Question

Case Study # 4: Foreign Markets Entry Decision for a Singaporean Firm

What is the nature of the product: brand new high technology consisting of a computerized CAD system. The CAD system that this company wants to promote in Pakistan consists of two major parts: the hardware which is a sophisticated weaving machine, and the software that designs the carpets and runs the weaving machine. How important is it to protect patents and the technology from being copied illegally? How important is the firm's intellectual property? How do transportation costs affect your decision?

2. Where is it being manufactured now: Singapore. What is the level of manufacturing sophistication in this country when compared with the target country?

3. What is the nature of the target market: What are the relative business barriers in the two countries? Demand? Economic development? Legal system for resolving disputes? Patent protection laws or enforcement of the law? Availability of skilled engineers and workers? Availability of suitable agents or partners?

The consideration of the above factors will allow you to produce an excellent report for Ms. Chang.

Answer 1

Let us evaluate each of the three alternatives available to Ms Chang to understand and make a well-thoughtout and informed choice:

1) If company exports to Pakistan from Singapore

In this case the company keeps its current manufacturing facility in Singapore intact and then transports CADs to Pakistan. Following Pros and Cons are likely to be observed in such a case:

Pros:

- Singapore is a fairly developed country with strong business law framework and stable business friendly environment. It has well defined labor laws& low taxation which can be an added advantage

- With an already existing unit, company doesnt need to incur any additional capital expenditure in set up of new facility and would have a stable manufacturing base.

- The technical prowess needed in a highly specialised product like this needs high technology and skilled labour. Singapore offers much better opportunities for same compared to Pakistan,

- Every business needs an established network of suitable supplier and since it is already built in Singapore, that worry also wouldn't bother Ms Chang

- Along with all this, the biggest is demand. While Pakistan has one of the largest weaving markets and there is high likelihood that such a product might find fanfare in Pakistan, the country is price sensitive and still very low on technological innovations. Thus, demand uncertainty surely prevails

Cons:

- The transportation costs can be immense in a specialised product like this. However, there are already import shipments from Singapore which Pakistan gets so it needs to be seen if existing distribution network can be used for same

- The advantages of cheap labour and getting subsidies and benefits which foreign firms get when establishing businesses in Paksitan would not be availed.

2) If company licenses a Pakistani firm to manufacture & market CAD

Pros:

- The transportation costs can be minimised if this is done. This can result in huge positive financial impact if the costs are quite significant.

- The advantages of cheap labour and getting subsidies and benefits which foreign firms get when establishing businesses in Paksitan can be availed to partial extent based on arrangement with the company

Cons:

- Will need to start developing supplier network, technical prowess and skilled labour inviting significant investment . If the arrangement is worked out in such a manner where this investment is made by the local partner and the company only gets royalty or share of profits, risk can be hedged with limited rewards. But finding the local partner is the key then

- Highly politically uncertain environment in the country puts CAD at a risk of being a failure before it hits success in global market since all manufacturing will happen in Pakistan now.

- Time to market will be delayed as the set up would require a lot of time due to highly specialised nature of product.

- Due to weak IPR laws, the product stands a high risk of being copied and mas marketed

3) If company establishes a wholly owned subsidiary in Pakistan

Pros:

- The transportation costs can be minimised if this is done. This can result in huge positive financial impact if the costs are quite significant.

- The advantages of cheap labour and getting subsidies and benefits which foreign firms get when establishing businesses in Paksitan can be availed to ful extent based on countries' FDI policy.

Cons:

- Will need to start developing supplier network, technical prowess and skilled labour inviting significant capital expenditure investment .

- Highly politically uncertain environment in the country puts CAD at a risk of being a failure before it hits success in global market since all manufacturing will happen in Pakistan now. Also, lack of clear labour and manufacturing laws puts at higher risk of failure.

- Time to market will be delayed as the set up would require a lot of time due to highly specialised nature of product.

- Due to weak IPR laws, the product stands a high risk of being copied and mas marketed

Thus, it will be better for the company that they first make financial due dilligence of the project and should start with option 1 of exporting to Pakistan from Singapore untill it reaches a magic demand number. Once there is proven demand and reaches a certain scale and brand value for product, to optimise costs, the company should surely evaluate and figure the best possible way to move manufacturing to Pakistan.