Chapter 16 Outline

The Strategic Role of Foreign Factories

Whatever the rationale behind establishing a foreign manufacturing facility, the strategic role of foreign factories can evolve over time.¹³ Initially, many foreign factories are established where labor costs are low. Their strategic role typically is to produce labor-intensive products at as low a cost as possible. For example, beginning in the 1970s, many US firms in the computer and telecommunications equipment businesses established factories across Southeast Asia to manufacture electronic components, such as circuit boards and semiconductors, at the lowest possible cost. They located their factories in countries such as Malaysia, Thailand, and Singapore precisely because each of these countries offered an attractive combination of low labor costs, adequate infrastructure, and a favorable tax and trade regime. Initially, the components produced by these factories were designed elsewhere and the final product would be assembled elsewhere. Over time, however, the strategic role of some of these factories has expanded; they have become important centers for the design and final assembly of products for the global marketplace. An example is Hewlett-Packard's (HP) operation in Singapore. Originally established as a low-cost location for the production of circuit boards, the facility has become the center for the design and final assembly of portable ink-jet printers for the global marketplace (see the accompanying Management Focus).

Such upward migration in the strategic role of foreign factories arises because many foreign factories upgrade their own capabilities.¹⁴ This improvement comes from two sources. First, pressure from the center to improve a factory's cost structure and/or customize a product to the demands of consumers in a particular nation can start a chain of events that ultimately leads to development of additional capabilities at that factory. For example, to meet centrally mandated directions to drive down costs, engineers at HP's Singapore factory argued that they needed to redesign products so they could be manufactured at a lower cost. This led to the establishment of a design center in Singapore. As this design center proved its worth, HP management realized the importance of co-locating design and manufacturing operations. They increasingly transferred more design responsibilities to the Singapore factory. In addition, the Singapore factory ultimately became the center for the design of products tailored to the needs of the Asian market. This too made good strategic sense because it meant products were being designed by engineers who were close to the Asian market and probably had a good understanding of the needs of that market, as opposed to engineers located in the United States.

A second source of improvement in the capabilities of a foreign factory can be the increasing abundance of advanced factors of production in the nation in which the factory is located. Many nations that were considered economic backwaters a generation ago have been experiencing rapid economic development during the 1980s and 1990s. Their communications and transportation infrastructures and the education level of the population have improved. While these countries once lacked the advanced infrastructure required to support sophisticated design, development, and manufacturing operations, this is often no longer the case. This has made it much easier for factories based in these nations to take on a greater strategic role.

Because of such developments many international businesses are moving away from a system in which their foreign factories were viewed as nothing more than low-cost manufacturing facilities and toward one where foreign factories are viewed as globally dispersed centers of excellence. In this new model, foreign factories take the lead role for the design and manufacture of products to serve important national or regional markets or even the global market. The development of such dispersed centers of excellence is consistent with the concept of a transnational strategy, which we introduced in Chapter 12. A major aspect of a transnational strategy is a belief in global learning--the idea that valuable knowledge does not reside just in a firm's domestic operations; it may also be found in its foreign subsidiaries. Foreign factories that upgrade their capabilities over time are creating valuable knowledge that might benefit the whole corporation.

For the manager of an international business, the important point to remember is that foreign factories can improve their capabilities over time, and this can be of immense strategic benefit to the firm. Rather than viewing foreign factories simply as sweatshops where unskilled labor churns out low-cost goods, managers need to view them as potential centers of excellence and to encourage and foster attempts by their local managers to upgrade the capabilities of their factories and, thereby, enhance their strategic standing within the corporation.