Dunning's Eclectic paradigm which sets out to explain that foreign direct investment as a theory can be unified as long as the firms applying it consider the ownership, location and internalisation of the process that will produce substantial benefits if applied accordingly. This is also the case if the extent, the form and pattern of international production is founded on the juxtaposition of the ownership to specific advantages that a firms posses when contemplating foreign production. This is reflected in GM's move to manufacture most of its China-market vehicles locally, through its Shanghai GM joint venture. The eclectic paradigm has always recognized the importance of the locational advantages of countries as a key determinant of the foreign production of MNE's (Dunning, 1998). This is reflected by the locational advantages that the area posses but it also offers GM a market seeking investment prospect. There are also plans to create a research facility in Shanghai for $250m to develop hybrid cars and alternative energy vehicles. Therefore GM follows a path suggested by Dunning to gain advantage in terms of competitiveness and cost by ownership in foreign market and aims to expand based on the initial success it has encountered. Initially, too, the eclectic paradigm primarily addressed static and efficiency related issues (Dunning, 1977), but more recently has given attention to the dynamic competitiveness and locational strategy of firms, and particularly the path dependency of the upgrading of their core competencies (Dunning).
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The Network Approach emphasises the industry as a system of networks, each firm within a network has relationships with customers, suppliers and other actors within their overall business circle. These relations are important competitive advantages which the network model also suggests the firm needs to take into account and evaluate. But not only its own position in the market in relation to its customers, but also the environment of that market in relation to others such as competitors, new entrants etcâ€¦ In order to study the internationalisation of a firm we need to understand the context in which it operates, such as, environmental conditions and the firm's relationships (Madsen & Servais, 1997). GM and Fiat formed a strategic alliance, with GM owning a 20% share in Fiat and Fiat SpA receiving 5.1% of GM's shares in exchange. Production and ownership have both been improved when a recent alliance took place under the form of two joint ventures (owned 50% by Fiat and 50% by GM). The first will conduct purchasing activities, while the second will produce engines and gear equipment which is mainly aimed at cutting expenses. Hence GM has followed the network model to some degree as their joint venture come in terms of relations with Fiat. By collaborating they have reduced the cost and the innovation has resulted in new production techniques. Which gave both of them some degree of competitiveness as they have gained purchasing power as well as reduced cost in terms of purchasing from the suppliers. Firm-specific location advantages and high complementarities make the use of strategic alliances or joint ventures beneficial, whereas country-specific advantages point, in the case of market failure, towards inter-industry trade or wholly owned subsidiary (Moon 1997)
Porter's Competitive Advantage is the ability gained through attributes and resources to perform at a higher level than others in the same industry or market (Christensen and Fahey 1984, Kay 1994, Porter 1980). By producing goods of a higher standard whilst still using the resources attributed to the location, this results in a superior performance in that sector and yields a higher profit at no extra cost, ensuring survival and a prominent placing within the market. This is perfectly demonstrated by GM in their production of alternative-technology vehicles that include: hybrid vehicles, all electric vehicles and hydrogen vehicles. All of the models mentioned target a premium price in the automobile market and due to the adaptability and the manipulation of already acquired resources and facilities, the profitability even in a market that has many competitors will override the associated costs of production. This process was based on an already successful business strategy that has been tried, altered and integrated by the company in the past on similar types of innovative projects. A firm's capabilities are a complex pattern of relationships between staff and resources that over time accumulate creating an in house knowledge database that is accessible on multiple levels and makes objectives such as innovation and market superiority a key element that maintains the firm at a high level within its market. Anything that can be moved or sourced from a distance is no longer a competitive advantage" (Porter, 1998p. 29).
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Uppsala Model is the theory that a company gradually expands its operations within its domestic market, firstly gaining knowledge and practical information before deciding on wherever to enlarge their initial operations a little further. These activities will in turn influence market knowledge and market commitment at later stages (Johanson & Vahlne, 1977, in Johanson & Associates, 1994). Knowledge is the key ingredient to internationalisation in this case, either objective knowledge that can be thought or experiential knowledge that can only be learnt through personal experience. After this acquired the expansion process will continue, overlapping into a foreign market preferably of a close geographic location with also similar cultural understanding. Before again, repeating the process until the optimal market placement for the firm is achieved. This particular internationalisation theory is probably the best suited theory for explaining the internationalisation process that resulted in the creation of General Motors Europe, that was created in 1908 only three years after the company's creation. Early starters can, if they are willing, directly enter large markets not necessarily neighbouring markets but markets culturally close to the home market (Hollensen, 2001). This leap frog effect, going from country to country either setting up joint ventures and strategic partnerships before moving onto more serious operations such as the acquisitions of Vauxhall and Opel in the space of nine years. Today they operate 11 production and assembly facilities in 8 countries, and employ around 64,500 people.
Why I chose GM as a company to demonstrate internationalization
For me GM was a perfect candidate to fulfil this assignment not only because it is situated within an industry that is represent well and truly on a global level but also due to the nature of the automobile industry and the pattern and high level of collaboration that takes place within it. There is also a historic background to the company, spanning over a century of knowledge in automobile producing that is rooted back in the industrial manufacturing sector for automobiles in the U.S Detroit Michigan. The brand recognition is still very strong in the U.S representing one of the big American corporations that has lasted for the good part of a century, which represents the spirit of capitalism that the country adores. This also obviously happens to be the main market that they have relentlessly continued to supply resulting in it being their prime customer. The rich history behind GM can be understood by the large amount of collaborations it has gone through over time.
Internationalisation within the industry
The American automobile industry is the biggest in the world in terms of number of cars manufactured and sold. The U.S. automobile market is saturated with the global car manufacturing companies however; the majority of the market share is occupied by domestic and Japanese companies. The outcome of this is a drop in the level of consumption as there are too many entrants competing in the same industry. Because of this decrease in consumption, the automobile industry leaders have been offering attractive incentives and lower prices leading to a loss in profitability. The world-class automakers are gradually expanding into foreign markets, as new emerging markets in China, South East Asia and South America are showing signs of sustainable economic growth. GM overseas operations were a method of diversifying themselves against the risks and uncertainties in their domestic market life cycle, by setting up new operations abroad multinationals can diminish adverse economic downturns. Most MNE's also follow a pattern that has often been laid out in front of them by competitors or similar sized companies that have adopted or mimicked behaviour that has been tested and proven to be success, if the right measures are taken when adopting it. For instance, it has been argued that organizations tend to imitate actions that have been taken by large numbers of organizations, because such practices are legitimized or their success is taken for granted (Fligstein; Haunschild; Haveman; Kraatz; Lewitt). This can also have an adverse affect on an MNE when entering a new market, leaving them less cautious and with a diminished aspiration towards growth, knowing that the chances of that market already being saturated and that the first come first served knowledge is already guaranteed not to be in their possession. This often happens when the specific market they enter does not suit their domain of expertise and experience, resulting in them investing much faster and with a lesser degree of uncertainty that they would have usually applied.
What processes lead to the internationalization of GM?
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GM has been involved in a range of global ventures aimed at extending their penetration and shares in the carmakers market and also increased its share of the sales. GM uses exports, acquisitions, joint ventures and strategic alliances to enter foreign markets based on business considerations. GM has also expanded its capabilities in manufacturing through technological competences. This was achieved by forming subsidiaries, strategic alliances and joint ventures with other automobile companies in different parts of the world.
According to (GM Press Release, 2006), the company has been involved in a range of global ventures throughout its history, each of which has aimed at extending its market penetration. Partnering enables GM to rapidly expand its technical fields and brings that knowledge in-house transferring it to multiple levels within the business, even extending it sometimes to corporate issues. Through the various stages of internationalisation, GM was able to enlarge its distribution and provide access to essential materials.
Additionally, the company developed and improved its operations, facilities and processes all of which have provided access to new technologies and a rich database of knowledge and new capabilities. GM's move to internationalise was mainly to reduce costs, attract a larger market and the creation of strategic alliances. The company strategically allied with Fiat in 2000 by acquiring 20 percent of Fiat's equity to establish a joint procurement venture. With a split of 50 percent of the capital each, giving them a concentrated purchasing power of about $32 billion per annum, this alliance has the capacity to strengthen their bargaining power as well as reducing the supplier management cost. GM also moved production overseas, as the number of internal competitors grew too high in most of the emerging country home markets. GM needed to find a new incentive to manage a new market while remaining at low cost.
A typical MNE's move towards internationalisation
GM is a good example of an MNE which underwent internationalization whilst maintaining its position as one of the leading carmakers. It has also followed the theories laid out about internationalisation such as the typical way a company proceeds to penetrate and enter a foreign market. Firstly the firm will look at the options available and analyse what will be best suited for them considering the high degree of uncertainty and risk associated with entering an unknown market. One such option available to it is licensing, but it has to be assessed in a precautious way, due to the fact that they might be risking firm specific advantages by engaging in premature licensing agreements, this is also the least preferred of all three options due to the fact that there is a risk of knowledge dissipation. The only instance when licensing will be considered as a viable option is if the revenue generated from the licensee exceeds the cost of policing it. But also, if they do choose go for an early licensing agreement it may be because their firms specific advantage is hard to duplicate or they have a tight control over the licensee, meaning that they would find it very hard and potentially dangerous to resell any kind of sensitive material to any potential competitor or a third party of any kind. The second option is the possibility that the MNE might only be willing to export at first if the demand of the local market is not high enough for them to want to engage in foreign direct investment and set up an overseas subsidiary, or they may also consider this as a possibly a bit longer down the line depending on the potential growth generated from initial sale patterns and the profitability a larger scale operation would yield. The exporting option also depends on the trade agreements, tariff barriers, taxes, transportation costs and quotas between the two countries involved which sub sequentially determine if the operation will be profitable or maybe another option should be considered.
GM case studies
Below are two strong examples of how internationaisation has been reproduced by GM in two separate continents.
The first is the case of General Motors do Brasil, which is GM's third largest operation outside of the U.S after being recently overtaken by China. In the beginning, the activities were in the assembly of vehicles imported from the United States. After five years, GMB officially opened its first plant in 1930 in São Paulo. Here we can see that exporting lead to the full scale creation of a production facility which was so successful a second one was opened 28 years later, thus resulting in Brasil being the main exporter of GM automobiles in the whole of South America. Breaking out of their domestic market and becoming an exporter themselves in a very short space of time and for such a large operation really does provide evidence that internationalisation does not spread from one point outwards with only one epicentre at its core but rather creates and distributes smaller nodes that in time expand themselves and repeat the process so on, just as how it is described in the network approach. Once the firm has passed the cultural barriers and had its first experience of foreign operations, it is generally willing to conquer one market after another (Carlson, 1966).
The second example is when the Cadillac brand was introduced to China in 2004, starting with imports from the U.S, which then lead to the Chevrolet making its first appearance on the Chinese market one year later. They were then able to move production operations to their Shanghai GM plant which opened as a joint venture with SAIC in 1997, initially created for the Buick brand that is especially strong in China. In this case exporting was clearly used as a testing method for foreign products penetrating the Chinese domestic market, market-specific knowledge and general knowledge are important for a firm's internationalization (Johanson and Vahlne, 1977). This also clearly outlines the typical way a company like GM would proceed in its internationalisation process, firstly by exporting a product that clearly had success amongst the local population which lead to the joint venture being formed and being able to produce the product on location for the domestic market. In 2007 the sales volume for the Buick brand over took the sales in their original market the U.S, selling approximately 330, 000 making up 35% of the total automobile sales in the whole of China. The advantages that market opened up for them are truly extraordinary, when the Chinese started to manufacture smaller engines for their domestically made Buick's, the U.S saw the profitability and started importing them for a different model in their own market thus reducing the costs on both sites which really proves to be the sign of a mutual beneficial venture for both of them.
Internationalisation goes hand in hand with globalisation and they are both forever expanding concepts that due to their nature will continue to push from market to market to country to country feeding off the capitalist lifestyle we live under. The businesses that start to see internationalisation on the horizon will become smaller and more local as time goes by as all areas of business and trading will be linked some way or another. The number of small to medium enterprises will diminish and will start to become part of a wider group of companies belonging to a conglomerate which will in turn be associated with a number of other conglomerates. Internationalisation is fast becoming the process a company follows if it encounters any kind of success and is norm amongst businesses that expand their horizons.