Strategies Resource Markets
Resource-seeking strategies of MNEs in the Romanian car industry
Two MNEs -Renault and Ford - have entered the local car industry by deploying resource-seeking strategies. These have been dependent on the moment of entry, the type of cultural distance to the takeover target and the overall strategy of the company. The acquisition entry form is predominant, and is later followed by more extensive greenfield investment. The strategies of the two companies result in different outcomes: manufacturing and R&D for Renault and off-shoring for Ford.
Internationalization and resource-seeking strategies
Resource-seeking strategies have been discussed as part of internationalization strategies of MNEs looking to invest in emerging markets locations. They relate to a variety of efficiency-seeking factors and have been described as focused on getting labor at affordable costs or the targeted country's “natural or created” assets. Resource-seeking strategies are depended on the “institutional context” of the host country and the various laws supporting foreign investment. Resource-seeking strategies are also seen in relation to the “strategic intent underlying the entry” and can be related to the advantages of either the first-mover role, as is the case of market-seeking FDI, or to the use of the local labor force for manufacturing or R&D activities.
Resources involved can be technological assets or market share in the target markets, or they can be real estate assets, business licenses, local blue-collar workers, and supplies of intermediate goods. Sometimes resources can be “context specific” ones, related to the functioning of legal institutions, contract law and enforcement of property rights.
Resource-seeking strategies are pursued with various different market-entry modes: greenfield, acquisition and joint venture, each allowing firms to deal with “market inefficiencies” related to the “characteristics of the resources and to the institutional context.” Usually, as institutions become more developed, the need for a JV partner becomes reduced, and acquisition and greenfield entry is preferred.
The local modes of entry
When it took over the Dacia plant in Pitesti in 1999, at the same time with sealing a deal with Nissan, and as part of a larger international expansions program, Renault rolled out a program to modernize Dacia's sales network and its production plant. The company described the overall expansion and M&A strategy as being part of an “inescapable” world trend in the car industry. The company described itself as being too vulnerable on its own, and looking to capitalize on the spending options available after the break-up with Volvo. Dacia's stated mission was that of supporting Renault's development in emerging markets. The takeover was preceded by a previous 10-year licensing agreement with the French carmaker, which supports the idea that internationalization is preferred with companies where synergies already exist, and the cultural/psychic distance is smaller.
Renault's stake in Dacia now stands at 99.43 percent, after it had purchased 51 percent of the company's share capital in the privatization process. The work Renault undertook at Dacia also entailed an extensive process of up-grading, reconstruction of the commercial network and reorganization of the network of suppliers.
Similarly, when Ford acquired the Automobile Craiova, the car-maker became part of Ford's twenty other assembly plants and joint ventures across Europe. Ford said it planned to upgrade the Craiova platform and to invest EUR 675 million in the location. In Ford's case, the availability of a location to shift production from Turkey was the advantage seen in Romania.
Timing and modes of entry
In terms of timing of the investment, both companies chose moments of institutional predictability. In 2001, when Renault took over the Pitesti plant, Romania displayed the characteristics of more developed economies, with just some characteristics of emerging markets traits. In 2001, Romania had just opened accession negotiations with the European Union, and, according to World Bank statistics, it was the first year it had started to show signs of economic improvement. It reported its first year of real GDP growth and foreign investment started to go on an upward trend, although much lower than its potential.
Still, Romania displayed a persistent characteristic of emerging markets. A 2001 World Bank survey found that corruption was perceived to be widespread, with “all” or “most” officials believed to be corrupt. At the same time, managers reported that encounters with customs offices, trying to get import or export licenses, traffic police, construction permits, financial inspectors or regulators were the most likely to involve bribery. Businesses reported currency depreciation and inflation to be the two biggest barriers to the development of the business sector, along with corruption, bureaucracy, red tape and sluggish courts.
Against this background, Renault recognized the importance of being present in emerging markets and bought the Romanian car maker after loosing a bid to takeover the Skoda brand. Renault strategy's was a combination of market-seeking FDI, which looks for “large populations with rising incomes” and resource-seeking FDI which seeks “labor forces at affordable costs.” The company had said it was looking for the “right model” for emerging markets and the acquisition of Dacia served the purpose well.
Ford entered the local market much later, but under a more stable institutional environment.
When it took over the Craiova plant, Romania was already a member of the European Union. Political stability and predictability of the institutional context had seen some progress, but the access to low-paid labor force was still an attractive enough factor.
EU membership created the premises for a more public scrutiny of the privatization contract. The European Commission found that the Romanian privatization authority had offered sale terms that provided a lower price and Ford had to repay an illegal EUR 27 million aid.
At the same time, the Commission authorized a EUR 143 million aid for Ford, arguing that Ford's presence would significantly increase direct and indirect employment and bring about further investments from suppliers. The region where the plant is located is expected to benefit of a technology transfer and an overall further development.
The labour resources
Inexpensive and available labor force has been one advantage both MNEs have found locally. Both of them have hired a significant workforce after setting shop here or have announced plans to do so. Renault employs 14,400 people at the Dacia platform, and estimates it will hire 2000 more this year. Ford plans to add 7000 to 9000 new jobs by 2012.
One phenomenon that the two MNEs are now facing in terms of labor resources is the recent increase in salary-levels expectations due to the overall local economic growth and EU membership. Renault, for instance, was faced at the beginning of the year with strikes and pressured into giving salary increases.
As it was pointed out, when it comes to labor resources, the local human capital was also used “to strengthen the global R&D of the investor.” Renault is focusing on R&D locally, after developing the Logan at its Paris Technocentre, and is opening an R&D center in Romania, its first one outside France. The decision was linked by the company to the strategic nature of the Romanian market, and to plans to launch 26 new models by 2009.
Spillovers and overall business strategies
The presence of the two MNEs created spillovers in the local economy, and Renault's presence has brought along numerous car-parts producers. It also created an incentive for local authorities to speed up infrastructure works to help the company reach its suppliers faster. Overall, infrastructure remains underdeveloped, and cannot be leveraged as a local resource. Mercedes' decision to locate a new plant in Hungary instead of Romania over infrastructure issues supports this idea.
Besides further investment announcements from the two companies, spillover effects can also be seen in the increased productivity of the car manufacturers present locally and the further targets they have set. Ford plans to manufacture 300,000 units a year in 2012 compared to just 19,000 presently, and will be using the Craiova plant for off-shoring activities. It will produce there the Transit Connect, which is currently assembled in Turkey, and export it to North American markets. Renault is also exporting but the overall strategy is spread on selling locally also, and doing R&D activities.
Overall, it can be argued that the resource-seeking strategies of the MNEs present in the Romanian car industry were determined by their time of entry to the market, the available pool of resources, and supported the two companies' international expansion plans.
References:
Khanna, T and Palepu K: “Why Focused Strategies May be Wrong for Emerging Markets”, Harvard Business Review, July-August. (1997)
Meyer, Klaus E. and Estrin, Saul: Investment Strategies in Emerging Markets, available at http://www.london.edu/assets/documents/PDF/investment_strategies.pdf
Meyer, Klaus; Estrin, Saul; Bhaumik, Sumon and Peng, Mike W: Institutions, Resources, and Entry Strategies in Emerging Economies, available at http://vlc.bath.ac.uk/management/research/pdf/2007-18.pdf
Diagnostic Surveys of Corruption in Romania; The World Bank, available at
http://www. wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2004/09/16/000090341_20040916085236/Rendered/PDF/289970RO0Diagn1urveys0of0Corruption.pdf
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