Nordic Industrial Park: bridging distance across international markets

When a resource-constrained firm enters a high-distance market, it helps greatly if it can utilise a low- distance entry point.

The lure of the Chinese market has led several Western companies to venture into a context that is unfamiliar and bewildering, especially for small and medium-sized enterprises (SMEs) lacking the deep pockets of large multinationals. It is useful for SMEs to have a ‘bridge’ into a high-distance market. One way to accomplish this is to use a foreign-owned industrial park (i.e. a space designated for industrial use).

Consider the case of the Nordic Industrial Park (NIP) that provides a physical space for offices and light-manufacturing facilities, and a range of value-added services to set up a business in China. These include legal services (e.g. registering the company and drafting contracts), human resource management (e.g. recruitment, payroll and expat relocation), accounting (e.g. financial reporting), and information and communication technology (e.g. internet access). NIP was co-founded by Ove Nodland, a Norwegian who first came to China in 1994 to manage different ventures. Nodland learnt that even though rules were set in Beijing (the national capital and political centre of China), they were implemented by local officials – and so they mattered greatly. Over the years he invested considerable energies in building close relationships with various officials, and took care to ensure that the ventures he worked for complied with local regulations and aligned themselves with local governmental priorities. Nodland’s local guanxi (network connections) grew rapidly.

After a decade’s experience in China, Nodland realised he was well placed to help European SMEs enter China more broadly. He chose to focus on what he knew best: firms from the Nordic region (Denmark, Finland, Iceland, Norway and Sweden) setting up a base in Ningbo, a port city in Zhejiang province just south of Shanghai (the commercial centre of China) and renowned for its entrepreneurialism. Thus was born the concept of NIP in 2002, which was sold to Silver Rise Hong Kong Pte Ltd, part of China’s Yinmao Group, in 2013, with Nodland staying on as consultant. In 2015, NIP was selected by the Zhejiang provincial government as one of the first designated ‘international industrial cooperative parks’ which further strengthened its local standing. Going forward, NIP has signalled its intent to attract projects from Nordic universities and achieve an output value in excess of RMB 2bn (€280m, £224m, $364m) by 2017.

From the perspective of a European SME entering NIP, there are multiple benefits:

• Process: L ower start-up costs. NIP leverages its knowledge of the Chinese business environment by hand-holding clients through the complexities associated with starting and running a business in China, thereby allowing firms to focus their time and energies on core business activities.

• Physical environment: A familiar ambience. NIP’s architecture and design mimics Scandinavian features that set it apart from standard Chinese buildings. Not only does this give expat managers a sense of the familiar, it is also a symbolic reminder to Chinese employees that they are part of a Western organisation.

• People: A like-minded community. By virtue of being part of the largest concentration of Nordic companies in China, expat managers have the opportunity to share experiences with and pick up ‘tricks of the trade’ from other managers with a similar cultural background through hallway conversations and lunchtime meetings. Of course, entering a facility like NIP comes at a cost, but offers benefits in terms of ‘reducing distance’.

Questions

1 Consider NIP’s services in light of the CAGE framework and analyse how they may help reduce distance.

2 What might be the drawbacks in being located in an industrial park?

Janice Huffman has decided to start Thornton Cleaning, a residential housecleaning service company. She is able to rent cleaning equipment at a cost of $720 per month. Labor costs are expected to be $65 per house cleaned and supplies are expected to cost $8 per house.

Required

1. Determine the total expected cost of equipment rental and the average expected cost of equipment rental per house cleaned, assuming that Thornton Cleaning cleans 10, 20, or 30 houses during one month. Is the cost of equipment a fixed or a variable cost?

2. Determine the total expected cost of labor and the average expected cost of labor per house cleaned, assuming that Thornton Cleaning cleans 10, 20, or 30 houses during one month. Is the cost of labor a fixed or a variable cost?

3. Determine the total expected cost of supplies and the average expected cost of supplies per house cleaned, assuming that Thornton Cleaning cleans 10, 20, or 30 houses during one month. Is the cost of supplies a fixed or a variable cost?

4. Determine the total expected cost of cleaning houses, assuming that Thornton Cleaning cleans 10, 20, or 30 houses during one month.

5. Determine the average expected cost per house, assuming that Thornton Cleaning cleans 10, 20, or 30 houses during one month.

Kindly summarize this Literature Review Section 3.2 Efficient Techniques and Performance Measurement Recently, developed techniques compare the efficiency of similar service organizations by explicitly considering their use of multiple inputs to produce multiple outputs. These new efficiency techniques are often divided into two categories. One broad category consists of the linear programming procedures used in this paper (DEA). The second category is a set of regression-based techniques that derive inefficiency estimates from two-part error terms, and has been called the econometric or stochastic frontier approach. Both techniques use sample firms to construct an efficient production frontier. The frontier is efficient in the sense that a firm operating on the frontier could not increase output without increasing its input utilization, or it could not reduce its input utilization without decreasing output. Deviations from the frontier represent inefficiencies, and are termed X-inefficiencies in the finance and economics literature. Efficient frontier techniques avoid the need to develop a standard cost for each service provided and are more comprehensive and reliable that using a set of operating ratios and profit measures. These techniques permit managers and researchers to service organizations and identify units that are relatively inefficient, determine the magnitude of the inefficiency, suggest alternative strategies to reduce the inefficiencies, all in a composite measure. Moreover, these techniques provide an estimate of the overall efficiency level of the market that is under consideration. We know of only two studies that use efficient frontier techniques in the hotel industry. The first is that of Morey and Ditman (1995) who measure the relative performance of hotel general managers using DEA. The authors gathered input-output data for 54 hotels from a geographically dispersed area. They found that managers were operating 89 percent efficiency. In other words, given their output, managers on average could reduce their inputs by 11 percent. The study reported that the least efficient hotel was 64 percent efficient. These results are relatively high compared to those found in other industry studies that utilize DEA. Large efficiency scores are indicators of High performance and competition (Leibenstein 1966). Thus in an economic context, the market for lodging services appears to be operating efficiently. Anderson et al. (1998) argue for the benefits of using a stochastic frontier methodology in addition to DEA in order to accurately assess performance. Using a classical stochastic frontier model, they also find the hotel industry to be performing relatively efficiently, with efficiency measures above 90 percent. While both of these studies are informative, neither provides any information on the source of the inefficiencies. The source of the inefficiencies, whether technical or allocative in nature, is important information that managers need in order to take proactive positions to increase performance. We re-examine hotel efficiency using a method of DEA that provides significantly more detailed results and we further analyze the inefficiency sources. The following section describes our procedure.

SECTION 4 EFFICIENCY DETERMINATION

Section 4.1 The DEA Technique

Within the DEA framework, performance of an individual firm is evaluated with respect to an efficient frontier, which is constructed by taking linear combinations of existing firms. While there are several DEA approaches, wee use an unput-base approach, assuming that inputs are contracted proportionally with exogenous outputs. The procedure relies on sophisticated mathematics; however, the following simplified graphical example deomstates how th eefficiency measures are computed.

Figure 1 displays tha overall (OE) and (TE), and allocativ (AE) efficiency measures. In this example, we assume two inputs (X1 and X2), one output (Y), and constant returns to scale. Additionally, we assume that technology is fixed and that input prices are represented as PP. Firm A is X-efficient since it produces along output isoquant Y by utilizing the least inputs. Suppose thee is a firm operating at point C and producing an output equivalent of that produced along Y. C is uses more inputs than A to produce the output Y and is classified as inefficient with an overall efficiency score of 0D/0C )or equivalenly and inefficiency score of DC/0C).

Overall inefficiency can be decomposed into its techhnical and allocattive components. Without being able to alter input allocations, the bestt that firmC could have done was to operate at point B. The "extra" input usage that was incurred by firm C as a percentage of total input usage is the technical inefficiency measure and can be dpressed as BC/0C The technical efficiency of firm C is ecpresses as 0B/0C. Allocative inefficiency representts managerial failurd to use the optimal input mix. Here, allocative inefficiencies for firm C can be represented by DB/0B, and allocatvie effficiency is expressed as 0D/0B.

Technical efficiency can be further decomposed into technical (PTE) and scale (SE) efficiency measures. Pure technical inefficiency simply refers to deviations from the efficient frontier that result rom failure to utilize the employed resoures efficiently. Hence, this measure assumes that firms are operating at constant return to scale. Scale ineficiencies, on the other hand are losses due tofailure to operate at constant returns to scale. Figure 2 illustrates these two efficiency measures. In this figure, the Y-axis represents output and the X-axis represents input conbinations that contain an equal amount of both input 1 an dinput 2. The graph shows three observations denoted A, B, and C, respectively. Two frontiers are illustrated, a fronier assuming constant returns to scale instead of decreasing or increasing returns toscale.

After completing this analysis, we examine the SE measure to determine if it equals one. If the SE measure equals one, firms are operating at constant returns to scale. If SE does not equal one, we then determine whether the firms are oeprating at increasing or decreasing returns to scale (see Appendix A for a mathematical treatment of DEA).

In the Schedule of Cost of Goods Manufactured and Cost of Goods Sold, the cost of goods manufactured is computed according to which of the following equations?

Multiple Choice

Cost of goods manufactured = Total manufacturing costs + Beginning finished goods inventory – Ending finished goods inventory

Cost of goods manufactured = Total manufacturing costs + Beginning work in process inventory – Ending work in process inventory

Cost of goods manufactured = Total manufacturing costs + Ending work in process inventory – Beginning work in process inventory

Cost of goods manufactured = Total manufacturing costs + Ending finished goods inventory – Beginning finished goods inventory

Problem: Consider each of the following situations independently. Fill in the blanks with the appropriate information.

1.

2.

3.

4.

Elliott Company produces large quantities of a standardized product. The following information is available for the first process in its production activities for March.

Prepare a process cost summary report for this process using the weighted-average method. (Round "Cost per EUP" to 2 decimal places.)

A firm has a total debt ratio of .50.

What is its (TOTAL LIABILITIES / TOTAL EQUITY) ratio?

Total product (TP) : Total quantity, or total output, of a particular good or services produced.

Marginal product (MP) : Extra output or added product associated with adding a unit of a variable resource, in this cas labor, to the production process

                                              Marginal product (MP) = Change in total output / change in labor input

Average product (AP) is total output per unit of a resource employed.

Question: How do these concepts relate to short and long run production strategies?

Pietro Frozen Foods, Inc., produces frozen pizzas. For next year, Pietro predicts that 50,000 units will be produced, with the following total costs:

Required:

If required, round your answers to the nearest cent.

1. Calculate the prime cost per unit.
$ per unit

2. Calculate the conversion cost per unit.
$ per unit

3. Calculate the total variable cost per unit.
$ per unit

4. Calculate the total product (manufacturing) cost per unit.
$ per unit

5. What if the number of units increased to 55,000 and all unit variable costs stayed the same? indicate the impact on the following costs.

a. Total direct materials    

b. Total direct labor    

c. Total variable overhead    

d. Total fixed overhead    

e. Unit prime cost    

f. Unit conversion cost    

What would the product cost per unit be in this case?
$ per unit