978-0134324838 Chapter 5 Solution Manual Part 1

QUESTIONS:

5-1. Explain why most Apple products are made outside the firm’s home country,

the United States.

(LO 5.4; AACSB: Reflective thinking)

■ Global sourcing: The advantages provided by suppliers and nations in Asia, Europe, and

■ Factor Proportions Theory

◘ Factor Proportions Theory may explain much of China’s success. This theory

5-2. What is comparative advantage? How does Apple benefit from comparative

advantage?

(LO 5.1; AACSB: Reflective thinking)

■ Comparative advantage (country) refers to superior features of a country that provide

■ Capitalizing upon its comparative advantage (country), Apple orchestrates its value

5-3. Describe the problems that Apple experienced with its supplier Foxconn.

What steps did Apple take to resolve the problems?

(LO 5.3; AACSB: Analytical Thinking)

Negative Consequences of Global Manufacturing

■ Foxconn, a leading Taiwanese electronics manufacturer, employing more than I

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■ More than 250,000 protesters signed a petition demanding better labor conditions for

■ Foxconn raised wages, moved some production to India (cheaper labor), and installed

■ Apple is struggling to strike the right balance between low-cost manufacturing and

● SUGGESTED SOLUTIONS TO CASE QUESTIONS

5-4. What are the roles of comparative and competitive advantages in Hyundai’s

success? Illustrate your answers by providing specific examples of natural and

acquired advantages that Hyundai employs to succeed in the global automotive

industry.

(LO 5.1; AACSB: Application of knowledge)

Comparative Advantage: (Country-derived) The relative efficiency with which a country

can produce a particular product or service, compared to other countries. Superior

features of a country that provide it with unique benefits in global competition, derived

from either natural endowments or deliberate national policies.

Examples:

Competitive advantage: (Firm-derived) An individual firm has a competitive advantage

when it possesses one or more sources of distinctive competence relative to others,

allowing it to perform better than its competitors. Distinctive assets or competencies of a

firm – typically derived from cost, size, or innovation strengths — that are difficult for

competitors to duplicate or imitate.

Note: The authors adopt a more contemporary view where competitive advantage

refers to the advantages possessed both by nations and firms.

Examples:

◘ Britain- prescription drug industry due to its first-rate pharmaceutical firms,

◘ The U.S. has a national competitive advantage in service industries because of

◘ Germany- engineering-intensive fields due to its first-rate engineering firms,

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◘ Japan- contributions of Sony, Hitachi, Toshiba, and numerous other indigenous

◘ Hyundai-

■ Hyundai was originally a member of the Hyundai Group, one of South Korea’s five

■ Hyundai Motor Company (Hyundai) now has numerous international subsidiaries.

■ A company has a competitive advantage when it possesses one or more sources of

■ The Excel was successful, with exports rising to I million global units, until quality

Natural Advantages: fertile land, abundant minerals, and favorable climate- were the

initial areas of focus for comparative advantage.

Examples:

◘ South Africa has extensive natural deposits of minerals, it produces and

◘ Canada has substantial agricultural land and suitable climate, thus it produces

◘ Hyundai: source from countries with abundance of factor inputs, e.g. steel.

Acquired Advantages:

■ Countries can create or acquire new, comparative advantages over time. A nation’s

bundle of advantages may evolve over time.

Examples-

◘ Japan originally built an automotive industry at home, but had to seek lower

◘ Germany relocated much of its mass manufacturing to Eastern Europe, to

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5-5. In terms of Factor Proportions Theory, what abundant factors does Hyundai

leverage in its worldwide operations? Provide examples and explain how Hyundai

exemplifies the theory. In what ways does Hyundai’s success contradict the

theory? Justify your answer.

(LO 5.1; AACSB: Application of knowledge)

■ According to the Factor Proportions Theory, each country should export products

■ Factors of Production: resources used in the production of goods and services,

What abundant factors does Hyundai leverage in its worldwide operations?

■ To gain a competitive edge, Hyundai’s factories in Turkey, India, and China provided

■ HMC has entered various collaborative ventures to cooperate in R&D, design,

■ Hyundai invested deeply in value-chain activities and used FDI to create key

In what ways does Hyundai’s success contradict the theory?

■ This view rests on two premises:

(1) Products differ in the types and quantities of factors (labor, natural resources,

(2) Countries differ in the type and quantity of production factors they possess.

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■ Factor proportions theory emphasizes the importance of each nation’s factors of

■ One way in which Hyundai might be seen to contradict Factor Proportions Theory is in

the fact that the firm was founded and established in South Korea. From this base,

5-6. Discuss Hyundai and its position in the global car industry in terms of the

determinants of national competitiveness. What are the relationships of the roles

of demand conditions, factor conditions; related and supporting industries, and

firm strategy, structure, and rivalry to Hyundai’s international success?

(LO 5.2; AACSB: Application of knowledge)

Demand conditions-

Refer to the nature of home-market demand for specific products and services.

■ The strength and sophistication of buyer demand facilitates the development of

Factor conditions–

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Describe the nation’s position in factors of production, such as labor, natural resources,

capital, technology and know-how.

■ Consistent with the Factor Proportions Theory, every nation has more of certain factor

endowments and less of others — a situation that determines the nature of national

competitive advantage.

■ Kia Motors, South Korea’s third largest automaker went bankrupt and in 1998, HMC

■ By investing in Kia, Hyundai gained access to the firm’s competitive advantages in

■ Hyundai also invested in R&D centers in North America, Japan, and Europe. To gain a

■ Hyundai invests heavily in various value-chain activities and uses FDI to develop key

■ Hyundai is developing environmentally-friendly technologies that emphasize fuel

■ Competitive factors include how a company competes. Hyundai’s “10-year warranty”

■ Hyundai provided extra value to consumers at a lower price point. HMC drove costs

Related and supporting industries-

Refer to the presence of clusters of suppliers, competitors, and complementary firms

that excel in particular industries.

■ Operating within a mass of related and supporting industries provides advantages

■ The Korean economy is made up of several family-owned conglomerates, or chaebol.

■ Chaebols are highly vertically integrated, such that suppliers are within the

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■ Hyundai cooperates with other global auto firms to develop new technologies and

Firm strategy, structure, and rivalry-

Refer to the conditions in a nation that determine how companies are created,

organized, and managed. The presence of strong competitors in a nation helps create

and maintain national competitive advantage.

■ With many competitors battling for market share, carmakers such as Toyota, Renault-

■ The automotive industry has been suffering from excess production capacity.

■ Industry Characteristics: Capital-intensive; mergers, acquisitions and divestitures in

recent years- Hyundai acquired a 34% interest in Kia Motors (Korea’s second largest

5-7. The Korean government has been instrumental to Hyundai’s success. In

terms of national industrial policy, what has the government done to support

Hyundai? What can the government do to encourage future success at Hyundai?

What can the government in your country to do support development or

maintenance of a strong auto industry?

(LO 5.2; AACSB: Application of knowledge)

What has the government done to support Hyundai?

■ The South Korean government devised a partnership system of close

government/business ties, favoring certain industries, including import promotion of raw

materials and technology at the expense of consumer goods, and directed

savings/investment over consumption.

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What can the government do to encourage future success at Hyundai?

Continued sponsorship of the automobile industry:

■ From a national industrial policy standpoint, expand/extend the public/private

partnerships in place.

What can the government in your country to do support development or

maintenance of a strong auto industry?

Encourage students to examine the cost structure of the U.S. auto industry. What does

a car made in the U.S. cost compared with a similar car made in country Y? What role

5-8. Consistent with Dunning’s Eclectic Paradigm, describe the

ownership-specific advantages, location-specific advantages, and internalization

advantages held by Hyundai. Which of these advantages do you believe has

been most instrumental to the firm’s success? Justify your answer.

(LO 5.4; AACSB: Reflective thinking)

Ownership-specific advantages (firm-specific advantages)

■ R&D- By investing in Kia, Hyundai gained access to the firm’s competitive advantages

in R&D and production. During its lifetime, Kia had managed to acquire a substantial

base of highly knowledgeable workers, engineers, and design staff. Together, the two

Location-specific advantages

■ Refer to the comparative advantages that exist in individual foreign countries.

■ Examples include natural resources, skilled labor, low-cost labor, and inexpensive

capital.

■ A location-specific advantage must be present for FDI to succeed.

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■ Automotive industry labor costs make up only 10% of total operational costs. To gain

a competitive edge, therefore, Hyundai must not only seek out cheap labor, it must also

source from locations that can supply low-cost input goods (such as engines, tires, car

Internalization advantages

■ Are the advantages that the firm derives from internalizing foreign-based

manufacturing, distribution, or other stages in its value chain.

■ When profitable, the firm will transfer its ownership-specific advantages across

national borders within its own organization rather than dissipating them to independent,

Which of these advantages do you believe has been most instrumental to the

firm’s success?

Dunning’s Eclectic Paradigm is a framework for determining the extent and pattern of

the value-chain operations for global firm. Thus, MNE activity can be viewed in terms of

the combination of the competitive advantages of firms and the comparative advantages

of countries.

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ADDITIONAL QUESTION:

In terms of its various advantages, discuss how Hyundai may influence the future

of the global auto industry. Do you think Hyundai will become a leader among the

world’s auto makers? Justify your answer.

■ Students should draw from recent news and events regarding the plight of the global,

■ Then, they can shift the conversation to Hyundai and what it may have done well. For

■ R&D: By investing in Kia, Hyundai gained access to the firm’s competitive

advantages in R&D and production. During its lifetime, Kia had managed to acquire a

■ Cultural affinity: Hyundai benefits from its proximity to China and management

■ Location-specific advantages: Natural resources, skilled labor, low-cost labor, and

inexpensive capital. A location-specific advantage must be present for FDI to succeed.

■ Internalization advantages: The advantages that the firm derives from internalizing

foreign-based manufacturing, distribution, or other stages in its value chain. When

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Canadian operation, the firm’s first foreign investment venture. However, the operation

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