The Transaction Cost Approach (TCA)
The Eclectic Framework (Dunning, 1998)
Summarise of the Main Points
List of references
In this assignment, the author would analyse the internationalisation of Fujifilm largely via local production. To do so, there would be considered three of the major internationalisation approaches, which have been considered as the most valuable for this case due to its practical appliance to the case study. The form of the analysis would be presented as following
First of all, the main the theories’ basis would be introduced, immediately after the author would compare the theory to the information given in the case study, where other theoretical information would be applied for after establish the validity of the theory to the case study.
Once the three approaches have been established, the author would summarise the main point to end with a final conclusion. International Trade theories
These theories explained the internationalisation of the firm as a series of incremental steps in which the company allocate resources as its knowledge and experience in the foreign market increase (Morgan and Katsikeas, 1997). Nevertheless, the reasons behind the commitment of these resources are varied.
According to the classical trade theory, the competitive advantages result from the differences in production costs which are attributed to the differences between countries in labour, capital and technology (Morgan and Katsikeas, 1997).
This supposition applies to Fujifilm´s decision to internationalise due to the organisation’s finance power and technology orientation, whilst keeping costs down with automatic procedures. However, this theory fails to explain the US choice as the organisation could have chosen another country with lower labour costs involved.
The Product Life Cycle theory of international trade considers product development and market size as a key determinant of the entry mode (Morgan and Katsikeas, 1997). This theory explains the US choice by Fujifilm. First of all, the US is the world largest camera film market with $2.7 billions sales, and secondly, the organisation invests 7% of its sales in product development, therefore it is important to ensure the new products meet the local requirements (Stan and Zou, 1997) the knowledge required would be enhanced by being present in the market (Doole et al, 1998).
These theories do not take into consideration other considerations in internationalisation as the government regulations and competition (Morgan and Katsikeas, 1997) which have been decisive for Fujifilm in the decision to translate the production to the US.
The Market imperfection theory establishes that the foreign investment depends on the advantages over the competitors in the foreign markets (Morgan and Katsikeas, 1997). As a follower in the market, Fujifilm needs to steal market share from Kodak in order to increase (Gurumurthy, 1998). The 1997 price war and the Fujifilm market loss in the early 1990s when it was force to raise the prices to avoid import duties confirms the price sensitivity of the US camera film market. Therefore, Fujifilm needs to price below Kodak in order to increase, and the US government can influence these prices with import duties (Dunning, 1980; Fayerweather, 1982; Stan and Zou, 1997).
The decision to establish a manufacturing subsidiary in the US can be seen as a Fujifilm´s strategic response to avoid these import duties and price below Kodak (Stan and Zou, 1997). In addition to that, the company would enhance its knowledge about the US market demand which would serve as a direction for future product development and innovation in which Fujifilm base part of its competitive advantage.
The Transaction Cost Approach (TCA)
The TCA is regarded to be specifically effective in explaining vertical integration decisions and to predict the entry mode for manufacturing firms (Andersen, 1997). It establishes that production cost efficiency is affected by the frequency of activities´ exchange within the organisation. The entry mode plays an important role in the exchange of assets and control of the operations, assuming that cost and control are related: the higher is the control; the most expensive it gets (Andersen, 1997).
This assumption is contradictory to the main Fujifilm objective of keeping costs down, nevertheless, the aim of avoiding trade disputes could be achieved with a higher control of operations, such as the loss of a major distributor in 1997, which originated the price war.
Fujifilm decision to internationalise largely via local production would be analysed in a framework presented in the appendices (see appendix figure 1).
The TCA Approach explains the Fujifilm choice to internationalise via local production by comparing the transactional costs involved of establishing an owned manufacturing subsidiary or to outsource the production. The forms of outsourcing that have been subjected to study are mainly contractual (licensing).
Even though, the TCA supports the own manufacturing subsidiary, it is important to underline that the model does not take into consideration some factors in internationalisation as the financial situation of the firm and competitor’s activities. Furthermore, the measure of potential risks in the internal and external uncertainty has been evaluated objectively, which may underestimate certain forces (Aharoni, 1966).