International business is one of the main features of the global economy. The decision made by a firm regarding venture abroad involves the evaluation of the different alternative entry modes. This is done bearing in mind the degree of the risk and the suitability of the business environment that is in the potential region or country. Economic, political, cultural and other factors are all of the significant importance. BMW’s plant is situated in Spartanburg in South Carolina. The plant began its operations of producing automobiles in 1994. Due to the enormous success that the company had, there was a need to expand the structural plant in Spartanburg. Its capacity was enlarged through the addition of shifts, hiring new employees and introducing flexible working hour models. Currently, the plant is open for six days a week and has a circa of 110 hours of production weekly.
The overarching factors that affected the decision of BMW to go international
Primary motives: for most business profitability are one of crucial importance. The opportunity presented by a firm in selling its products in a foreign market may thus be attractive, especially in instances when expansion in the home market is difficult due to the slow market growth, regulatory obstacles, and market saturation. In some cases, significant business growth can only be possible through international expansion. The international exposure may also enable a firm to achieve the international reputation that may be vital if the form wants to be recognized as a market leader (Kaarna, 2010).
The changing global environment: in simple terms, the countries that typically conduct business internationally have experienced an unprecedented period of stable international trade and peace. In some years, the international trade has been disrupted by conflicts notable oil during times of turbulence in the Middle East. It is, however, the United States, Western Europe, and Japan that have been the major trading nations since they have enjoyed cordial relations amongst each other.
Country-specific factors: while it is the general international environment that affects the overall internationalization decisions, it is the decisions to conduct business in a particular country that is primarily affected by the conditions in the country concerned. Among the most vital factors that have to be considered may include economic stability, institutions created by the host country, culture and the country’s stock of “created assets”. “Created assets,” are the properties that a country has developed through investments made over some years. These assets may include tangible assets like transport or communication infrastructure or the intangible assets like education, skills, capacity for innovation, and technology.
The economic geography of BMW’s internationalization
The geographical location has always been considered by companies when they want to venture abroad. Nonetheless, while the location is the main area of focus in conventional theory, it has to be understood that the dominant internationalization theories turned their attention towards the various roles of the firm and the ability of the company to minimize its transaction costs and exploit its resources in the management of its foreign operations. The location factor still plays a vital role, especially using Dunning’s Paradigm. However, location is no longer playing an integral role.
The theory of comparative advantage
In the early nineteenth century, David Ricardo developed the theory of comparative advantage. This theory offers a fundamental explanation for investments and international trade. The key idea in the theory of comparative advantage is that if a country specializes in manufacturing some particular goods, then the manufacturing of such products in that country has a comparative advantage if the country has surplus resources when compared to other nations. The whole world economy would be better if the total output of the goods that are produced from a given country that has a comparative advantage. According to Rodriguez (2007), the theory of comparative advantage predominantly applies to the comparison between different countries rather than the various companies in the host nation. However, it is the companies in the host nations that are involved in the actual trade and not the host countries. In the case of BMW, it is the company that benefits from the comparative advantage in the United States by moving from Germany (Cainelli et al. 2014).
There are various conventional ideas about the sources of the comparative advantage that a particular country has (Hassid and European Centre for the Development of Vocational Training, 2002). However, the key idea tends to concentrate on the role of the natural resources, and the proximity of the natural resources has become less vital to the modern industries. Nonetheless, if the theory of comparative advantage is then adapted to take account of other resources that may include human capital and technology, then the theory may still offer a plausible explanation for broad patterns of the international location if not necessarily for the motives of BMW.
Internationalization process of BMW
There are various strategic perspectives that BMW had to make while entering the market in the United States. The decisions were made based on the basic entry decisions and the contrasting paradigms.
Why: regarding the motives that lead BMW to choose the United States, there are various factors. According to Fletcher & Bohn (1998), the market is one of the key factors that BMW had to consider. By moving some of its production line to the United States, BMW was well aware that there is a high demand for cars in the United States. This led the company to have an added incentive in that it was able to analyze the market. The United States also offered a large and growing market. There were also adjacent markets in Canada that BMW could exploit. The presence of other large multinational companies such as Ford and General Motors also provided an added incentive in that the company wanted to conduct business in markets that had real competitors. While still in Germany, BMW saw itself as a market leader. In the United States, however, there were various competitors in the market and for one to be considered as a market leader globally, there is a need to compete with the best companies in the same industry.
Additionally, BMW’s advantages in the United States could be attributed to control over the bundles of the unique material, organizational setup of BMW, human capital present in the United States and the skills that would enable the company to have unique creating strategies (Laurens et al. 2015). Regarding the availability of resources, for BMW to ensure that they sustained an above-average performance, the cars that they created in the United States were valuable meaning that the buyers would be willing to purchase the cars at output prices that were significantly above the costs that they incurred.
Regarding access to resources, the United States has a history or large deposits of iron ore precious metals and copper. This was one of the strategic decision that BMW made as it was attracted to the international market. Perhaps a more general reason that the United States was attractive to BMW is that there was a specialized resource such as skilled labor that was relatively immobile. However, it has to be comprehended that as a whole, the resources present in a country has become less vital as a motive for a company to invest in a foreign country in the modern world. It is technology and highly transferable knowledge that seems to have acquired greater importance than the availability of natural resources (Laanti, 2005)
The How: regarding the how it is vital that the management of BMW changes the manner in which they conduct business. The process that they change their management actions and the interactions with other firms.
The what: the decision that BMW made was based on the resource-based approach. In the United States, it was the firm’s specific resources that BMW was able to exploit. Bannò & Sgobbi (2010) note that BMW was looking forward to exploiting the large pools of competencies that were available in the largely skilled labor force in the United States.
The whom: the manner in which BMW internationalized in the United States is through full acquisition. This entry mode offers the maximum potential profit, the maximum level of involvement. The only downside to this mode of entry is that it requires a full investment and BMW was able to set up a complete plant of manufacturing on their own.
Analysis of the host country (USA)
During the early 1990s, the economic climate of the United States was stable. The gross domestic product was in a high-level meaning that the citizens had enough disposable income. The GDP per capita was higher than that of Germany, and this presented an opportunity for BMW. The country had also beaten the recession that had occurred in 1987, and the inflation rate was lower. This means that for foreign companies such as BMW, it would be profitable to venture into the new market as it presented more opportunities.
Key challenges faced by BMW
The key reason that led BMW to set up plants in foreign markets is that the strategy was to capitalize on the growth opportunities and so as to also take advantage of the lower cost basis, tax rates and to gain economies of scale. Such a strategy is challenging if the correct market research is not conducted. Hätönen (2010), notes that this is because there is bound to be some barriers due to the internal resources, information flow, legal procedures and cultural differences. Some of the key challenges that were tackled by BMW include;
Strategy: an internationalization strategy needs to be well researched, documented and planned. A dedicated team is required to guarantee that the scheme is well implemented. The problem that BMW did not foresee is that the strategy that they implemented meant that they were working in an area that has various automobile producing companies (Fletcher, 2011). The rate of competition was very high since the market was already saturated.
Taxation: there was a need for careful planning so as to ascertain the most tax efficient structure for their operation in the United States. Some of the other considerations that BMW could have made included the price of their automobiles, the repatriation of their profits and ensuring that they complied with all the requirements that were needed in tax reporting in the United States.
Payroll: as a company operating overseas, there was a need for the company to employ individuals who would assist the employees with the local payroll taxes and the reporting obligations. When the company set up shop, there were various employees who did not conform to the tax regimes as most of them were initially from Germany and the taxation structures in Germany were dissimilar from those in the United States.
Financial reporting: as an overseas subsidiary, it was necessary that BMW filed their accounts in the relevant country. Furthermore, these accounts also needed to be audited. For BMW, the accounts of the overseas subsidiaries had to be consolidated with the other group accounts. The accounts of the subsidiary companies had to be audited and prepared by the accounting standards that were applicable in the United States or converted to international standards for consolidation purposes.
Reflections
While doing research about the internationalization process of BMW in the United States, there are various lessons that one can learn. One of the key lessons that are learned is that there must be absolute care to be undertaken when considering a move into the international market. If the process is not properly undertaken, then there is bound to be many problems. Additionally, there is a need to guarantee that the economic environment in the host nation is favorable. The target market has to be well studied so as to ensure that the company makes profits. Additionally, other cultural differences also have to be considered. BMW’s strategy was successful in the long run due to their ability to come up with a strategy that good. It is not only enough to venture into new markets for the sake of going global, but there is a need to ensure that once a firm has decided to go global, then opportunities for increasing the profitability of the company is achieved.
With internationalization, the company is much more than an entity with investments, sales, and operations in foreign markets. For a company to continue dominating other foreign markets and industries in the foreign markets, there is a need to have an integrated strategy that ensures that it links its global resources and skilled labor to the global markets with a profit. BMW’s strategy was to ensure that they thought globally and acted locally (Chwo-Ming, 2005). It was a strategy that lets BMW adopt and allow it to minimize the adaptation to the United States and add value to the United States customers.
Conclusion
In conclusion, the global economy offers international business activities of one of the main features. One of the key lessons that are learnt is that there must be absolutely care to be undertaken when considering a move into the international market. If the process is not properly undertaken, then there is bound to be a lot of problems. Firms are answerable for choosing the best entry mode to enter into the foreign markets. The locality that a firm that wants to internationalize is imperative. In terms of locality, BMW’s plant is positioned in Spartanburg in South Carolina and in 1994, BMW began its operations of producing automobiles in the United States. While conducting research about the internationalization process of BMW in the United States, there are innumerable lessons that one can learn. Through the examination of the host country, there are many indications as to why BMW chose the United States. There are innumerable lessons that one can pick up from the internationalization of BMW into the United States.
Bibliography
Laurens, P, Le Bas, C, Schoen, A, & Larédo, P 2015, 'Internationalisation of European MNCs R&D: "deglobalisation" and evolution of the locational strategies', Management International / International Management / Gestión Internacional, 19, 4, pp. 18-33, Business Source Premier, EBSCOhost, viewed 6 April 2016.
Fletcher, R, & Bohn, J 1998, 'The Impact of Psychic Distance on the Internationalisation of the Australian Firm', Journal Of Global Marketing, 12, 2, p. 47, Academic Search Premier, EBSCOhost, viewed 6 April 2016.
Bannò, M, & Sgobbi, F 2010, 'Firm participation in financial incentive programmes: The case of subsidies for outward internationalisation', Journal Of Policy Modeling, 32, 6, pp. 792-803, Academic Search Premier, EBSCOhost, viewed 6 April 2016.
Cainelli, G, Di Maria, E, & Ganau, R 2014, 'An explanation of firms' internationalisation modes, blending firm heterogeneity and spatial agglomeration: micro evidence from Italy', Environment & Planning A, 46, 4, pp. 943-962, Academic Search Premier, EBSCOhost, viewed 6 April 2016.
Rodriguez, J 2007, 'The Internationalisation of the Small and Medium-sized Firm', Prometheus, 25, 3, pp. 305-317, Academic Search Premier, EBSCOhost, viewed 6 April 2016.
Chwo-Ming Joseph, Y, Yu-Ching, C, & Chiung-Jung, C 2005, 'The impact of internationalisation and proprietary assets on firm performance: an empirical analysis of Taiwanese high-tech firms', International Journal Of Technology Management, 29, 1/2, pp. 116-135, Academic Search Premier, EBSCOhost, viewed 6 April 2016.
Hätönen, J 2010, 'Outsourcing and licensing strategies in small software firms: evolution of strategies and implications for firm growth, internationalisation, and innovation', Technology Analysis & Strategic Management, 22, 5, pp. 609-630, Academic Search Premier, EBSCOhost, viewed 6 April 2016.
Fletcher, R 2011, 'Internationalisation strategies for SMEs in the decade ahead: are our theories relevant?', International Journal Of Entrepreneurship & Innovation Management, 13, 3, pp. 246-262, Business Source Premier, EBSCOhost, viewed 6 April 2016.
Laanti, R, McDougall, F, & Baume, G 2009, 'How well do Traditional Theories Explain the Internationalisation of Service MNEs from Small and Open Economies? - Case: National Telecommunication Companies', Management International Review (MIR), 49, 1, pp. 121-143, Business Source Premier, EBSCOhost, viewed 6 April 2016.
Hassid, J, & European Centre for the Development of Vocational Training, T 2002, 'Internationalisation and Changing Skills Needs in European Small Firms: Synthesis Report. CEDEFOP Reference Series', ERIC, EBSCOhost, viewed 6 April 2016.
Kaarna, K 2010, 'UNDERSTANDING ACCELERATED INTERNATIONALISATION: INTEGRATING THEORIES FOR ANALYSING INTERNATIONALISATION PATHS', Economics & Management, pp. 556-561, Business Source Premier, EBSCOhost, viewed 6 April 2016.
