Do conventional foreign direct investment theories explain why multinational enterprises conduct foreign direct investment in Thailand?

Do conventional foreign direct investment theories explain why multinational enterprises conduct foreign direct investment in Thailand? By Sean-Leig...
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Do conventional foreign direct investment theories explain why multinational enterprises conduct foreign direct investment in Thailand?

By

Sean-Leigh Severn

2007

A dissertation presented in part consideration for the degree of MSc International Business

Abstract

This study aims to determine if conventional foreign direct investment theories explain why multinational enterprises conduct foreign direct investment in Thailand. Theory testing based on multiple case studies will be the research method employed and qualitative secondary data will be used in an exploratory manner. Specifically, Dunning’s eclectic paradigm will be tested against the foreign direct investment of three multinational enterprises in Thailand, namely, Royal Dutch Shell, Toyota and Tesco. The study shows that conventional foreign direct investment theories are not powerful enough to explain all of the reasons multinational enterprises conduct foreign direct investment in Thailand. Favorable exchange rates, weak market conditions, cultural similarities, geographic proximity, profitability, availability of partners, encouraging government incentives and the future potential of the region can play a substantial role when judging why multinational enterprises conduct foreign direct investment in Thailand. This enhances our understanding of foreign direct investment theories and highlights their shortcomings when applied to Thailand. Therefore, governments and business analysts should not only rely on conventional foreign direct investment theories in order to explain the foreign direct investment of multinational enterprises in Thailand.

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Table of Contents

Abstract……………………………………………………………………..……… i Table of Contents………………………………………………………...………… ii Figures……………………………………………………………………...……… iv Tables……………………………………………………………………….……… v Acknowledgements…………………………………………………….…………… vi Abbreviations………………………………………………………………………. vii Chapter 1:

Introduction……………………………………………..………… 1 1.1 1.2 1.3

Chapter 2:

Literature Review...………………………………………….…… 5 2.1 2.2 2.3

2.4 Chapter 3:

Definition of FDI………………………………...………… 5 Reasons for FDI…………………………………….……… 5 Theories of FDI…………………………………..………… 6 2.3.1 Strategic Behaviors………………………… 6 2.3.2 Product Life Cycle…………………….…… 8 2.3.3 Industrial Organization………………..…… 9 2.3.4 Internalization…………………………….... 11 2.3.5 Eclectic Paradigm………………………..… 12 2.3.6 Future Theoretical Suitability……………… 19 Summary…………………………………………………… 21

Methodology………………………………………………….…… 22 3.1 3.2 3.3 3.4

Chapter 4:

Aim of Study……………………………………………..… 2 Scope of Study…………………………………...………… 3 Structure of Research…………………………….………… 3

Data Sources……………………………………………..… 22 Analysis………………………………………………….… 24 Selected Cases...……………………………………………. 26 Summary…………………………………………………… 27

FDI and Thailand……………………………………………….…28 4.1 4.2 4.3 4.4 4.5

FDI Overview……………………………………………… 28 FDI in Thailand…………………………………………..… 30 Thai Government Policy on FDI……………………………35 Future Challenges for Thailand………………………….… 37 Summary...……………………………………………….… 39

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Chapter 5:

Case Study Analysis…………………………………………….… 41 5.1

5.2

5.3

5.4 Chapter 6:

Tesco……………………………………………………..… 41 5.1.1 Ownership...…………………………...…… 42 5.1.2 Location………………………………….… 43 5.1.3 Internalization……………………………… 45 5.1.4 Overview………………………………....… 47 Royal Dutch Shell………………………………………..… 47 5.2.1 Ownership………………………………..… 48 5.2.2 Location……………………………….…… 49 5.2.3 Internalization……………………………… 51 5.2.4 Overview…………………………………… 52 Toyota………………………………………………...……. 53 5.3.1 Ownership………………………………….. 53 5.3.2 Location…………………………………..... 54 5.3.3 Internalization………………………...….… 56 5.3.4 Overview……………………………...……. 58 Discussion and Summary………………………………...…58

Conclusion ………………….………………………..……............ 63 6.1 6.2 6.3

Conclusion…………………………………………..……... 63 Limitations……………………………………………….… 66 Areas For Further Study………...…………………………..66

References................................................................................................................. 68 Appendix 1:

Thailand: Major Developments in The FDI Policy Regime

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Appendix 2:

Tax Incentives offered by the Thai Board of Investment

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Appendix 3:

Tesco: Global Reach

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Appendix 4:

Toyota Guiding Principles

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Appendix 5:

Vehicle Production in Thailand 1993-2007

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Appendix 6:

Toyota: Production, Sales and Export by Region

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Toyota: Sales and Production Map

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Thailand’s Oil Production and Consumption 1990-2006

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Thailand’s Natural Gas Production and Consumption 1994-2006

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The History of Shell in Thailand

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Appendix 7:

Appendix 8:

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Figures

Figure

Page

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Push and Pull Factors Affecting FDI Trends

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2

Global FDI Inflows and by Group of Economies 1980-2005

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3

Thailand and Net Private Capital Inflows 1983-2002

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4

Thailand’s FDI Inflows by Sector 1990-2002

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5

FDI Confidence Index 2005

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Tables

Table

Page

1

Data Collection Options for Case Studies

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2

FDI by Region and Selected Countries 1980-2005

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3

FDI Inflows 2002-2005

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4

FDI to Thailand by Country Rank

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Acknowledgements

There are two people without whom this dissertation would not have been possible. First, my research supervisor, Dr Chengqi Wang, who was always available to provide calm, relevant and motivational guidance. Second, Katie Kitsos, who has been the rock by my side throughout the peaks and troughs of this year.

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Abbreviations

FDI

-

Foreign Direct Investment

MNE -

Multinational Enterprise

OLI

-

Ownership, Location and Internalization

FPI

-

Foreign Portfolio Investment

BOI

-

Board of Investment (Thailand)

IMF

-

International Monetary Fund

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Chapter 1: Introduction

In the new global economy, foreign direct investment (FDI) by multinational enterprises (MNEs) greatly helps overall economic development in developing countries. Globalization has fueled competition across borders and has pushed governments to focus on development strategies for their countries (Khan and Khan 2007). ‘In the 1960s and 1970s, FDI and indeed multinational corporations in general were viewed with heightened levels of suspicion by governments in developing countries. Today, those same governments seem to fall over one and other in an attempt to attract FDI’ (Bora 2002:i). The development of the roles MNEs play in the global economy justifies a greater understanding of how they operate and choose where to invest (Stone and Jomini 2002).

Developing countries have witnessed a continual increase in FDI inflows, from receiving 20% of overall inflows between 1978-1980, to 36% between 2003-2005 (United Nations 2006). The growth and increasing attention toward the causes of FDI have led to a number of competing theories which attempt to explain why MNEs conduct FDI, and why MNEs choose specific countries (Moosa 2002). During the conceptualization of conventional FDI theories, the majority of FDI was flowing into developed countries. The theories do not explicitly distinguish their usefulness when applied to different kinds of countries. With the emergence of the increased FDI flow into developing countries, it is questionable whether the already established theories are still useful in this very different context.

Some of the increase in FDI inflows to developing countries can be attributed to MNEs who continue to search for new markets to control by direct ownership, as well as the need for domestic firms in developing countries to attain new skills and technology. Governments also act as a catalyst to increase FDI, as FDI provides advances in technology and skills for a country, and more importantly, provides capital, which is in short supply in developing countries (Dilyard 2003).

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Thailand has never been colonized, but its economy has been dependent on foreign countries to increase its own amount of foreign trade (Bende-Nabende 1999). Therefore, Thailand has relied on external countries to help in its growth and this has mainly been achieved through exports. When countries such as Thailand adopt an export lead FDI strategy, they look to, and rely greatly upon, MNEs to make this happen (Natarajan and Miang 1992). Countries compete with one another globally for FDI because of the associated benefits it brings to a country. Countries can tailor their policies, offer incentives, and generally assist incoming MNEs, which influences a firm’s preference of one country over another. There are reasons why an MNE chooses to conduct FDI in a country, and theoretical tools are commonly used in order to assist understanding MNE investments.

Thailand, as an emerging market in a developing country, is keen to increase the performance of its economy. Thailand, along with many other Asian countries, are all vying for MNEs to conduct FDI in their countries. Thailand has competed reasonably well in its efforts to attract MNEs, but greater understanding about MNE behavior will assist in Thailand’s competitiveness in the future. By understanding why MNEs wish to conduct FDI in Thailand, the government can prepare policy which helps to welcome FDI, as well as preparing for future FDI trends. Having greater understanding of why MNEs conduct FDI in Thailand helps domestic firms position their operations optimally to either supply, compliment or compete. Because the inflow of FDI into developing countries is growing, it is becoming increasingly important to be able to pre-empt exactly why MNEs are investing. However, far too little attention has been paid to this up until now.

1.1 Aim of the Study

This papers aims is to address the following question: Do conventional foreign direct investment theories explain why multinational enterprises conduct foreign direct investment in Thailand? It will answer this by analyzing whether the FDI of MNEs in Thailand is consistent with conventional FDI theories. By testing the FDI theories on a developing country with an emerging market, this study looks to critically analyze the

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usefulness of theories used in international business in this context. This study will review recent research conducted in the field so far to determine the performance of FDI theories generally, before narrowing them down and subsequently conducting tests to determine how they fare when applied to incoming MNE FDI in Thailand. By conducting a unique and in depth analysis, this study seeks to make original contributions to knowledge in the field and act as a platform from which other research can build.

1.2 Scope of Study

This study is restricted to dealing with FDI only and will not investigate the study objective with reference to foreign portfolio investment (FPI) in any way. Inward FDI in Thailand will be analyzed in this case and outward FDI will not be covered. Thailand will be the specific focus. During the analysis of three case studies involving the FDI of three MNEs in Thailand, the study will only focus on the FDI of those MNEs into Thailand and will not cover other countries where these MNEs invest. The scope of the study was narrowly defined in order to focus the efforts of the researcher and meet word and time constraints so as to make the study feasibly researchable.

1.3 Structure of Research

This dissertation contains six chapters that are arranged as follows:

The current chapter, chapter one, introduces the reader to the area of investigation and justifies the issue which will be concentrated on from here on in. The aim of the study is identified, the scope in which the study is placed is described, and the outline of the chapters is presented. This chapter is intended to give the reader a clear overall view of what is to follow.

Chapter two defines FDI and justifies why it exists. The theoretical foundation from which the remainder of the study will base itself is presented in the form of a literature

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review in order to put the topic in an academic context. The relevant theories are critically evaluated in an effort to determine their suitability for use in analysis.

Within chapter three, the methodology behind how the study is organized in order to reach the overall objective is presented. The sources of data are identified and the method of analysis is justified. The MNEs chosen for analysis are identified and elaborated upon. Possible alternative methods will be recognized and the approach used for this study will be justified.

Chapter four examines the pattern and growth of world FDI and the recent role developing countries have played. Next, FDI in Thailand is focused on and an overview is presented. Thai government policy on FDI is investigated in order to understand the country’s outlook and the rules that govern incoming FDI. Finally, challenges that will affect future FDI in Thailand will be investigated.

Chapter five will present an analysis of three separate MNE case studies of FDI in Thailand to determine if the investments are theoretically aligned. The three companies that will be analyzed are heterogeneous with regard to their motivations for investment, are from different industries, as well as different home countries. A discussion and summary will follow to synthesize findings and highlight areas of wider relevance.

Chapter six covers the findings of the research and reveals what was uncovered and demonstrated as a result of the analysis. In view of the work undertaken, limitations of the study will be noted to give the reader an idea of the issues that have held back this work in some way. Lastly, areas for further research will be suggested for those wishing to continue where this work ends.

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Chapter 2: Literature Review

This chapter will provide a theoretical foundation for the remainder of the dissertation. Firstly, FDI will be defined, followed by reasons for the existence of FDI. A global overview of FDI will then be presented. Impacts of FDI will be explored, followed by a differentiation between types of FDI. The bulk of the chapter will deal with the theories of FDI in a critical manner, with the aim of sourcing theories to use as suitable tools in future analysis. Finally, the chapter will conclude with a brief summary.

2.1 Definition of FDI

When analyzing FDI, it is important to differentiate from foreign portfolio investments (FPI). FPI is passive, non-fixed holdings of foreign stocks, bonds or other financial assets. Investors look to profit from the rate of return on their investments and no management control is assumed (Griffin and Pustay 2002). FDI, on the other hand, as defined by the International Monetary Fund’s (IMF) Balance of Payments Manual, is, ‘an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor, the investor’s purpose being to have an effective voice in the management of the enterprise’ (Moosa 2002:1). Rugman and Hodgetts (1995:84) provide a simplified definition of FDI as, ‘the ownership and control of foreign assets.’ Therefore, the distinguishing feature between FDI and FPI is that FDI has some form of control over operations and influence over decisions, but with control comes risk and commitment. Risk is something which MNEs are prepared to take. An MNE can be defined as, ‘an enterprise which owns and controls activities in different countries’ (Buckley and Casson 1976:1), so those organizations which conduct FDI in other countries can be classified as MNEs.

2.2 Reasons for FDI

It must be acknowledged that imperfections in markets throughout the world create the desire to invest in other countries, and therefore firms conducting FDI are opportunists

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who are continually looking for new possibilities to explore (Hood and Young 1979). Firms are motivated to engage in FDI for a number of reasons. Wall and Rees (2004) have identified three main factors: supply factors, which include reduced production costs, more favorable locations, lower distribution costs, better availability of natural resources and access to technology; demand factors, which include better marketing power through a presence on the ground, protection of a brand name through better monitoring and closer proximity to business customers; political factors, which are the benefits of avoiding set trade barriers, as well as tax and economic incentives from host governments. The presence of just one of the aforementioned reasons supports the decision to engage in FDI rather that pursuing an alternate means of serving a foreign market, such as exporting, licensing or franchising.

Firms who choose to invest abroad are commonly more competitive than their peers, who remain satisfied with a domestic market. Not all firms choose FDI, as it is inherently risky due to the degree of unknown when operating in a foreign market. However, increased risks bring greater incentives, and those firms who manage to become more successful as a result of their FDI activities receive larger rewards (United Nations 2006).

2.3 Theories of FDI

In order to realize advances in FDI thinking, it is important to critically analyze theories relating to FDI. The view of Agarwal (1980 cited in Moosa 2002) will be considered, which states FDI theories should be regarded as hypotheses, due to the fact that there are a plethora of competing theories with differing degrees of power.

2.3.1 Strategic Behaviors

Knickerbocker (1973) developed a behavior related approach to explain FDI in foreign markets. Knickerbocker asserts that firms that operate within oligopolistic industries tend to follow the FDI moves of one another. This behavior is an oligopolistic reaction where, ‘the decision of one firm to invest overseas raises competing firms’ incentives to invest in

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the same country’ (Head, Mayer & Ries 2002:454). FDI by one firm into a foreign country triggers other firms to follow suit. In this follow-the-leader type behavior, the follower is looking to minimize the first mover’s overall competitive advantage. When conducting FDI in new foreign markets, oligopolistic firms are not only looking to be better than their rivals, they are also looking to increase their own profitability by exploring new opportunities. Knickerbocker states that investment in overseas markets can be characterized in one or more of the following ways: movement to supply the native market, investment to gain resources, and investment to gain a strategic export platform.

The reason one firm follows another is certainly logical, however Knickerbocker does not explain the triggers behind the initial investment by the first firm to move (Moosa 2002). Therefore, it is difficult to use Knickerbocker’s theory to correctly predict what actually motivated the first firm’s investment decision and why exporting or licensing were disregarded as alternatives.

Building on the work carried out by Knickerbocker, studies conducted by Head et al. (2002) found that the risk-taking behavior of firms within an oligopoly determine the speed of which the follower decides to join. When there is a degree of uncertainty regarding the cost of doing business in a new foreign market the followers’ speed will be effected. Firms that have witnessed successful FDI by other industries into a given country can expect followers much sooner. First movers undoubtedly have the ability to make significant gains from their bold moves, but bold moves are inherently risky.

Yu and Ito (1988) found that FDI movements in oligopolistic industries are influenced by host countries, internal firm situations and the actions of competitors. Oligopolistic and non-oligopolistic firms make their FDI decisions based on economic variables in addition to their competitors’ actions. Knickerbocker’s theory does provide influential reasoning for FDI movements of firms within an oligopoly sometimes, however, in a situation with so many global variables, it is not possible for one theory to explain FDI movements in an oligopolistic industry all the time.

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2.3.2 Product Life Cycle

This concept was developed by Raymond Vernon (1966) in an effort to explain the overseas expansion behavior of American MNEs after the Second World War. In this theory, the justification for foreign investment and expansion is due to the stage in the product’s life, not the country where the FDI takes place (Moosa 2002).

Vernon (1966) proposed three stages in a product’s life:

1. New product: Production happens at home due to the need for synthesis between the production and R&D teams, and close proximity to potential buyers. Price at home is inelastic at this stage because of increased demand, and innovative products can command a higher price. Here, the product can be advanced with the help of feedback from home customers. 2. Maturing product: The product has started to become more established and export is taking place to developed counties as demand emerges. With an increase in demand, competition appears and innovative firms resort to FDI in developed countries to meet the needs of the demand. This action is taken to support sales and profits as the market and competition increases. At present, the country where the innovation was born is the net exporter and the foreign countries are net importers. 3. Product standardization: The product and the producing processes are no longer monopolized by the innovating firm. Competition on the basis of price pressures the innovating firm, and the decision is made to invest in developing countries in an effort to take back a cost advantage. Bende-Nabende (1999) suggests that foreign investment which occurs at this point is defensive investment aimed at safeguarding profit margins. The foreign countries are net exporters and now the home country is a net importer from foreign and domestic firms located in foreign countries (Moosa 2002).

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The theory highlights how an innovative firm cannot simply rely on home markets and home production to give it a lasting advantage. Reason is given to explain why and when a firm should move into overseas markets (Moosa 2002).

The theory sufficiently justifies the flow of FDI from innovating countries, such as the US, to developed nations, such as those in the EU, and also to developing countries. Vernon does not address the reverse flows of FDI, from developing countries to developed countries, but the theory does explain how destinations for both imports and exports change (Sanyal 2001).

Mature products produced at home, close to natural resources, can compete globally, especially when economies of scale are pursued. Therefore, just because firms can produce overseas does not dictate they should (Mullor-Sebastian 1983). However, MNEs now have the ability to unveil products to different markets around the world simultaneously; moreover, these products are not all standardized (Bende-Nabende 1999).

2.3.3 Industrial Organization

The first person to highlight the makeup of the market and the characteristics of inward investing firms when explaining FDI was Stephen Hymer (1976). Hymer claims that if incoming foreign MNEs are the same as their already established domestic counterparts, they will not gain from entering the domestic market. This is because the incoming MNE will be hit by higher costs, including communication and transport, bringing in staff, cultural barriers, language and the lack of an established network with the government and local businesses. Therefore, Hymer proposes incoming firms must have some specific advantage which will counter the associated challenges of entering a new country (Moosa 2002).

Kindleberger (1969) suggests the advantage possessed by a firm needs to be firm specific for FDI to be suitable and appropriate for transfer, and powerful enough to overcome the

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foreign disadvantages. Licensing such an advantage to a foreign firm could result in unwanted transfer of knowledge.

As with any theory in the field of FDI, the time and location where it was conceptualized features heavily on its usefulness thereafter. Hymer’s outlook and the world FDI situation at the time of writing, in the sixties, was when America was the world’s main superpower and MNEs were from a small pocket of countries. Hymer judged FDI decisions on MNEs’ ownership advantages over those firms in the host country, and at that point less attention needed to be paid to competing nations. Currently, MNEs come from a much wider range of countries, and therefore MNEs need not only weigh up their ownership advantages in relation to firms in the home country, but also must measure themselves against competing MNEs internationally, leading to a need for a holistic approach to investment decisions (Cantwell and Narula 2003).

Hymer believed that MNEs’ actions are driven by the pursuit of total power. Hymer incorrectly predicted that the world would come to be dominated by fifty to sixty ‘megafirms,’ which conveniently fell in line with his Marxist ideological standpoint at one point in his life. This subjective stance clearly influenced Hymer’s theoretical framework, which has control at its core (Graham 2006).

One of the main downfalls of this theory is that it does not clearly consider why expanding firms choose not to make the most of their advantages by increasing production in their home countries and exporting to foreign markets, which could be a substitute for FDI. The theory does explain why firms choose to invest in foreign countries, but it does not explain why investing firms choose country A over country B, and credit must be given here to Vernon’s theory for addressing that (Moosa 2002). Despite crucial limitations, Hymer’s theory is powerful nonetheless and provides a pioneering foundation (Pitelis 2006).

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2.3.4 Internalization

Internalization was conceptualized by Ronald Coase (1937). Coase found that FDI and associated internalization take place when transaction costs, i.e. the costs of negotiating, enforcing and overseeing a contract, are high, and in such cases firms internally can be a suitable substitute for markets. Alternatively, when these costs are low, this positively supports the case for working in partnership with other firms, being part of the market, and using mutually beneficial licensing and franchising agreements. The firm is left to decide if it is more cost effective to own and run a facility overseas (internalize) or if it is better to establish a contract with a foreign firm to run, license or franchise it on their behalf (Wall and Rees 2004).

The internalization theory developed from the imperfections in the market. Internalization can be seen as a form of vertical integration, where the firm takes ownership of duties and/or goods that it formerly relied on a third party to provide. Hood and Young (1979) argue that it is not just the ownership of a firm specific asset that gives it its advantage, it is the process of being able to internalize that asset, rather than selling it, that gives the MNE its overriding advantage. Overall, knowledge provides a firm with a monopoly advantage and only through discriminatory pricing, instead of licensing for example, can MNEs capitalize fully.

Transactions with other firms take time and costs can be incurred in tracking firms and uncontrollable events, therefore replacing these market inherent obstacles with internal processes can reduce insecurity. The internalization argument provides reasons why firms prefer FDI in some circumstances over importing and exporting, and why they may refrain from licensing or franchising (Moosa 2002). The internalization argument does not appear to have any theoretical foundations, and Rugman (1986:104) supports this by stating that, ‘Due to its generality, internalization can be seen as more of an approach than a theory.’ Also, with internalization, centralization is promoted. This may not be beneficial in all firms, especially those that are innovative (ibid).

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The costs of internalization need to be taken into consideration; more accounting and ownership of information is required, the cost of communication increases, and the dislike of MNEs in some host countries causes political discrimination that could affect the firm adversely. All of these costs need to be offset by the overall advantage of internalization for it to be justified (Hood & Young 1979:56).

MNEs have to consider the full picture when making future FDI decisions and as Grosse (1985) asserts, MNEs are complex and the internalization principle features as a small part of a large picture in the FDI decision making process. Nevertheless, FDI evidence across countries is in general support of the hypothesis (Moosa 2002:33).

2.3.5 Eclectic Paradigm

The eclectic paradigm, constructed by Dunning, proposes three determinants of FDI which each relate to an advantage of conducting direct investment as a preference to other methods of serving foreign customers (Bende-Nabende 1999). The three variables of the eclectic paradigm are ownership, location, and internalization (OLI), and act like a three legged stool, where each leg is equally as important as the other (Dunning 2002). Dunning asserts that firms will become involved in FDI when three factors are present:

Ownership advantage (O): a unique advantage must be present which can counter the disadvantage of competing with firms on their home grounds. A firm can gain this by having one of three forms of assets: production technology, managerial resources or marketing technique. Two main advantages arise from having one of the aforementioned; first, a firm will have more effective production and marketing, and second, a firm will have an international competitive advantage due to having a strong ownership advantage over the local firms (Bende-Nabende 1999; Griffin and Pustay 2002).

Location advantage (L): There must be increased profitability from exploiting a firm’s ownership advantage in a different location rather than in its domestic market, and this may come in the form of economic, market, cultural, or prospect benefit (Wall and Rees

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2004). The advantage of the location can either be used to directly serve the foreign market or as a convenient base from which to export. The location advantage needs to be considered in relation to the current state of the host country as well as the foreseen development path of the country (Bende-Nabende 1999).

Internalization advantage (I): There must be increased benefits from having full control over the foreign business rather than using an independent local firm to carry out those duties. There are a range of situations where internalization can be beneficial, from circumstances where local firms cannot be trusted either for tarnishing the brand of a firm or being incapable of performing the required duties, through to being overpriced (Griffin and Pustay 2002). With internalization, firms have the opportunity to fully exploit the ownership advantage. Firm advantages commonly revolve around their knowledge of making a good or providing a service, and internalization provides an opportunity to keep that particular information secure, as this could be the core of their competitiveness (Czinkota, Ronkainen and Moffett 2005:177).

The three elements of Dunning’s eclectic theory have been assembled using the support of other theories, namely Vernon’s product life cycle, Hymer’s ownership advantage, and internalization by Coase. When combined, they bring together separate areas, which allow them to provide greater and more detailed criteria to judge the suitability of FDI. Therefore, the eclectic paradigm has three times the power of each of the theories which make it up. Dunning (1997) also suggests four types of seeking behavior that stimulate firms to engage in FDI. These include resource seeking to attain physical or human resources, market seeking to use or get close to a foreign market, efficiency seeking to gain access to more efficient labor or technology, and strategic asset seeking to acquire resources and capabilities that help to capitalize on competencies or to prevent an asset being lost to a competitor. Traditionally, FDI was motivated by lower costs of production overseas with the view of exporting to serve other markets rather than serving the domestic market, but now the reasons for investing abroad vary tremendously. More recently, FDI has been undertaken to serve domestic markets, and this is particularly evident in developing countries (IMF 2003).

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The eclectic paradigm does justify the who, where and how of FDI, but unlike the product life cycle theory, the eclectic paradigm is incapable of indicating exactly when a firm should invest overseas. A firm may find itself beaten by other investors if it delays, which may be because local partners are scarce or natural resources are limited. Also, if the country has a small market, the firms who move first could saturate the market and holding off could result in reduced profitability for a firm. Timing is an important consideration when firms move into developing countries and failing to consider it could mean that a firm invests after the optimum time has passed (Ramasamy 2003). Foreign investment does not happen instantly, but once the commitment has been made it may be irreversible. After investment, and while waiting for operations to commence, a firm’s golden benefits of a market may slide away. This could cause a knock-on effect and result in delays entering the next market, as all of this affects a firm negatively when compared to proactive competition.

Firms weigh up their OLI variables at a particular point in time and based on the outcome, decisions about FDI are made. Countries are at differing stages of development and the OLI configuration that outward and inward investors face is a dynamic picture. This is particularly true in developing countries, where the L advantage for incoming firms may change rapidly as the country edges toward developed status. Firms who once perceived a country as a desirable FDI location because of its cheap labor or abundance of natural resources, may think differently as the country develops and changes. On the other hand, a country’s L advantage may become more attractive as technology is pooled or as policy is loosened to allow easier entry (Dunning 2003). According to Dunning, the OLI criterion is either present or not present at any one point in time. Investors do move into countries based on predictions, even though the L advantage may not be fully present at the time of entry, but the incoming firm perceives that it will blossom in due course. Therefore, those firms who decide to invest in a country when its L advantage is still in its infancy may not fulfill the L criteria of the OLI paradigm at the time of entry. Moreover, there may be a time lag between deciding to conduct FDI in a country and commencing

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trade, and therefore firms sometimes need to work on anticipated benefits from an L advantage, and the eclectic paradigm does not consider this.

The institutional environment within developed countries will be more tested and solid, as opposed to developing counties, where change and transition will be ongoing. Transaction costs will be increased in developing countries and this will ultimately affect the performance of FDI (Demirbag, Tatoglu and Glaister 2007). Therefore, after weighing up the OLI criteria, a fundamental issue relating to the implementation of FDI is the amount of risk the managers of an MNE are willing to take. This is particularly applicable when choosing to invest in developing countries, as there is a higher degree of unknown. One conundrum MNEs face is that managers are working with a system where they are rewarded more for making profitable decisions, but the system does not include a calculation for risk. Managers are commonly given set or percentage bonuses from their FDI deals and introducing a risk analysis into the FDI decision making process could face resistance from the managers whose deals may then be in jeopardy. Analysis of such risks may include political, cultural, marketing, currency instability, exchange controls, and tax risks, which will all have a differing impact overseas than in the MNE’s home country. Therefore, managers wearing rose tinted glasses may overlook a deficiency in the OLI variables because of anticipated future returns and immediate financial gain for themselves (Wells 1998).

The push and pull factors affecting managers’ decisions to invest abroad (see figure 1) need to be considered. The OLI criteria accounts for some of the push and pull factors but it does not specifically lay down a criteria to judge the FDI decision against. The push element can be seen as the motivation to seek such things as lower wages or an emerging market, and the pull element from the country would be such enticements as financial incentives, human capital improvement and liberalization (Sethi et al, 2002). There is the possibility of an imbalance once the factors have been placed side by side. It may be the case that a location advantage is so desirable that a firm is willing to forsake the deficiencies it has in ownership and internalization capabilities or visa-versa. Moon and Roehl (2001) suggest the eclectic paradigm explains the motivation of developed

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countries to invest in developing countries, as the developed countries commonly have a technological ownership advantage over firms in the developing country where they are investing. In FDI from developing countries to developed countries, the ownership advantage is not always present and the eclectic paradigm struggles to hold. In such cases the investment may seek strategic assets rather than exploiting their ownership advantage, which is a key criterion when judging FDI according to the eclectic paradigm. There may sometimes be an imbalance in the push and pull factors, but some of the factors may be so great that they counter some of the OLI criteria and the firm invests, even though it may not possess each of the OLI variables simultaneously. In such cases the interaction between the three sets of OLI variables may not be present, but the FDI may go ahead even though the OLI tripod does not stand. Firms may be driven to address deficiencies in their competitiveness by engaging in FDI to learn more about a particular market, advance technology or develop their human resource capabilities. FDI in such cases may be conducted to add to a firm’s capabilities first of all, with profitability being a second motive (Moon and Roehl 2001).

Figure 1: Push and Pull factors Affecting FDI Trends

Source: Sethi et al, (2002)

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Firm size is one variable that is not considered in the eclectic paradigm. Two firms may meet the OLI criteria equally, but one firm could have an overriding advantage due to size. Hood and Young (1979:149) state, ‘all other things being equal, the larger firm would have a greater ability to bear risks associated with the movement of production facilities abroad.’ Dunning’s proposed ownership advantage deals with this issue to a degree, however size is not a have or have not variable, and firms may wish to decide if FDI is comfortably within their firm’s capacity at that time. Size across all of the OLI variables is difficult to measure and not accounted for within the construct of the eclectic paradigm. Therefore, it is difficult to measure any of the antecedents which support the case for FDI, so strategy decisions are not backed up with quantitative data clearly denoting each category so it can be compared to the next. Devinney, Midgley and Venaik (2003) argue that only when there is an empirically testable framework behind the eclectic paradigm will its true potential be realized. When this is achieved, criticisms suggesting that it is a convenient set of theories and it provides inadequate direction regarding what should be analyzed will be silenced.

MNEs play a large role in the world economy and more recently they have greatly assisted some developing countries to their feet. The actions of MNEs in developing countries have not always been seen positively, as they do not always benefit the country they move into. Host governments in developing countries are faced with difficult choices as they sculpt their national policies on foreign investment. Countries must try to make sure that MNEs do not take more out of the country than they put in, and governments have to pitch their investment policies on the continuum somewhere between slow, sustainable and fully controllable, and open, encouraging and fast (Frank 1980). Policy makers within a country also must take into consideration that what is beneficial for domestic economic progress does not always encourage new foreign investment. For instance, competition policy makes the market easier to access but it reduces the incentives for foreign firms who are aiming to secure a monopolistic advantage (Bevan et al, 2004). By not taking into consideration the political element, and solely judging investment moves on OLI criteria, firms may appear to be investing in a country unjustifiably. Planned government investment incentives for incoming firms may be strong enough to offset weaker OLI

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results. Wint and Williams (2002) state that governments can have a substantial impact when attracting FDI by promoting their countries. If there were no policy differences between countries with regard to incoming FDI promotion, and the policies which countries use are equally effective, then a given country could not use policies as a leverage to increase FDI. Developing countries may aggressively seek to attract FDI in order to kick-start their economies. This may be discriminating to home investors, who the government has a monopoly over, but governments may need to implement policies in order to compete with other countries to attract incoming investors. Boddewyn (1988) asserts that by inserting a political element within the OLI framework, its effectiveness when explaining foreign investment would be increased. The political element might sufficiently explain why some MNEs are able to survive where others fail or why a select MNE is granted access, while competitors are denied, and this may help the eclectic paradigm to continue where other theories fall short. However, results from the work of Demirbag et al (2007) suggest that FDI policies which treat all investors equally, instead of selectively, will benefit both the country, new and existing investors in the future.

By offering three theories in one framework, Dunning is able to provide greater explanation for FDI movements in an open market than any alternative theoretical lens. However, because the eclectic paradigm is essentially firm-centric and based on principles of market orientation which pay particular attention to the economic efficiency of the firm, the OLI combination needs to be molded to consider internationalization. The eclectic paradigm does successfully incorporate the variables within a firm’s operational sphere, namely product, firm, industry and economy. However, the paradigm does not incorporate the importance of cohesion between firms and governments, and between governments. As well, the matter of divided costs between firm and government is not covered (Grosse and Behrman 1992).

The profitability of new FDI is of prime consideration for MNEs. By maximizing returns on their ownership advantage in an alternative location, MNEs look to fund their investments and profit from them. When weighing up two different countries as possibilities for investment using the eclectic paradigm, the fact that one country may be

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more profitable is neglected if the other country scores better overall on the OLI scale (Bitzenis 2003). However, there are some circumstances when profitability could be downgraded as a motive. Frank (1980) points out that MNEs moving into developing countries have to weigh profitability against moral and ethical practices. For instance, profitability could certainly be increased by choosing the very cheapest source of labor, but this may not be a sustainable long term advantage. If MNEs keep the bulk of their profits, they may be depriving the nation part of its home grown wealth. Therefore, it is important that FDI is beneficial to both the MNE and the country.

2.3.6 Future Theoretical Suitability

Although the above theories do provide some support to justify a firm’s initial FDI movements, they do not address the issue regarding why, where and when the FDI decisions change. The underlying current beneath the different theories is that firm’s abilities constitute a tacit ownership advantage and with the MNE’s capacity and motivation to sustain this, they are driven to capitalize on these ownership advantages by investing in different locations throughout the world. All of the theories are limited, in that they provide a blanket cover rationale for FDI, but without allowing for or covering regional variations (Sethi et al, 2002). Any theory in the field of international business that wants to be relevant the world over needs to be equally suitable when applied to every country and this is not present at the moment. Betzenis (2003:94) supports this and states, ‘…no theory dominates the decision making process of FDI.’ Each of the theories is therefore inherently limited in some way. The prime differences between theories which attempt to explain domestic business as opposed to international business are the governmental policies that are different in each country. In the absence of such differences, domestic theories would be equally relevant across boarders (Grosse and Behrman 1992).

The overall growth rates in FDI during the past decade have been exceptionally large compared to previous growth, and undoubtedly growth and change will be a prominent feature of FDI in the coming years. The new changes will mean that a number of the

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theories on FDI will be obsolete, especially the static ones, and therefore, even if present theories were flawless, their suitability would be challenged in the years to come (Bitzenis 2003). Moreover, due to the fact that the conventional FDI theories were conceptualized when FDI inflows were overwhelmingly into developed countries, these same theories may come unstuck when applied to the now increased FDI inflow into developing countries, as the context is different.

Critics accuse the eclectic paradigm of having so many explanatory variables that it results in its predictive value being small. Dunning argues against this claim and points out that each of the OLI variables are grounded in economic and organizational theory. Selflessly, Dunning also suggests that none of the present theories in international trade can correctly give explanation for foreign transactions in goods and services all of the time (Dunning 2003:29). Grosse (2003:55) refers to the eclectic paradigm as the ‘kitchen sink’ theory because its explanatory power covers all of the major investment issues possible for an international firm. There is also criticism regarding the lack of priority given to the factors which effect international business and the eclectic paradigm’s overall staticness. The paradigm does, however, continually appear in literature, and it is a concrete relative to other theories regarding FDI, and in many ways it is valuable to policy makers today.

It may be convenient to assume that firms consider the OLI triad and make FDI decisions based on the outcome, but unfortunately for theorists, firms commonly make decisions their own way. Although the eclectic paradigm must be praised for getting firms to consider three of its resources simultaneously to judge its predicted FDI success, firms do not make identical FDI moves when presented with the same data. Personalities and individual judgments lead decision makers to deviate from the confines of academic theory, and therefore, individual strategies towards FDI may play a much larger part in the decision making of MNEs than considerations of academic theory. This may be a result of insufficient information or a desire to follow one’s instinct and go with what ‘feels right.’ The eclectic paradigm does not consider the role of managers when it comes to deciding strategy for the firm and the historic structure within the firm which influences managers’ beliefs. Nor does the eclectic paradigm take into account the strategic

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feasibility of FDI actions. The orientation of these two points ultimately decides if the organization has the drive and the capacity to undertake FDI. These issues must be taken into account along with the eclectic paradigm to decide if a particular FDI is feasible (Divinney et al. 2003).

2.4 Summary

Globalization has lead to a world marketplace where firms need to compete on a global field. Control is a primary motivator for becoming involved in FDI, and market imperfection makes some countries more favorable locations in which to invest than others. Global FDI inflows increased by 29% in 2005 to $916 billion, and the world’s largest MNEs control the bulk of world investment. Developing economies, especially those in South, East and Southeast Asia had the largest percentage increase in inward and outward FDI flows in recent years. Horizontal and vertical FDI have differing effects on wealth distribution within and between those countries that conduct FDI.

Advances in FDI scholarly thinking have lead to FDI perspectives that adopt a greater appreciation of a more holistic approach. The perspectives have all been progressive and credit must be given to the scholars for each providing a block for the next person to build upon. Knickerbocker explains what leads firms to undertake FDI in industries characterized by an oligopoly, but perhaps the greatest contributor in this field, with his proposed eclectic paradigm, would be Dunning. Dunning managed to successfully amalgamate Vernon’s product life cycle, Hymer’s ownership advantage and internalization by Coase, to form the OLI eclectic paradigm. The eclectic paradigm is the most recent benchmark from which other theoretical perspectives gauge themselves, although areas of potential enrichment have been identified. As a result of the findings, chapter 4 will test Dunning’s eclectic paradigm against three MNEs in Thailand to determine whether the theoretical criteria justified specific MNE’s FDI moves into Thailand.

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Chapter 3: Methodology

This chapter will discuss the rationale behind the methodology used to answer the research question. Sone and Jomini provide justification for work into the chosen area and state that, ‘The growth in the role of MNEs in the world economy underlines the need for a better understanding of how MNEs operate’ (Stone and Jomini 2002:233). In order to better understand how MNEs operate, the methodology used in this paper is tailored to unraveling the actual moves of an MNE and subsequently gauging if they are, or are not, theoretically consistent in their FDI moves. It is important in this, as in any other research, to clearly specify the chosen methodology, and this chapter aims to fulfill that obligation. First, the sources of the data will be explained, followed by the method of analysis. The approach used will then be compared to other available approaches, and the MNEs chosen for the case study and analysis will be explained and justified. Finally, a brief summary will conclude the chapter.

3.1 Data Sources

After completing the literature review, it became evident that an exploratory qualitative approach to research would be preferred to quantitative research in order to answer the research question because strength in numbers is not a prerequisite. The nature of the theories which will be tested and the data required for analysis in this circumstance lend themselves more favorably to a qualitative approach because they can be interpreted and represented in a qualitative manner. One of the limitations with qualitative research however, is that the researcher uses his or her own personal lens to judge the information. Although subjectivity is a downfall of qualitative research, the researcher needs to remain as objective as possible throughout to ensure that a clear, accurate picture is painted for the reader (Creswell 2003). During the process of this research the researcher will endeavor to remain as objective and neutral as possible in both the selection of and presentation of the data. But ultimately, the decision as to whether the researcher has been too biased is left with the consumer of the research (Salmon 2003).

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In this case, the qualitative method is more appropriate due to the fact that it is able to provide a conceptual look at how theories operate in specific cases (Gephart 2004:455) and because qualitative research, ‘is a situated activity that locates the observer in the world and makes the world visible’ (Denzin and Lincoln 2005:3). However, it is recognized that quantitative research does have the advantage of revealing errors, clarifying reasoning and reducing ambiguity, and these benefits would have certainly positively influenced the outcome of this study (Gorard 2003:4). The message that the reader can take from quantitative research can sometimes be a bit ambiguous, and Salmon (2003:26) argues, ‘Quantitative researchers rarely address this issue explicitly, often sheltering behind the ‘generalisability’ of their findings.’ The quantitative approach was disregarded because in this case it could not model what qualitative data could, and it would have been less practical. Despite the acknowledged advantages of each approach, the unfolding emergent nature of qualitative research is particularly well matched with this study; rigid quantitative research may not have suited the exploratory path this paper takes (Crewell 2003).

Journal articles, books and internet resources will be the three main pools from which information will be collected. Specifically, The World Bank, United Nations Conference on Trade and Development (UNCTAD), International Monetary Fund (IMF) and the Thailand Board of Investment (BOI) will be key sources of information because of their trustworthiness. A number of different websites will be used to collect relevant and up to date information about current FDI flows and MNE actions. By using a number of references from a variety of difference sources, it is hoped that a more rounded, valid and objective conclusion is reached.

It was decided to use secondary data because of the amount of relevant material available and the fact that analysis can be conducted from it once it has been collected. Secondary data in the case of this study is quicker to collect and more progress can be made, however, the question is not whether it exists but where to find it (Gorard 2003). Admittedly, the use of a mixed method would have been more appealing and substantial to the reader, therefore and lack of primary data is one of the shortfalls of this research. That said, the

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quality and up to date nature of the secondary data used certainly provides a substantial platform from which to work. Authenticity is a concern with secondary data, especially data sourced from the internet, however caution has been taken and the information has been graded, but unfortunately some errors are inescapable in secondary data.

It is true that academic institutions place a great deal of stress on the originality of work produced. Wrongly, it is sometimes assumed that original work must flower from primary data. It is certainly correct that original work can be carried out using secondary data, and this study is testament to that (Gorard 2003).

3.2 Analysis

When research involves theory testing, the use of multiple case studies to test the theory against it is appropriate (Benbasat, Goldstein and Mead 1987; Bryman 2004; Meredith 1998). This approach allows a rich set of data to be collected that is focused around a specific research question and the contextual complexity can be captured (Benbasat, Goldstein and Mead 1987). The testing of theory is achievable by determining if it is supported by empirical facts (Hillebrand, Kok and Biemans 2001). Therefore, the use of three cases was deemed to be satisfactory in testing the chosen theory against MNEs located in Thailand and their FDI activity. Three cases were selected to be analyzed because social phenomena can be understood better when compared with two or more cases (Bryman 2004). Additionally, when a single case is used, it is very difficult to generalize the results (Meredith 1998). Better insight, more confidence, a different perspective and less chance of presenting surprising findings can be achieved by using more than one case (Eisenhardt 1989). It would be naive to think that generalizing the population from three samples would be optimum, but given the constraints in both time and words, it was felt that three cases would be more suitable, as opposed to one in-depth case, which would be very individual and possibly isolated. Therefore, one limitation of the study is that it is admittedly non-representative of the general situation of MNEs in Thailand, but it does provide a small cross section of three different cases. Darke, Shanks and Broadbent (1998) support this by arguing that the use of multiple cases allows cross

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case assessment and the investigation of a particular aspect in different settings. Moreover, the cases used are heterogeneous in terms of motivation to invest, are from differing home countries and are in differing industries. This criterion was chosen in order to form a more representative picture. At this point, it also should be noted that the use of case studies favors a qualitative method (Bryman 2004).

When conducting multiple case studies there are a choice of different data sources which must be taken into consideration to determine which will provide the best fit for the research in question. The decision about which sources of evidence to use was weighed up against the alternatives: Table 1: Data Collection Options For Case Studies Method

Participant Observation

Strengths • Can obtain a first–hand account and an in–depth understanding. • Provides detailed assessment of interpersonal activities.



First–hand account of events and the context of those events.



Focuses directly on the case study topic. Provides perceived causal inferences. A broad array of information can be collected in one meeting. Access to specific information that otherwise may be difficult to source. Up to the minute. Produced outside of the research (objectivity). Electronic communication has created numerous new forms of documentation Precise and consistent. May allow for a review across several years. Can be obtained unobtrusively.

Observations

Interviews

• • • • • •

Documentary Evidence

• • •

Weaknesses • Not appropriate and would not provide desired information for the planned analysis. • Inefficient method in this situation. • Hard to gain access. • Language and geographic barriers. • Time consuming. • Difficulty in assessing objectivity. • Potential for Hawthorn effects. • Time consuming. • More need for a holistic view. • Hard to gain access. • Potential for Hawthorn effects. • Interview questions must be systematically developed. • Inaccuracies from poor recall. • Potential for interviewees to provide interviewers with answers they want to hear, or to provide socially acceptable answers. • All information may not be releasable. • Must be carefully scrutinized for objectivity. • May be difficult to access, or access may be deliberately blocked.

Adapted from: Johnston, Leach and Liu (1999:208)

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Due to the need of a more objective perspective, the ease of availability and the ability to review data over a number of years, documentary evidence was decided upon. One prominent disadvantage however, is the timely trawls for appropriate information, but this is countered by the quality of data collected. Additionally, as the study evolves it is possible to delve into different sources and maneuver sideways during the ebb and flow of the writing to gain specific supportive data.

3.3 Selected Cases

The analysis draws data from three separate case studies using MNEs which were deliberately chosen. The selected MNEs are Royal Dutch Shell (Holland/UK), Toyota (Japan) and Tesco (UK). These MNEs were chosen for a number of reasons which positively support this research. Because of the size and impact of the chosen MNEs globally, there is an adequate amount of rich, suitable data ready to be cultivated. The three MNEs are heterogeneous in terms of their country of origin, which provides a global perspective. This would not be the case if the MNEs were from the same country. The MNEs have differing motivations for investment due to the nature of their businesses, which are from three different industries, namely, automotive, oil and gas, and retail. The chosen MNEs selected to invest and set up their operations in differing locations within Thailand. This positively supports the theory testing on Thailand as a location, and does not only focus on one given hub within the country, such as the capital city of Bangkok, where most MNEs congregate.

Results from the analysis of three dissimilar MNEs helps to provide a general representative picture. Because the MNEs are so diverse, the findings can be generalized to an extent, with regard to applying them to other MNEs in Thailand. Using dissimilar MNEs helps stretch the theories and fully test their usefulness in different contexts. The automotive, oil and gas, and retail industries are all very big in Thailand, with a number of MNEs already established there, and the results could be applicable to other MNEs within the same industries. Including an MNE from Japan was very important because Japan is the largest single country conducting FDI in Thailand, and the results may help explain

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the FDI of other MNEs from Japan to Thailand. The analysis will bring out general reasons why MNEs choose to invest in Thailand. However, it must be acknowledged that even though Royal Dutch Shell, Toyota and Tesco help to assemble an overall picture, they each have their own unique reasons for conducting FDI in Thailand, as do other MNEs. Therefore, the cases used assist in building general understanding, but because motivation for FDI is not mirrored from one MNE to another, the results are not fully representative of all other FDI by MNEs in Thailand.

3.4 Summary

This chapter has shown that rigorous research can be conducted with secondary data and original results can be derived from such work. Using multiple case studies to test specific theories relating to FDI was chosen because the contextual complexity can be captured and the empirical facts can be used in relation to testing the theories. The three MNEs were selected because they can help form a more representative picture due to the fact they are very diverse. After weighing up the advantages and disadvantage of the methods of collecting data, it was found that this paper lends itself better to collecting data from documentary evidence, no matter how much scrutinizing of evidence is involved. Other methods of data collection would have certainly added to this research, but given their disadvantages and the timely nature of this paper, it was considered more appropriate to focus upon one source. In spite of the noted advantages of a quantitative approach, the qualitative methodology was deemed to have a better fit with the nature of this research question after completing the literature review. The depth the aforementioned method allows the researcher to go into in order to answer the research question results in a rich and vigorous study that will allow the reader to fully grasp the situation.

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Chapter 4: FDI and Thailand

This chapter looks at the flow of FDI around the world and the increasing role of developing countries in FDI. A brief overview of world FDI is first presented to set the foundation for the discussion that follows. Thailand is then focused upon specifically, and the development and pattern of FDI there in recent years is presented. Thailand’s policies toward FDI are then examined in order to understand the attitude of the Thai government towards FDI. Current FDI challenges for Thailand are then discussed. Finally, the chapter concludes with a summary.

4.1 FDI Overview

As a result of globalization in the production and consumption of goods and services in recent times, FDI has steeply increased around the world. As FDI spreads, it becomes difficult to separate domestic from foreign firms, and countries that actively encourage FDI will gain from the benefits of globalization (International Finance Corporation 1998).

The spread of global FDI has changed the world’s economic landscape forever. The first wave of global FDI was from 1980-1995, and was the result of the relaxation of regulations by host countries in order to increase FDI inflows. It surged again from 19952000, when firm mergers and acquisitions increased as a result of the Asian financial crisis and due to huge privatizations in South America (Brooks, Fan and Sumulong 2004). World FDI inflows peaked in 2000, and then declined from 2000-2003, before regaining an upward momentum (see figure 2). Global FDI inflows increased by 29% in 2005, to $916 billion, up from an increase of 27% in 2004 (United Nations 2006).

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Figure 2: Global FDI inflows, and by groups of economies 1980-2005 (Billions of Dollars)

Source: UNCTAD based on its FDI/TNC database, cited in United Nations 2006

The FDI investing process requires large amounts of capital, and FDI speculators have a tendency to be the largest world-wide firms (Woods 2001). Specifically, 80% of the world’s total FDI is conducted by the world’s 500 largest firms, who also carry out half of the world’s total trade. Therefore, MNEs control the bulk of the world’s investment and trade, making them very influential players indeed (Rugman and Hodgetts 1995). Estimates predict that the largest MNEs are directly responsible for 4%-7% of world GDP (Woods 2001). Moreover, around 90% of FDI originates from developed countries (Griffin and Pustay 2002).

Recently, developing countries have become more prominent in FDI patterns, and their percentage inflows have increased from 20% in 1978-1980, to 35% in 2003-2005 (see table 2). Developing countries have also had progressive increases in their FDI outflow, which indicates an increased ownership advantage by their own firms. In the interpretation of table 2, there is one important caveat to bear in mind. FDI requires external financing, and some of the financing included in table 2 may be in the form of round tripping. Therefore, the figures may not be entirely representative of actual foreign investment (United Nations 2006).

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Table 2: FDI by Region and selected countries, 1980 – 2005 (%)

Source: UNCTAD based on its FDI/TNC database, cited in United Nations 2006

4.2 FDI in Thailand

Thailand is considered one the best investment locations within Southeast Asia due to its stability which is greatly influenced by the stable monarchy, abundance of cheap labor, encouraging investment policies and its private enterprise economy (Bende-Nabende 1999). The Thai economy grew by 5% during 2006 and forecasts for 2007 are that it will grow by 4.3%. Exports have been increasing with a growth of 4.3% in 2005 and 8.5% in 2006. Imports grew 9% in 2005 and only 1.6% in 2006. The exports and imports have both contributed towards a strengthening economy (World Bank 2007). Foreign direct investment has been one of the prime antecedents behind the development of Thailand. The majority of FDI in Thailand has taken place since the 1980s (see figure 3). Initially, one of the key drivers was the relocation of production from Japan and Taiwan due to growing labor costs and currency appreciation in Japan and Taiwan. By moving to 30

Thailand, Japanese and Taiwanese firms also had better export opportunities for their products. During the 1990s, Thailand was a target for FDI inflows and it ranked the eighth best FDI location in the world (Thomsen and Nicolas 1999).

Figure 3: Thailand Net Private Capital Inflows 1983-2002

Source: Bank of Thailand cited in Tangkitvanich et al, 2004:241

Prior to the 1997 economic crash, Thailand’s economic development was very dynamic with a growth rate of 8% between 1960 and 1996, and FDI was a large contributor to this success (Brimble 2002). The financial crisis did have an adverse effect on the strength of the economy as a whole, largely due to the weakening of the Thai Baht, but the crisis did not hamper inward FDI. Flows of FDI increased after the financial crisis, as investors took advantage of the circumstances and gained control of slowly liquidating domestic firms which Thai firms were previously unwilling to sell. FDI inflows grew by 50% in 1997 and 64% in 1998. This incoming FDI assisted Thailand economically after the financial crisis (Thomsen and Nicolas 1999).

Countries in Southeast Asia as a whole have seen an increase in FDI in recent years, with China being the heavy weight among them. Interestingly, over 50% of the FDI into Southeast Asia originates from developing countries, and most has been from counties within the region. Thailand has seen overall increases in inward FDI, and between 2004 31

and 2005 inward FDI more than doubled, from $1.4 billion to $3.7 billion (United Nations 2006).

Table 3: FDI Inflows 2002-2005 (in Millions of Dollars) 1999-2000 (Annual Average)

2002

2003

2004

2005

Thailand

3 198

947

1 952

1 414

3 687

China

30 104

52 743

53 505

60 630

72 406

Indonesia

1 547

145

-597

1 896

5 260

South-East Asia

22 161

15 774

19 920

25 666

37 136

Asia and Oceania

76 616

96 244

110 489

157 328

199 951

134 670

163 583

175 138

275 032

334 285

495 391

617 732

557 869

710 755

916 277

Developing economies World

Source: United Nations (2006)

Thailand receives FDI from a wide range of countries including Japan, USA, the European Union and surrounding Asian countries. Since the 1970s, Japan has been the single largest investor of FDI in Thailand. Between 1988 and 1990, FDI from Japan accounted for 40-50% of incoming FDI to Thailand, but in more recent years this figure has fallen, which has coincided with the slowdown of the Japanese economy. In recent years, Singapore has increased its FDI to Thailand, with the majority of the investment focusing on finance, petroleum and real estate, arriving by means of loans to affiliated firms. This is significantly different to Japanese FDI, which is mainly in manufacturing.

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Table 4: FDI to Thailand by Country Rank Country Rank/ Year 1st nd

2

3rd th

4

1970-1979

1980-1989

1990-1999

2000-2006

USA

Japan

Japan

Japan

Japan

USA

USA

Singapore

UK

Hong Kong

Hong Kong

UK

Singapore

Taiwan

Singapore

USA

Source: Kirakul (2007)

The automotive sector has been a key target for FDI, mainly from Japanese firms. Real estate did particularly well until the financial crisis, when the bubble burst. There was a marked increase in FDI in financial institutions in 1998, when policy was changed to allow more foreign ownership (see figure 4) (Tangkitvanich et al. 2004). Thailand’s economy has benefited from switching from an import substation to an export driven FDI strategy. Of the total exports, 11.1% have been in computers and parts, 7.57% electrical appliances, 7.1% electrical machinery and parts, 5.5% iron and steels, 4.23% integrated circuits, and 3.3% vehicles and parts (Bank of Thailand 2007). Exports grew by a total of 17% from 2005 to 2006, and export oriented manufacturing has been pushing the figures up (CIA 2007).

Figure 4: Thailand’s FDI Inflows by Sector 1990-2002 (%)

Source: Bank of Thailand cited in Tangkitvanich et al. 2004:248 33

When examining the criteria which determine a country’s suitability for FDI inflows, Thailand marks well. The criteria include investment incentives, economic growth, labor cost, political stability, currency and the exchange rate (Siamwalla, Vajragupta and Vichyanond 1999). For developing countries, India and China place first and second in the FDI confidence index of 2005 (see figure 5). Thailand held twentieth place for two years in this index, 2004 and 2005. Investment in transportation related equipment is particularly drawn to Thailand, where the automotive sector accounts for 16% of the GDP and utilizes 8% of overall Thai labor. Diversification is one of the reasons car makers are coming to Thailand as they hedge against China (Kearney 2005). Developing countries are attracting lots of attention for inward FDI, and when two developing countries feature at the top of the FDI index, it reflects positively on other developing countries.

Figure 5: FDI Confidence Index 2005

Source: Kearney 2005:2

During 2006, FDI in Thailand hit its overall highest rate since the financial crisis, with an increase of 30% since 2005, and FDI in 2006 was 45% of overall investment in Thailand. 34

This growth may not continue, as the confidence of investors in Thailand has slowly been waning. MNEs from Japan and Europe have announced that they will begin to reduce investments in Thailand. Moreover, the Thai Board of Investment received a 60% reduction in 2006 over 2005 in applications for joint ventures in Thailand, which ultimately leads to less new investment in the future (World Bank 2007).

4.3 Thai Government Policy on FDI

Thailand benefited from its geographic location when attracting foreign investors during the Asian boom, and laid down appropriate policies to guide these large inflows of investment (see appendix 1). Investors who export from Thailand are encouraged, and firms face less red tape who do so for the majority of their production. Additionally, they are eligible to own land, be exempt from duties on inputs, benefit from tax holidays and are permitted to locate their operations wherever they choose in the country. On the other hand, those firms who wish to predominantly cater to the domestic market face greater restrictions. Domestic firms are protected to some degree from being taken out of business by foreign competition. When catering to the domestic market, foreigners are not eligible for a majority ownership within a firm and they are forbidden from owning land and working in certain sectors. These FDI policies, based on promoting exports, have generated large exports in areas where Thai firms had little expertise (Thomsen and Nicolas 1999). Developing countries commonly feel the need to protect their home industries from foreign competition while they are growing. Measures put in place by Thailand, to restrict access to some sectors and openly encourage investment in others, has had very specific impacts. One of the problems with placing protectionist measures on home industries is that they are very difficult to remove. Home firms become accustomed to operating under a protective umbrella and they become resistant to change (Woods 2001).

The conduct of FDI in Thailand is defined by two very prominent laws, namely the Foreign Business Act 1999 and the Investment Promotion Act 1977. Both of the acts are overseen by the Board of Investment for Thailand (BOI).

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The Foreign Business Act controls the degree to which foreigners can be involved in business in Thailand. The act allows foreign businesses to conduct business as long as it is not within three forbidden lists. The first list contains sectors where foreigners are barred from entering, and includes rice, animal husbandry, mass media and a number of other resource based areas. The second list contains areas focused on the national security of Thailand, traditional or folk handicrafts, natural resources, art, culture and customs. Foreigners wishing to be involved in these must first obtain written agreement from the cabinet. The third list includes specific areas which the government feels are not suitable for foreign competition and to be eligible to operate in these areas written permission must first be sought from the Director General of the Business Development Department (Tangkitvanich et al. 2004). The minimum total amount of capital a foreigner requires to enter business within the first list is 2 million Baht (32,640 GBP), and 3 million Baht (49,000 GBP) is required for lists two and three. American citizens are exempt from the Foreign Business Act, as they abide by the more favorable 1968 Treaty of Amity and Economic Relations between the Kingdom of Thailand and the United States of America. Americans have the same business rights as Thais, apart from being restricted in conducting business in six specific sectors (BOI 2002).

The Investment Promotions Act 1977 outlines tax and tariff incentives for foreign and domestic investors in Thailand. The act encourages investment in provincial areas of Thailand, and investments in developing areas of the country receive greater benefits than those located in the developed areas (see appendix 2) (BOI 2002). Firms who choose to locate their operations in the most favorable locations can expect full exemption from corporate income tax, favorable import duties and lower business taxes on imported equipment, parts, raw material and machinery (Bende-Nabende 1999). The BOI, through the Investment Promotions Act, uses tax incentives as its main tool to encourage inward FDI. Similarly to other countries, Thailand’s investment authority, the BOI, is tasked with encouraging investment, and as it is not responsible for collecting revenues, it is enthusiastic about giving tax incentives. Tangkitvanich et al. argue that due to the fact that it is difficult to calculate the revenue which is lost through tax incentives, the BOI is

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allowed to continue to use this expensive enticement without being held accountable (Tangkitvanich et al 2004).

4.4 Future Challenges for Thailand

With the presence of FDI, the Thai economy has been able to grow much more than it would have through internal investment alone. However, the proximity of Thailand to China and Vietnam has limited FDI in Thailand, and is one of the main challenges Thailand faces (Thomsen and Nicolas 1999). The competitive advantage Thailand currently has lies in its abundance of cheap labor and engineering capabilities. Developments in Thailand have lead to shortages of specific raw materials, less availability of skilled labor and inadequate infrastructure to deal with future demands (Bende-Nabende 1999). Similar advantages, sometimes at an even lower price, are also available in Vietnam and China, and therefore Thailand has direct competitors very close by who have similar interests.

Thailand has used tax holidays as a means of attracting FDI, but this approach is not cost effective and difficult to withdraw. The firms who benefit from this incentive the most are the larger, more profitable enterprises. Tangkitvanich et al. (2004) argue that tax holidays are not as much of a sweetener to influence firms’ FDI decisions as governments may think. It is argued that the use of tax holidays are used in countries where the infrastructure and qualified labor are sub-standard. If this is the situation, it would be more appropriate to abandon tax holidays and use the income from the tax to develop infrastructure and the workforce. Either way, withdrawing tax holidays and replacing them with incentives is a significant challenge to Thailand.

Focusing on export lead growth through FDI is not always a sustainable strategy for a country. Exports in such cases are commonly reliant on high quality imported parts because of the need to remain competitive in the export market. This reliance on imports adversely affects the balance of payments and the economic reaction to changes in the exchange rate. Moreover, firms which are export focused are not likely to source their

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inputs from the local market, and this prevents potential technology transfer between foreign and local firms. Local firms are therefore prevented from contributing towards the country’s export led growth (Thomsen and Nicolas 1999). During the course of economic growth, developing countries slowly become more apt at bargaining with MNEs (Frank 1980). MNEs located in Thailand need to increase their technology transfer to local firms, which can be achieved by introducing policy which promotes technology transfer between local firms and MNEs and will help to further the potential of the country as a whole and not just the MNEs (Tangkitvanich et al. 2004). However, a balanced approach is needed so as not to spook investors. Countries can no longer expect compliance with policies from MNEs if they do not agree. MNEs are progressively more mobile, and with governments increasingly acting like oligopolists within a region, one country’s gains may be the result of another’s restrictiveness. Governments may find they achieve better results if they work alongside and actively assist MNEs, which may act as a country’s competitive advantage in its own way (Dunning 1997).

Even though the influx of large firms and promises of a prosperous future may sit well with people controlling the purse strings of a country, there will still be a segment of the society who will not fully agree. There is an increasing anti-globalization movement in Southeast Asia that believes FDI can pose economic security threats. The argument is that global capitalism does not always have a positive effect on the indigenous development of a country as a whole and incoming firms do not always have the countries’ interests at heart. MNEs and host governments face criticism from human rights activists about the exploitation of labor, and pro environment groups are against the negative ecological effects permitted by host governments that come as a bi-product of some MNE investment (Dent 2004). It is not sustainable, ethical or just for Thailand to be mistreated just to increase its FDI inflows. Greater controls may lead to less FDI, but the investment which does come in may be better for the country in the long term. Moreover, developing a reputation as a country that cares about and respects its citizens and environment may encourage a different clientele.

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The bloodless coup to oust Prime Minister Thaksin Shinawatra on 19 September 2006, left the country with an interim government until elections can be held, which are expected in December 2007. Power was taken away from the Prime Minister after months of political instability (BBC 2007). Currently, the military lead interim government is forcefully attempting to amend the Foreign Business Act in an effort to make investment in Thailand more restrictive. A large number of foreign investments have been put on hold until after the long awaited elections to bring an elected government into power. Many MNEs, such as Ford and Tesco, are waiting to see what changes the elections bring before they continue to move forward with their plans for Thailand (Asiamoney 2007). The current political instability is making investors reluctant to commit to Thailand during this time of change. Consequently, other countries in the region may benefit from Thailand’s period of uncertainty. Therefore, the quicker the problem can be resolved, the sooner foreign investors can begin to look towards Thailand with optimism and security once more.

4.5 Summary

The evidence presented on FDI and global development highlights that FDI has a profound impact on weaving the global economic landscape of a country. MNEs control the bulk of the world’s investment and FDI in developing countries is becoming increasingly more attractive.

Thailand can be regarded as one of the prime investment destinations in Southeast Asia and FDI has been a fundamental reason behind Thailand’s economic growth. Although the 1997 financial crisis did have an adverse effect on the Thai economy, preferential exchange rates did spur a surge of FDI, which has subsequently helped the Thai economy back to its feet. Japan is the country which provides the largest amount of FDI in Thailand, and over 50% of the total FDI in Thailand originates from developing countries, mostly from within the region.

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The Board of Investment regulates FDI in Thailand and it does so with rules laid down in two acts, namely, The Foreign Business Act 1999 and the Investment Promotions Act 1977. Controls are placed on FDI in certain sectors of the market in an effort to protect local producers. Incentive levels vary depending upon which province inward investors choose to locate themselves, with the less developed areas offering greater benefits.

The export lead FDI strategy which Thailand has pursued in the past has brought significant benefits. However, local producers have not benefited from this because the majority of the components are imported to guarantee quality, which allows the end product to compete in the export market. Thailand faces the challenge of encouraging more technology transfer from MNEs to local firms in order to allow local Thai firms to supply MNEs with inputs for production. Otherwise, Thailand will be left to compete predominantly on the basis of cheap labor with China and Vietnam.

Finally, the present political climate in Thailand is causing some investors to put their Thai investment plans on hold until order is resolved, which will hopefully come after the elections in December 2007.

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Chapter 5: Case Study Analysis

This chapter aims to test whether the theoretical criteria of Dunning’s eclectic paradigm correctly anticipate MNE’s FDI in Thailand. This will be achieved by examining the FDI in Thailand by Tesco, Royal Dutch Shell and Toyota, and analyzing the ownership, location and internalization aspects of their investments. The three firms that will be analyzed are heterogeneous with regard to their motivations for investment, are from different industries, as well as different home countries.

The eclectic paradigm proposes that, if the ownership advantage is present and suitable for internalization, this will lead an MNE to invest in a location where returns are favorable. Each one of the three firms will now be analyzed against the eclectic paradigm, followed by a brief overview for each firm. The chapter will end with an overall discussion and summary of the findings.

5.1 Tesco

In 1998, Tesco, Britain’s largest food retailer, purchased a 75% stake of the thirteen supermarkets which made up the Lotus group from the well connected native Thai Charoen Pokphand Group, and together, they changed the name to Tesco-Lotus. Tesco became the first British retailer to move into Asia when it entered Thailand, and did so shortly after the Asian financial crisis (Dow Jones 1998; Hollinger and Bardacke 1998).

Tesco currently operates in 12 countries, including the UK (see appendix 3). In Thailand, Tesco-Lotus operates a total of 370 stores, with more planned (Tesco 2007). Tesco is very focused on international expansion, with its CEO, Terry Leahy, stating, ‘Our strategy is to take a successful UK firm and make it a world leader in an industry we think will become an international industry’ (Terry Leahy, Tesco CEO, 2002 in Quelch and Bartlett 2006:38).

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5.1.1 Ownership

Tesco’s ownership advantage is its ability to cater to customer needs in a retail setting. Tesco simply knows how to give customers what they want (Andrews et al. 2003). For the first fifty years after Tesco was listed on the London Stock Exchange, they dedicated their work to developing their brand and expanding their UK business by focusing their attention on improving their customers’ shopping trips (Tesco 2007). The knowledge and proficiency Tesco developed through tirelessly competing in the UK since 1919, has resulted in a common understanding of the firm’s mission among the employees. By harnessing this common vision, Tesco feels that when investing abroad, ‘…the main advantage we have is by exporting our culture’ (Terry Leahy, Tesco CEO, 2002 in Quelch and Bartlett 2006:53). Exporting, franchising or licensing would not fully capture the firm’s inherent cultural strengths. ‘World class distributors who have experience in many countries, who have access to large amounts of capital, have knowledge of customers, are likely to win over the potential customer’s mind very easily’ (Tosonboon 2003:78). The Thai consumers were a sitting target for Tesco to apply its successful formula of British retail knowledge and advanced local marketing (Sheridan 2001).

The key to the successful transfer of Tesco’s ownership advantage is its focus on a localization standardization approach, where each market is treated individually in order to cater to social expectations as well as cultural and political differences. Moreover, being a global firm operating in the retail sector, each market entry into a new country increases the scale and scope of its product sourcing to benefit both its domestic and overseas subsidiaries (Coe and Lee 2006). Therefore, Tesco’s move into Thailand benefited the Thai consumer by bringing in products from other countries in which Tesco operates, and in turn these locations benefited from Thailand. Tesco has one of the world’s best distribution networks, and this ownership capability can be utilized and advanced by including more branches (Quelch and Bartlett 2006). Tesco has systems which not only successfully sell goods on the shop floor but also ensure that the supply chain is managed in a way that is mutually beneficial to the supplier and Tesco, creating a shared goal.

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Tesco’s ownership advantage has been refined and grown within a competitive sector in an advanced, developed country. When this strong ownership advantage is transplanted to a developing country, the strategy puts it ahead of the local players. The majority of Tesco’s overseas expansion has been into emerging markets, where it can leverage its ownership advantage more effectively (see appendix 3). Tesco did research before moving into Thailand, and brought with it a tool kit of ownership advantages to deal with competition, which was much less than in its domestic market. Local competitors may have been market orientated, but Tesco was seen as innovative to local consumers because their retail approach was entirely new to the country and this put them in a monopolistic position. Tesco’s ownership advantages were so effective, overwhelmed local firms protested against them because they felt, ‘Asians are exploited by rich westerners.’ However, the stores still remain 98% full (Andrews et al. 2003:300).

At the time Tesco entered Thailand, the Lotus chain of supermarkets was operating at an annual loss of GBP 2 million (Dow Jones 1998). The Charoen Pokphand Group recognized Tesco’s strong ownership advantage and safely gambled when they went into partnership in order to develop their business. Tosonboon (2003) points out that the Chareon Pokphand Group’s ability to run cash and carry stores in Thailand lead other world class distributors to be confident about investing money in Thailand. This was still a risky move, but Tesco’s strong ownership advantage countered the danger of moving into a market during difficult times, as well as the challenge of foreignness.

5.1.2 Location

Thailand fulfilled Tesco’s criteria as a suitable location in which to move because Tesco was able to enter early, the country was relatively stable, Thai people were perceived to have adequate spending power, and there was potential for future growth in the market (Quelch and Bartlett 2006). In 1998, when Tesco did enter Thailand, the 1997 Asian economic crisis had severely hit the Thai economy and the repercussions were being felt. At that point, the British pound was worth 50% more in Thailand than it was before the 1997 Asian economic crisis (Smith and Mandhachitara 1999). Prior to the financial crisis,

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Lotus supermarkets were wholly owned by the Charoen Pokphand Group. However, as a result of the financial crisis, the group, who owned more than 300 firms in Asia, were forced to consolidate their enterprises in order to stay afloat, which lead to them selling Tesco a 75% stake of Lotus supermarkets (Hollinger and Bardacke 1998). Undoubtedly, Tesco’s entry was at a time when overall valuation within Thailand was low, which made the location even more favorable. Tesco did take on huge debts (GBP 89 million) with its investment of GBP 111 million and it did loan the Charoen Pokphand Group GBP 16 million (Dow Jones 1998). Tesco, who were considering various Asian countries for their first Asian investment, opted for Thailand because of the potential they saw and the reduced cost of entry.

Due to increased competition from close rivals in the UK which often resulted in a zero sum game, such as Asda and Sainsbury’s, Tesco decided to look for new customers overseas with the aim of having more foreign than domestic retail space. Tesco was able to invest heavily in Thailand and other foreign countries because of financial strength generated in the UK (Quelch and Bartlett 2006).

Tesco’s overseas expansion in Thailand was an effort to reach more customers, and with Thailand being an emerging market, there was a possibility of better future prospects, although the economic situation at the time of entry was sub-optimal. Within Tesco’s Annual Review (Tesco 2007:2), Tesco openly states that its expansion was an effort to source, ‘…new customers, new markets, new products and new opportunities’, and because of this expansion, Tesco is now able to reach two billion customers worldwide. When moving into a foreign market, Tesco does not use its own staff operationally; human resources are relied upon in the native country for all of its operations (Quelch and Bartlett 2006). When using this approach there are sometimes human resource limitations which prevent market entry, but this was not the case in Thailand. This strategy also applies for suppliers, who Tesco prefers to also source locally.

For a firm thinking of expanding within the Asian region, Thailand is a very central point from which to control other Asian operations (Thomsen and Nicolas 1999). Shortly after

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Tesco invested in Thailand for the first time, it announced that Thailand would become the base from which it would run all of its future Asian operations (Business Day 1999). Its Asian operations have subsequently increased to include South Korea, Malaysia, Japan and China (Tesco 2007). Therefore, Thailand’s location advantage has had the dual benefit of access to a new market, as well as a base to control operations regionally.

5.1.3 Internalization

Tesco’s formula is suitable for internalization and warrants a physical presence in Thailand. Wholly owning operations in Thailand was not an option because of restrictions put in place by the Thai government, which limit foreign ownership. However, Tesco did ensure that even though they were in a joint venture with a local partner, they did maintain managerial control over operations (Hollinger and Bardacke 1998). Franchising could have been a possibility, but that would not have fully infused Tesco’s successful corporate culture into Thailand. Exporting would not have released the full potential Tesco could bring, and licensing would have been inappropriate for a committed MNE looking for roads into Asia. Moreover, the rapid expansion Tesco undertook may not have been aggressive enough if it was trusted to a third party, and Tesco was not accustomed to this way of operating its business. Therefore, internalization was appropriate.

Realizing the cultural divide was too large for Tesco’s management to bridge alone when moving into Thailand, autonomy was given to local managers. Tesco would only have the capacity to fully exploit the location and ownership advantage simultaneously if its own systems were used, and Tesco achieved this by using experienced Tesco staff to train local employees. Tesco staff trainers were tasked with bringing Tesco’s corporate values to the Thai employees, at which time the local staff were given ownership (Quelch and Bartlett 2006).

Tesco was fortunate to team up with one of Thailand’s most influential and best connected firms, the Charoen Pokphand Group. Because of this anchor in Asia, Tesco could

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concentrate on what it did best, with a well equipped intermediary by its side to help with their local experience. During one of the first meetings between the new partners, both sides did not see eye to eye because Tesco’s western outlook asked for demanding contracts to be signed on all issues, whereas the Charoen Pokhand Group felt verbal agreements were enough (Sheridan 2001). Therefore, the partnership was not a perfect fit initially, and Tesco could have avoided an early clash of cultures if they were legally allowed to fully internalize and go it alone, but they may not have been enlightened to local practices, a lesson that was better to learn sooner rather than later.

Having a successful business model but a reduced number of new customers in the UK, Tesco’s move into Thailand was to cash in on its already fine tuned retail knowledge. Profitability may have been sacrificed if Tesco would have opted for more of a back seat role with another partner, but given Tesco’s confidence and strong financial position, it had the capability not only to have an overseas presence, but also to manage and build on it.

For Tesco to integrate Thailand within its other operations, it is important for the internalization of activities to fall under the responsibility of Tesco. By building a global distribution and supply chain, Tesco increases its reach with every country it enters. When Tesco moved into Thailand, it set up a purchasing center which was charged with sourcing and distributing goods to purchasing centers in Hong Kong and Central Europe (Xinhua News Agency 2000). Only by internalizing operations in Thailand could it securely link it to its network, reduce transaction costs, and subsequently control and spread its operations throughout Asia from its regional headquarters in Thailand. There were many benefits from internalizing Tesco’s ownership advantage in Thailand.

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5.1.4 Overview

The pattern of Tesco’s actively managed FDI in Thailand falls in line with the O, L and I of the eclectic paradigm. Tesco’s motivation for an FDI move stemmed from a market seeking drive, which was a good match for moving into an emerging market such as Thailand. Tacit knowledge is a fundamental ownership advantage Tesco has which is difficult to export and superior when taken to a developing country, therefore it was sensible to internalize in order to lever Tesco’s Thailand strategy.

Although there is a convenient fit with the eclectic paradigm, there are other substantial reasons to explain Tesco’s FDI in Thailand. The timing of the entry, shortly after the financial crisis, and the need for the Charoen Pokphand Group to generate funds quickly, led to a unique opportunity and a currency imbalance in Tesco’s favor. The purchasing power of Thailand as a location was sub-optimal at the time of entry and Tesco took a risk, hoping for improvements. If a similar offer had come from another Asian country at that time, Tesco may have invested elsewhere. Tesco did however, join forces with a well connected partner who could provide security and guidance for their first attempt in Asia, which may have added security to their FDI decision.

5.2 Royal Dutch Shell

Royal Dutch Shell (Shell) is a joint venture between two firms, Shell Transport (UK) and Royal Dutch (Netherlands). Now the third largest oil and gas firm (Rugman 2005), Shell has sales which outdo the gross domestic product of a number of countries (Frynas 2003).

‘Our business strategy is focused on finding and producing the resources to help meet the world’s growing demand for energy, and doing so in a responsible way,’ Jorma Ollila, Shell Chairman (in Shell 2006b:2). Shell delivered its very first shipment of fuel to Thailand in 1892 (see appendix 8), the same year it conducted FDI to construct the country’s first oil depots (Shell 2007). Shell pursues natural resources globally.

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5.2.1 Ownership

Shell’s ownership advantage is its ability to develop and use technology in energy sourcing and production. In addition, it has complimentary financial and project management capabilities to successfully manage large projects involving oil and gas (Shell 2006a). Because of Shell’s capabilities and breadth, the firm is powerful and skilled enough to be relied on to provide complete energy solutions for a given country. Countries can then negotiate the access to natural resources with one firm, safely knowing that it has total expertise in the area.

Embarking on an oil or gas project is a huge commitment for a firm and a country. Prior to beginning a project, the risks and potential rewards are analyzed in depth to calculate the economic viability. Energy firms are important financers of countries, and this is especially so in developing countries such as Thailand. Moreover, the sourcing of energy and subsequent delivery of that energy to the marketplace is time consuming and the benefits from the initial commitment take tens of years to realize. In Thailand, oil exploration licenses are valid for 20 years, and in return the firm pays 50% income tax on the sourced fuel (Pongsiri 2005). Shell, with its 108,000 employees and operations in more than 130 countries, has both the physical and financial resources to embark on such large commitments and operate successfully (Shell 2006a). This capacity allows Shell to productively operate in some of the world’s toughest markets.

Oil firms are usually forced to operate locally because they need to be close to supplies, wherever they may be. Shell has been operating over 100 years, and in order to maintain its worldwide position within the market, it is has been forced to expand globally (Rugman 2005). As a part of this ever increasing global expansion and experience in a vast number of countries, Shell has been able to develop its knowledge-based assets internally, which leads to it taking optimum advantage of natural resources. Such intangible capabilities are priceless when entering new markets. Shell’s reputation within the sector is strong and this is bolstered by the fact that the firm has a very recognizable brand image, partly due to the 45,000 service stations worldwide (Shell 2006a).

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Efficiency and know how have been built upon during Shell’s long history. This experience, which has developed around the globe, is seen as advanced when bought into developing Thailand. Shell has a strong ownership advantage, backed by solid finances and a respectable reputation, and this acts as a barrier against local competition in Thailand.

5.2.2 Location

‘Once you think you know Southeast Asia, you’ve just made your first mistake,’ Castrol International Executive (in Andrews et al. 2003:1).

Thailand is dependent on imports to cater to its growing thirst for oil and gas. There has always been a need to import oil into Thailand, and surges in development during the late 1990’s lead to the need to also import gas. As this trend rises, it affects fiscal stability (see appendix 7). Thailand has identified large reserves of gas and this is increasingly being utilized (Energy Information Administration 2007). The growing economy and increasing use of energy, coupled with the availability of natural resources, provides opportunities for energy firms to establish operations knowing that the demand is present and increasing.

The market for oil and gas are significantly different. Oil can be used domestically or transported to other countries, gas, however, differs because it is difficult to contain, store and transport. The production of gas in a given country is therefore dependent on the immediate needs of the local market (Pongsiri 2005). The need for gas in Thailand is strong and realizing that the gas reserves are greater than oil, there has been a move towards converting cars to use gas for fuel. Therefore, firms such as Shell, which produce gas in Thailand, are doing so to serve the local market, and the local market in Thailand is good.

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Governments of emerging markets face the challenge of a rapidly moving economy. Oil and gas are needed to help fuel the growth of the country and the more independent the country can be at sourcing, the greater security and control the country has. MNEs located in Thailand source and supply the majority of Thailand’s oil and gas (Energy Information Administration 2007). Petrochemicals have been one of the main areas which have helped the economic recovery of the region (Andrews et al. 2003). The government is therefore heavily reliant on oil and gas firms because the country does not have the inherent capacity to extract such resources. Firms are being welcomed into Thailand to help the country utilize its natural resources. Due to these circumstances, the oil firms are satisfied and the government is equally happy (Abraham 2000).

Thailand has numerous surrounding countries with abundant oil and gas resources, such as Indonesia, Brunei and Malaysia, and sometimes corporate decision makers may have to select a country from a number of possibilities in a region. Thailand does have the advantage of being the most liberal and open minded location of all its neighbors. Moreover, within Thailand, schools, hospitals and transportation possibilities, especially air, are above average for the region. For firms such as Shell, who are thinking of a location to station the expatriate community in Asia, Thailand is very difficult to beat (Andrews et al.2003).

Due to the nature of Shell’s business, global sourcing of natural resources is a fundamental activity. Shell conducts resource seeking FDI in Thailand and it also benefits from the efficiency of the labor, as it is less costly than in its home countries (UK and Holland). By conducting FDI in Thailand, Shell is also close to the rich oil fields of Brunei and Indonesia, and clustering assets and staff can assist in capitalizing on the region. Investing in Thailand allows Shell to avoid serving the market from other countries, which incurs large transportation costs (Andrews et al. 2003). As early as 1993, Shell was conducting more business overseas than in its home countries (The Wall Street Journal 1993). Thailand is one of the countries which offer a location advantage to Shell.

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5.2.3 Internalization

‘The objectives of the Shell Group are to engage efficiently, responsibly and profitably in oil, gas and chemicals and other selected businesses…’ (Shell 2005:3).

There is suitable synergy between the location and ownership advantage in Shell’s case in Thailand to warrant internalization. By internalizing its operations in Thailand, Shell does its utmost to protect its technology and know-how in a bid to contain its upper hand and achieve its firm objectives. Czinkota et al. (2005) point out that firms often have to move their technology, know-how and capital in order to chase unique factors; oil and gas are being pursued by Shell in Thailand.

Shell’s heavy emphasis on technology and innovation is at the heart of its business framework (Shell 2006a) and the firm searches for ways to leverage its technology (Rugman 2005). By conducting operations itself, Shell is utilizing and profiting from its in-house advancement activities which are aimed at increasing efficiency and advancing knowledge. Moreover, working at arms length with a less resourced partner could cause not only greater transaction costs, but it could unnecessarily upset Shell’s seamless systems.

In order to conduct FDI in Thailand and extract natural resources, Shell has to agree to a set of principles in order to obtain an operating license for a set period of time. Time is literally money in the oil and gas industry because when refineries or drilling operations are not running at full capacity, the firm loses money. Shell’s size and experience in the industry allows it to quickly set up an operation and run it at maximum capacity. There is a risk of creating a weak link in the supply chain by fragmenting the operation and subcontracting out to another firm, as the second firm may not have the same inherent desire as Shell to maintain work motivation and urgency. Shell consciously works against the clock to maximize output from natural resources, and it has the backing of the entire firm.

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Shell feels their employees are the reason for the success of the firm. ‘Without people, we can make all these wonderful plans, but we can’t execute them’ (Walter van de Vijver – Shell CEO in Poruban 2003:39). In order to get the most out of their staff and motivate them to work to the best of their ability, Shell takes the individual professional development needs of all of their employees very seriously (Poruban 2003). With well trained staff all working towards a common aim, Shell can work very efficiently internally with a high degree of control, without being in fear of divulging firm held competitive knowledge. Leaking such knowledge could negatively affect Shell as it engages in strategic asset seeking in the vicinity. Internalizing operations effectively helps in the broader sense when the firm is building a regional network. Through internalizing operations in Thailand and throughout Asia, Shell can benefit from economies of scope and scale.

5.2.4 Overview

Shell holds an ownership advantage which it successfully internalizes, and Thailand is a location which has natural resources that Shell desires. Therefore, Shell’s FDI decision is theoretically consistent with the triad of OLI factors because it possesses each one to warrant its investment.

By heavily focusing on new technology and innovation, Shell is adding to its ownership advantage. These advancements are then used globally to gain the greatest returns. By internalizing this process, Shell is protecting home grown knowledge and developing its human resource capabilities. Moreover, by spreading operations globally, economies of scale and scope can be capitalized upon. The foreignness disadvantage is then proportionally reduced in each new country it enters.

Thailand and other developing countries have an increasing thirst for energy as their economies evolve. Competencies are not present domestically to extract energy resources. Shell, with its experience and confidence, can build its own business and aid Thailand by

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accessing its natural resources. Within Thailand, Shell shows signs of resource, market, and strategic asset seeking behaviors.

5.3 Toyota

With the aim of holding 10% of the world’s automotive sector by the early 2010s, Japan’s largest car maker identified that it relied too heavily on domestic production and has concentrated on developing its overseas manufacturing abilities. In order to achieve this, Toyota wants to produce cars where, or very close to where, they are purchased (Brush 2005).

In 1956, the year Toyota Motor Thailand was established, a major hurdle for the firm was to persuade Thai people to purchase cars from a Japanese manufacturer. The term ‘Thailanization’ was created to mean precisely this. Toyota wanted to create a kind of connection with people, so they would buy their cars. As a result of this strategy, Toyota is now the largest automobile manufacturer in Thailand (Petison and Johri 2006). Toyota Motor Thailand currently produces 240,000 vehicles per year, employs 5,000 staff and has 238 showrooms throughout the country (Toyota Motor Thailand 2007).

5.3.1 Ownership

Toyota’s ownership advantage stems from its design and production of automobiles with high levels of quality control. The production process Toyota has is second to none. The foundation for Toyota’s ownership advantage was initially developed within the confines of Japan, with its highly educated and skilled labor pool, quality conscious customers and solid supply base. Complimentary to this, Toyota is an extremely capable firm when outsourcing production to suppliers with whom Toyota is focused on developing long term commitments (Rugman 2005).

Progressively, Toyota has built a reputation for quality, and this intangible asset provides Toyota with an advantage overseas and at home. Toyota’s guiding principles (see

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appendix 4) have successfully crossed borders and helped build defenses against competition. ‘There’s a simple explanation for why Toyota’s success is hard to replicate. Their system drives a universal focus on ground-level innovation, to the point that the pursuit of perfection is part of who they are, not just what they do’ (May 2007). A valued corporate culture exists throughout Toyota, where respect for people and continued improvement is central. By never being satisfied with where they are and always wanting to improve, Toyota strives to create new limits (Toyota 2007).

When considering technical capabilities as the main basis of overall competitiveness, Toyota is a research and development intense firm (Toyota 2006). Toyota’s end products are aimed at being able to compete globally and because of global competition, Toyota is able to benefit from economies of scale.

Unlike local country rivals China and Malaysia, Thailand does not currently have a national automobile producer (Foster 2006). Therefore, in Thailand Toyota does not have to compete with a domestic manufacturer. It has an advantage over its competitors, GM and Ford, because Toyota cars are sold at lower prices, consume less fuel, and their resale prices are higher. The ownership advantage contributes towards the fact that, although their cars sell for a lower price, they make a greater profit. Toyota has an average profit of USD1000 on each vehicle sold, as compared to GM’s profit of just USD300 (Rugman 2005). As more profit is made per car sold than their competitors, Toyota is in possession of capital which can re-fuel its ownership advantage to ensure it stays ahead. The strength of the Toyota’s ownership advantage gives it confidence to invest overseas.

5.3.2 Location

‘Open the window over there and take a look. It’s a big world out there’ Sakichi Toyoda – Founder of Toyota (in Hino 2006).

The Thai Board of Investment (BOI) chose the automobile industry as one of the first areas for promotion because more than 20,000 parts are needed to make a car and there

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are lots of upstream possibilities which could benefit Thai industries (Tangkitvanich et al. 2004). When Toyota first entered Thailand, its focus was only on importing its cars from Japan. The BOI then offered Toyota preferential treatment and allowed them to set up and wholly own a production facility within the country, which became Toyota’s first firm overseas (Toyota Motor Thailand 2007). Therefore, Toyota was firstly market seeking in Thailand, but by setting up a production facility they benefited from cheaper labor in Thailand than Japan, and showed signs of efficiency seeking behavior. Labor is currently still a draw for car manufacturers in Thailand, and BMW also understand this well, as they refer to the Thais as fastidious, cheap, educated and friendly (The Economist 2000).

Production in Thailand is currently more than local Thai sales. Approximately 60% of the vehicles Toyota produces in Thailand are sold domestically, with the remainders exported. Thailand is the largest production center in Asia after Japan (Varghese 2005) and Toyota Motor Thailand believes its success in Thailand can be put down to the Thai customer base, which has remained loyal and has placed total faith in Toyota automobiles (Toyota Motor Thailand 2007). Thailand’s overall automobile production has been rising, apart from a brief dip between 1997 and 1998, due to the Asian financial crisis (see appendix 5). Compared with one of its main competitors, China, Thailand offers incoming firms greater freedom, an export focused policy, a larger foreign ownership allowance and a suitable supplier base (Foster 2006). It is no surprise that Thailand, also referred to as, ‘The Detroit of Asia,’ is the regional automotive hub (Ngui 2003).

Toyota is currently not producing in every country where it sells vehicles, and this shortfall is mainly accounted for with its surplus of production in Japan. Cars are heavy to transport and can be heavily taxed when imported into a given country, but a substantial customer base can warrant production in a given country. Production of Toyotas in the Asian region, excluding Japan, is growing, and sales in Asia have increased more than in any other region (see appendix 6).

There are reasonable arguments to suggest that Toyota, with its deep Japanese roots, may find working within Thailand less troublesome than other countries. Both countries are

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predominantly Buddhist, collectivist societies with an emphasized respect system, and place great value on face. The cultural divide is shorter between Thailand and Japan than some other countries, particularly western countries. These similarities may help oil the wheels of business and create common understandings. Moreover, Thailand’s economic position as an emerging market with sea ports and land borders with other Asian countries adds to the benefits of its location.

Not only is Thailand a suitable location in which Toyota can add value to its business through internalizing its ownership advantage and successfully cater to the market, but it also plays a significant role regionally as well. Toyota now uses Thailand as their training location for all of their staff in the region. Toyota Thailand is seen as a good firm example, and the staff turnover there at the moment is zero (Jaiimsen 2006). Thailand is geographically central within Asia and prices are comparatively low, especially when compared to Japan.

5.3.3 Internalization

Toyota invests heavily in research and development to advance its technological abilities (Toyota 2006). These technological ownership advantages are relied upon heavily and are used to set itself apart from competitors in the marketplace. Toyota does use suppliers to provide components for its vehicles, but the assembly is always undertaken by Toyota itself. By limiting the involvement of third parties, Toyota can better control the quality of the end product.

Quality control is one area which Toyota pins a great deal of importance, and it is believed that regardless of where Toyota vehicles are produced, they will all measure up to the same high quality standards. Consistency is key, and because of this, Toyota refuses to place labels on their vehicles stating, ‘Made in a specific country,’ and instead Toyota place, ‘Made by Toyota,’ labels on their vehicles (Ina 2007). Toyota can prevent its ownership value from diminishing by internalizing their ownership advantage and designing and assembling their vehicles themselves. If Toyota did contract out the

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production of its vehicles to a third party, it is less likely that they would be able to build on their ownership advantage so successfully. Toyota’s ownership advantage is linked with its ability to internalize, and there is a learning cycle within the firm which advances Toyota’s overall capabilities.

There are certainly benefits associated with locating Toyota in Thailand, however it is undeniable that the inherent technological capabilities of the Japanese are much greater when compared to the Thais. Thailand does have labor advantages, mainly in the cost of labor, but it struggles to produce a sufficient quantity of engineers, researchers and highly skilled workers (Ngui 2003). Due to its size and experience, Toyota can account for the deficiencies in labor locally by training staff internally.

Although Toyota’s parts suppliers may be independent, Toyota is aware that its cars are products of a wide number of suppliers, and the quality level of the cars is largely influenced by the care and attention the suppliers have in their work as well. ‘Cars are not built by automotive firms alone. First-tier suppliers, in particular, must be partners in research. We don’t just buy things from them. We have them make things for us.’ (Kiichiro Toyoda in Hino 2006:9). There are limitations to what Toyota can internalize. Those goods which are outsourced are treated with the same amount of care as those manufactured in house. Staff at Toyota build close relationships with suppliers, involve them and work with them for mutual benefit.

Toyota must have high levels of control to ensure that quality standards are met and this can only be achieved by internalizing the important elements of its business. Local firms in Thailand may have fewer incentives to continually increase quality as they may only be concerned about their reputations locally, unlike Toyota who is working on a global stage. Control also helps in preventing unwanted technology transfer, which is an important issue in Thailand because intellectual property rights are not as certain as they are in Japan. It is therefore advantageous for Toyota to internalize its ownership advantage in order to protect and develop itself.

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5.3.4 Overview

There is demand for motor vehicles in Thailand, but this is not catered to by a domestic firm. By investing early, and receiving preferential treatment from the Thai government, Toyota has been able to develop its reputation and resources, suitably serve the market, and export surplus cars overseas. Toyota has conducted market and efficiency seeking FDI in Thailand.

The culturally similar Asian connection helps business cohesion between the two countries. Japan benefits from Thailand’s geographic location in terms of its central Asian position. However, intellectual property rights are not as controlled in Thailand as they are in Japan, and through internalization Toyota can prevent leakages, as Toyota can securely monitor internal activities, which is not the case in the general market.

Toyota has built a reputation as a quality vehicle producer by heavily investing in its research, development and production processes. It is critical that this intangible asset is guarded and built upon for the firm to remain competitive. By internalizing its ownership advantage, Toyota remains in control. Moreover, Toyota’s ownership advantage and its internalization are interlinked, and only when they operate side by side can they filter into each other to positively influence internal knowledge advances in the future. What Toyota can not fully internalize, they work hard to monitor, in order to ensure the highest quality standards. By benefiting from internalizing its ownership advantage in Thailand, Toyota’s FDI in Thailand is consistent with the eclectic paradigm.

5.4 Discussion and Summary

Each one of the firms analyzed fulfills the criteria to warrant an FDI move according to the rules of the eclectic paradigm. Additionally, all of the firms analyzed have subsequently been successful since their initial FDI in Thailand. Each one of the firms is motivated by different seeking behaviors, which emphasizes that MNEs do not only invest in Thailand to benefit from its lower costs in labor.

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All three firms have an overwhelming ownership advantage which can be effectively leveraged globally. Within the region, Thailand appears to be an optimum location for controlling regional operations. Tesco, for example, controls its Asian operations from its Bangkok headquarters, and FDI in Thailand could have been motivated by establishing a controlling position for future expansion. Proximity, as part of a long term strategy to access other sources or markets, is not fully considered in the eclectic paradigm, as it solely focuses on the immediate investment.

The analysis has shown that all three MNEs built their ownership advantages in a developed country before transporting it to Thailand. Strong internalization is a trait that is common among the three MNEs and this could be because their ownership advantage is so lucrative they do not wish to allow it to seep out. With growing competition, being strong in the internalization aspect of the OLI may be an area they are forced to concentrate on in order to retain their might over rivals. Furthermore, all of the MNEs are dependent on internalization to feed their ownership advantage, which is heavily reliant on internal knowledge generation. Therefore, internalization is an area where all of the MNEs are especially capable, and is an ingredient which is essential for current and future success.

In all cases, investment from each MNE was progressive, backed by solid finances and an established brand image. All of the MNEs tested the water before investing further. It seems that as knowledge was generated about the location, further commitments were made based on gained assurance and security from understanding the market. In all three cases the MNEs have made a concrete investment in the location and placed faith in the Thai government.

In addition to the similarities between the MNE’s investments, the analysis also found deep divides between the actions of the MNEs with regard to the three elements of the eclectic paradigm. Even though all of the MNEs invested in Thailand, each firm chose a different location within the country based on the purpose of their FDI. Different zones within the country offer different levels of incentives and each MNE benefited differently

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according to the zone chosen (see appendix 2). Tesco preferred the urban environment, Toyota opted for the area outside the city, and Shell used coastal and sea areas. The location the MNE chose corresponded with the seeking behavior (i.e. efficiency, strategic asset, market and resource seeking) which motivated the FDI. Each MNE exported different levels of its production from Thailand, and also relied on imports to differing degrees.

Although the eclectic paradigm does suitably provide three main factors which positively affect FDI, the previous analysis has found additional motivators for investment which the eclectic paradigm does not include. In the case of Tesco, the timing of the investment after the Asian financial crisis substantially decreased Asian values, which made it an optimum time to invest. Also, Tesco had an experienced, but needy partner ready to hold Tesco’s corporate hand in their first venture in Asia. Toyota received preferential investment treatment from the Thai government, and the cultural gap was also favorable. Shell brought itself closer to the rich oil fields of Brunei and Indonesia with its investment in Thailand. It is questionable whether the investment would have taken place in their absence.

Toyota chose not to internalize all of its operations and some of its components are manufactured by suppliers in Thailand. These suppliers are very important in the production process and Toyota works closely with them which makes them feel as though they are part of the team, in an effort to effectively control their actions. Similarly, Tesco formed a joint venture, but ensured that they had ultimate control of the day to day operations, embracing everything within their realm. Shell, on the other hand, took full control of its operations in Thailand and formed water tight internalization in order to keep everything in house. Internalization is fundamental in all three cases, however each firm chose to go about it in their own way.

Tesco and Toyota have their largest markets situated in their home countries, whereas Shell does not. Tesco’s ownership advantage is symbolically British and Toyota’s is heavily Japanese, whereas Shell is more global and not specifically pinned to any given

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country. Toyota and Tesco are known for the quality which they can offer as a firm, and this is heavily associated with the esteemed reputations of their home countries. It is questionable whether all three of the MNEs would have been as successful if they would have been from less reputable home countries to the Thai people. The eclectic paradigm does not manage to capture this point, as full focus is on the MNE and not its home country.

In the context of the three MNEs analyzed, the eclectic paradigm does not sufficiently cover the cultural and geographic distance between Thailand and the home country of the MNE. As was previously discussed, Japan is the largest conductor of inward FDI into Thailand and Japan also happens to be one of the closest developed countries to Thailand. Overall proximity to the country of investment, in a multitude of respects, may increase the ease of the investment and later success. Moreover, once a country such as Japan, has built a good reputation on a country level with Thailand, Thai firms and the Thai government may be more willing to deal with firms from that country because there is an already established relationship and trust.

It has been found that each firm progressively invested in Thailand. However, if the firms were confident about their FDI in Thailand, why did they not heavily strike initially instead of easing their way in? This highlights that the MNEs had more potential investment power than they displayed in their initial investments. This suggests that there were still degrees of uncertainty, which the eclectic paradigm did not cover, that lead the MNEs to commit their FDI in Thailand progressively, depending on initial results.

The eclectic paradigm was conceptualized within the context of developed countries investing in other developed countries. When developed countries invest in developing countries, the ownership advantage, due to the country they are coming from, is so overwhelming that it seems to be much more advanced than the capabilities of the local firms. In Thailand, such incoming firms arrive with built up momentum powerful enough to penetrate the market quickly and with enough experience that they can pre-empt the

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future needs of the market. The ownership advantage an incoming firm holds is judged differently depending on the stage of development in the country being entered.

Despite its highlighted shortcomings, the eclectic paradigm does recognize elements within its framework which are of prime importance to consider when conducting FDI. In the case of Tesco, Toyota Motor Thailand and Royal Dutch Shell, fulfilling the OLI criteria did ensure that the firms were capable of dealing with the challenges of foreignness.

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Chapter 6: Conclusion

This chapter aims to sum up and tie together the findings from this study, as well as highlight the limitations of the research. Also, based on the findings of this study, possibilities for further research will be considered.

6.1 Conclusion

Returning to the question posed at the beginning of this study, it is now possible to state that conventional FDI theories are not powerful enough to explain why MNEs conduct FDI in Thailand all of the time. Although the theories do give justification for some of the reasons, they do not manage to sufficiently capture all of the ‘whys’, all of the time, for the MNEs analyzed.

After investigating the suitability of the strategic behavior, product life cycle, industrial organization, internalization and eclectic paradigm in the literature review, it was decided to focus on the eclectic paradigm for the analysis because it offered a more holistic analysis. However, findings from this study suggest that the eclectic paradigm does not offer a one stop explanation as to why MNEs conduct FDI in Thailand, as other factors have been found which effect the FDI decisions of MNEs.

Following are conclusions that can be drawn from the present study. All of the theories suffer from the fact that they were not conceptualized with FDI in developing countries in mind. Currently, as Thailand develops and grows, its thirst increases for such things as energy, cars and retail. MNEs with vision, who perceive Thailand as a large future consumer, are motivated to conduct FDI so as to establish themselves and prepare for the potential of the market. Even though some of the conditions, such as the Location aspect of the eclectic paradigm, may not be at an optimum level at the time of entry, investments are made based on anticipated growth potential for years to come. Emerging markets, such as Thailand, inevitably have a higher possibility of future rewards and therefore the growth potential may offset the possible shortcomings in any of the OLI variables. There

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may be a higher degree of risk now, but MNEs sometimes invest based on anticipated future rewards.

Long term strategies of MNEs are not taken into consideration within any of the theories. As Asia rapidly develops, firms are vying for a foothold in a region that could be a high priority for all MNEs in the future. Furthermore, MNEs fragment their operations globally and although one given location does not meet all of an MNE’s needs collectively, strength is gained from the combination, so an MNE may invest in different locations for different reasons (Madhok and Phene 2003). MNEs moving into Thailand may be excited about the country’s potential, but more importantly, the Asian region is a major growth area for MNEs in the future, and Thailand provides an ideal platform from which to execute an Asian expansion strategy.

Undeniably, ownership advantage is the one aspect that provides the firm confidence to invest overseas, and credit must be given to the eclectic paradigm for recognizing this importance. However, because ownership advantage is derived from its relative strength over the firms in the host country, advantages of incoming firms can also be said to be in the level of an MNE’s home country (Madhok and Phene 2003). Having a stronger capital foundation, more advanced technology, focused research, development and tuned management skills, MNEs from developed countries entering Thailand have a country ownership advantage (Panandond and Zeithaml 1998). It was found that FDI conducted in Thailand by firms from developed countries have favorable home attributes, developed in a more advanced economy. When this is transplanted to Thailand, it is advanced when compared to Thai development, and subsequently desired and capable of generating income. The country advantage was not considered as a reason why MNEs conduct FDI in Thailand by any of the FDI theories covered, but was found to be influential.

The results of the investigation highlight that the eclectic paradigm is able to anticipate what is internally needed from a firm’s standpoint to transition operations across borders and counter the foreignness disadvantage. It does also explain the value adding FDI moves into Thailand in some instances. But, the eclectic paradigm does not state what

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should specifically be analyzed and what priority should be given to each factor, and on the other hand its explanatory variables are so broad that its predictive value is small. Each one of the OLI variables has a differing level of importance for each firm, and in some situations other factors can counter the OLI results. This study has shown that government policy, favorable exchange rates, weak market conditions, cultural similarities, geographic proximity, profitability, availability of partners, favorable government incentives and future potential of the region play a substantial role when judging why MNEs conduct FDI in Thailand.

Perhaps the fundamental flaw of the eclectic paradigm, with regard to judging why firms conduct FDI in Thailand, is that it does not incorporate the anticipated demand level the MNE will face there (Grosse 2003). This is a mistake if the FDI is motivated by a market seeking reason for investment. Firms such as Tesco, Toyota Motor Thailand and Royal Dutch Shell may find that they have the capacity and ability to internalize their ownership advantage in Thailand as a location of choice, but if people do not want to buy their products, the FDI will consequently be fruitless. After all, the possible profitability of one location over another, due to the anticipated demand in the market, equals better FDI performance results, which ultimately justify the decision to invest overseas.

These findings are significant because the results have gone some way towards enhancing our understanding of the suitability of applying theories on FDI to developing countries and emerging markets. Taken together, these findings illustrate that theories on FDI are not fully applicable in all settings, therefore showing that context must be greatly considered when theoretically mirroring an MNE’s FDI moves. This enhances our understanding of the shortcomings of the theoretical tools and highlights that they are not useful in all situations. This point is particularly noteworthy to those in Thailand who may have been using theories as guidelines to explain what leads MNEs to FDI in their country, so wider relevance could be taken from the results. Unfortunately, the analyzed theories do not provide all of the answers, and it would be somewhat optimistic to expect them to cover all of the gaps. It must be noted that some of the gaps in the theories are

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equally applicable to developed countries, as well as developing countries. However, until more robust theories have been uncovered, their importance should not be discarded.

6.2 Limitations

A number of important limitations need to be considered. First, with a small sample size caution must be applied, as the findings may not be representative and transferable to other MNEs. Second, the study has only examined MNEs that come from developed countries in the Western world. Therefore, those firms may have similar traits and choose to behave in similar ways. Third, the time and word constrains of the study only permitted the researcher to dig to certain depth. Fourth, theories were only examined in terms of their usefulness to explain MNE investment in one country. Perhaps by using more countries, contrasts could be drawn between the applicability of theories with different MNEs, as well as countries. Fifth, secondary data did prove suitable for the study, however the validity of such sources cannot always be clarified and there is the chance that subjectivity could have blurred other researchers’ findings. Sixth, the study investigated the FDI of firms into Thailand, but this initial investment was not conducted recently, therefore the results are not an up to the minute perspective. Finally, the researcher was limited to reading the resources in English only, and could not use some materials found in the Thai language.

6.3 Areas for Further Study

Based on the findings of this investigation, other avenues for further investigation have been identified. More work should be conducted into the suitability of FDI theories in other developing countries to determine the usefulness of the theories in different settings. It would be beneficial in such studies to include MNEs from developing countries to see if they behave in a similar way to their developed counterparts. Additionally, using firms that have decided to invest very recently may add to the value of the study.

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It would be interesting to the assess the effects of market demand on an MNE’s decision to conduct FDI in a given country to determine the weight a firm places on the anticipated demand when conducting FDI. Research following this track would be substantially benefited by using primary data collected with the co-operation of the MNEs being analyzed. Using this different methodological approach, where the results are testable, would be beneficial.

Further research might explore samples of MNEs from an array of different home countries to determine if MNEs from certain countries, per se, have inherent ownership advantages over other countries when they invest overseas.

This generated knowledge will then contribute towards establishing new theories which will have the power to explain FDI into all countries.

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Appendix 1

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Thailand: Major Developments in the FDI Policy Regime Period State capitalism (1940s-1950s) Import substitution (1958-71)

Export promotion (1972-92)

Promotion of industrial decentralization (1993-96)

Post-crisis liberalization (1997-present)

Development State monopolization of most imports and exports. 1st Economic Development Plan (1961-66) brings reduction in direct government involvement in the economy and greater promotion of private investment. Import substitution policy introduced. High levels of protection provided for capital-intensive industries such as automobiles. High tariffs imposed on finished consumer products. Industrial Promotion Act of 1960 establishes an organization that later becomes the Board of Investment, marking the beginning of tax concessions. Tariff structure revised several times to give greater protection to domestic industries. Balance of payments problems arise due to the import of parts and components, leading to discussion of the sustainability of the import substitution policy. 3rd Economic Development Plan (1972-76) brings shift to export promotion. Investment law revised in 1972 to provide exemptions from duty on raw materials and intermediate items for exporting industries. Alien Business Law of 1972 enacted, prohibiting foreigners from entering several business areas. 21 of 72 provinces designated investment zones. Investment Promotion Act enacted in 1977, introducing income tax holidays and 50% concessionary import duty on machinery. Four investment zones established in 1978. Tax incentives on raw materials and machinery reduced for Bangkok and Samut Prakarn, to promote deeper industrial decentralization. A series of baht devaluations takes place between 1983 and 1991. Investment Promotion Act revised in 1987, introducing tax privileges and refunds, industrial zones, and export-processing zones. 6th Economic Development Plan (1987-91) aims to improve income distribution and reduce income disparity. 7th Economic Development Plan (1992-96) aims to reduce income disparity between urban and rural areas and promote sustainable development. Investment Promotion Act revised in 1993 to promote industrial decentralization, with generous incentives provided to encourage industries to locate outside Zone 1. Local content requirements eliminated for motorcycles in anticipation of the TRIMs Agreement of 1995. Liberalization extended as part of the IMF-led reform package. Foreign Business Act of 1999 enacted, allowing full foreign participation in most manufacturing sectors. Condominium Act revised in 1998 to allow foreigners to wholly own building on two acres or less of land. Corporate Debt Restructuring Advisory Committee established to monitor and accelerate debt restructuring. ASEAN Investment Agreement adopted in 1998. Bankruptcy Act revised in 1999 to establish a central bankruptcy court. Local content requirements eliminated for vehicle assembly in 1999. Foreigners allowed to own 100% of shares in promoted manufacturing projects in 2000. Local content requirements eliminated in dairy products in 2003.

Source: Tangkitvanich et al. 2004:244

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Appendix 2

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Tax Incentives Offered by the Thai Board of Investment

Machinery

Raw Materials

Corporate Tax

Zone 1 Standard duty of 5%, or 50% reduction of import duty, on machinery that is subject to an import duty of not less than 10%. Exemption of import duty on raw materials used in the manufacture of export products for one year.

Zone 2 Same as for Zone 1.

Zone 3 Exemption from import duty on machinery for projects located in 40 designated provinces.

Same as for Zone 1.

Tax holiday for three years for projects located in an industrial estate or promoted industrial zone, provided that they have invested capital of B10 million or more and obtain ISO9000 or similar international certification within two years of startup; otherwise the tax holiday will be reduced by one year.

Same as for Zone 1 except that tax holidays are granted for five years.

Exemption from import duty on raw materials used in the manufacture of export products for five years, for projects located in 40 designated provinces. Same as for Zone 1 except that tax holidays are granted for eight years. Projects located in 18 designated provinces are given the following additional privileges: a 50% reduction in corporate income tax for five years after the period of exemption; double deduction from income tax of transport, electricity, and water costs for ten years from the start of operations; and a 25% deduction from profit of the project’s infrastructure/construction costs for ten years from the start of operations. Projects located within an industrial estate or promoted industrial zone are given the following additional privileges: a 50% reduction in corporate income tax for five years following the period of exemption; and double deduction from income tax of transport, electricity, and water costs for ten years from the date of first revenue derived from a promoted activity. Projects located outside an industrial estate or promoted industrial zone can deduct 25% of infrastructure and construction costs from profit for ten years from the start of operations.

Source: Tangkitvanich et al. 2004:256

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Appendix 3

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Tesco: Global Reach

Source: Tesco 2007:31

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Appendix 4

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Toyota Guiding Principles

Source: Toyota 2007:2

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Appendix 5

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Vehicle Production in Thailand 1993-2007

Source: Thailand Automobile Institute 2007

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Appendix 6

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Toyota: Production, Sales and Export by Region

Source: Toyota 2007:19

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Toyota: Sales and Production Map

Source: Toyota 2006:28

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Appendix 7

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Thailand’s Oil Production and Consumption 1990-2006

Source: EIA International Energy Annual 2004 in Energy Information Administration 2007:3 Thailand’s Natural Gas Production and Consumption 1994-2006

Source: EIA International Energy Annual 2004 in Energy Information Administration 2007:5

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Appendix 8

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The History of Shell in Thailand 1892 Shell brought in the first bulk shipment of kerosene to Thailand on the "SS Murex" which discharged its cargo at the Pak-Lat depot in Samut-Prakan Province on 23rd September 1892. The SS Murex was the world's first bulk-oil tanker and the first to pass through the Suez Canal. 1892 Shell, through agents Markwald and Company, built the country's first oil depot with two 1,500-tonne underground tanks, a service tank, a godown and tin-container factory at Pak-Lat. It was closed down in 1924 and replaced by a new depot on 26 rai of land at Bang-Pakok. Lacking rail transport facilities, it was replaced in 1932 by the present-day installation at Chong-Nonsi area of Klong-Toey District in Bangkok. 1929 Shell's first upcountry depots were constructed at Korat, Chiang-Mai, Denchai, Bandon, Lampang and Phitsanulok. These depots are among the earliest oil products distribution facilities outside Bangkok. 1959 Shell introduced liquefied petroleum gas to the Thai market. Shell was also the first to operate an LPG filling plant, constructed at Chong-Nonsi in the late 1960s. Two spherical gas storage tanks constructed at the plant were the first ever in the country. 1967 A company-operated service station was opened, the first of its kind in Thailand. Located on the road to Yannawa near the Krungthep Bridge, the station houses a training centre for service station management. 1970 Shell opened the country's first luboil blending plant in its Chong-Nonsi installation. Built at a cost of 37 million Baht, the plant, operating at full capacity, was able to meet the entire Thai industry demand for lubricants at that time. 1981 Thailand's first commercial oil field was discovered. Named the Sirikit Oil Field in honor of Her Majesty the Queen, it is brought on-stream in 1983. It has to date produced over 100 million barrels of crude oil and remains the Kingdom's largest oil field. 1987 Oil was discovered at the Nang Nuan-1 well off the coast of Chumporn Province in the Gulf of Thailand. The well, after having produced some 500,000 barrels of crude oil, was shut down in 1988. 1990 Shell was awarded the Seal of the Royal Garuda by His Majesty the King for contributions to Thailand. Shell is the very first oil company in the Kingdom to receive this honor. 1991 Unleaded gasoline (Formula Shell ULG) was introduced to Thailand, one of several initiatives by Shell to promote cleaner air. 1992 Shell received the country's first ITS/ISO 9002 international quality certification for its luboil and grease plants at the Chong-Nonsi installation. The certification gave international accreditation to the quality of Shell's local manufacturing process and the products produced. 1994 Shell opened ShellCARE, the first fully-integrated customer service centre in the Thai oil industry. 1996 Rayong Refinery, the countries forth oil refinery designed with state-of-the-art technology, started operation. The refinery is 64% owned by Shell and 36% by the state-owned Petroleum Authority of Thailand. 1997 Shell launched Shell Fleet Card, (Link to Fleet Card page) the country's first fleet management system specifically designed to meet the needs of both light vehicle and truck fleet operators/owners. 2002 Shell launched Shell Pura Diesel, the World’s first semi-synthetic diesel formulation.

Source: Shell 2007

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