This essay is about the potential objective of the multinational company of entry in to the new market for expanding business and maximizing profit in new explored market, and will highlights possible insinuation of a global company in host country economy. In this essay Auto car manufacturing Company will be critically highlighted that why multinational auto manufacturing company expands business to other regions and discover new market places and what are the grounds behind that step.
The chosen company for this critical essay is Honda Motors.
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Honda is sustaining a global point of view, and is devoted in supplying products of the uppermost excellence keeping in view a reasonable price for worldwide buyer’s satisfaction. Honda Motor Company Limited is possibly best branded as an auto maker. Among the car manufacturing companies in Japan Honda is second and fifth biggest and successful car manufacturing company in the world. Today Honda is renowned for its innovation, excellence, well-built and advanced engineering which combine to get the best possible output in auto market and that is the reason why Honda has strong image among leading car manufacturing companies. Honda is a Japan based company, which has made its name in the manufacturing of cars in very short period of time. Honda Motor Company was founded by Soichiro Honda and his partner, Takeo Fujisawa (Source, www.honda.com). Innovative strength of mind is obvious in the absolute name of their business, which is Honda Technology Research Institute Company Limited. Honda is considered to be the primary producer of engines across the world in terms of the complete volume of the engines it manufactures annually. Honda endeavoured into the Japanese car industry after 1960 with the T360 (Source, www.honda.com).
In this essay I will focus Honda Motors investment in Pakistan. Honda Atlas Cars Pakistan Limited is a mutual enterprise between Honda Japan Motors and the Atlas Group Pakistan.
Honda Company was established in 1992 and combined agreement was signed in 1993. The inauguration ceremony was held on 17th of April 1993 and within a very small time of 11 months, construction and erection of machinery was completed. Honda invested in Pakistan because of numerous reasons which can be called the perfect location for investment. As per Dunning the location, owner specific and internalisation advantages are three basic fundamentals for multinational company to invest across the border. Pakistan got strategic importance because of its prominent geography. Indian Ocean on one side and very close of Persian Gulf which is very significant for trade import and export purpose. Pakistan is like a gate way for Middle East, for Central Asia to China and India. Pakistan is at number 9 with a population of 140 million, so it is clear that Pakistan has got a vast market and around 40 million hard working cheap labour. Road and rail infrastructure of Pakistan is reasonable well developed and it is developing time by time. Because of its link with Persian and Arabian Sea export processing zone is working from 1980 and because of large demand three more export processing zones have started working in Sialkot, Risalpur and Saindak. Honda invested in Pakistan because Pakistani economy usually showed sensitivity and possible aptitude to convene exogenous blows and minimize risk (Source:- www.unescap.com).
Pakistan got very strategic place in term of foreign direct investment (FDI) as per economic survey of Pakistan FDI is increasing from 2006-2007 from 6 billion US dollar which is almost 48% higher than last year. According to figures there are around 3.9 million auto cars on the roads of Pakistan, and the demands for vehicles individually and combined are increasing rapidly, and prominent figure is calculated of 300,000 as an annual demand. Multinational companies from Japan, Europe and Korea have invested around 1.5 billion dollars in Auto industry of Pakistan (Source:- www.unescap.com). It is the matter of fact that developed markets drench with the passage of time, keeping this point companies still want to preserve expansion. Honda keeps a strong point of expanding their business to areas which are less saturated. Most of the certain saturated markets may welcome variety from other developed economies and companies attempt to invest in those markets to capture market share. Pakistan government has eased up the investment policy environment foreign private investment. For welcoming and encouraging foreign direct investment in export-oriented industries, an Export Processing Zone (EPZ) is set up in Karachi. The government of Pakistan has also ratify a wide set of investment incentives including credit facilities, fiscal incentives, and visa policy. Foreign controlled manufacturing companies exporting 50% or more of their production can now borrow working capital without any limit. Other foreign-controlled manufacturing companies including those not exporting and selling in the domestic market can borrow rupee loans equal to their equity without prior permission of the State Bank of Pakistan. Foreign investment in Pakistan is sheltered through the Constitution (Article 24) as well as through specific laws. Section 8 of the Protection of Economic Reforms Act 1992 provides legal cover to foreign investment in Pakistan.
Honda established its unit in Pakistan due to several factors which they believe that will maximise their profit by investment abroad like abundant low cost land and natural resources, vast cheap and technical working people, increasing local market, reasonably developed infrastructure and important and critical location. As According to Dunning (2008) company invest abroad because of suitable climate, proximity to relevant markets, availability of raw materials and minerals, and availability of low cost advantages such as cheap labour. Honda invests overseas to lessen revelation to one market. This gives Honda international diversification and leads to benefits for Honda. As the global economy changes over the time and recession is affecting one area some time another economy in different region is practicing a boom, so operating in different countries instability can be less experienced by companies. According to Dunning (2008), It has to be more gainful for the company to develop its resources in overseas, rather than in domestic, locations. Honda chose site in Lahore, Honda current location in Lahore Pakistan is near to Allama Iqbal International Airport Lahore which can be easily and affordably accessed adding to this it can be easily access from motorway which connect main cities of Pakistan and nearly 90 km from Faisalabad international dry port. Honda is enjoying economical delivery of cars with its well managed delivery set-up all over Pakistan. Pakistan government policies are very much in favour for investors of auto makers to invest in Pakistan. Honda invested huge amount of investment in Pakistani market so that to get more benefit and capturing more international reputation from the cheapest cost of production in Pakistan economy, as there is availability of cheap and skilled labour as it is fact that companies with labour intensive production processes have a larger incentive to invest overseas and thus benefit from these cost efficiencies. This gives host country many advantages like increase in export, boost in economy and linkage with other countries. According to Lipsey (2002), FDI has a great influence on any host country economy and increases the interaction of countries and export from the host country increases as well. Customers who are interested in new models are manufactured in the local country (Japan) and as well as manufactures in Pakistan, is another, verdict weighty factor and gives a extra advantage to Honda FDI policy. Dunning (2000), said that market seeking factor is appropriate in the FDI decision making process. One of the reasons why Honda invests abroad is diversification. By diversifying, it reduces risk and by diversifying worldwide, one can reduce the risk further. International investing provides investors the opportunity to spread risks over more than one market. Due to rise in oil prices that increases transportation cost of vehicles from one country to other country so the prices of imported vehicles are normally are very high than the cars which are manufactured and assembled in home country. Honda is enjoying this case by establishing its manufacturing and assembling unit in host country as to maximise its markets shares and reduce risk. High import duties make imported cars prices higher and unaffordable. Market saturation and increased competition at home have lead automakers to the evident termination that future growth will occur in investing abroad where population is more and where the demand of cars is much. Honda motors have domination over its firm specific advantages and can exploit them abroad, ensuing in a higher trivial return or lower trivial cost than its opponents, and thus in more profit. This was said by Cantwell (2000), that advantage in technology might be used to increase international expansion and this can be motivating factor as well for companies. The subsistence of a particular know-how or core ability is an asset that can give rise to economic rents to Honda. These rents are gathering by Honda by licensing the Firm Specific Advantages to another firm, exporting products using Specific Advantages as an input, or amendment subsidiaries abroad. Honda has its unbeaten technological power and innovation in their manufacturing and this makes it the successful car manufacturing company in the competition. There were and still there are competitors for Honda in Pakistan as some companies started well before than Honda in Pakistan, they know how the market and environment is. According to Hymer’s (1966), to compete in the overseas market foreign companies must possess some kind of advantage. Such advantage can be of many different types, but the most obvious is size and market power. A business intend to build up a firm precise advantage in international market and development tends to be completed in the market because of localisation feature like trading hurdles, expensive carrying costs, company mostly adopt this criteria by investing out from its home country in their own services to a certain extent than through, let take a example of a licensing or agreements. The more insubstantial the company exact advantage is much stronger that propensity would be. To do business with intangible assets are very tricky and difficult to handle. There is some significant argument is that transnational corporation exist because information crossways boundaries can be moved much powerfully in the corporation rather than among independent industry, the reason is not of market collapse. That extracted that in common intangible asset can be taken as a demanded asset, but can rarely be separated from the company itself and it is impossible to be taken as a community good (Source, www.ousest.com).
As the oil prices are increasing day by day so to afford heavy cars are getting tougher so trends towards small and local manufactured cars are increasing and that is the reason why Pak Suzuki Motors enjoys a domination in the car market with 40.2% of car market share and Honda has 14.7% of market share and trying its level best by deploying the new and advanced technology to its cars with affordable price (Source:- www.ousest.com). Honda has transferred nearly all its advanced technology to the unit working in Pakistan so that to facilitate the customers with innovation and advance technology with low prices as exporting cars from Japan to Pakistan becomes more expensive and unaffordable for buyers to grab the car of their dream and also buyers tends to buy relative cheap and locally manufactured and assembled cars so to reduce the factor of losing customers Honda makes sure that market must be in hand by investing more in host country. According to Dunning firm must have some ownership advantages to penetrate in any country and capturing the market through that ownership advantages. Initially Honda was emphasizing on investments in countries where political situation were stable and government policies were in favour of foreign investment to reduce barriers in their investment and returns, Pakistan political matters were never been much stable but the policies and climate are always in a favour of foreign investment, Honda neglected the political factor and invested hugely in Pakistan to capture the uprising car market of Pakistan. This showed the interest of Honda as an active market seeking FDI.
Economic prosperity is the main ingredient to the country’s progress and advancement. Foreign investment gives the strong base for economic development. FDI added notably in the human resources development, capital formation, and organizational and managerial skills of the people in the country. One of the positive spillover effects was that the occurrence of foreign firm helps in enlargement infrastructure facilities, which makes it easier and profitable for local firms to crowd-in (Lemi, 2004). In developing countries like Pakistan FDI is helpful to narrow down the Saving-Investment gap. The economic benefits of FDI were extensive ranging, it unlock new opportunities of knowledge, transfer of technology, training of manpower, market networking and externalities in the host countries. The potential advantages of the FDI on the host economy are it facilitates the use and utilization of local raw materials, it bring in modern techniques of management and marketing, it eases the access to new technologies, Foreign inflows could be used for financing current account deficits, it increases the stock of human capital via on the job training. The local ventures are able to learn by watching if the economic structure is suitable (Bhagwati, 1994) also it stimulates the investment in R&D (Calvo and Robles, 2003).
Although there is huge positive impact of FDI on host country economy there is some negative implication that results due to FDI. Often seen that host country faces problems with FDI, government has less control over the foreign companies which are operating in the country and this results in not adopting the economic policies of the host country. Defence of the country has to face some risk due to incoming foreign investment. Foreign firms deploy its home country policies in the host country firm which sometimes are not suitable for the workers of the host country. Inflation rate increases in a considerable amount in host country. One of the main negative impacts of FDI is that the economically backward section of the host country is always inconvenienced when the stream of foreign direct investment is negatively affected (Source:- economywatch).
Honda is providing advanced and innovated cars to the its customers mostly in affordable price and playing important role in the economy of the country as well. Honda investment resulted not only in maximizing their profit but resulted in opening of thousands of jobs and also pays taxes to the government. Honda successful investment and increase in profit motivated other companies to invest in Pakistan which will be again beneficial to locals and to government. But going to the depth of Honda investment, Honda is getting more than their investment but Honda is still not able to provide more employment opportunities by expanding their units to other cities in Pakistan. Although the unit is fully working in Pakistan but still car prices are not in a range of middle class community which could be in affordable price if Honda management reduces a small percentage from their profit. Highly technical staffs are still called from Japan and avoiding local technical staffs to remain where they are, Honda must send host country technical staff to trainings abroad so that human resource of host country can go further up in the company making more opportunity for others. This will in return reduces Honda cost and will be helpful for host country human resource.
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