Gerald D. Newbould

Foreign direct investment by smaller UK firms : the success and failure of first-time investors abroad

Acknowledgements - Introduction: Foreign Direct Investment by Smaller European Firms - Going International - The Firms in the Sample - The Success of Overseas Production Subsidiaries - The Preliminary Stages - The Planning Stages - The Investing Stages - Controlling the Subsidiary - Lessons and Problems - Overseas Sales Subsidiaries - Profile of a Successful Production Subsidiary - Appendices - Regulations, Policies and Inducements, by Country - UK Exchange Control Policy - Questionnaire - Index

Lessons and problems

A structure has been imposed on the firms’ responses so that each chapter, from Chapter 4 onwards, represents a succeeding stage in the total process of initiating, setting up and running an overseas production subsidiary. There remains only this chapter which covers the firms’ responses on their own view of the total process. Thus this chapter looks at the lessons learned and the problems encountered by the forty-three firms with their first overseas production subsidiaries.

The planning stages

While the title of this chapter might convey the impression that the forty-three firms, after the preliminaries discussed in Chapter 4, settled down to a planning and evaluation phase prior to a decision, it is legitimate to point out that many of the firms had, at this stage, already made the decision to invest in their first overseas production subsidiary. For some, this was a conscious decision, albeit reached quickly and at an early stage without careful evaluation of the facts. For many, however, the decision was probably not conscious in the sense that the process simply gathered its own momentum, and the result was the establishment of an overseas production subsidiary. Indeed, in some cases, it was difficult to see at what stage prior to the first actual production coming off the line, did someone in the firm sit down and make a conscious decision. The inability to see that decision in some cases does not, however, invalidate the layout of these five chapters into the preliminary stages, the planning stages, the investment stages, control, and lessons and problems, since these represent a logical time sequence in their own right.

The firms in the sample

This chapter describes the method of selecting those firms whose experiences in setting up their first overseas production subsidiary constitute the data for this book. In addition, the chapter describes the industrial, ownership and size characteristics of the firms; and the size characteristics of the overseas production subsidiaries.

The success of overseas production subsidiaries

The smaller firm differs from the large in the greater attention it has to pay to ‘the bottom line’. The amount of profit — that which is left on the bottom of the profit and loss account after all expenses and claims have been met — is crucial to the smaller firm. The amount of profit is ultimately the source of survival to the smaller firm, and, in the shorter term, it determines too the friendliness of the bank manager, for the smaller firm has no muscle at the bank, nor in the corridors of government so increasingly and easily accessible to the large firm. The smaller firm therefore has to tread more carefully, for if a mistake is made it will have to rely on its own resources to recover. Additionally to the typical owner/manager, the bottom line is still a source of pride, an indication of a job well done, of competition met and beaten. For many smaller firms the success of the firm and of the man who runs it, is one and the same thing — the firm is the man. Hence most likely the most important question this book can answer is the simple one: ‘Was the overseas production subsidiary successful?’.

The preliminary stages

The previous chapter laid down criteria by which overseas production subsidiaries might be judged. Using these criteria for the forty-three overseas production subsidiaries in the sample, the criteria gave an overall success, rating for each of the subsidiaries. (See summary in Table 3.9, page 35.) This chapter and the subsequent four chapters will match these success ratings against the particular decisions and actions taken in connection with each of the overseas production subsidiaries. For example, is success related to the route which led to the setting up of an overseas production subsidiary? Does it matter that some firms went straight from exporting to overseas production while others followed the more cautious route of exporting, appointing an agent and setting up an overseas sales subsidiary before taking the plunge into overseas production? These pre-investment factors and the levels of success are the concern of this chapter, and the subsequent chapters concentrate upon success related to the planning stages of the investment, to the investment itself, to the operational controls on the project once in operation, and to the problems found and lessons learned.

The investing stages

The factors which remain to be considered are the productprice-marketing decision, the objectives set for the venture, the siting of the factory, inducements offered by the host government, and exchange control permission from the Bank of England. Ideally these factors would be considered and decisions made before the first turf was turned or the first share purchased; but as indicated at the start of Chapter 5, the process of setting up an overseas production subsidiary was, for many of the firms, not a step-by-step evaluation and decision process, but a muddled process. Perhaps the best examples relevant to this chapter are the three firms who invested abroad without even knowing that they needed Bank of England permission to do so!

Controlling the subsidiary

Managing at a distance for the first time brings new problems for the firm. Thus while the last three chapters have concentrated on the establishment of a successful overseas production subsidiary, this chapter puts the emphasis upon methods of ensuring continuing operational success. Consequently control procedures will be related to success, for in the absence of data or experience the choice between allowing the overseas production subsidiary a great deal of autonomy (which has the risk of local management ruining the venture) and strict control (which may stifle all enterprise in the overseas unit) is a very difficult one to make.

Overseas sales subsidiaries

As noted in Chapter 2, the survey was set up to deal with overseas production subsidiaries. However, a number of firms contacted in the enquiry stages expressed a willingness to participate even though they had set up an overseas sales subsidiary only. Consequently, in order not to let potential data slip by, there was a follow up on these firms. Thus, this chapter examines the experiences of smaller firms which have recently established marketing and distribution subsidiaries abroad for the first time. The purposes of the chapter are to determine the extent to which an overseas sales subsidiary is a potential springboard to overseas production, and to determine the extent to which a local presence and sales facility generates demand for the firm’s products. Lessons learned and problems encountered are discussed in order to assist those managers currently contemplating setting up an overseas sales subsidiary for the first time.

Profile of a successful production subsidiary

Accepting the danger that a simplified summary may enhance some factors at the expense of others, this chapter simply lists those factors from preceding chapters which appear to be part of a successful overseas production subsidiary. The listing is provided so as to enable managers to compare quickly their own subsidiaries, or their own plans, with the profile of the successful subsidiary built up from this report. The list should not be taken separately from the comments made in the body of the report. A successful overseas production subsidiary appears to be: