Introduction
It is essential to note that international expansion for a business is a complex and multifaceted process that requires thorough analysis of potential destinations. The latter statement is especially true when the country of origin of Solawerk AG differs massively from the nation of interest, such as a Germany-based business considering a Southeast Asian nation. These countries differ significantly from Germany in various aspects, including culture, market, government, politics, and consumer preferences. Therefore, a properly targeted and comprehensive assessment of the two nations needs to be done to make a conclusive recommendation for a new manufacturing facility. Thailand presents the most favorable opportunities for reducing production costs and expanding the market for Solawerk AG.
Theory and Methodology
The given report will conduct a comprehensive analysis of modes of entry in South East Asia, which is why determining a specific theory is critical. The selected theoretical framework for the assessment is the comparative advantage theory of international business expansion. It essentially states that relative productivity or labor costs within a nation make it worthwhile to reallocate some business elements to that location.
The theory was first proposed by David Ricardo in 1817 as a response and re-evaluation of Adam Smith’s theory of value (Brondino, 2021). The main reason why the theory is selected is that South East Asia was selected as a core preference, which naturally excludes other countries, making the comparative analysis more applicable. The methodology will focus on deriving comparisons with an emphasis on location advantage and human resources (HR) issues.
Relevant Modes of Entry
There are various modes of entry when it comes to international markets and business expansion. The main ones include greenfield venturing, acquisition, partnering, licensing, and exporting (Teece, 2021). However, it should be noted that Germany does not have the closest ties with Southeast nations as it does with other European countries. This creates a degree of uncertainty and reduces the plausibility of greenfield venturing.
Additionally, exporting is relevant to international trade, which falls outside the company’s scope of interest. Partnering is not possible because Solawerk AG is a leading telecommunications company, which would enter into rivalry with other similar firms, and the case question focuses on production cost reduction. Therefore, licensing and acquisition are the two most critical modes of entry into the Southeast Asian market.
Foreign firms’ acquisition will result in greater growth for a multinational corporation than licensing. The primary reason is that the benefits of the first option outweigh those of the second when considering the associated risks. Foreign firm acquisition happens when a company enters a new international market by buying a local business to sell its products and services. However, licensing refers to allowing a foreign company to sell a product or service of one that provides the license (Kotabe and Helsen, 2020). In simpler terms, the acquisition means a foreign company is bought and owned, but licensing is similar to renting and representing.
Regarding acquisitions, Agyei-Boapeah (2019, p. 1) states that “foreign acquisitions have a negative impact on corporate performance. However, the negative impact of foreign acquisitions disappears under two circumstances.” This happens “(1) when domestic firms undertake foreign acquisitions; and (2) when highly experienced multinationals undertake foreign acquisitions … the benefits (costs) associated with foreign acquisitions are greater (lower) … for highly experienced multinationals” (Agyei-Boapeah, 2019, p. 1). In other words, Solawerk AG faces less risk than mid-sized businesses.
Licensing presents certain benefits, as well as risks. The advantages include low capital investment, a lower risk of expansion, reduced political risk, and additional income from technical expertise (International Business, 2021). The limitations lie in higher competition, potentially decreasing income and quality, and consequently damaged brand image and reputation (International Business, 2021). Thus, in simpler terms, licensing does not require significant investment, but it also yields limited benefits.
The greatest damage pertains to ruined brand image and company reputation. When sharing how to run a business, it is difficult to ensure that the foreign firm will implement the recommendations effectively (Hasegawa and Witt, 2019). Due to the specificity of the local business’s environment, the technical information should often be adjusted. The daughter company might not handle the adaptation of the strategy to the local market, and the parent company gains too little from it.
Therefore, foreign firms’ acquisition carriers usually carry more risk than licensing, but not in the case of Solawerk AG, as shown by the evidence above. For multinational corporations, licensing is riskier because their reputation is highly valuable, and any damage to it cannot be tolerated. The negative brand damage of Solawerk AG in a foreign nation can impair its sales and performance in other countries. Additionally, Solawerk AG is unlikely to generate significant revenue from licensing. That is why the acquisition is better, more profitable, and less risky for Solawerk AG.
Thailand
The first locational mode of entry is Thailand, a Southeast Asian country that offers cheaper labor and a plausible market. It is reported that “over the last four decades, Thailand has made remarkable progress in social and economic development, moving from a low-income to an upper middle-income country in less than a generation” (The World Bank, 2022a, para. 1). In other words, it is one of the top success stories of Asia. The GDP growth rate for Thailand is shown in Figure 1.
When it comes to cost and workforce, Thailand also has the upper hand over many East Asian nations. It is reported that labor costs, as reflected in minimum wages, are higher in Thailand than in other countries, such as Malaysia, where 2013 estimates reveal the numbers to be $253 and $51, respectively (del Carpio, Messina, and Sanz-de-Galdeano, 2018). Therefore, in comparison to other nations in the region, it will be more expensive to open a new manufacturing facility in Thailand.
In addition, workers in Thailand are highly educated, as reflected in the literacy rate, the duration of compulsory education, the high school enrollment rate, higher education enrollment, and other factors (“Education stats,” 2022). Considering that the manufacturing facility is interested in creating and developing telecommunication products and services, the education and availability of a specific set of workers are of paramount importance. Therefore, Thailand, despite its higher minimum wages, is a better alternative since it is likely that the hired specialists will be paid above the minimum wage anyway.
China
The second locational mode of entry is China, which is the most obvious option for any international business. China is the world’s second-largest economy, having demonstrated phenomenal growth in recent decades. It has become so successful that it has emerged as the most powerful nation in the region, and it can rival the United States both militarily and economically (Cherunilam, 2020). China’s population is the biggest globally, and it has the most lucrative market for Solawerk AG. Therefore, China’s locational advantage lies in its massive market potential compared to other Southeast Asian nations. The figure below illustrates China’s GDP growth and inflation.
However, in terms of production costs, China is not the most suitable place to seek cheap labor, as wages have increased in recent years, comparable to those in Europe. It is reported that “China is now an upper-middle-income country … China’s high growth based on investment, low-cost manufacturing, and exports has largely reached its limits and has led to economic, social, and environmental imbalances” (The World Bank, 2022c, para. 2).
Therefore, the economy is unstable and has reached its potential, where the future growth is expected to be incremental rather than ‘double-digit’ (Collinson, Narula, and Rugman, 2020). The top priority for Solawerk AG is to reduce production costs through lower labor costs, whereas international expansion is secondary. Under such conditions, China may not be the best option, as its labor costs are higher compared to other nations in the region.
Malaysia
The third locational mode of entry is Malaysia, which is a viable option since the company plans to utilize both the local labor force and the market. Malaysia is a highly advantageous location for reducing production costs, as it has open access to the seas and oceans, and is conveniently located near China. The latter is one of the largest customers and hosts a range of existing facilities, making Malaysia a geographically advantageous option.
The analysis of the nation indicates that “Malaysia has successfully diversified its economy from one that was initially agriculture and commodity-based, to one that now plays host to robust manufacturing and service sectors” (The World Bank, 2022b, para. 1). Malaysia is a highly open economy in terms of trade and investment, and it is already a major electrical appliance and component exporter.
For HR issues, Malaysia has a workforce with relatively low labor costs and a sufficiently educated background. However, it is worth noting that the country faces a significant issue with wealth inequality. Around 40% of its population is severely lagging behind the upper 60%, with almost 6% living in absolute poverty (The World Bank, 2022b). Although the COVID-19 pandemic had a negative impact on Malaysia’s economic growth, the country has historically experienced a growing economy, with projections indicating continued growth. Figure 3 shows the projections for Malaysia by the International Monetary Fund.
Benefits and Drawbacks
In terms of locations, all three locational modes of entry are advantageous since they have access to the sea and are not involved in geopolitical conflicts. Only China has some tensions with the West over Taiwan, which is not severely disrupting business. For HR regulation, Thailand’s government is stricter than most East Asian nations, where the mode of entry is more challenging for Germany-based businesses (Hamilton and Webster, 2018). It is worth noting that labor regulations and business regulations are more effectively enforced and monitored in Thailand (Huang & Xu, 2019). In the case of intellectual property, both nations face a high risk of intellectual property theft by establishing manufacturing locations in each country.
China’s key advantage lies in its large market, which provides a vast pool of consumers with high purchasing power. However, it has lost its advantage in offering lower-cost labor. Solawerk AG will not be able to significantly reduce its production costs in China, but it will be able to capitalize on the Chinese market. In accordance with the comparative theory of international business expansion, Malaysia lags behind Thailand in all regards, making the former less appealing than the latter.
However, comparatively, Thailand is likely to be better due to stricter enforcement of the laws than Malaysia and China. When it comes to reputation, it is challenging to pinpoint which nation will be perceived more favorably by customers. However, Thailand is a well-developed nation that is well-known due to its lower corruption index, higher GDP per capita, and various rankings and ratings (Prateeppornnarong, 2020). The superiority of Thailand in many statistics serves as a basis for its perceived reputation among customers, who will most likely view Thailand favorably.
In terms of sustainability measures and environmental regulations, Thailand has more stringent and effective regulations, which are reflected in the nation’s performance in this area. According to the Environmental Performance Index EPI, Thailand is ranked 108, which accounts for power sources, waste utilization, and pollution (Huang & Xu, 2019). The EPI scores for China and Malaysia are lower than for Thailand (Environmental Performance Index, 2022). In addition, Thailand is gradually climbing up its ranking among Asian nations. Therefore, Thailand is a better option, as a German-based business needs to comply with EU laws on the environment and production due to European regulations, as well as consumer awareness.
Strategy
Home Country Nationals
HR planning for home country nationals must be approached carefully, as the individuals involved will likely be drawn from the existing pool of workers. Their role is to bring experience and knowledge of the company to Thailand, where they will conduct local training and provide supervision. Performance management must be conducted using the same metrics that were utilized in Germany, but they need to be adapted to Thai conditions.
The training and development will involve increasing cultural competency and acculturation, as well as enhancing Thai language proficiency (Hamilton and Webster, 2018). The remuneration is the most important element, as it is essential to provide a monetary incentive for current workers to relocate to Thailand. The most effective strategy is to either double their current pay or guarantee a promotion to a higher position, as they will be supervising host country nationals.
Host Country Nationals
HR planning for host country nationals should be conducted in collaboration with local HR agencies, as they are more competent and knowledgeable about the Thai workforce. The performance management system should be adopted from existing production sites in Germany, but the evaluation can be adjusted to correspond to the capabilities of a newly built facility.
Training and development must be conducted by utilizing the knowledge and experience of home country nationals, which is why each Thai worker should have access to a German employee. The remuneration must be determined based on the country’s industry average values. Solawerk AG should add 5-10% to the average to attract the most competent Thai applicants.
Neither Home nor Host Country Nationals
HR planning for neither home nor host country nationals should be done from the point of exclusion. This group of employees should not be involved in the process since the cultural and national differences are already significant enough to manage. Adding more nationals will complicate the expansion of production in Thailand, both legally and organizationally, as well as culturally and in terms of language (Reiche, Tenzer, and Harzing, 2018). Multinationalism should be promoted only after the basics of production are established. Therefore, the training, development, and management should be kept within the boundaries of German and Thai nationals. The entire strategy is outlined in the figure below.
Recommendations
The core recommendation for Solawerk AG is to establish its opening manufacturing facility in Thailand to reduce production costs. Thailand outperforms Malaysia in many aspects, and the nation’s higher minimum wage should not be a problem, as the facility will require high-skilled workers for the production of computer parts. The regulations and enforcement of essential laws are more effective in Thailand, which will better resonate with German-based businesses. The solution for Solawerk AG is to enter the Thai market, meeting its two needs simultaneously: reducing production costs and expanding into a new market. Both goals can be best met in the country when compared to other nations in the region.
Action plans to utilize the existing pool of German workers and incentivize them to relocate to Thailand, either permanently or temporarily, to share their experience and knowledge with newly hired Thai workers. For host country nationals, the local HR agencies should be used to avoid the cultural and regulatory hurdles specific to Thailand. Employees who are neither from the home country nor host country nationals should be excluded at the beginning of the process, as the expansion of production is already a complex undertaking. Taking on additional management of legal and organizational issues is unnecessary and wasteful.
Reference List
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del Carpio, X. V., Messina, J., and Sanz-de-Galdeano, A. (2018) ‘Minimum wage: does it improve welfare in Thailand?’, Review of Income and Wealth, 65(2), pp. 358-382.
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