical resources over a period of time lose importance and become increasingly substitutable since an artificial way of producing them can be found or alternative production methods can be developed (Welge & Holtbrügge, 2015: 67).

Central factor 2: home demand conditions

All factors that have an influence on the level of purchase demand are part of the category ‘home demand conditions’. Nations gain competitive advantage in industries where the home demand gives local firms a clearer or earlier picture of buyer needs than foreign competitors can have (Porter, 1990: 86). The size of the home market can be a criterion for competitive advantage (economies of scale). This efficiency could also lead to a domination of the industry in other countries (Hitt et al., 2015: 250).

Quality and customer-tailored service becomes more important than just quantity recorded in sales volumes or units. Particular characteristics of domestic demand, such as design, technology, and product functions, require specific attention by the industry (Welge & Holtbrügge, 2015: 67). As a result, firms are forced to be innovative, which positively influences the development of the whole industry. The expectations and wishes of customers at home can often result in innovative technological trends for worldwide sales in the future (Kutschker & Schmid, 2011: 449–450). The rate of growth of home demand can be as important to competitive advantage as its absolute market size. Rapid domestic growth forces a nation’s firm to adopt new technologies faster and, consequently, allows first mover advantages and valuable experience curve effects (Porter, 1990: 94).

Central factor 3: supporting industries

Porter describes the supplying and supporting industries in a country as, for instance, logistics, the educational system, and research and development capacities. Sophisticated, developed supply networks form the basis for stable production of technologically innovative standards with reasonable sourcing prices because supplying enterprises are confronted with high competitive pressure. Qualified suppliers are able to provide considerable input for further technological development (Welge & Holtbrügge, 2015: 67). Competitive advantage emerges from close working relationships between vendors and the industry. Suppliers help firms perceive new methods and opportunities for applying new technology. Firms gain quick access to information and innovation potentials. The exchange of R&D know-how and the joint problem of solving technical issues lead to faster and more efficient solutions. Through this process, the pace of innovation within the entire national industry is accelerated (Porter, 1990: 103).

Central factor 4: firm strategy, structure, and rivalry

Porter claims that the goals, strategies, and ways of organizing firms in industries vary among nations (Porter, 1990: 108). National advantage results from a good match among these choices. The pattern of rivalry at home also has a profound role to play in the process of innovation and in the ultimate prospects for international business. The higher the competitive pressure at home, the more enterprises are forced to internationalize. Nations will tend to succeed in industries where the management practices and modes of organization favored by the national environment are well suited to the industries’ sources of competitive advantage. Important national differences in management approaches occur in such areas as the way of motivating employees, the hierarchical structure of the enterprise, the strength of individual initiative, the ability to coordinate across functions, and management’s influence on customer relations (Hitt et al., 2015: 250 –251; Porter, 1990: 108–109; Welge & Holtbrügge, 2015: 68).

Two additional factors: government and the role of chance

The government positively or negatively influences the four central determinants mentioned above. Therefore, the role government and the role of chance should not be seen as separate independent factors. Factor conditions are affected by policies toward capital markets, legal property rights, a nation’s infrastructure, and the educational system. Governmental institutions establish technical standards for products (e.g., specification of safety and hygiene standards and emission standards), which influence the behavior of the market actors. Furthermore, the government is often a major buyer of specific goods, among them defense products or aircraft for the national airline (Porter, 1990: 126–128).

Chance events are often beyond the influence of firms such as emerging new technologies (e.g., electric cars, 3-D printers). Such events often change the structure of the entire industry and provide opportunities for innovative firms. Advanced knowledge-driven industries, such as differentiated, innovative products, services, and technologies, are the most significant industries for a nation’s welfare. They are necessary in order to achieve competitive advantage and, therefore, should be fostered by the national government. Advanced technologies are more scarce because their development demands large and often sustained investment in both human and physical capital (Porter, 1990: 77).

2.2.4Review of the location concepts

The external environment of firms involved in international trade provides many opportunities but, simultaneously, is becoming increasingly complex and competitive. The liberalized global trade and capital flow framework and advanced logistics and communication systems provide many attractive chances and allow easier entry of firms into the international markets than was possible decades ago. In parallel, environmental uncertainty increases as a result of the amount of complexity plus the degree of change existing in a firm’s external environment. Considering these developments, Dai et al. (2013: 555) emphasize that ‘location’ is decomposed into two separate factors: ‘place’ and ‘space’. Place refers to the conventional location-specific attributes, while space emphasizes geographic distance and network characteristics. Thus, traditional locational ‘place’ concepts should be amplified by the issue of ‘space’ in order to better understand multinational enterprise activities in the global markets. Similarly, Beugelsdijk et al. (2013: 414) argue that the term space should refer to characteristics among places combining within-country variations (e.g. investment behavior of firms with regards to a regional industry cluster within one country) and integrate these with between-country variations (e.g. comparison of the firms’ investment behavior concerning industry cluster between countries).

According to the location theory, before firms decide their market entry strategy, they have to scan the external macro and industry environment in order to identify possible opportunities and threats in light of internal resources that reflect the strengths and weaknesses of the company. The more the firm is involved in global business and the higher the number of potential competitors, the greater the market research complexity. Internationalization in today’s context and complexity is less about just entering foreign markets than it is about increasing the firm’s exposure and response to permanently changing international business dynamics (Jones, 2001: 193).

The location theory assumes that the decision to make a direct investment in a particular country is certainly determined by its location factors. However, empirical studies of the relative influence of these individual factors, because of their enormous complexity, are rather difficult. The location factor approach does not supply a reliable contribution regarding the relative meaning of each of the individual factors (Welge & Holtbrügge, 2015: 69). Multinational firms make use of diversified globally distributed operational networks, which even broadens the complexity of the location approaches.

Porter claims in his diamond model that the competitiveness of enterprises is influenced by country-specific conditions. Some enterprises, therefore, have better prerequisites for successful international business activities because of favorable home market surroundings than others. Criticism arises because it is empirically hard to measure the meaning of competitive advantage, and some assumptions are rather speculative. The theoretical assumptions and the influence of each of the location factors as well as their relations are empirically hard to test. The model lacks the ability to provide behavioral patterns or precise recommendations for how to achieve competitive advantage for the firm, which could be of interest to national governments that seek to foster their economies (Grant, 1991a: 542)

The diamond model does not answer the question that asks under which circumstances it is desirable to enter the market through export or alternatively through foreign direct investment (Kutschker & Schmid, 2011: 452). Furthermore, the approach focuses on the home market conditions, which ignores the fact that multinational enterprises make use of cross-border value-added activities depending on the costs at home and abroad. The model neglects other countries and their impact on the competitiveness of firms in the home country and vice versa. This has led other authors to introduce the ‘double diamond’.While the ‘single diamond’ model by Porter focuses on the ‘home country’ conditions, the ‘double diamond’ simultaneously takes into consideration the elements of the ‘home country’ and the ‘elements of the foreign markets’ with regards to their mutual influence on the performance of the competing firms originating in the home and the foreign markets (Rugman & D’Cruz, 1993: 17; Rugman & Verbeke, 1993: 76–77).

Esterhuizen (2006: 73–74) stresses the importance of human resources for the firm and, consequently, a nation’s competitiveness and amplifies the diamond to the ‘nine factor model’ by adding human resources, divided into categories such as ‘workers, politicians and bureaucrats, entrepreneurs, managers, and engineers’, which are crucial to gaining a nation’s competitive advantage.

Despite all its weaknesses, location concepts and the diamond model have become widely known. The diamond model’s strength is its simplicity and pragmatic approach. The model emphasizes that a firm cannot develop independently from each nation’s environment and rather depends on various factors, such as infrastructure, the educational system, resource availability, and the political-legal system. The diamond model is one of the best known models within the category of location models. It expands traditional internationalization trade theories, connecting strategic management issues of firms with macro and industry-specific elements of nations and their industries (Grant, 1991a: 540 –548).

2.2.5Case study: Market entry of Asian high-technology firms in Europe

2.2.5.1Location-specific macro analysis

In recent years, international business research has delivered valuable knowledge concerning the market entry strategies of firms conducting business in the Far East, especially in China (Belderbos & Zou, 2006: 1096; Child & Yan, 1999: 3). On the other hand, research on the market entry concepts of Asian high-technology firms conducting business in Europe seems to be comparatively underrepresented. This case study expands the understanding of Asian firms doing business abroad. We are witnessing an emerging market domination of Asian-based firms in the global markets, particularly in advanced, knowledge-driven industries, such as high-technology businesses (Fu & Zhang, 2011: 330; Wu & Mathews, 2012: 524).

In this study, high-technology firms are categorized as being a part of the ‘electronics industry’ when their core value added activities are positioned in the area of computer hardware components, audio, electronic displays, micro-electric components, and electronic household devices. Electronics can be seen as a sub-segment of high-technology industries, which are characterized by relatively short-lived product and technology life cycles, among other characteristics. Shortened technology and product life cycles in high-tech industries mean that firms that are technologically leading today may disappear from the market tomorrow if upcoming technologies are ignored by the firm’s management.

Additionally, there is a relatively intense and permanent cost pressure in electronics industries. Electronic products, such as smart phones, television sets, and laptops, are highly standardized and, therefore, usually provide the best prerequisites for intense price competition (Kita, 2001: 1). Manufacturing and processing knowledge plays a superior role in gaining a competitive advantage through realizing economies of scale. Firms that underestimate the link between ever-changing technologies and efficient manufacturing definitely risk quickly falling from the market (McIvor, Humphreys, & Cadden, 2006: 374).

Mainly as a result of emerging firms from South Korea, China, and Taiwan, worldwide competition in electronics has greatly intensified in recent decades; and market entry activities did not stop at the European borders. As a result, traditional Western electronics firms, such as Thomson, Grundig, Philips, and Loewe, but also Japanese firms (e.g., Sanyo, Pioneer, and JVC) lost competitive power against their Asian rivals or even declared bankruptcy.

On the macro-level, this case study discusses, among other things, whether country-specific electronics industry clusters developed and how they evolved over time in Europe. On the micro level, the market entry activities of Asian-based high-technology firms doing business in Europe are described. This study allows descriptions of the changing local industry configurations of high-technology firms.

In general, countries located in western Europe, such as the United Kingdom, Spain, and Germany, served as major European investment target regions for Asian-based firms during the 1980s and 1990s but significantly lost importance thereafter. Asian-based high-tech firms, during the last decade, mainly concentrated on the new European Union (EU) member states located in the east, such as Poland, Hungary, the Czech Republic, and Slovakia (LG.PhilipsLCD, 2006; UNCTAD, 2010; World_Bank, 2013). Consequently, the analysis of location-specific macro-economic indicators, such as GDP, inflation rates, and so forth, concentrates on those countries: Poland, the Czech Republic, Slovakia, and Hungary. Interestingly, Bulgaria and Romania, which have also been members of the EU since 2007, could not attract Asian investors to any significant extent and, for that reason, are not considered in the following case study discussion (European_Union, 2013).

In general, firms prefer to invest in regions that belong to countries that are connected through trade and capital flows and/ or memberships in free trade zones, with the EU serving as an excellent example (Easton & Araujo, 1994: 81). This location-specific pattern influences the multinational firm’s choice for its foreign direct investments (Bandelk, 2002: 411; Dong, Zou, & Taylor, 2008: 82). The political and economic challenges related to the transition from centrally planned economies to market economies in the central and eastern European (CEE) countries have been tremendous and, in most cases, have been successfully met (Svejnar, 2002: 4). As a result of EU membership, firms that have invested in the CEE area, such as Poland, the Czech Republic, Slovakia, and Hungary, have taken advantage of borderless, liberalized trade and capital flow patterns. Additionally, these countries have relatively stable political-legal environments. These markets are often more promising and indicate higher sales growth volumes for electronic products (locality-specific advantages) when compared to saturated western European markets (DisplaySearch, 2010; Dunning, 2001: 174).

An analysis of the country-specific macro-economic data delivers evidence that Poland is the largest national economy based on its gross domestic product (GDP) volume followed by the Czech Republic. Both countries reached an impressive GDP growth over the period from 2002 until 2013 (compare Table 1). This is not the case for Hungary, which recorded its highest GDP levels between 2006 and 2008 but, significantly, was falling behind in performance between 2009 and 2012. Hungary also suffers from the highest inflation rates when compared to Poland, the Czech Republic, and Slovakia. The Czech Republic indicates the lowest unemployment rate and, as a logical consequence, the highest average wage levels. Poland is also attractive when the average wage level is considered and compared with other new EU member countries (IMF, 2013; OECD, 2013; WTO, 2013). Table 1 provides a summary of GDP, average wages, inflation, and unemployment rate for the Czech Republic, Poland, Hungary, and Slovakia for the period from 2003 until 2013.

2.2.5.2Business activities of high-tech firms from the Far East: A country perspective

Next the manufacturing breadths and depths of Asian-based electronics firms in the Czech Republic, Hungary, Poland, and Slovakia are analyzed. The multiple-case study method aims to describe the evolution of country-specific electronics industry clusters in these target countries.

Czech Republic

Panasonic (Japan) has been operating a liquid crystal display (LCD) panel plant in the town of Zatec, Czech Republic, since 2007. However, against the background of worsening business performance for the Panasonic group, the Japanese firm initiated a restructuring program. As one outcome, Panasonic closed its Zatec LCD panel factory for televisions at the end of 2012. The firm maintains operations in its second Czech plant in Plzen, where Panasonic does the final assembly of LCD television sets (Reuters, 2013).

In 2005, the Chinese firm Changhong established its first European subsidiary in the Czech Republic. The LCD television set assembly factory is located in the industrial zone of the city of Nymburk, from which Changhong serves its European markets. LCD panels are imported from China (Changhong, 2013).

In 2000, the Taiwanese Hon Hai Precision Industry Co. (Foxconn) invested around 45 million Euro in existing manufacturing facilities previously owned by the national Czech firm HTT Tesla in the town of Pardubice in the eastern part of the country. In 2008, Foxconn opened a second facility in Kutna Hora. Based on original equipment manufacturing (OEM) contractual relationships, Foxconn manufactures electronic devices for HP, Cisco, and others, thus making Foxconn the second largest exporter in the Czech Republic by 2011 (Czechinvest, 2012).

Hungary

Samsung Electronics established a television set assembly factory in 1989. To realize the firm’s vertical integration strategy, Samsung Electronics procures a major part of its needed displays from Samsung SDI’s factory, which is also located in Hungary (established in 2002). In addition, Samsung SDI, Hungary, has delivered components (e.g., plasma display panels) not only to Samsung Electronics but also to Philips, Hungary (Naver, 2004). In 2013, due to worsening operating performance, Samsung SDI closed its operations in Goed, Hungary (Samsung, 2014). Samsung SDI was not alone. In the same year, within the framework of a joint venture agreement with the Taiwanese TPV Technology Limited, Philips closed its Hungarian television set plant operations. Manufacturing capacities were transferred to TPV’s Poland factory, located in Gorzow, which was opened in 2008 (Philips, 2011). Samsung Chemicals, a subsidiary of Samsung Cheil Industries Inc., continues operations in Hungary (Samsung, 2015).

Table 1. GDP, average annual wages, inflation, and unemployment rate for the Czech Republic, Hungary, Poland, and Slovakia for the period from 2002 until 2013.
Sources: GDP, inflation and unemployment (IMF, 2013), average annual wages (OECD, 2013)

Poland

In 2009, Samsung Electronics acquired the Polish household manufacturer (e.g., washing machines) ‘Amica’ (Economic_Review, 2013). In addition, Samsung runs a research and development center in Krakow. Samsung has also operated a television set assembly plant in Poland since 2009. As a result, Samsung’s television set lead time, from production to sales, is just five days within its European markets. The delivery time takes just one day from its television set factory in Poland to Germany.

Toshiba (Japan) established its Polish television set plant near Wroclaw in 2007. Toshiba’s Poland factory has procured most of its liquid crystal display panels for its TV assembly from LG Display (a former joint venture called LG.Philips LCD), which is located in the Wroclaw area as well. Toshiba invested 19.9 percent interest in the LG Display plant in Poland (Finanznachrichten.de, 2007: 1).

From 2007 until 2011, Toshiba’s business performed at a reasonable level mainly due to increasing LCD sales volumes in Europe and worldwide. However, since 2008, due to the relative strength of the Japanese Yen, intensified competition in the LCD business, and upcoming fast developing competitors from China and Taiwan, Toshiba, like other Japanese firms, was confronted with shrinking sales. During the course of a worldwide restructuring program, Toshiba sold its Polish operations, called ‘Toshiba Television Central Europe’, to Taiwan-based ‘Compal Electronics’ in 2013. After the transfer of ownership to Compal, Toshiba continues to sell electronic devices manufactured at the plant, through an original design manufacturer (ODM) partnership with Compal (Toshiba, 2013).

Sharp started its LCD module production in Łysomice near Torun (Poland) in 2007. The city of Torun is located in the ‘Pomeranian special economic zone’ (WarsawVoice, 2006: 2). Sharp has invested 44 million Euro in its Polish subsidiary, which became an important component supplier in Europe. However, in 2014, due to the accumulating losses of the Sharp Group, the Japanese company withdrew its activities from Poland and sold its LCD factory (including its AQUOS brand) to the Slovakian-based company Universal Media Corporation (UMC) (Sharp, 2015b). Beginning in 2004, Sharp held 29 percent of Loewe AG (Kronach, Germany) capital and delivered electronics components and displays to Loewe AG (Bastian, 2006). However, in 2013, the German premium brand Loewe filed for bankruptcy, suffering from heavy losses for years as it has struggled for survival in a market dominated by Asian-based rivals (Loewe, 2013). As a consequence of the bankruptcy of Loewe, Sharp’s strategic positioning has worsened in its European markets.

One of Sharp’s former OEM partners, the US-originated ‘Jabil Circuit Inc.’, invested 13 million Euro in a manufacturing factory in Kwidzyn, which is located in the same economic zone where Sharp operated. Jabil manufactures electronic components for various consumer electronics products. The factory was established in 1994 by Philips, which sold it to Jabil at a price of 12 million Euro in December 2004 (Philips, 2004). Today, Jabil’s customers include Philips, Sharp, and Orion. Firms like Jabil benefit from the public assistance offered to businesses within the zone, including tax incentives for their investments (WarsawVoice, 2006: 1).

In 1999, South Korean LG Electronics initiated its TV assembly operations in Mława. LG Display began producing LCD modules from 2007 onwards in Wroclaw. Displays manufactured in Wroclaw are delivered and assembled into television sets at LG’s Mława factory. In Wroclaw, LG Electronics also manufactures washing machines and refrigerators (LG_Electronics, 2008).

In 2004, the French Thomson and the Chinese TCL agreed to establish a joint venture in the television set assembly business. As a part of the agreement, Thomson transferred its Polish television set factory to the joint venture with TCL (TCL, 2004). However, TCL experienced severe financial difficulties during the venture operations. As a result, TCL China downsized its European business and closed its television set assembly operations in Poland (Zyrardow) in 2007 (TCL, 2007a). The joint venture was finally liquidated in the same year (TCL, 2007b).

Slovakia

Samsung Electronics is the largest electronics company in Slovakia. In 2010, revenues reached 3.24 billion Euro and 3.16 billion Euro in 2011. Samsung’s television set plant in Galanta was established in 2002. Samsung planned to sell its factory in early 2012 but decided to remain as the Slovakian government agreed to further support the Galanta factory for a total of 28 million Euro. Samsung runs a second company in Voderady, where LCD modules are being completed after being imported from South Korea and then finally assembled into complete TVs in Galanta (Slovak_Investment, 2012).

Sony opened its first CEE production facility in Trnava in 1996. In 2007, Sony opened a new LCD TV manufacturing plant in Nitra, one of the largest and most modern plants worldwide (Sony, 2007b, 2013a). However, for the past couple of years, Sony has operated with losses because of the firm’s poorly performing consumer electronics business division, among other reasons (Sony, 2008d). As a result, Sony’s management decided to reduce its stake in the television set business and started to look for investors, including investors for its Slovakian operations. Finally, the Taiwanese Hon Hai Precision acquired 90 percent interest in the Nitra plant from Sony. In this plant, Hon Hai manufactures its own television sets but also television sets for Sony, based on an original equipment manufacturing (OEM) contract relationship. Sony Supply Chain Solutions Europe (a subsidiary company of Sony) has rented a part of the facilities and continues the operation of the logistics centre, which has been located next to the Nitra production plant. Nitra remains the most important production location of LCD televisions for Sony in the European region based on its OEM relationship with Hon Hai (Hon_Hai, 2013).

The Japanese Panasonic operates two manufacturing subsidiaries in Slovakia. Panasonic AVC Networks Slovakia in the city of Krompachy manufactures DVD and Blu-ray/3D Blu-ray devices. Panasonic Electronic Devices Slovakia is split between two manufacturing sites, one in Trstená and the other in Stará Ľubovňa, where Panasonic manufactures tuners, chargers, remote controls, iPod adapters, elements for steering wheels, and speakers for cars (Slovak_Investment, 2012).