In this twenty first century, globalisation has an impact in every economy. World of today is considered to be united as a bunch countries with no boundaries. Raw materials from different countries are being processed in another country to manufacture goods & products are being marketed in another country. It is the modern concept of the globalisation. A company goes international for so many reasons like, small domestic market, adverse government policy in home country, high demand of the product in foreign market etc. FDI across the globe had a fixed upswing with a sharp growth in the second quarter of 2008. Even it was not affected so much by financial crisis during recession in 2008. FDI is mainly originated from the advanced economy like USA.[ Peter Dicken]
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In this essay we have chosen famous electronic gadget manufacturer APPLE as our company, which is mainly based in USA, has expanded its production unit in EUROPE and ASIA. It is manly famous for introduction of a new age in mobile phone industry by brining iPHONE & MACBOOK in pc section. Recently they have launched iPAD in the market which turn to be a great success. How their strategy has been affected when they go global by the main three factors (1.Technology.2.geography.3.goverment policies ) has been described below.
TECHNOLOGY:
For a product to become more acceptable by quality, implied technology of production plays an important role. Foreign direct investment prospects can be propelled to a new level if the quality of production can be retained in a cost effective manner. Hence, investment opportunity of a country is significantly influenced by its internal development, technology and growth. These intrinsic developments are always in the lamplight of MNCs and are effectively made use by them.
Apple has met its investment prospects in China as this country maintains the unique work quality in assembling the inputs for final production. As a part of corporate global strategy, company has given outsourcing more importance at the same time imparting mandate high control over product integrity. When apple produce iPods in China, it is not produced in a factory owned by Apple. It is been contracted with third party to produce IPods with the specifications Apple provides.
Moreover from outsourcing, Apple is sourcing quality products for assemblage from foreign countries and some even from China itself by fragmenting its supply chain very effectively. The standard of factors of production is set to meet the requirements set by Apple Inc. If the company is not successful in monitoring the strategy which is being implemented in a country, it will eventually destroy company’s reputation. The subtle implementation of internationalisation strategy is been spawned in such a way that Apple products are leveraged to its maximum utility. For leveraging the products to its maximum levels, sophisticated research and development is being carried out through international investments and intrinsic ground-breaking technologies.
Trade theory gives light by how much proportions the various factors of inputs needed at each stage of a production process, together with various inputs’ at comparative costs, influencing the investment proposal. As technology is one of the important input of production, while framing up an international strategy it has to be dealt well while investing in a foreign country. The comparative cost of the technology brought forth for production is very significant as it contributes to the international pricing strategy. The quality technology which is been generated in China holds cost advantage when it is compared to the same technology implemented in US. Advanced technology is pioneer to production of any innovative products but this technology has to be accessed in a cost effective manner to produce competitively priced product. Skilled labour is another requisite which should be considered in quality production. High cost of labour in United States of America can be a down beating factor in home country which can be eliminated through foreign direct investment. Hence, advantage is been derived in the host country in terms of technology implementation through skilled labour force at low cost. Apple Inc’s business establishment in China is a subtle example for their tactical part in internationalisation strategy.
GEOGRAPHY:
The geographical dispersion means that company’s activities are not concentrated to a single country rather it is dispersed between different countries. The production in foreign country can be commenced in two ways namely Merges & acquisition and Greenfield investment. Greenfield investment means setting up a new plant and physical assets in the foreign country whereas Merges & acquisition means merging with a foreign firm or buying existing assets in a foreign country. The cost of geographical dispersion can be of three types which is firm level, plant level and the economies of integration foregone.
Almost 54% company’s geographical market place is situated in United States. Final assembly of company’s product is mainly done in Ireland & by external vendors in California, Texas, China, Korea, etc. Manufacturing & supply of many critical components is executed by sole sourced third party vendors from Taiwan, Germany, US, Germany, Korea, Netherlands etc. But main assembly part is done in China by sole sourced third party vendors. That means its production input has been divided into sub category & situated in different countries. So it is an example of centralized vertical Foreign Direct investment by apple where it’s headquartering is situated in US.
The benefit of geographical dispersion for the company is that, it is able to reduce the cost of primary input as the price for inputs varies in different locations. It also helps the company to lower operating cost and reduces the company’s direct control over the production and distribution. This also helps in lowering the trade cost and enables it to capture the markets. For example, the investment decision to manufacture the products from China helps the company to have a better control over the Asian markets. Also the cost incurred in exporting the products from United States to Asian market is much lower when it is from China. The firm also enjoys economies of scale as the cost of production is less due the dispersion and the company is able to employ skilled and cheap labor.
In spite of its benefits, it’s uncertain what negative effects will this have on the company. The diminished operational control may have an effect on the quality of the products or services or its flexibility to respond to changes. This may adversely affect the reputation of the company. Another problem is that, if the manufacturing or providing logistical services in the other country is disturbed for any causes like natural disaster, war, political issues, public health, failure in information technology system, financial crises may materially affect the company’s financial condition and operation.
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GOVERNMENT POLICIES:
The vertical foreign direct investment strategy of Apple is advantageously and manifestly framed up by the influence of political environment or trade policies that operate within the country. The supply chain is fragmented and for assemblage, the Apple’s input commodities are sourced from special enterprise zones of China where much of import duties and taxes are waived. The government trade policy influences the intricate supply chain management and outsourcing of the company.
Apple being an American multinational propels a strategy that insulates itself from foreign exchange risks. The price the company has to pay for a specific input item in a specific country is influenced by the exchange rates of currencies at the time. The company exhibits a pattern of a good net receiver of currencies except the American dollar. As the US dollars gains strength, it will negatively affect the Apple’s net sales and gross margin articulated in American dollars. Financial innovations are spawned by the international financial flows. The financial innovations are greatly influenced by the monetary and fiscal policy of a government. This level of influence determines the stability of economic performance. As US government tends to maintain very low interest rates to support the demand for housing and promoting the revival of building industry, international capital flows are possible. It may result in more capital outflows and a weaker dollar. An immediate effect can be noticed in the US output as a result of more US exports. Thus for Apple, weaker dollar gives more euro earning and allows it to state an elevated profit rate to it stakeholders. [Linden 2008]
Many financial innovations are spawned out from the introduction of capital flows. There is an economic significance of international financial instruments like forwards or options when Apple deals with it. July 2008 Company reports stated that the Apple inc was willing to enter into forward and option dealings of foreign currencies. This also included some strategically committed transactions, the investment company possessed in foreign subsidiaries, forecasted future cash flows etc. Evidently, practice of the company was to hedge a large number of its material foreign exchange exposures for some months. [Apple inc, 2008]
The progression of this model imparts light into the strategy framed up by Apple in tackling the effect of rising prices too. A developing country like China has remarkable success in controlling the inflation. Apple has a peculiar stake in China where country exhibits success in managing its economy from extreme pressures and creating higher inflation rates. Chinese central bank put forward a straight policy in framing up the exchange rates. Till July 2005, the policy upheld was to fix the rate it levied to exchange Chinese currencies for American dollars. In this context, Apple could assertively forecast the exchange rates weeks in advance. [Apple inc, 2005]
Apple endeavours to do outsourcing in the country where there is minimal legal regulations as they can maximise their profits. As the operations are mainly concentrated in China, Apple Company has got relaxation from heavy tax burdens. Vertical specialisation with internalisation keeps the production cost low at the same time company benefits from low trade cost. The company is getting more and more innovative by research and development. Proper caution is taken as the economy breeds the risk of a global financial downturn that could have disastrous effect in their business.
At last , after analysing the all the factors that affects company’s internationalisation & foreign direct investment we can conclude Apple is truly globalised . That means it has stretched its corporate arms in such a way that we can say that for Apple the difference across countries does not matter. They have fragmented their production parts across countries & sell its products all most around the world just to take the benefit of the internationalisation & globalised concept. Their main strategy is to take advantage from different counties’ favourable condition that helps their business to gain more revenue using economics of scale. As we have discussed the main reason of their expansion of business in China are cheap labour costs, higher productivity of Chinese labour output & huge demand of Asian market. They also want to take benefit from the exchange rate & investment friendly government policy. It is proved from their establishment of unit in China & Ireland. Their well organized globalised business strategy has helped them to spread their products world wide almost in every country, which is much more appreciated from the point of view of internationalisation of a company. In every of their business strategy the concept of true globalised company can be visualised.[ Peter Dicken]
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