What are the primary motivating factors behind Electrolux’s decision to expand aggressively into Asia, Eastern Europe, and Latin America in the 1990s?
There are myriad factors that are motivating Electrolux to expand into the foreign markets. First, the company boasts of high quality in its line of products and that is why its household goods are competing effectively in the market. Electrolux is confident enough that it can meet the needs of its consumers and therefore daring to tap into dormant foreign markets. Second, the growing population in the developing world is another driving force and a motivating factor for Electrolux. One of the most important elements in its production is the availability of markets. While other companies are also scrambling for the very overseas markets, Electrolux is motivated by the fact that the growing population will always lead to a rise in demand for its products. Finally, the company is ambitious to emerge among the top three market leaders supplying household goods. This motivates the management at Electrolux since it is a higher goal that has been set and must be achieved.
Why do you think Electrolux required Lehel in Hungary but opted for green-field investment to enter many other eastern European countries?
Electrolux acquired Green-fields investments to experience expansion in Eastern Europe faster than relying on Lehel. One important benefit was the economies of scale associated with such mergers as well as the availability of complementary resources. Besides, Electrolux would benefit from tax advantages which would go a long way in improving operational efficiencies. Electrolux also forecasted growth because the company would contain proprietary rights in its production line as well as the ability to penetrate new marketing points.
Green-fields investments offered the right opportunity for Electrolux to engage in a joint venture. Although the company had already acquired Lehel, it would be more profitable, less risky, and more profitable to run a joint venture rather than enter the market as an individual. Besides, there were several hindrances brought about by local business regulations making it harder to operate singly.
The company has generally preferred FDI to exports as a way of entry into foreign markets. Why do you think this is the case?
Engaging in FDI has a cost advantage. For instance, there are lower sunk costs when goods are exported but this translates into higher costs per unit qualifying exporting as a rather expensive way of doing business compared to costs associated with local subsidiary sales in a host country. Furthermore, Electrolux considers itself a productive firm and it is only through FDI (which is more profitable though requires huge investments) that the firm can experience growth and profitability at a faster rate. FDI is more suitable for firms that are well established in the domestic market but not those which are still in their infancy stage. Foreign Direct Investment (FDI) has several merits compared to exports. For instance, FDI lowers the extra costs associated with exports. In other words, exporting products across borders demands additional overheads such as logistics and government regulations in form of tax. Also, FDI has a lower risk value compared to exports. The profit margin is higher in FDI than when dealing with exports.
What theory or theories best explain Electrolux’s FDI’s decision during the 1990s?
Market imperfections are common when transacting business at any stage of operation. For instance, business undertakings such as Electrolux’s decision to enter into FDI led to market imperfections such as higher operational costs, stiff competition, and higher market risks associated with venturing into newer geographical settings. Hence, Electrolux would have to evaluate and understand all the market imperfections that accompany FDI and then make necessary adjustments in a bid to remain profitable in the foreign markets. It is also worth noting that the very market imperfections may also lead to higher returns for Electrolux. A case example is when the company decided to expand into Eastern Europe through green-fields investment instead of its acquisition, Lehel. According to the product life-cycle approach, every individual involves in the entire chain of production has a unique part to play in the success of the business. Besides, this approach is important when decisions and choices have to be made regarding investment risks such as the state of the economy and the nature of the business environment.
The management at Electrolux must have considered all these factors before opting for Foreign Direct Investment (FDI) since all the persons involved in the chain of production as well as the risks are paramount in ensuring business success.
Electrolux was applying the strategic behavior theory as well as the location specific-theory. For example, the main rationale behind any FDI undertaking is to seek a strategic point of production where raw materials and other overheads such as human resource can be obtained cheaply. On the same note, the location-specific theory has it that the right location for a business enterprise is paramount when engaging in FDI. A specific location should be chosen based on the viability and accessibility of the markets. This was the exact approach of Electrolux during the 90s.