The Foreign Direct Investment Decision
Process Case Studies of Different Types
of Decision Processes in Finnish Firms
Jorma Larimo
UNIVERSITYOF VAASA, FINLAND
Foreign direct investments (FDIs) have been one of the most noticeablefactors
in the world during the twentieth century. Relatively little is known, however, about the decision processes in firms which have led to making an
FDL The aim here is to highlight the FDI decision process in five foreign
manufacturing investments made by Finnish firms. In the analysis of the
FDI decision behavior the general model of the strategic decision process
developed by Mintzberg, Raisinghani, and Th~oret (1976), is used as a
framework. Concerning the case firms' FDIs the following aspects are dealt
with: stimuli to FDIs, routes to FDIs, motives for FDIs, consideration of
alternatives, information collection, evaluation, choice and authorization
and both the problems expected and actually met, and experiences from
about twice as much than in the previous 20 years. The target
countries of Finnish investments in the 1960s and 1970s were
mainly European, especially Sweden, the U.K., and West
Germany. In the 1980s the proportional share of units
established or acquired in the U.S. especially, but also in various
developing countries, grew considerably, whereas in the late
1980s a great share of the investments was made in various
EC countries.
the investments. The basis for the choice of cases was that there should
be differences in the background data of investingfirms, in the process data,
and in the situational data. In spite of this, a lot of similarities in the cases
werefound concerning e.g. the motives for the FDI, alternative development
behavior, information categories and methods used in the evaluation of the
investment. Most of the findings were in accordance with the behavioral
investment theory and previous FDI studies, j BUSNaES 1995. 33.25--55
The increased use and importance of FDIs in the operation of
firms of different origin and the strategic nature of FDIs make
them an interesting and important target for analysis. Additionally, it seems that relatively little is known about the more
detailed FDI behavior of firms, especially of the decision-making
processes leading to FDIs. Therefore the aim here is to highlight the FDI decision process in five foreign manufacturing investments made by Finnish firms. In the analysis of the FDI
decision behavior the general model of strategic decision process developed by Mintzberg, Raisinghani, and Theoret (1976)
is used as a framework. The analysis of the FDI decision process is divided into three phases: identification, development,
and selection. The following aspects of the case firms' investments will be dealt with:
he internationalization of business and business
enterprises has been one of the most notable factors in
the world economy during the twentieth century. A clear
general trend in the international operations of the firms has
been the increase both in the amount and value of foreign direct investments (FDIs) made by firms during the past few
decades. As an indication of the role of FDIs it can be mentioned that according to estimates in 1988 there were 17,500
to 20,000 firms with 120 to 125,000 foreign affiliates (see
Dunning, 1993: 16). In some countries like the U.S., the U.K,
the Netherlands, and France, the making of FDIs has a long
tradition, but in several smaller countries, like Austria, Denmark,
Finland, and Norway, most of the FDIs have been made relatively recently. Because this study concentrates on the FDI
decision behavior of Finnish firms it can be mentioned that
Finnish firms had 54 foreign manufacturing units in 1970, 125
in 1980, 254 in 1985, 388 in 1987, and approximately 920
units in 1991 (see Larimo 1993: 15). The value of net investments made into those units during the years 1965-1985 was
about FIM 10.6 milliard (about 2.8 billion USD) and in
T
1986-1990 somewhat over FIM 22 milliard (about 5.9 billion
USD). Thus the investment flows were in the five-year period
Address correspondence to Jorma Larimo, Institute of Marketing, University of Vaasa,
RO. Box 297, 65101 Vaasa, Finland.
Aim of the Study
1. Identification p h a s e - stimuli to FDIs, routes to FDIs, and
motives for FDIs
2. Development phase-consideration of alternatives and
information collection
3. Selection phase-evaluation, choice, and authorization
In addition, the problems expected and those actually met, experiences of the investments and various other aspects of the
processes will be reviewed. The case studies have been selected
from 59 FDI cases reviewed by the author in another study
(Larimo 1986, 1987). The basis for the selection of cases was
that there should be differences in the background data of the
investment firms, process data, and the situational data.
Methodology of the Study
The cases that will be presented have been drafted by using
annual reports, in-house magazines, questionnaires, and inter-
Journal of BusinessResearch33, 25-55 (1995)
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26
J Busn Res
1995:33:25-55
J. Larimo
view results. Interviewees then checked them, and it was possible for them to add a few extra details. The managers who
were interviewed had been centrally involved in the FDIs
reviewed,
How reliable is such a data base for research? The strategic
decision process may be researched by observation, by study
of organizational records, and by interview or questionnaire,
Investigation of records is often impossible because strategic
decision processes seldom leave reliable traces in the files of
an organization. As Barnard has noted (1966: 192-193): "Not
the least of the difficulties of appraising the executive functions
of the relative merits of executives lies in the fact that there is
little direct opportunity to observe the essential operations of
decision. It is a perplexing fact that most executive decisions
produce no direct evidence of themselves and that knowledge
of them can only be derived from the cumulation of indirect
evidence. They must largely be inferred from general result in
which they are merely one factor, and from symptomatic indi-
of Finnish firms. Because the main aim is to illustrate various
types of processes observed among the investment processes
that have been studied by the author, the cases are selected in
such a way that there is variation in the background data (firm
size, extent and experience in international operations, especially concerning FDIs), in the process data (process nature,
routines, and dynamic factors), and in the situation data (competition situation, motives for FDIs, environment, role of organizations affecting the FDI). A summary of the main background data, process data, and situation data concerning the
cases is presented in Table 1.
cations of roundabout character."
Observation is certainly a powerful and reliable method (see
e.g., Mintzberg et al. 1976: 248), but extremely demanding of
research resources as strategic decision processes typically span
periods of years. The researcher is forced to study the process
Review of Empirical Foreign Direct
Investment Decision Studies
after completion, therefore obliged to rely heavily on interviewing. The best trace of the completed process remains in the
minds of those people who carried it out, as Mintzberg et al.
remark in their study (p. 248).
Tapping the memories of the decisiommakers could introduce two forms of error: distortion and memory failure. Obviously there is no reason to suspect any systematic distortion
in the study: This is argued by the fact that the goal of the case
studies was to try to trace and describe the decision-making
processes in such and not to analyze the progress of the
processes from a normative point of view. The possibility of
random distortion could have been reduced by using multiple
interviewing, but this was possible only in one case. As for memory failure, there is no doubt that some information on false
starts, unsuccessful steps, views, and influences of various persons during the decision processes went unreported. In the two
oldest cases it was possible to use more internal written material, which reduced the possibility of memory errors. (Concerning methodological issues in case studies see also e.g., Filstead, 1970; Glaser and Strauss, 1967; and Lindgren, 1982).
According to Normann (1976: 54) there are four different
ways to select cases. The four methods can be differentiated
according to the criterion for comparison: (1) comparison with
other cases, (2) comparison with (formal) theories, (3) comparison with ideal states and types, and (4) comparison with
traditional norms and presentations. As for FDI situations, no
ideal states or ideal types can be regarded as prevailing. The
main aim of this study is m illustrate various types of cases concerning FDIs and that is why there will only be limited analysis
in the form of comparison with formal theories in the area of
investment behavior. However, there will be some comparisons of the results with typical features of FDI decision behavior
wyn (p. 23):
There havebeenmajor analyses of decision-making in multinational corporations of course, but they tend to focus on
the issue of centralization versus decentralization in the making of various functional, product, and area decisions
(Goehle, 1980), rather than on the foreign investment decision itself. The conditions, motivations, and evaluation pracrices bearing on the decision to invest abroad have also been
studied extensively... This kind of analysis sheds relatively
little light, however, on the foreign investment decision process itself.
Framework for the Analysis of the
Foreign Direct Investment
Decision Process
In a 1983 article, Jean J. Boddewyn considers the situation in
the area of FDI decision-making studies. According to Bodde-
In Table 2 a summary of empirical research in the area of FDI
decision-making is presented. Of the studies where decision
behavior in several FDIs made have been analyzed, those by
Aharoni (1966), Wahab (1978), Larimo (1987), and Bj6rkman
(1989) may be regarded as the most important ones concerning the progress of the FDI process.
The study by Aharoni (1966) is a pioneering study in the
area of FDI decision-making processes. Aharoni states in his
study (p. 45-46): "... a foreign investment decision is a very
complicated social process . . . . It contains various elements
of individual and organizational behavior, influenced by the
past and perception of the future as well as the present. It is
composed of a large number of decisions, made by different
people at different points in time. The understanding of the final outcome of such a process depends on an understanding
of all its stages and parts." He stresses the importance of a strong
initiating force in triggering the strategic decision process. Once
management has recognized FDI as a legitimate problem or opportunity, an investigation process is initiated. During the investigation the firm searches for solutions to the problem or
FDI Decision Processes in Finnish Firms
opportunity. This is done, e.g., by desk research and on-thespot investigation. Aharoni refers to Cyert and March (1963)
and states that the search is motivated, simple-minded, and biased. He also points out that often the firm's level of commitment to the FDI increases as a result of the continuing investigation. Typically the firm does not reach a decision before the
reviewing bodies within the firm have bargained as to which
alternative solution is most appropriate. Leadership may permit the organization to settle conflicts during the dynamic bargaining process. For the firm with previous FDI experience,
organizational learning may cause changes in goals, in the balance of power among participants in the process, and in policies,
Wahab (1978) tried to make improvements in Aharoni's
study with the quantification and ranking of variables mentioned
by Aharoni and with the addition of a number of new variables
not mentioned by Aharoni. The empirical findings of Aharoni
and Wahab were different in two respects (Wahab 1978:
148-152). The first area of difference was the lack of emphasis
upon profit motivation in Aharoni's research. In the study of
Wahab the respondents repeatedly emphasized that profit was
an important consideration in FDI decisions. The second area
of difference was in the passive role Aharoni assigned to firms
in responding to FDI opportunities before the creation of an
international division or before the recognition of FDI as a legitimate problem area. The findings of Wahab showed that firms
were not only receivers of information in various forms, but
they were also seekers of information or were constantly in
search of opportunities,
In the study of Larimo (1987) it was found that the following features seemed to have been typical of the FDI decision
behavior of Finnish firms: (1) the stimuli to the investment came
from outside the firm in cases of first time investors and from
inside the firm in cases of repeat investors; (2) in contrast to
the findings in several U.S. studies, the FDI decisions were in
the majority of cases triggered by different types of opportunities, not by problems, in the target country of the investment;
(3) firms tended to have at least exported to the target country
before making the FDI; (4) a central motive for making a FDI
was the small size of the domestic market-in FDIs made in
OECD countries the size of the target country market, closer
contact to the customer, maintaining or expanding market share
and in FDIs made in LDCs arid NICs, the measures taken by
local officials to favor local products and nationalism were
central motives for the reviewed investments; (5) most of the
FDIs were horizontal types of investments; (6) Finnish firms
preferred wholly or at least majority-owned units in OECD
countries, whereas jointly and minority-owned units were relatively common in LDCs and NICs; (7) acquisition was the main
form of FDI in OECD countries and greenfield investments in
LDCs and NICs; (8) investments tended to be quite small in
relation to the size of the Finnish firm; (9) firms did not usually
develop many investment alternatives for evaluation; (10) central information categories were strategic suitability, size of the
market, market potential/market growth view, competitive sit-
J Busn Res
1995:33:25-55
27
uation and return on investment; and (11) investment decisions were usually go/no go decisions.
In the study by Bj6rkman (1989: 163-164) it was found
that in the reviewed cases the firms had developed only one
FDI alternative at a time. This concerned both the country to
be investigated, the location within the country, the choice of
whether to acquire a firm or to make a greenfield investment,
the choice of joint venture partner, and the choice of which
firm to acquire. Secondly, as in the study by Larimo, the results
indicated that the FDIs were only in very few cases triggered
by problems with current operations in the foreign country concerned but mainly by different types of opportunities. A third
observation was that the final FDI alternative was often clear
to decision-makers early in the decision-making process. Fourth,
it was found that prior to a change in general readiness to carry
out FDIs, the decision-makers did not perceive foreign production as a relevant alternative, in fact they exhibited an inertial
resistance. Finally, after the first commitment the investing firms
became more receptive towards FDIs-in six of the reviewed
seven cases in the study a new FDI decision-making process
was initiated shortly after the first commitment to FDI.
GeneralModel of the Strate~c Decision Process by
Mintzberg,Raisinghani, and Thior~t (1976)
The general model of the strategic decision process developed
by Mintzberg et al. (1976) will be used as the main framework
in this study. There are several reasons for the choice. Firstly,
this model was developed for unstructured decision processes
and, as presented in the introduction, FDIs are a fairly new
phenomenon for most of the Finnish firms, so that obviously
no predetermined and explicit set of ordered responses exists.
Second, the Mintzberg et al. model was developed for strategic
decision processes, and FDI can be regarded as an important
strategic decision in most cases. Third, there are many decision process models that are normative. In this study the viewpoint is behavioristic as in the Mintzberg et al. model. Fourth,
their model is more detailed than many other models, e.g., those
by Aharoni and Wahab, as can be seen from the next chapter,
where the main content of the world will be presented.
The study by Mintzberg, Raisinghani, and Th6or6t (1976)
is based on 50 strategic decision processes, of which 25 were
analyzed in depth. The central framework of Mintzberg et al.
resembles Simon's three-phase I-D-C process model (intelligencedesign-choice). Mintzberg et al. use the terms identification, development, and selection as the corresponding phases in their
research. They describe these three phases in terms of several
central "routines." In addition to the central routines, they found
three sets of supporting routines in the field study. To help to
explain the relationship between the central and supporting
routines, they use six sets of dynamic factors. The general model
of the strategic decision process developed by Mintzberg et al.
is presented in Figure 1.
The identification phase of decision-making comprises two
28
J Busn Res
1995:33:25-55
J. Larimo
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32
J Busn Res
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J. Larimo
Identification
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FIGURE 1, A general model of the strategic decision process (Mintzberg, Raisinghani, and Theoret, 1976: 266).
routines: decision recognition and diagnosis (p. 252-253). Decision recognition consists of opportunity, problem of crisis
recognition, and decision activity evocation. In diagnosis, routine management seeks to comprehend the stimuli evoked and
determine cause-effect relationships for the decision situation,
Information need for the evoked situation will be analyzed, and
information acquisition and the sources of information planned,
As with the identification phase, the development phase also
consists of two routines: search and design (p. 255-256). Search
is evoked to find ready-made solutions for the situation. Mintzberg et al. isolate four types of search behavior that vary from
an active searching for alternatives to a passive waiting for unsolicited alternatives. In a design routine, the firm strives to develop alternatives by itself or it modifies a "ready-made" solution. Because the development phase consists of routines that
lead to the development of one or more solutions to the situation, this phase can be regarded as being at the heart of the
decision-making process according to Mintzberg et al.
The selection phase of the model consists of three routines:
screening, evaluation-choice, and authorization (p. 256-257).
The screen routine is evoked when search has generated more
ready-made alternatives than can be intensively evaluated.
Screening is used to reduce the alternatives to a number that
can be stored and later handled by time-constrained decisionmakers. Evaluation-choice is then used to investigate the feasi-
ble alternatives and to select a course of action. The largest part
of the literature on the strategic decision process has focused
on the evaluation-choice routine. According to the findings of
Mintzberg et al. this routine seemed to be far less significant
in many of the decision process routines than the diagnosis
or design routines. The last routine is authorization, which is
used when the individual making the choice does not have the
authority to commit the organization to a course of action.
The three central phases in the strategic decision process
are supported by three sets of routines: decision control routines, decision communication routines, and political routines
(p. 260-263). Decision control routines guide the decision process itself. Faced with a decision situation, not only does the
decision-maker execute the steps leading to a solution, but also
plans the approach and allocates organizational resources to
get there. Decision control activities are difficult to study because they tend to be implicit and informal, taking place in the
mind of the decision-maker, and they tend not to leave tangible traces.
Decision communication routines provide the input and output information necessary for maintaining decision-making
Mintzberg et al. delineate three communication routines (p. 261).
The exploration routine involves the general scanning for information and passive review of unsolicited material. The investigation routine involves the focused search for and research
FDI Decision Processes in Finnish Firms
of special purpose information. The third communication routine consists of dissemination of the information,
There is considerable evidence of political activities being
a key element in strategic decision-making (p. 262). Political
activities reflect the influence of individuals who seek to satisfy
their personal and institutional needs by the decisions made
in an organization. These individuals, who may be inside or
outside the organization, are tied to the decision process by
their belief that they will be affected by the outcome. Their political activities serve to clarify the power relationships in the
organization or they can help to bring about consensus and
to mobilize forces for the implementation of decisions,
Strategic decision processes are often presented as a steady,
undisturbed process. In practice the situation is often quite
different. According to the findings of Mintzberg et al. most decision processes were unsteady, disturbed processes. They
found six different types of dynamic factors that affect the decision process (p. 263-266): (1) interruptions, which were caused
by environmental forces, (2) scheduling delays, because managers were severely time-constrained, (3) feedback delays, as
the decision-maker awaits the results of the previous action
taken, (4) timing delays and speed-ups; where managers may
speed up or delay a decision on purpose to take advantage of
special circumstances, to await support of better conditions,
etc., (5) comprehension cycles, within one routine or between
two routines in order to comprehend the issue, and (6) failure
recycling; where the proposed solution is for some reason not
accepted. Mintzberg et al. state (p. 263) that the dynamic factors are perhaps the most characteristic and distinguishing fedtures of strategic decision processes, and it is therefore surprising that they are hardly mentioned in the literature,
In the categorization of decisions Mintzberg et al. use in addition to the stimuli that evoked the process and solutions for
the processes also a third method, the process used to arrive
at the decision. Based on the third method the decision processes
reviewed in the study fell into seven groupings (p. 268-273):
(1) simple impasse decision processes, (2) political design decision processes, (3) basic search decision processes, (4) modifled search decision processes, (5) basic design decision processes, (6) blocked design decision processes, and (7) dynamic
design decision processes. The seven groupings appeared to
depend largely on the type of solution and the nature of the
dynamic factors encountered,
An application of the model by Mintzberg et al. to FDI situations is presented in Figure 2. (For details of the application
development see Larimo, 1987.)
Different Types of Foreign Direct
Investment Process Developments
in Finnish Firms
In the following, five different types of process development
concerning foreign direct manufacturing investments in Finnish firms will be presented in detail. The main features of the
I Busn Res
1995:33:25-55
33
process developments and the main events that affected the
processes will be presented.
Case 1" A Small Firm in the Electronics Industry
Firm A is a small firm operating in the electronics industry.
The firm is a part of a Finnish concern operating in several
fields of industries. The turnover of the concern was about FIM
80 million in 1983, of which the share of exports was about
20%. The turnover of firm A was about F1M 10 million, of which
exports accounted for about 50%. The exports of the firm were
mainly arranged directly from Finland or by using local agents;
the firm had only one foreign sales office. The concern had three
sales units abroad, established in the late 1970s and early i980s,
but no licensing agreements or assembly or manufacturing units.
In 1979 Firm A had negotiated possible cooperation, including
acquisition, with a foreign firm B, having heard that the firm
had financial problems (stimuli evocation; evaluation), but the
negotiations had ended at the preliminary phase (interruption).
Firm B had operated in the field for quite a long time and was
much bigger than firm A. The national attitude concerning the
firm and its ownership basis and the announcement that the
government would take part in the operation of firm B, mainly
as a financer, was an important factor in the reluctant attitude
of firm B toward cooperation and especially acquisition.
In 1983 the Board of Directors of the concern concluded
that firm A was too small a unit to grow on its own and did
not fit the overall strategy of the concern. In the strategic planning process the Board concluded that in the future firm A
should not concentrate on two, but only on one, business sectot. The firm was the only manufacturer in the sector in Finland, having acquired the only domestic competing firm some
years before. As a result of the strategic decision to concentrate
on one business sector, the Managing Director of firm A changed
because the former Managing Director acquired the other business sector.
After this strategic decision there was also the problem of
how to achieve the growth and profit goals in the business sector. As mentioned previously, the firm was the only manufacturer in Finland and an evident market leader. The only competitor in the Finnish market was firm B, which was mentioned
earlier. Because the market in Finland was relatively small in
the business sector in question, and no significant growth could
be expected within the sector in the future, the firm was forced
to base its growth mainly on foreign markets (stimuli evocation). Because of this, as a central criterion in the choice of the
new Managing Director, it was decided that he or she should
have experience in the planning and realization of foreign operations of other firms. A person who had the needed experience
w a s found and he was elected as the new Managing Director
of the firm in November 1983.
~n March 1984 the firm decided as its next move to study
the markets and future prospects in its industrial field, mainly
in Europe (diagnosis). Because of a lack of own resources, the
firm decided to contact a well-known foreign consultancy firm
(search), which some years earlier had been commissioned to
34
J Busn Res
1995:33:25-55
J. Larimo
The main factors affecling the decision process:
origin and nature of the stimuli; strategic plans of the firm;
international operation experience of the firm and its management;
quantity and nature of other stimuli in the firm; size of the investment;
potential target country, acquisition candidate and/or joint venture partner;
competition situation
Identification
!
Development
I
1
Selection
It
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• country, target ]
firm/joint ven-[
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location etc. ]
• clarification
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target
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Judgement:
policy/case
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Eval/Choice
• problem,
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opportunity
Analysis:
Evaluation
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|
|
• inside and
outside the
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Bargaining:
Eval/Choice
FIGURE 2. A general model of the foreign direct investment decision process and the main factors affecting it (Larimo, 1987: 154).
survey the future outlook in this particular tield by another firm
in the concern. The brief consisted of analyzing the economic
outlook for the field in question and of drawing up a strategic
plan for firm A (design).
Fairly soon after this, the management of the concern heard,
via personal contacts, that firm B was again facing financial problems and might be interested in cooperation or in selling some
parts of the firm. Because it was quite evident that internal
growth for firm A would take too long, the brief given to the
consultancy firm was revised, so that cooperation, including
the acquisition of firm B, was included in the study (design).
The consultancy firm completed its study in May 1984. The
results clearly supported the views of the Managers in firm A
about the leading position of firm B in its home market and
in the whole of Europe and, with certain products, even globally,
The demand for the products of the business-sector in which
firm A was especially interested was clearly highest in Europe.
The production volume of firm A was twice as big as the production volume of the second and third biggest firms in 1983. Earlier the difference in the size of production volume had not
been as big, but in 1983 firm B had completed some large contracts. Furthermore, firm B was a European company, the second and third biggest firms were both Japanese. The other firms
in the particular field (less than ten firms) operated mainly locally and were significantly smaller than the three biggest firms,
The consultancy firm's attitude towards more intensive cooperation with firm B, mainly in the form of an acquisition, was
very reserved, however. The gains of synergy were considered
fairly small in relation to measures needed to improve the financial state of the firm.
Cooperation with the second or third biggest firms in the
industrial field was not regarded as realistic by the Managing
Director of firm A, or by the Board of Directors of the whole
concern, because both firms were large Japanese multinational
companies. The turnover of these firms was over a hundred
times bigger than that of firm A. The share of the business secfor in which firm A was especially interested was only a fraction of the total turnover of these firms and as a consequence
their interest in developing firm A's business sector would obviously not have been as high as firm A's own interest. Additionally, the very different cultural background of the two firms
was expected to cause problems. Consequently, firm B was regarded as the only potential cooperation partner (evaluationchoice).
The study by the consultancy firm dealt with the acquisition of firm B with all its nine business sectors. However, firm
A was primarily interested in buying only one business sector
(i.e., the same as its own). Because of this, it was decided to
investigate the acquisition possibilities of that particular sector
more thoroughly. It was considered that the cooperation could
FDI Decision Processes in Finnish Firms
offer synergy effects in production and RgrD operations (firm
B had developed a new product which was regarded as very
promising by the managers of firm A) and economies of scale,
Additionally, because the main weight of the operation of firm
A was to be outside Finland in the future, the strong reputation
of firm B and its wide marketing network would lead to additional synergy gains. Thus, Concern management contacted the
two main shareholders of firm B at the beginning of June 1984
(evaluation-choice).
The owners of firm B had intended to divide the firm into
nine smaller units. In the negotiations between the main shareholders of firm B and the two representatives of the Finnish
partner (one member of the Concern Board and the Controller)
several models for cooperation were discussed. The representatives of firm B were interested in getting firm A and some
other firms in the concern to operate in several new units which
were to be formed. On the other hand, the representatives of
firm A were only interested in cooperation within their own
business sector, as presented earlier,
The result of the negotiations was that the firms drafted a
letter-of-intent agreement according to which the firms would,
in the future, investigate the possibility of firm A taking part
in the operation of the two new units, with management responsibility, and less intensively in the operation of some other units,
Firm A was itself especially interested in one of those two units,
but the other one was in a business sector in which another
firm in the same concern as firm A operated, and was therefore included in the letter-of-intent agreement (design).
In the negotiations held at the end of the following month,
the firms reached a preliminary solution according to which
firm B would sell part of its operation in the business field in
which A was especially interested to firm A. A new firm was
to be created, of which B would own 30% and A 70%. Firm
B would reorganize the operation of its business sector before
establishing the new unit. This concerned in particular the foreign sales network of firm B and a number of workers and
managers. According to the agreement, the Finnish firm would
also participate, with a minority ownership share, in the operation of another new unit. With regard to this unit, the partners had agreed on management responsibility investigations
earlier. On the suggestion of the management of firm A, they
decided not to start cooperation of other units (evaluationchoice),
The partners very soon reached an agreement concerning
the ownership share in the new unit, because firm B was interested in continuing in the business sector to some extent,
and the Finnish firm regarded it as sensible that firm B should
take part in the operation in light of its experience, know-how,
etc. In addition to the consultants who had made the industry
and strategy investigations, firm A hired two other firms of consultants to make further analysis. The firm had used both consuiting firms previously. One was engaged to make a more
detailed analysis concerning production and products of firm
B and the new unit, whereas the other firm had to make a more
detailed analysis concerning the management of firm B.
J Busn Res
1995:33:25-55
35
The proposition concerning the acquisition/establishment
of a new unit was discussed by the Board of Directors of the
concern for the first time formally in September (authorization)
and again in November 1984 (authorization). The final agreement was signed immediately afterwards. The final solution
differed from the earlier agreement in the respect that firm A
would not involve itself as a minority shareholder in the operation of the other unit. This decision was made on the initiative
of the Finnish firm. In the agreement there was an option, however, that the Finnish firm could buy a minority share in the
unit later.
The managers of firm A were unanimous about the FDI decision, but at concern level the managers of the other business
sectors were more reserved because the investment to be undertaken by firm A was so big that it would influence the investment possibilities of the other business sectors for several
years to come. Because the most influential members of the
Board of Directors of the concern regarded the project as worthwhile, however, there were no bigger problems with the authorization (political routines).
There were no problems in getting permission for the FDI
from the Bank of Finland (external authorization; from the late
1980s there has no longer been any requirement to obtain permission for the FDI from the Bank of Finland). The partners
had agreed that firm B would acquire all the permission from
the local authorities that was required. Apparently because of
the weak financial state of firm B and because there were no
other firms in that sector in the country with whom there could
have been cooperation negotiations, there were no big problems in getting permission in the target country, either (external authorization).
As can be seen, acquisition negotiations progressed rather
quickly. This was greatly influenced by the following facts: (1)
there existed a clear view in firm A that it should either grow
or leave the business sector and the firm had decided to stay
in the business sector; (2) the best way to grow would be an
acquisition and the best acquisition target firm would be firm
B; and (3) neither firm A nor firm B had any, at least any more
detailed, acquisition/cooperation negotiations, with other firms
at the same time.
A model of the progress of the decision-making process is
presented in Figure 3. Both opportunity and problem acted as
the stimulus for the process. No special project group was elected
for the process. Active search best describes the information
collection behavior. The design routine in the process can be
categorized as modified, i.e., features of both ready-made and
custom-made solutions could be identified. The selection routine resembled mainly the bargaining alternative. In the decision communication features of exploration and investigation
could clearly be found and dissemination at least to a limited
extent. The managers of other business sectors were somewhat
reserved because the relatively large size of the FD1 would influence the investment possibilities of other business sectors
in the near future. Thus political activities could be identified
in reaching the decision. Of the dynamic factors comprehen-
36
J Bush Res
1995:33:25-55
J. Larimo
Search
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FIGURE 3. The foreign direct investment decision process development in case 1
sion cycles could clearly be identified and scheduling delays
and failure recycles at least to some extent. As a whole the
decision-making process may be best categorized as modified
design decision process,
One of the central problems in the process was that firm
A was in a certain sense acquiring a firm that was in many
aspects (turnover, production volume etc.) much bigger than
the firm itself. Apparently the firm would not have had the courage to start the whole FDI process at all, if first there had not
been a concern behind it and a financing firm behind the concern and second, if there had not been personnel in the firm
who had experience of both domestic and foreign investment
planning and realization,
As a result of the investment, firm A and the new joint venture unit of which the firm owned 70%, had a monopoly position in Finland, in the home country of firm B and also in the
other Scandinavian countries. It had a market share of about
60% in Europe and of 30% globally in its business sector. The
budgeted sales in the first year of operation were about 40 million FIM, and the unit employed some 50 persons,
About one year after the signing of the FDI agreement the
Finnish firm acquired firm B's share in the production unit.
There was no option concerning this in the original agreement,
because firm A had thought that it was only sensible that firm
B took part in the operation and was a minority owner. However, the problems resulting from taking one business sector
away from a bigger entity were greater than firm A had expected. There were big changes in the operation mode, compared to the former operation of firm B, because in production
it was planned to use more subcontractors than earlier. In the
construction of the organization model, there were also more
problems between the partners than were expected. For example, finding a suitable Managing Director for the unit caused
unexpected problems and even before that some members of
the Board of Directors had to be changed. It was planned that
a Finnish person would be the chairman, but according to local law it was forbidden for a foreigner to act as a chairman.
The products of the firms were competing with each other to
some extent and the marketing channels overlapped somewhat.
It was planned that there would be no changes in the initial
stage and the problems presented by the consultancy firm used
in the strategic planning on how finally to arrange the marketing,
would gradually be solved. Later it became evident that reaching the marketing synergy goals was much more problematic
FDI Decision Processes in Finnish Firms
than expected. The reaching of production and R&D synergies
also yielded more problems than expected. It took until the late
1980s before the expected synergy effects could be reached,
Case 2: A Consumer Goods Manufacturer
Firm X operates in several industrial fields. The turnover of
the concern was about FIM 550 million in 1982, of which the
share of exports was 42%. The business sector under consideration (consumer goods) had a turnover of about FIM 80 million in 1982 and the share of exports in that business sector
was about 50% of the turnover. The firm had been the market
leader for certain products of that business sector both in Finland and in another Nordic country (Sweden) for several years,
To strengthen the market position in Finland, the firm had
made some domestic acquisitions in the late 1970s. In the 1970s
the concern had established two sales subsidiaries abroad to
support the export operation. One of them had been established
in Sweden to support the export operation of the business sector
in question. Additionally, one of the domestic subsidiaries of
the concern had established a small manufacturing unit of its
own in another industrial field outside Europe in the mid-1970s,
The export efforts made in the business sector outside the
Scandinavian countries in the 1970s had not succeeded as expected. There was a clear overcapacity situation in all Scandinavian countries. Because of this, the Finnish firm had had
cooperation negotiations with the two biggest firms in the industrial field (firms A and B, the former from Sweden and the
latter from Denmark). The three firms (X, A, and B) decided
to establish a new firm C in the early autumn of 1980. The new
firm, C, was to comprise one production unit that was formerly
owned by firm A and a small private firm from Sweden. Each
of the three firms A, B, and X would own one-third of the new
firm C. Some of the business sector's products would be
manufactured by firm C, some by firm X and the subsidiary
firm Y, which firm X had acquired a few years previously, and
some by firm B. Some of the products of firms A and X were
to be marketed under the same product name in the future,
The Management Team of the newly established firm C was
chaired by the Manager of the particular business sector of firm
X who at the same time also acted as Managing Director of firm X.
After some months, problems appeared in the cooperation
project. According to the cooperation agreement, firm Chandled all the sales of firms A, B, and X in Sweden. The problems
arose because customers wanted to be in direct contact with
firm X. Additionally, the Managing Director of firm C, who was
elected mainly on the proposal of the Management Team of firm
A, was unable properly to do his job and there was also some
financial confusion in the operation of firm C. Therefore the
Finnish firm X regarded it as sensible to pull out of the cooperation. Firm C's share was immediately sold to the other partnets at a low price in early 1981.
The operation of the Finnish firm's sales unit in Sweden had
diminished in the late 1970s, because the marketing personnel
worked directly under the parent firm, not under the sales unit.
J Busn Res
1995:33:25-55
37
During the cooperation period firm X had a marketing organization of its own in addition to responsibility for the marketing
arrangements of firm C, because the reorganizing of the operation was unfinished when firm X decided to sell its share in
company C. After the end of the cooperation the Finnish firm
decided to strengthen the operation of the sales unit. The former
Managing Director and shareholder of the subsidiary company
Y was appointed as Export Manager of the firm. His location
was Stockholm, the capital city of Sweden. He knew the customers well in the business sector in all Scandinavian countries and the sales began to grow remarkably. Outside the Scandinavian countries the sales of the firm had not yet reached
the level expected in spite of numerous sales efforts.
In summer 1982 the Managing Director of a small Swedish
company in the business field contacted the managers of firm
X and offered the company for sale (stimuli evocation). Sweden
was the second important market area for firm X, and because
the cooperation project had failed and the firm wanted to gain
an even stronger foothold in the market, it was considered that
the prospect of making the acquisition should be studied in
more detail (diagnosis). Because several small firms in the industrial field had gone bankrupt or were merged into bigger
firms, the number of alternative firms was fairly limited. The
representatives of firm X went to negotiate the deal. The suggested price was considered clearly too high by both managers
in relation to the weak financial state of the firm. Consequently
firm X decided to reject the deal straight after the first visit
(evaluation-choice). Shortly afterwards the small Swedish firm
went bankrupt.
A person who had worked as a consultant in the firm that
had been offered to firm X, bad bought the machines and equipment used in the firm before the bankruptcy and had started
production immediately. In June 1983 the manager of firm X's
sales unit reported to the manager of the business sector that
this company was perhaps for sale (stimuli evocation). The share
of sales in Sweden was about 30% of the total sales of firm X
in the business sector, and the share of total exports was 60%.
The turnover of the Swedish firm was under FIM 5 million and
it employed about 30 persons, so it was a fairly small unit. However, the firm manufactured certain products of a very wellknown product family. The Finnish firm's market share of the
products that the unit manufactured was about 40% in Sweden
and the market share of the target company about 10%. There
were only two other bigger firms in the business sector. One
of them was owned by a foreign company and was probably
not for sale and the other one was company C, with which the
Finnish firm had had the failed cooperation agreement. Other
firms in the sector were small and not of interest. Consequently,
no real acquisition alternatives were available. Because of the
clear overcapacity in the industrial field a greenfield investment
was also out of the question (diagnosis-search).
The target firm's customers consisted mainly of those of the
firm's former owner. The firm was the only producer of the
particular products in Sweden. The firm had a different distri-
38
J Busn Res
1995:33:25-55
bution network from firm X and the other firms in the industrial field, thus the acquisition would make it possible to have
a broader distribution base. The owner of the firm was famous
for starting and modernizing firms and then selling them. Based
on this, it was expected that the firm would also be offered to
other firms. Because the acquisition would offer the main competitors a possibility of completing the product range, it was
evident that they would also be interested in the acquisition,
The Administrative Director and some other experts discussed
the situation unofficially with the Managing Director of firm
X and it was decided to start the negotiations on possible acquisition as soon as possible (evaluation-choice; authorization)
to maintain an edge over the competitors (speed-up).
During the first trip the partners signed a letter-of-intent
agreement concerning the conditions of the deal. According to
the agreement, the Finnish firm had priority rights to the firm
if there were not to be big changes to the original conditions
of the acquisition. The Administrative and Financial Director,
manager of Swedish export, and some production and technical experts made three trips to the target firm, during which
detailed analysis concerning the production, financial state, etc.
were made. The central questions in the negotiations were the
purchase price, the sales arrangements that the firm had made
with one customer, and the future of the company employees,
Concerning the sales arrangements, the target firm had given
one customer a 95% monopoly in selling the firm's products,
Concerning the post-acquisition situation, the owner Managing Director, who was of local origin, wanted guarantees that
all the workers could hold their jobs. Because the Finnish firm
was to be the sixth owner of the firm in just a few years, the
employees' deep concern was understandable. During the third
trip to October 1983 the partners made a preliminary acquisition agreement (evaluation-choice).
The final acquisition proposal was presented in December
1983. There were only a few minor changes to the preliminary
agreement. The Finnish firm committed itself to employing the
former Managing Director and all the employees at least for a
specified period. Alternatively, the firm was to pay compensation (evaluation-choice). The owner Managing Director and the
workers approved of the proposal and it was formally presented
to the Board of Directors of the Finnish firm in January 1984
(authorization). The firm moved preliminarily into the ownership of the Finnish firm in December 1983 and finally in May
1984, when the Bank of Finland and authorities in Sweden gave
permission for the deal (external authorization). A model of
the progress of the decision-making process is presented in Figure 4.
In the process both opportunity and problem acted as the
stimulus. As in case 1 no special project group was created.
Active search was used in the information collection. As for
solution, it may be stated that it was found ready-made. The
evaluation-choice procedure in the case is best dassified as haying been bargaining. In the decision communication exploration and investigation could clearly be recognized and dissemination at least to a limited degree. Of the dynamic factors,
J. Larimo
comprehension cycles and timing speed-ups could clearly be
identified and scheduling delays at least to some extent. If the
original cooperation agreement that was canceled is taken into
account, failure recycle could also be identified. If the original
cooperation agreement is excluded, case 2 may be categorized
as a whole as having been near to a basic search decision process; no alternatives were considered and the conditions of the
deal were presented to the Finnish firm already at the beginning of the process.
Via the acquisition, the Finnish firm could expand its market share in Sweden from 40-50% in certain business sectors.
At the same time, the firm strengthened its position as the biggest firm in the industrial field in Scandinavia. It was possible
to conclude the negotiations fairly quickly, because the Finnish
firm knew the market very well already, knew what kind of
alternatives it had, and because the size of the investments was
very small. In the Finnish firm the acquisition raised no objections among managers of other industrial fields because of the
size of the investment. The process of acquiring the firm
progressed steadily- only in the contact phase there was a need
to push the matter. In other stages no speed-ups or time delays
existed.
Before the acquisition it was expected that cost accounting
and reporting would be the biggest problem areas. However,
after the acquisition it became evident that the main product
the firm manufactured was not as competitive or in such demand outside Sweden as the Finnish firm had expected. Firm
X had planned to increase the production volume of the acquired firm by about 50% through exports. The main product
was rather different from the other products of the firm and
its production was more costly than anticipated. The firm that
had made the monopoly selling right agreement would not allow the firm to sell the product or any other products of the
same type in Sweden to any other customers or it would have
stopped buying products of the Finnish firm altogether. For
some years orders from that customer had declined to 50%
of earlier levels and the Finnish firm was considering whether
it should renew its marketing arrangements in Sweden or if
there was something else that could be done. The firm decided
to develop a similar type of product that had been sold in
Sweden for some time. The other main problem was that the
former owner Managing Director of the firm did not consider
the interests of the new owner, but established a new competing firm without permission. The products of that unit were
manufactured from different materials however (there was in
the acquisition agreement a paragraph that prevented the starting of production of the same material for a four-year period).
The Managing Director was dismissed, and a new Managing
Director moved from the parent company to Sweden in late
1985.
Positive results were achieved in production development.
During the following two years the productivity of the firm rose
by about 100%. In spring 1984 firm C and some other small
firms in the industrial field went bankrupt and thus the position of the Finnish firm has not weakened as much as could
FDI Decision Processes in Finnish Firms
39
J Busn Res
1995:33:25-$5
Search
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Diagnosis
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recognition
Design
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May 1982
June 1983
T Interrupt
May 1982
December 1983/
May 1984
FIGURE 4. The foreign direct investment decision process development in case 2.
be expected on the basis of the problems presented previously,
The situation has been partly affected by the fact that the firm's
exports from Finland to Sweden increased somewhat. In 1988
there was a management buy-out operation in the Finnish firm
X. Because of the great need to rationalize the production in
the business sector the new management team decided to concentrate the whole manufacturing of the products on the main
production unit of the firm in Finland. Therefore the production in the acquired Swedish unit was finished and the unit
was changed to a sales unit in late 1988.
Case 3: A Chemical Manufacturer
Firm X is part of concern Y operating in the chemical industry
and it is fully owned by the concern. The turnover of firm X
was about FIM 400 million in 1983, of which the share of exports and other foreign sales was 25%. The number of eraployees was about 870 persons. The total turnover of concern
Y was about FIM 4,000 million in 1983, of which the share
of exports was 40%. The main mode of foreign operation of
firm X was exports. The main target countries were Sweden
and the Soviet Union. The firm had established a sales subsidiary jointly with another Finnish firm in Sweden in 1967. In
1976 firm X had bought the other firm's shares in the subsidi-
ary. In addition, the firm had cooperated with a Dutch firm
in the 1970s and, since 1978, with a Norwegian firm.
The parent firm of the concern had established sales offices
and representation units in eight countries between 1960 and
1980. A a result of a domestic acquisition, the parent firm had
also gained ownership of a production unit outside Europe.
The operation of the unit had been stopped after several years,
because it did not fit in with the overall strategy of the firm
and the unit was also unprofitable. In 1982 the parent firm had
bought a firm in the U.K In addition, the parent firm had
negotiated another possible acquisition in the same country during 1983, but without results.
The market share of firm X in Finland was about 45% at
the beginning of the 1980s. It had been a leading firm in the
Finnish paint market for a long time. Of domestic sales, the
share of trade and construction paints had been about twothirds, the share of industrial paints about one-third, and the
share of other sales a few percent. Expanding in the domestic
market seemed to be nearly impossible. The field of industry
in which firm X operated was (and can still be) regarded as
saturated in Scandinavia and also in the rest of Europe. As in
other saturated industries, there had also been a trend toward
bigger units in this one (stimuli evocation-diagnosis). Because
40
J Busn Res
1995:33:25-55
of this, the management of firm X started to look for suitable
foreign cooperation parmers in 1981 and had negotiations with
some German firms and a French firm during 1982-1983, but
without results (search-evaluation; interruption),
In 1982 firm X decided to invest in a new research center.
Because the R(~D costs were relatively high, domestic markets
fairly limited and growth m the market share was unlikely the
firm's share was about 50% in Finland the pressure to expand
abroad became more obvious. On March 12th, 1984 one Swedish firm, K, in the particular industrial field announced in some
economic magazines an offer to buy the shares of a firm, Z,
in the U.K. at the price of GBP 0.75 per share. When a firm
announces that it is ready to buy the shares of a PLC company
in the U.K, the bidder has to draft a fairly comprehensive offer. Firm K submitted an offer of some 30 pages on March 21st
(stimuli evocation),
Firm Z, which was a concern, consisted of two parent firms
(a holding company) with several production units across the
U.K. The parent company also had production units in four
other European countries and in two countries outside Europe.
The turnover of firm Z was about FIM 800 million in 1983,
of which the share of the foreign production units was about
20%. The firm had about 2,600 employees. The firm was one
of the leading manufacturers of trade, construction, and industrial paints, it had a 10% market share of the industry's retail
market in the U.K. in 1983, and was the fourth biggest firm
in the country. In certain small industrial sectors firm Z held
the leading position. The importance of the foreign units for
the firm's financial position had grown. As the markets in the
U.K had declined over the previous four years, the foreign units
had given needed balance to the firm's operations. However,
the financial state of the firm was relatively poor.
The firm had numerous shareholders, all of whom owned
less than 5% of the firm. The financial results of the firm had
been good until the late 1970s, but had become weaker and
weaker in the early 1980s. The main reason for this had been
that the production facilities of the firm had become outdated,
and there were too many people employed in the factories. The
firm had invested in acquisitions, all of which had not been
as satisfactory as expected. Because of this, the quotations for
the firm's shares had continued to fall over the past few years.
Firm Z seemed to have good products, a good reputation,
and a good marketing network. The production facilities of the
firm were old-fashioned and thus needed modernization. Because the Finnish firm had experience of the modernization
of old production facilities in the domestic market, no significant problems were expected. RggD, acquisition of raw materials,
and technology and investments were also regarded as possible synergy areas. Additionally, the U.K. was regarded both in
cultural and in language terms as one of the easiest countries
to enter. The firm had already exported on a small scale to the
U K The parent company of firm X had more experience of
operations in that particular country, because it had established
some sales units there during the 1970s and had also acquired
a production unit of its own in 1982 (diagnosis). Because the
J. Larimo
cooperation negotiations with other foreign firms had not succeeded and other potential acquisition target firms could not
be identified quickly, the alternative seemed promising (searchevaluation).
The Board of Directors of firm Z decided unanimously not
to accept the offer made by firm K. The shareholders were informed of this decision. At this stage the Board of Directors
of the Finnish firm X considered it sensible that they should
make an offer for the shares of firm Z (design). When firm X
was still drafting its offer, a PLC company L in the U.K announced on April 10th, 1984 that it would make an offer to
buy the shares of firm Z. The actual letter was sent on April
19th, and it contained a recommendation by the Board of Directots of firm Z to its shareholders to accept the offer. The price
quoted was GBP 1.10/share, i.e., GBP 0.35 higher than in the
offer made by firm K. As an alternative, firm L offered its own
shares for sale. Based on the quotations, the offer of firm L was
GBP 1.23.
After considering the offer made by firm L the Finnish firm
announced its own offer to the Board of Directors of firm Z
and to the press on the 9th of May. The firm was prepared
to buy the shares for GBP 1.25/each (evaluation-choice). The
offer, which included the recommendation by the Board of
Directors of firm Z to sell the shares to a holding company that
the Finnish firm had established in the U.K., was sent to all
shareholders. This meant that the Board of Directors of firm
Z had cancelled its recommendations to sell the shares to firm
L. During the offer drafting process, the Finnish firm had gradually brought firm Z shares and at that stage it owned 13% of
them.
The offer made by the Finnish firm in cash was clearly higher
than the offer made by firm k, but in comparison to the share
offer made by L, only a little higher. Because the Finnish firm
offered cash, it was obvious that firm L had to do something
to make the price of its own shares rise so as to be able to continue the acquisition negotiations. Immediately after that, firm
L announced in the press that its financial result in 1984 would
be better and therefore yield increased dividends. It also informed the press that it had sold some property at a good profit.
As a result the quotations for firm k's shares rose slightly over
GBP 1.25, i.e., the offer made by the Finnish firm. During the
last week of May they varied from GBP 1.27 to GBP 1.28.
Meanwhile the Finnish firm had tried to make a competitor
analysis of firm L. The turnover and the number of employees
of firm L were about 50% bigger than those of the Finnish firm.
The financial results of the firm had been very satisfactory during the last few years. About 50% of turnover came from outside the U.K. As stated before, the potential sectors of synergy
according to the Managers of firm X were R6~D, acquisition
of raw materials, technology, exports, and investment (diagnosisevaluation).
According to the view of the Managers, firms Z and L could
offer synergy effects to each other only in the acquisition of
raw materials and even then only to a limited extent. To improve the situation from the Finnish firm's point of view, the
FDI Decision Processes in Finnish Firms
J Busn Res
41
1995:33:25-55
firm decided to publish an article in one of the leading business magazines in the U.K The article dealt with the competition arguments of firm L and synergy effects of the acquisition
from both firms' point of view. Firm X was interested in acquiring firm Z particularly because other possible firms in the
field were too big. In fact, the acquisition of firm Z would also
strain firm X's resources almost to the full. Consequently, firms
bigger than Z were out of the question. On the other hand, firm
X was not as interested in buying a local firm with only a limited
market area. With regard to firm Z, the management of firm
X was interested primarily in its operation and manufacturing
units in the U.K. and interest in the foreign operation of the
firm was only secondary,
There was a declining trend on the Stock Exchange in the
U.K. at the end of May and beginning of June 1984. In addition,
the published article could have had some influence on the fact
that the quotations for firm L fell somewhat to GBP 1.23-1.24,
i.e., under the bid of the Finnish firm. Because of this, firm L
canceled the June 7th cash bid. It still offered its shares for sale
but in addition to them it offered GBP 0.10/share in cash, making
the bid equal to GBP 1.33-1.34.
The management of firm X was of the opinion that in this
situation there were three different alternatives (design): (1)
to give up the acquisition idea, (2) to make a new "ordinary"
bid, or (3) to try something new and surprising. The management did not want to give up the acquisition idea yet, so the
choice was between alternatives two and three. Over half of
the shareholders of firm Z were professional investors, and it
was expected that at least they were aware of the fact that the
offer had apparently reached the limit of its market value. An
offer in cash was likely to beat an offer that was made in shares
when the bids were approximately the same level. The main
questions concerned: (1) the kind of possibilities that the firm
had to make a surprise offer; (2) the outcome if the surprise
offer failed; and (3) the limit to which firm L would raise its
offer (evaluation).
After considering the situation, firm X made the following
offer on the afternoon of June 12th (choice): the firm offered
GBP 1.40 in cash immediately, the offer was valid for three hours
only and the firm had to obtain the majority of shares, thus
becoming the principal owner. If these requirements were not
met, the offer would expire. Immediately after having made the
offer, some 20 brokers began to contact certain shareholders,
By the evening of the same day, the firm had acquired 37%
of the shares of firm Z. Because the firm had during the previous weeks acquired over 13% of them, it now had slightly over
50% of the share stock,
A firm that owns 30% or more of the shares of a PLC company in the U.K. has to be prepared to buy the rest of the
shares, too. When share ownership exceeds 90%, it is possible to acquire the remaining shares by compulsory purchase,
The management of the Finnish firm decided to make an offer
to buy the remaining shares at the price of GBP 1.40 in cash
(evaluation-choice). In September 1984 the firm had gained 98%
of the shares,
Firm X had now acquired a foreign firm that had a turnover
twice as big as its own and production units in six countries
outside the U.K. The total price of the deal was about FIM 200
million. It took three months from the stimuli evocation to the
purchase of firm Z. When considering the timetable of the investment process, it is worth noting that the firm had already
earlier regarded it as necessary to try to expand abroad and
had, consequently, negotiated with a number of foreign firms
about acquisition. Firm X itself did not have any experience
of more intensive operation abroad, but the parent firm had
some experience, especially of the U.K. However, the concern
level did not participate very actively in the process, because
the parent firm itself had important foreign acquisition negotiations going on at the same time.
Managers of firm X had started drafting an integration plan
even before the acquisition process was completed. Some of
the production units of firm Z were to be closed down and
others modernized. It was decided to reorganize the Rg~D operation step by step between the firms to avoid overlapping. The
products and marketing of the firms were to remain unchanged
and independent. It was estimated that the costs of immediate
technical changes would be about FIM 60-70 million. It was
planned to carry out a similar type of automatization program
of manufacturing in the unit as the firm had made in Finland.
In the Finnish firm, the Managing Director and the Administrative Director were responsible for the planning of the acquisition and the integration of the acquired firm into the operation of the acquiring firm. All proposals for making offers were
discussed by the Board of Directors of firm X and by that of
the concern. In addition, permission to export currency was
obtained from the Bank of Finland in advance (external authorization).
Furthermore, the following organizations took part in the
process in various phases: the Merchant Bank, which acted as
the chief adviser and local organizer, a lawyer's office, which
took care of, e.g., the establishment of the holding company
that officially bought the shares; an auditors' office, which took
care of the financial details of the offer; a firm of stockbrokers,
which contacted shareholders and arranged the purchase, and
a Finnish Bank, which arranged the required credit. Permission was also needed from the local Fair Trade Commission,
which ensures that there will not be too much concentration
in the field of industry because of the acquisition. In this case
there was no problem in obtaining permission (external authorization).
A model of the progress of the decision-making process is
presented in Figure 5. As in the two other cases discussed, opportunity and problem were stimulus for the process and no
special group was created for the project. Active search was
used in the information collection and, as in case 2, the solution can be stated to be found ready-made. The evaluationchoice behavior resembled mainly bargaining as also in cases
1 and 2. In the decision communication all three types of routines could be identified and political routines were a key element in the process. Of the dynamic factors comprehension
42
J Busn Res
1995:33:25-55
J. Larimo
Search
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March 1983
June 1983
FIGURE 5. The foreign direct investment decision process development in case 3.
cycles and timing speed-up could be recognized clearly (the
offer made by the Finnish firm concerning the buying of the
shares was valid for three hours only). On the whole case 3
may be categorized best as a modified design decision process,
Over the period 1984-1985, firm X invested in the U K
to build a new paint factory, and it brought a sector dealing
with, e.g., farm machine paints from a competitor. Two of the
foreign manufacturing units of firm Z came under the direct
ownership of the Finnish firm. Because of an unsatisfactory
financial result, one of those units was sold. Gradually, the higher
management of firm Z was totally changed. The management
of the Finnish firm had expected the operation of firm Z to be
profitable by 1985. Because there was a need for larger investments and changes in the management of firm Z, a financial
surplus was not expected until 1986 at the earliest.
In 1986 the operation yielded a financial surplus, but the
result was not at a satisfactory level. Therefore the Finnish firm
established two new manufacturing units and acquired three
units from its competitors in the U.K between 1987 and 1989.
Together with the continued rationalization processes in the
units acquired earlier, the new investments strengthened the
competitive position of the firm and the firm was even the market leader in some subfields. However, the financial result has
not been at a satisfactory level, and the firm had made additional acquisitions and also divestments in the U.K. in the 1990s.
Case 4: A Tractor Group
Firm X is the parent firm of a concern that is operating in the
metal and engineering industry. The turnover of firm X was
about FIM 1,800 million in 1978 and the turnover of the whole
concern about FIM 2,000 million. The operation of firm X was
divided into seven industrial sectors. The share of the business
sector under consideration, i.e., the tractor group, was about
25% in 1978. The share of exports of the firm's turnover was
56% and of the tractor group's turnover 35%. In the 1960s and
1970s the firm had established sales subsidiaries in eight countries. At the beginning of the 1960s a manufacturing unit for
tractor operation was set up in Brazil. The firm had also made
several cooperation and licensing agreements with foreign firms.
The relevance of the foreign unit was central to the operation of the firm. Because of this, it was one of the seven industrial groups of the firm. The turnover of the production unit
and its local marketing units was only a little smaller than the
turnover of the industrial group in Finland in 1978. Thus the
share of the tractor sector was nearly 50% of the total turnover
of the firm. The tractor unit employed a little less than 1,700
people in Brazil in 1978; that is, a little more than in Finland.
The Management of the firm had only recently considered
whether it should continue in the tractor business or if it should
leave the whole business sector. The Management regarded it
FDI Decision Processes in Finnish Firms
as sensible to continue and because of this the firm had started
cooperation negotiations with its main competitor in Scandinavia, the Swedish Volvo concern, to rationalize the business sector. As a result of the cooperation negotiations, Volvo decided
to abandon the business sector in favor of firm X through certain transition period arrangements,
Demand in the business sector had declined in Finland and
the other Scandinavian countries and was not enough as a sole
basis for the operation. Competition in the Central European
market was hard because all the multinational companies in
the industry were operating there. So the managers were of the
opinion that there was a need for new target countries in the
business sector (stimuli-evocation). To find new suitable target
markets a special unit was established at the beginning of 1978.
The new u n i t - technology transfer group-employed only a few
persons. Its task was to investigate various countries to which
the firm could start exporting e.g. components, on a regular
basis and to establish units in these countries. The unit was
to concentrate on developing countries as a location for the units,
The choice of the target area was affected by the market situation presented above, the firm's experience of the operation
in Brazil, and the increase in development assistance funds in
Finland (diagnostic; search; evaluation),
In the spring of 1978 the President of Tanzania visited Finland. During the visit, senior officials discussed industrial development assistance between Finland and Tanzania among
other things. In the autumn of 1978 the Prime Minister of Finland visited Tanzania and paid a visit to an experimental farm
that was managed by different Scandinavian countries. In the
discussions, farm machinery was mentioned as a potential
cooperation sector. At the same time the possibility of using
development assistance funds in the operation was discussed,
At this stage the possibilities of firm X acting as a cooperation
partner were also discussed, because the firm had long experience in the planning and operation of a tractor manufacturing unit in another developing country. Additionally, the
Finnish firm had exported tractors to Tanzania for some years
already and local authorities were satisfied with the tractors
(stimuli reinforcement).
At the beginning of 1979, four persons from firm X traveled
to Tanzania to clarify the possibilities of technical-economic
cooperation in the country. The so-called prefeasibility research
group consisted of the Project Manager and production, motor, and tooling experts. In 1979, not long after the second oil
crisis, many international organizations had optimistic views
on economic development in many LDCs, such as Tanzania.
During the trip the group carefully investigated the prospects
for industrial operation, the education system, the level of education of the work force, the agricultural methods, and the degree of mechanization and the level of machinery in agriculture (diagnosis). Regarding the operation mode, originally it was
planned to continue traditional export operation. However, already at this stage, symptoms of poor exchange rates were becoming apparent in Tanzania, as a result of which the local
authorities' attitude toward imports of tractors was becoming
J Busn Res
1995:33:25-55
43
increasingly negative. Freight costs had also risen. Licensing
was not regarded as a possible operation mode either, because
the local authorities expected firm X to invest capital in the project to ensure the transfer of all the needed technical know-how.
Consequently, it was evident that the only possible operation
mode for the firm was to establish a manufacturing unit in Tanzania if it wanted to have a permanent foothold in the market
(evaluation-choice).
Therefore the group tried to clarify, e.g., the size of the plant,
the technical requirements of the products and the budget for
the project. The main products of the Finnish firm's factory
in Brazil were agricultural tractors and because Tanzania was
an agrarian country, it was planned that the unit should concentrate on assembling and manufacturing agricultural tractors.
About 700 new tractors were imported annually to the country. The number of tractors in use was about 5,000 and their
average operating time was four years. Based on these facts,
it was planned to start the operation by assembling and manufacturing from 500 to 1,000 tractors per year. It was planned to
increase the output gradually and that production over a 10year period should be as strong and simple as possible. There
should not be too many electrical appliances or detachable parts,
and those items should be well protected and easy to maintain.
Concerning the budget of the project, the product group calculated that the development, planning, training and transfer of
technology would cost so much that some of the cost items
should be covered by development assistance funds (design).
The local partner in negotiations was the National Development Corporation (NDC). The Development Corporation had
negotiated similar types of arrangements in some other fields
of industry and, for example, a joint venture unit had been established for the production of trucks. The foreign partner in
that investment was a Swedish firm. In the discussions some
problems arose concerning, e.g., the technical details of the tractots. The local representatives wanted the tractors to meet international requirements regarding design, for example. Other
problems during the negotiations will be discussed later in the
study.
Based on the prefeasibility study, the parmers signed a Letterof-Intent agreement, concerning the project in May 1979. According to the agreement the partners would establish a tractor manufacturing company, in which the Finnish firm would
own a minority of the shares only. In the planning and realization of the production, the technology and technical expertise
of the Finnish firm were to be used. The production of the unit
would be marketed on the domestic markets in the first place
and later in neighboring countries. The local partner should
try to influence the authorities so that there would be limitations on tractor imports. The manufacturing of parts and components should be moved gradually to become more and more
local. Also local resources (subcontractors etc.) should be used
in the operation. In the Letter-of-Intent it was agreed to start
the operation temporarily as an assembly unit. The main components would be imported from Finland and some minor parts
should come from local subcontractors. The period of temporary
44
J Busn Res
1995:33:25-55
manufacturing was planned to be about 3 years (evaluationchoice),
After the signing of the Letter-of-Intent agreement more
detailed negotiations were held. They dealt with the commercial and technical aspects of the project, its realization and timetable. Based on the negotiations, a feasibility study, "Development
Program for the Tanzanian Tractor Industry," was drafted (design). The study was based on the preliminary investigations
made by the local partner, following which the Finnish firm
made its own changes, and then the final report was written,
The feasibility study included: the goals of the partners, the
transfer of technology needed in the project and the various
phases in the process, the production plan, plans concerning
education, service and maintenance, the integration of the plant
to the local economy, and the cost and return plans. When the
study was finished, the partners agreed on the realization of
the project in an Interim Agreement in December 1979 (evaluation-choice). At the same time the partners decided to start the
negotiations concerning the final agreement at the beginning
of 1980.
The investments needed for the plant were calculated to rise
to FIM 180 million during the years 1980-1987. During the
first two years the investments needed were to require about
FIM 45 million. All the investments were to be made by the
new joint venture unit. The project was to be financed by local
banks, the shareholders with their capital stock and a new Finnish organization Finnfund, suggested by the Finnish development assistance officials. Finnfund was officially established in
spring 1980 to support Finnish firms' technology transfer
projects to developing countries and to act as a minority shareholder in joint ventures established in developing countries at
the initial phases of the operations. The unit operated under
the administration of the Ministry of Foreign Affairs. The tractor project in Tanzania was to be the first large project of the
organization. At this stage of the process, the planned capacity
of the factory was 1,500 tractors a year, which was supposed
to be achieved within four or five years. In the first year the
production target was about 500 tractors,
Before the final negotiations concerning the project, the partners started to negotiate the technology transfer agreement
which was to precede the establishment of the new unit. During the negotiations, it appeared that it would be possible to
get financial assistance from the Finnish development funds
amounting to FIM 24.4- million to finance the service operation
of tractors, training of employees, and management assistance,
Without those funds, the partners would obviously have been
forced to leave the project because of the weakened economic
situation in Tanzania (evaluation-choice).
During the spring of 1980 the local parmer changed. The
change of partner was due to the reorganization of the industry in Tanzania. SMC (State Motor Corporation) was the new
local partner. The person responsible for the negotiations remained the same, however. In practice, the change of the organization had no obvious influence on the process and its
progress,
J. Larimo
The joint venture agreement was signed at the end of September 1980, the proposal being accepted formally by the Board
of Directors of the Finnish firm before that (authorization). According to the agreement, a new firm called TRAMA would be
established. The shareholders of the firm would be the Tanzanian State Motor Corporation, the Finnish firm, and the Finnish development assistance organization, Finnfund. The total
investment would be 240 million Tanzanian shillings (about
FIM 112 million) over a 10-year period. Of the total investment, the share of both Finnish partners would be Tsh 10 million and the share of the ownership 10% each. The originally
planned capacity goal had been lowered by mutual agreement
because of the balance of payments problems of the country.
According to the agreement, the goal was to assemble 300 tractors a year during the initial phase. It was planned to increase
the number of components manufactured in Tanzania gradually. The conditions concerning the agreement's execution were
rather extensive and complicated and concerned, e.g., the financing of the project. It was also required that the local parliament
approve the establishment of the unit. The contractual arrangements were fairly similar to those concerning the truck manufacturing unit established jointly by a local firm and a Swedish
firm (presented earlier in the study). The production figures
in that investment were much higher, however, and in fact had
turned out to be too high.
During the negotiations, from the very beginning to the signing of the agreement, most consultation and disagreement was
caused by the following matters: (1) financing of the project,
cost compensation and profitability goals of the project; (2)
transfer of technology, production volume, project range, and
protection of the production by import limitations; (3) management of the unit; (4) choice and training of the employees; and
finally (5) marketing of the tractors.
1. The local partner considered the problems in project
financing to concern mainly the availability of risk and
loan capital and the supervision of the use of development assistance funds. The Finnish partner, on the other
hand, emphasized the importance of the profitability and
the rate of return of the project and also the financing
during the period of highest risk. The problems in the
country's current account affected the views of the local
partner. The Finnish partner did not expect to receive
a dividend in the initial phase of the operation, but hoped
to get compensation for the investment in the form of
exports of, e.g., components.
2. The plans concerning the assembly and production volume have partly been dealt with already. The local partners wanted to have high production figures, whereas
the Finnish partner regarded it as sensible to start
modesdy but increase production gradually. There were
different opinions between the managers of the Finnish
firm regarding this question. Some of the managers were
ofthe opinion that the production volume should be similar to the production volume in the other foreign unit
FDI Decision Processes in Finnish Firms
of the firm. However, most of the managers supported
a smaller production volume in the initial phase to maximize the risks (political routines).
Concerning product range, the local partner wanted
a broader range than the Finnish partner (in addition to
the agricultural tractors, forestry tractors and some other
products). After negotiation the partners also decided to
include agricultural machinery in the production range,
The Finnish partner was ready to broaden the product
range, because the buying behavior of local farmers was
different from the buying behavior, for example, in Finland and other Scandinavian countries. This made it sensible to broaden the product range. The local partner
wanted to use local subcontractors intensively already
in the starting phase, but the Finnish partner did not regard this as realistic. So the partners made a compromise,
The use of local subcontractors would be increased gradually according to the production level and quality development of the local firms. To ensure sales of the production the local partner should negotiate with the local
authorities not only about import limitations but also
about giving priority to the firm's products,
3. According to the agreement, the local partner had 80%
of the share capital, the Finnish firm had 10%, and Finnfund 10%. The Finnish partner did not want to have a
higher percentage of the share capital. The Finnish firm
was responsible for the unit's management that had also
been its goal. The local partner wanted to have an English style management system in which the board of
directors is the central organ. The Finnish partner wanted
a management system where the factory manager had the
operational responsibility and the matters discussed by
the board of directors would thus be limited. The latter
alternative was chosen by the partners and a Finnish
Managing Director was appointed to the firm.
4. Concerning personnel, the local partner emphasized
training and employment effects of the unit in the tractor
factory and subcontractor firms. The Finnish partner, on
the other hand, tried to emphasize the meaning of skills
and productivity in the choice and development of personnel,
5. The local partner saw the exports of the products from
the viewpoint of production volume and current account,
whereas the Finnish partner saw the exports mainly from
the viewpoint of the competitiveness of the factory,
During the progress of the investment project, the local partner had also been in touch with other foreign tractor manufacturers. Those firms obviously did not enjoy similar possibilities to the Finnish firm regarding financing of the training of
local personnel. Also, it had been noticed that the tractors
manufactured by the Finnish firm were well-suited to the conditions in developing countries. The main reason for the negotiations with other firms was obviously to secure better terms
with the Finnish firm. The influence of the negotiations with
J Busn Res
1995:33:25-55
45
other firms was however only slight regarding the terms, progtess, and timetable of the project.
In addition to the main local negotiating organization (the
local partner) the following organizations took part directly or
indirectly in the project: The local Central Bank, the Ministry
of Industry, the Ministry of Finance, the Ministry of Agriculture, and the Parliament's Board of Economy. The Finnish firm
had unofficial contacts with those organizations, too, although
it was supposed that the organizations received information
on the progress of the negotiations from the local partner. The
Central Bank of Tanzania had great influence on the financing
of the project, but because it was not possible for the Bank's
officials to be visited officially by foreigners, the negotiations
had to be held unofficially.
It took about two years from the stimuli evocation to the
preliminary signing of the joint venture agreement. The persons in the Finnish firm with the main responsibility for the
project had also investigated the possibility of establishing new
units in many other developing countries between 1979-1980.
This naturally affected the progress and timetable of the project. There had been very detailed negotiations concerning two
of those previous projects, but both projects had been discontinued, one of them completely, and the other temporarily.
The agreement still required the approval of the local Parliament. The Finnish partner expected approval to take from up
to six months and the local partner had similar expectations.
That was not to happen, however. The Parliament decided to
appoint a committee to review all the stipulations of the agreement. Multifarious investigations and negotiations followed,
which lasted about 18 months. Because of this, there were discussions within the Finnish firm as to whether the project
should be abandoned (interruption). Such a decision was not
made however, which was influenced by the fact that although
the demand for tractors and the sales of the Finnish firm had
progressed as planned in Finland, export market goals had not
been reached. The new negotiations caused no changes in the
main structure and stipulations of the agreement. The changes
mainly concerned production volumes and financing of the project (evaluation-choice). The final joint venture agreement was
signed in May i982 after the Board of Directors had approved
the revised agreement (authorization).
A model of the progress of the decision-making process in
case 4 is presented in Figure 6. As in the other cases, both opportunity and problem acted as stimulus for the process. In
contrast to cases 1 to 3, a special project group was created.
In the search behavior features of memory and active search
could be recognized. In the design routine features of both readymade and custom-made solution were included. As in the all
three previous cases, bargaining was the prevailing routine in
the evaluation-choice and all three types of decision communication routines could be identified in case 4. Political activities
were a key element in different stages of the decision-making
process. The decision process was very long and included several interrupts, scheduling delays, and comprehension cycles.
As a whole the case included features from both blocked de-
46
J Busn Res
1995:33:25-55
J. Larimo
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September 1980/
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FIGURE 6. The foreign direct investment decision process development in case 4.
sign decision process and dynamic decision process. However,
the case may best be categorized as the latter type of process,
The economic situation in Tanzania had clearly weakened
during the negotiations. Because of this, there were negotiations
about starting the operation with development assistance funds,
Partly on account of the financing negotiations, parts and cornponents for about 100 tractors were exported to Tanzania from
Finland in 1983. To save costs, assembly facilities were hired
and so were those for personnel training and tractor service,
The assembly facilities were hired from the above-mentioned
joint venture firm in the truck industry. They were situated
in the neighborhood of the capital city Dares Salaam and were
not in use because of unrealistic preliminary production plans,
As negotiations about hiring the facilities were underway, negotiations were also held to hire about 50 persons who had previously worked in that joint venture. The hiring of training and
service facilities was only a temporary solution and the building of facilities was started almost at the same time. The goal
was that after the service network had been built and farmers
trained to use the tractors, the average operational life of the
tractors would be extended from eight to 10 years. This would
mean a considerable national economic saving. The goal was
that the service network would serve the needs of some other
Finnish firms, too.
The local partner and the Finnish firm paid their share capital quotas in the autumn of 1982. The third partner, Finnfund,
felt that the plans had changed so much from the original ones
concerning production volumes, the share of local manufacturing and some other factors that the organization was no longer
interested in being a partner in the project. Because the share
capital quota of the other organization would have remained
fairly small, the participation was not regarded as sensible by
the other partners, especially in relation to its requirements.
The investment fund officially left the project in March 1983.
However, it was agreed with the Finnish development assistant officers that it would be possible to receive development
assistance funds to finance the operation of the unit.
In the autumn of 1983 the partners started more intensive
negotiations about compensation to the Finnish partner. At the
end of the year the partners agreed on barter trade arrangements as a mode of compensation. The barter trade products
included, e.g., agricultural products, tea, coffee, tobacco, etc. The
Finnish firm agreed to the resale of the products with two international trading houses.
About 500 tractors were assembled in Tanzania in 1984 and
in 1985. In 1986 the volume was planned to be 500-600 tractors. The compensation for the Finnish firm was still for a great
part based on barter arrangements. According to the Finnish
FDI Decision Processes in Finnish Firms
partner, the arrangement succeeded fairly well, although there
were sometimes problems reaching agreement on the barter
products and prices of the products. In 1986 there existed more
problems, and production volume had to be cut compared with
the preceding year. It was the barter trade arrangement that
caused the cut, rather than technical, production, or demand
questions. The view of the local partner has turned out to be
too optimistic concerning the level of local subcontracting in
the production. At the beginning the share of local parts and
components was about 10%. However, there were plans to increase it to 15-20% gradually,
Some years after making the FDI, the Finnish firm was, on
the whole, fairly satisfied with the project. The firm had learned
that in investments made in developing countries the negotiation process can be prolonged, for many reasons. In addition
to the commercial and technical argument for the project, the
firm should also have considered the politico-commercial atgument. The project was seen too much from the Western viewpoint only, and not enough from the viewpoint of the local system. There were too few persons in the planning and negotiation
team of the firm (for example when the local Parliament appointed two committees to investigate the planned joint yenture agreement, no representative of the firm was permanently
in Tanzania). Additionally, the firm should have been in closer
touch with high local officials already at the early stages of the
negotiations, than it actually was.
Because the great economic problems in Tanzania continued
in the late 1980s and early 1990s, the plans for increasing
production were not realized. Instead the production was decreased and in the early 1990s only about 110 tractors were
assembled. In the early 1990s the Finnish development assistant funds to be unit were also stopped, because of the decline
in Finnish development assistant funds as a whole. The Finnish partner viewed that the unit could, however, operate without any governmental support, if the unit could operate more
freely according to the plans of the Finnish firm. Therefore the
partners started negotiations in 1992 to change the ownership
structure of the unit so that a clear majority of the shares would
be owned by the Finnish firm. Because of several problems
related mainly to the local partner, the negotiations were still
continuing in early 1993.
Case 5: A Manufacturer in the Plastics Industry
Firm X operates in the plastics industry. The turnover of the
firm was about FIM 260 in 1979 and the firm had about 900
workers. The share of exports was about 35% of the turnover,
The operation of the firm was divided into four business sectors. The business sector under consideration had a turnover
of about FIM 100 million in 1979 and the share of exports in
that business sector was about 30% of the turnover. The firm
had made its first foreign manufacturing investment in the middle of the 1960s. In the late 1960s and 1970s the firm had made
five marketing unit and four production unit investments. Three
of the production units were in European countries and one
was established outside Europe.
J Busn Res
1995:33:25-55
47
In the middle of the 1970s it became evident that the field
of industry began to be saturated, especially in Scandinavia. Because of this, a new unit was established in November 1979,
the goal of which was to market the products in business sector A, outside the traditional target countries. Firm X was the
leading firm in the business sector in Finland. At the Scandinavian level the market share of the firm was also considerable.
At the beginning of 1980 firm X learned from a Finnish Foreign Representation that the Bangkok Metropolitan Water
Works Authority was organizing a tender competition open
to international building contractors. There were about four
months to the closing data for offers. Firm X had no prior experience in Thailand. One of the managers of the firm had visited
Thailand in the late 1970s, but the firm had not followed that
up in the form of offers, etc. The firm had exported a little to
some other countries in the Far East in the late 1970s. Further,
firm Y, which had been one of the main suppliers of raw material to firm X since the 1950s, had suggested to firm X that it
could become a partner in a manufacturing unit which it was
planning to establish in a country neighboring Thailand (Malaysia) in the middle of the 1970s. The Finnish firm had established a joint venture manufacturing unit with firm Y in its home
country and had another type of more intensive cooperation
with it. The firms had discussed the establishment of a joint
venture unit only at a preliminary level and discussions had
not led to any action. The reason for this was mainly that the
established joint venture unit had not reached the goals imposed by the management of firm X. As a result, firm X had
sold its share in the unit to firm Y sometime earlier. A little
later firm Y established a manufacturing unit of its own in
Malaysia.
In conjunction with the tender, the manager of the newly
established unit traveled to Thailand to investigate the project
and prevailing circumstances in more detail. During the trip,
he became acquainted with some local people who were able
to help in many questions regarding local circumstances and
had good connections with the water authorities. The firm submitted its tender a little before the set deadline and subsequently
won the tender competition. The decision in the firm's favor
was affected by the quoted price, the strength of the firm's systern, the duration and type of installation (causing minimal disruption to traffic, minimum damage to streets and surrounding buildings, and minimum interruption to water distribution).
The project consisted of planning and supervising the installation of about 10 km of polyethylene pipe. The project deal was
signed in May 1980 and the price for the project was about
FIM 20 million.
Already at this stage the management of firm X decided to
investigate the market in more detail (stimuli evocation). Thailand could be regarded as one of the most politically stable countries in the Far East, the growth rate of the economy had been
very rapid, and it was forecast that this trend was set to continue. The project supervisor heard from local authorities that
one goal was to renew the whole network of water pipes in
Bangkok before the year 2000. Because the length of the whole
48
J Busn Res
1995:33:25-55
network of water pipes was about 230 km, the situation seemed
promising. There was no manufacturing of that type of pipe
in Thailand. As a result, the firm decided to investigate the possibilities and conditions of manufacturing investment in Thailand (stimuli evocation). It was also decided to study the possibility of obtaining investment dispensations,
Making an investment in Thailand requires permission from
many authorities and registration with the local Department
of Commercial Registration (DCR): Thus this organization was
contacted first. Investment dispensations are granted by the local
Board of Investment (BOI), which was also contacted. During
the discussions with the representatives of the BOI, it became
clear that permission for foreign investments was granted only
to a few firms in the same business sector. It was also revealed
that no firm had so far submitted an investment application.
So the management of the firm decided to submit its investment dispensation application as soon as possible to gain an
advantage over the competitors (speed-up). The decision was
partly influenced by the information, obtained indirectly, that
processing of such applications could take a long time. In spite
of the fact that the plans concerning the investment were only
at an early stage, the application was left with the BOI at the
end of 1980 (evaluation-choice).
The planning and design of the water pipe project took about
three months. It also took three months to negotiate with the
local contractor concerning the civil works that would be undertaken under the supervision of firm X. The real installation
work began in August 1981. At the same time, the firm had
investigated the market preliminarily and had also negotiated
with the local authorities. In June 1981 the firm obtained preliminary permission for the following dispensations: freedom
from import customs duties on machines and equipment for
three years, freedom from corporate and dividend taxes for
five years, the right to export currency free and the right to
use foreign employees. The dispensations were valid for six
months (external authorization). At this stage, the management
of firm X decided to acquire more experience before making
any decisions concerning its own manufacturing in the country (evaluation-choice; interruption),
During the project, the firm had decided to establish a
representation unit of its own in the country. The unit was
turned into a sales unit at the end of the project. The goal of
the sales unit was to be the base point for the sale efforts of
the firm in the whole of the Far East. The management team
of the firm felt that there was not enough information on the
market and future patterns of demand were too unclear, so the
firm decided to apply for an extension to the validity period
of the investment dispensations at the beginning of 1982
(evaluation-choice). The BOI approved the application and the
firm obtained an extension of six months (external authorization),
The local water authorities were satisfied with the project,
but this did not lead immediately to other big projects. The firm
obtained some smaller projects, however. There had not been
J. Larimo
any bigger changes in the plans for Bangkok's water pipe
projects. Additionally, the World Bank had granted a loan of
$200 million to finance the modernization of the Provincial Water Works' existing water supply system. Potential buyers of
pipes were also local mining firms, as it was possible to use
the same type of pipe, e.g., for carrying ore, and the pipe type
had many advantages over the iron pipes that were in common use. So the firm sent samples to one local mining firm.
Firm Y, with which firm X had cooperated in many ways
earlier contacted firm X in September 1982. Firm Y suggested
again to the management of firm X that the firm should take
part in the operation of the manufacturing unit that was estabfished in a country neighboring Thailand (in Malaysia). The
production of that unit was directly totally at local mining firms.
At the initial phase of the operation, sales of the unit had developed moderately, but in the early 1980s sales had dropped dramatically. The reason for the fall in sales was that the price level
of the raw material that the main customers were producing
had fallen sharply. Firm Y was interested in the technical knowhow of firm X and suggested a minority ownership in the unit.
Firm Y was operating in many industrial fields and was much
bigger than the Finnish firm. Firm Y had also competed with
firm X in some projects in Thailand and had also won some
projects mainly as a result of the firm's lower offers and good
local connections. Thai operations had been handled from
Malaysia, however. The firms were also competitors in some
other Far Eastern markets. Therefore, firm X suggested that the
discussions should be broadened to concern the whole Far East
area (diagnosis).
To gain a wider base for its plans, firm X decided to investigate the local markets in more detail. The competition situation and market development of pipes manufactured from vatious raw materials were to be investigated in particular (design).
It was decided to have the market study undertaken by a local
market research company (search). Firm X would take care
of the planning and realization of production. Because the organization of firm Y was rather limited in Thailand, a local partner with a big enough sales network was obviously needed for
the project. Some of those duties and the contacts with the local authorities were to be carried out by those local persons
who helped firm X in the preparation of the tender offer (design).
Firms X and Y were in contact a few times during the last
months of 1982, but the investment project really progressed
in February 1983, when the representatives of both firms traveled to the Far East to investigate the local situation. The representatives visited both Thailand and the manufacturing unit of
firm Y in Malaysia. With regard to the operation of firm Y in
Malaysia firm X received the requested accounting information
covering many years, valuation of the real estate etc. (diagnosis). The owners of the manufacturing unit in Malaysia were
firm Y and a firm from a third country that had the know-how
needed in the production of the earlier manufactured pipe type.
Firm Y intended to extend the ownership basis to include firm
X and a local firm. The Managing Director of the local firm,
FDI Decision Processes in Finnish Firms
and at the same time its main owner, had good connections
with many people, especially with those in local government
(he was of noble birth),
In the negotiations held with the representatives of firm Y,
the following arrangements were agreed on preliminarily at the
beginning of March 1983. Firm Y would participate in the investment in Thailand with a 25% ownership and the Finnish
firm would take a similar 25% ownership share in the manufacturing operation in Malaysia. Both units were to use mainly the
production technology developed by firm X. Concerning Thailand, firm Y should take care of contacts with the local authorities, general sales promotion, and perhaps also marketing. They
also agreed on cooperation in certain pipe sectors in some other
Far Eastern markets (design; evaluation-choice). The agreement
was only preliminary and needed the authorization of both
firms' Boards of Directors.
In Thailand the Finnish firm had also obtained some smaller
deliveries after the bigger project, as stated earlier. The small
project deliveries were seen to have been rather unprofitable,
however, because of the high freight costs and high import
duties, being as much as 80% on the price of certain products,
During the visit, firm X also got preliminary information on
the market research. The demand situation still seemed promising. No other firm was manufacturing the same type of products, but one firm had made an application for starting production of competing products,
The management team of firm X was ready to accept the
arrangement with firm Y. It was known that because of the system of decision-making in firm Y, the treatment of the proposal
would inevitably take several months. It seemed that it was possible to reach an agreement on the conditions of cooperation,
however. The investment dispensations were valid until April
1983 and the representatives of firm X in Thailand had the feeling that the BOI would not grant more time. It is possible that
the competing firm had held negotiations with the BOI from
the start of their production of the same type of pipes which
firm X intended to manufacture. To get more local identity for
the unit and to ascertain more ready-made contacts and knowledge about the markets, the firm decided to get in touch with
those persons in Thailand who had helped the firm in planning and obtaining the tender project some years earlier and
they were asked to take part in the company registration (design). They were ready to join and the unit was enrolled in the
local company register in April 1983. At the same time, firm
X had preliminary discussions concerning the possibility of
those persons taking part in the actual operation of the planned
unit (design).
In May 1983 the market research was completed and did
not contain any relevant new information that firm X had not
known earlier- the local market seemed promising and there
had been no major changes in the competition situation. The
Board of Directors of firm Y accepted preliminarily the crossownership of the investments, but wanted to see more detailed
plans concerning the unit in Thailand and its operation. Firm
J Busn Res
1995:33:25-55
49
Y also proposed that negotiations should be held about a local
bank, with which firm Y had good contacts, joining in ownership of the planned unit.
In the summer of 1983 there were changes in the management of the local water organization. It was revealed that the
local personnel, who were to take part in the operation of the
unit as planned by firm X, had been suspected of inappropriate measures by the local authorities. These measures partly
had an effect on the changes in the management. Because of
this, it was decided not to continue the negotiations about their
participation in the investment, although no clear evidence concerning the charges could be presented (evaluation-choice).
The management of firm X had the feeling that firm Y did
not have the same kind of interest in the progress of the investment project as did firm X, although this was not stated directly
in the negotiations. However, the manufacturing investment into
Malaysia progressed by the Managing Director of the other
planned new firm visiting the production facilities of firm X
in Finland in June 1983. He was convinced by the production
technology developed by firm X, to the extent that he stated
that the condition for his firm's participation in the investment
would be that firm X would also join the project.
Because firm X would have the main responsibility in
production questions, it continued planning during the summer months (design). It was considered best to start production on a small scale and with small risk investments. To realize cost savings at the initial phase of the operation, it was
decided that the firm would transfer two production lines from
Finland to Thailand. Because the BOI had granted investment
dispensations for the unit, the plant location needed BOI approval. An area near the capital city and its airport was chosen
as the plant location (search; evaluation-choice), because in the
near future the main weight of demand would obviously be
in the capital area, and the firm had found a factory unit there
that could be used for manufacturing. The changes required
did not mean high costs (design).
The manager of firm X's local sales unit had preliminary
negotiations with the bank that firm Y had suggested, and with
a local development bank (International Finance Corporation
of Thailand) about their joining the project with small shares
(search). In that way it would be possible to reduce the economic risks involved in the project and those organizations
could help with the contacts with local authorities. IFCT had
never earlier participated in any investment projects made into
Thailand, although it had held negotiations about starting this
type of operation.
Although it was not certain whether these organizations
would join the project, firm X decided to make an application
to the Bank of Finland to make the investment. In the application the ownership basis of the unit was as follows: firm X 90%
and both local banks 5% each (evaluation-choice). The Bank
of Finland gave permission to make the investment on the
previous conditions (external authorization). The Board of
Directors of firm X discussed the project formally in Decem-
_50
J Busn Res
1995:33:25-55
J. Larimo
Search
r
I
~
J
,
T:
Authorization
I
Decision
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I
~1
,
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i
I
:
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il
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May
.
.
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i
i 1
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7-
1980
Interrupt
June 1981
December 1983
FIGURE 7. The foreign direct investment decision process development in case 5.
ber 1983 and the investment proposal was accepted unanimously (authorization).
The decision to make the FDI had been affected by the market potential, the relatively small size of the investment and the
fact that a competitor was starting local manufacturing of cornpeting products. It was regarded that the start of competitive
production did not only have negative effects, but some posirive effects, too. The pipe type made by firm X was rather different from the other pipes on the market, so the speed of product acceptance had been slower than was planned. It was hoped
that the competitor could help to make the product known and
help the acceptance,
A model of the progress of the decision-making process is
presented in Figure 7. The stimuli to the investment were evoked
in May 1980 and the final decision to start production in Thailand was made in December 1983. So the process took over
40 months. The progress and the duration of the project were
affected especially by the following matters:
1. Stimuli for the investment were evoked in the initial phase
of the operation in Thailand when the firm had only a
2.
3.
4.
5.
little knowledge of the local environment. To get a competitive edge, the firm undertook certain measures iramediately after the stimuli evocation (application for investment dispensations) in order to lay the groundwork
for the investment.
The competition in the main market areas of the firm
had clearly tightened during the years 1980-1983 and
the firm had made two foreign acquisitions and two greenfield investments in those markets. As a result, the firm
did not have enough resources and time to devote to the
investment into Thailand. On the planning side, a problem was also that the firm developed a more detailed strategic plan, which was still not clear enough, only after
planning had been going on for some time.
The firm's local contact network was insufficient and the
newness of the firm's product such that the demand in
Thailand did not develop as planned.
The making of the FDI was partly connected with the
FDI into a neighboring country of Thailand.
Later it became apparent that the planned partner in the
project was obviously not as interested in the pipe fac-
FDI Decision Processes in Finnish Firms
J Busn Res
51
199S:33:2S-55
tory investment with firm X as it was in the licensing and
turnkey projects in the raw material sector for pipes. Because of this, the planning efforts made by the firm were
fairly small and treatment of the matter was prolonged
at various phases of the project.
As in the other cases both opportunity and problem evoked
the decision process. In spite of the relatively great FDI experience of the investing firm, no special project group was
created for the planning. Neither could clear evidence of memory search be identified in addition to the active information
search behavior. The design routine included features of both
ready-made and custom-made solutions, however, with more
features of the latter solution. The evaluation-choice routine was
characterized by bargaining and all the three types of decision
communication routines could be identified as also in the other
cases. During the decision-making process all six types of dynamic factors could be recognized. As a whole case 5 may be
categorized as a dynamic design decision process.
Because it seemed obvious that firm X could not itself adequately perform the marketing of the products, and the actual
interest of firm Y in the project was unclear and the resources
and knowledge of firm Y were also obviously insufficient (partial diagnosis), firm X contacted a local firm, Z, at the end of
1983 (search). Firm Z was much bigger than firm X, the economic situation of the firm was stable and it had a broad sales
and distribution network. Firm Z operated mainly in the building material sector, but also, to some extent, in the pipe sector,
In the production of pipes made by firm Z a different type of
raw material was mainly used. So the features and competitive
advantages of the products were different. Because of this, the
projects in which the firms had been interested, had also been
different, although in some projects the firms had been cornpeting with each other. Firm Z was interested in diversifying
into the polyolefin pipe sector and had applied for and obtained
a concession to manufacture a raw material that was used in
the manufacture of firm X's products. In the negotiations held
firm Z seemed to be interested in the proposal concerning marketing cooperation (design).
At the same time, firm Y became interested in the project,
and in February 1984 negotiations led to an agreement which
stated that firm Y would take part in the operation of the unit
in Thailand with an ownership share from 10-25% and firm X
in the manufacturing operation in Malaysia, with 21% ownership,
According to the plan the bank, which had close connections
with firm Y, and IFCT would both take part in the operation in
Thailand with a 5% ownership share each (evaluation-choice).
In Malaysia the following ownership basis was agreed: firm Y
25%; the third country firm, which had earlier participated in
the investment project, 24%; firm X 21%, and the other new
(local) firm 30%.
The bank accepted the proposal for its 5% ownership when
it heard that firm Y would participate in the project. Regarding
IFCT, the situation is uncertain. In the written plans at least,
the organization is not mentioned among the possible partners
until later. Firm X made an application to the Bank of Finland
for permission to sell 21% of the unit in Thailand to firm Y
and to take part in the operation in Malaysia with a 21% ownership. The firm received permission for the arrangements in
March 1984 (external authorization). The first part of the capital stock was paid before acceptance of the above mentioned
new application. Because the ownership basis negotiations were
unfinished, the local corporate register was informed that the
share of firm X was 90%, and 10% was formally in the name
of a local worker of the firm. This arrangement was meant to
be temporary.
At the beginning of March 1984, a change in the ownership
basis of firm X took place. The firm had been mainly owned
by two families, but one family had decided to sell its shares.
The change in the ownership basis did not have any influence
on the investment decision in Thailand at this stage. According
to plan, the firm transferred two production lines from Finland to Thailand in the spring of 1984. Production started in
June 1984. During the initial phase the unit had about 20 employees and the financial investments made were about FIM
5 million.
Because of the change in the ownership basis of firm X, the
strategy of the firm was to be planned more carefully in the
future. Especially in the domestic and Scandinavian markets
a powerful reorganization was realized (diagnosis; design), e.g.,
in Scandinavian countries the firm sold two foreign manufacturing units to another Finnish firm (evaluation choice). A1though the change in the ownership basis had no influence on
the decision to start production in Thailand, it had a somewhat
delaying effect on the ownership basis and marketing cooperation negotiations.
The marketing cooperation negotiations with firm Z progressed so much in August-September 1984 that firm X made
an application to the Bank of Finland again to change the ownership basis of the unit (evaluation-choice). It had turned out that
firm Y wanted to minimize its ownership in the unit, so the
earlier planned minimum ownership of 10% was chosen. As
for the local bank, the same ownership share was chosen. Because the participation of the bank in the project was closely
connected with the participation of firm Y, firm Y regarded that
its share could be 20%, which was almost the same percentage
as the planned ownership of firm X in the investment in Malaysia. In the application, the share of firm X was 80%. However,
there was a reservation in the application of the possibility to
sell 35-39% of the 80% ownership share. Firm Y did not suggest any proposal concerning the organization of the marketing and distribution questions, so firm X regarded it as sensible to include a reservation in the application for more freedom
in further negotiations. The application was accepted in October 1984 (external authorization).
Before there were any further negotiations, the reason for
firm Y's lack of interest in the project and for the attitude toward firm Z was revealed. The subsidiary totally owned by firm
Y had made a licensing agreement with the local firm, L, at the
beginning of 1984. The agreement concerned the manufacture
52
J Busn Res
1995:33:25-55
of one raw material, which could be used in the production
of plastic pipes, and a turnkey agreement concerning the
manufacturing facilities of that raw material. The rights to
manufacture this type of raw material were granted to firm L.
The project had progressed very rapidly and had met expectations. Because of this, in the autumn of 1984 firm L had applied for a concession for the manufacture of the same raw material for which firm Z had been granted a concession already,
As an exception to normal practice, the application had been
accepted. The local authorities had obviously considered that
because of the successful first project, firm L also had a good
possibility to start the manufacture of the other raw material,
Therefore the totally owned subsidiary of firm Y had started
the same type of negotiations as earlier, concerning the manufacture of the second raw material with firm L. Because the negotiations were not finished, the value of the agreements was considerable, and firms Z and L would become competitors with
each other. Firm Y did not want firm Z to hamper the deals
by participating in the project,
When the situation was revealed to firm Z, it announced
that it had lost interest in the project. The new situation led
to new negotiations between firms X and Y concerning both
investment projects at the beginning of 1985. Firm X stated
that the planned conditions needed certain changes (design)
and this therefore led to the negotiations being stalled for some
months (interruption).
In May 1985 firms X and Y started negotiations again and
in June changes in the terms of cooperation that satisfied both
firms were agreed upon. Those changes were to the planned
ownership shares, but affected some compensation and other
conditions that were attached to the investment. The planned
production volume and technological solutions concerning the
investment in Malaysia were similar to those in Thailand (the
production started with two production lines, etc.) (design;
evaluation-choice). The Board of Directors of firm X made a
formal decision to participate in the investment in June 1985
(authorization).
Because the operation in Thailand got less attention in the
negotiations, firm X contacted the representatives of the BOI
and IFCT and asked them to name a suitable cooperation partner (search). The organizations did not directly name any firm,
but obviously the contact had some effect on it, because the
previously mentioned firm L contacted firm X sometime later.
Firm L was a family firm, operating in many industrial fields,
The firm had marketing and purchasing networks that covered
the whole country, and it also had trading operations abroad.
The turnover of the firm was much higher than that of firm
X. In the negotiations, the participation of the firm in the ownership of the unit was discussed in addition to the marketing arrangements (evaluation).
After the change in the ownership basis of firm X, the firm
started to show a greater preference than earlier when planning foreign investments, for the use of licensing and smaller,
probably minority, ownership shares in the units outside the
traditional market areas. Because firm Y had good relations with
J. Larimo
firm k due to the licensing and turnkey deals (negotiations about
new licensing and turnkey project deals also led to an agreement at the beginning of 1986), it had nothing against firm L
being a partner in the project.
As stated earlier, the main interest of firm Y had been, no
doubt, in the turnkey projects and the representatives of firm
Y said that they did not necessarily want to participate in the
project. Because the condition for the participation of the local
bank in the investment had been the participation of firm Y,
the negotiations concerning ownership were started on a new
basis (design). First the negotiations concerned 50-50 ownership, but gradually the partners decided to ask a third partner
to join the investment. The advantage of this arrangement was
that the unit would then be a firm from Thailand (local ownership share would exceed 50%) and this made it possible to start
contracting in the country and it also gave more freedom to
choose the plant location.
IFCT was initially intended as the neutral partner, because
the firms planned to use its financing in some arrangements.
However, the organization had not yet taken part in any local
joint venture project, but negotiations on participating in that
kind of operation were still ongoing. It was also revealed that
the financing of the planned projects could be arranged by IFCT
without an ownership share in the FDI. The participation of
IFCT in the investment was regarded as too uncertain, however, and the firms agreed on a new ownership arrangement.
Both partners wanted the firm to be a local firm because of the
reasons stated previously, but firm X also wanted to have a balance in the ownership shares of the partner firms. Because of
this, the following solution was agreed on: firm L 50%, firm
X 49%, and a small, local firm, which was established by the
Managing Director of firm X for quite different arrangements,
1% (evaluation-choice).
Concerning operation in Malaysia, the local authorities had
required changes in the licensing agreement between firms X
and Y. Therefore firm X regarded it as sensible as try to get
all the agreement arrangements to come into force from the beginning of 1986. The first reason for the timetable was the time
needed for the renegotiation and approval of the licensing agreement. Second, firm X had made a licensing agreement with a
firm from a third Far Eastern country. The partners had reached
an agreement to renew the agreement from the beginning of
1986. Third, the Finnish authorities had negotiated tax arrangements and from the point of view of firm X, more favorable
tax agreements were to come into force from the beginning of
1986. Fourth, firm X hoped to reach a cooperation agreement
with firm L in such a way that even that agreement could be
valid from the beginning of 1986.
The negotiations with firm Y took longer than planned, however, and an agreement on the arrangements was reached only
at the beginning of April 1986. Before the final agreement on
the new arrangements was signed, the senior person in firm
L (the head of the family) died at the end of April. None of the
other managers of the firm (his sons) had a stronger position
and authority than any of the others. The deceased had also
FDI Decision Processes in Finnish Firms
taken care of contacts outside the firm, e.g. banks, and he had
also held the key position in the negotiations with firm X and
IFCT. After having negotiated with local banks, the management team of firm L decided not to sign any new agreements
in this new situation. Because of this, the preliminary negotiated
agreement with firm X was suspended (external interruption),
When firm Z, with which firm X had also earlier conducted
negotiations about the marketing and production co-operation,
heard about the negotiations between the firms X and L and
about the interruption in the negotiations because of the new
situation in firm X, the firm contacted firm X again in the summer of 1986 (stimuli evocation). Firm L had set up its own raw
material production very quickly, and firm Z was clearly behind in starting production. To start its own production, firm
Z had agreed to buy a license for the production technology
from a Japanese firm. Regarding the machines, equipment etc.,
which were needed in the production, the firm had negotiated
J Busn Res
1995:33:25-55
53
firm should have drafted a more comprehensive strategy concerning the whole Far East area earlier than it actually did. Third,
the plans of firm Y, which is one of the partners in the unit
in Malaysia, have been and still are partly unclear concerning
Thailand. This caused problems in planning the FDI and also
in later phases of the project. For the above reason, firm X considers that it would obviously have been wise to try to negotiate more intensively with firm L as early as during the initial
contact period. The starting point of the investment that was
made into Malaysia was quite different from the FDI made into
Thailand. The investment concerned diversifying the product
basis of a unit already in operation and a local firm with good
contacts was found at the initial phase of the project. Since the
settlement of the problems of the planning phase of the project,
the situation has been much easier than in Thailand and the
financial result has also been much better.
a turnkey agreement with the subsidiary of firm Y, i.e., with
Summaryand Managerial Implications
the same firm as firm k had made the agreement. The competition situation between firms Z and L was very tight, so firm
L wanted to know at the beginning of the negotiations what
the cooperation situation was between firms X and L. Firms
X and Z had made a preliminary non-exclusive distributing
agreement (design; evaluation-choice), but because the situation in the market was very unclear in many ways, firm X
wanted to have a better view of the situation before signing a
final agreement (interruption).
The central problem with the unit in Thailand was finding
a suitable marketing cooperation partner. Because this caused
unexpected problems, firm X started its own sales force training and started to organize marketing in other ways too, but
the need for cooperation in marketing was obvious. The demand in the market did not develop as planned, either. The
growth rate of the economy slowed significantly during the years
1984-1985 and several projects were suspended, to be realized later. In i986 the situation was better and during the following years the growth rate of the economy was estimated
to be even higher. Making the product known caused difficulties, but the situation started gradually to get better, partly because of the measures taken by the competitors (they intensifled their marketing and the advantages of the pipe type became
better known). The financial results of the unit were negative
during the years 1984-1985, in 1986 the firm reached
breakeven point, and after that the unit was planned to yield
profits. The plans were also realized. A favorable development
continued in the late 1980s and the firm expanded its operation by establishing another manufacturing unit in the country
in 1989.
The ownership basis of the unit, which was chosen in 1984
(90-10), was planned to be quite temporary, but because the
cooperation negotiations failed, the ownership basis has remained the same. Firm X was of the opinion that it won the
first big project fairly easily, and because of this the marketing
and the connections with the local authorities were partly
neglected when the later projects were addressed. Second, the
According to many researchers, fairly little is known about
company foreign investment decision-making processes. The
aim of this article was to highlight the foreign direct manufacturing decision processes in five FDIs made by Finnish firms.
As a framework for the analysis, the general model of the strategic decision-making process developed by Mintzberg, Raisinghani, and Theoret (1976) was used. Because the main aim of
the study was to illustrate various types of processes noticed
among the investment processes that have been studied by
the author, the cases were selected in such a way that there
is variation in the background data (firm size, extent and experience in international operations, especially concerning
FDIs), in the process data (process nature, routines and dynamic factors), and in the situation data (competition situation,
motives for FDIs, environment, role or organizations affecting
the FDI).
The results of the study show that there are a number of
factors that influence the FDI decision-makingprocess and there
can be a lot of variation in the nature and content of that process. In spite of the many differences, there were also many
similarities in the reviewed cases concerning, e.g., the motives
for the FDI, alternative development behavior and both information categories and methods used in the evaluation of the
investment. Further, it can be said that in accordance with behavioral investment theory (e.g., Cyert and March, 1963; Carter,
1975) and previous foreign FDI studies, the FDI decisionmaking process behavior of the sample firms was characterized by: (1) noncomparative investment analysis, (2) acceptablelevel decision-making as opposed to maximization behavior,
and (3) multiple objectives as a guide to behavior. The results
of this study are also in accordance with the findings in the
pioneering study by Aharoni (i966: 45-46): the decision is
usually a very complicated social process, it is influenced by
the past and perception of the future as well as the present,
it is composed of a large number of decisions made by different people at different points in time. A summary of the strate-
54
J Busn Res
1995:33:25-55
J. Larimo
TABLE 3. Summary of the Strategic Decision Process Elements in the Reviewed FDIs
Identification phase
1. Decision recognition/stimuli
Opportunity
Problem
Crisis
2. Diagnosis
Creation of a special project group
Development phase
1. Search behavior
Memory search
Passive search
Trap search
Active search
2. Design
Given fully developed
Found ready-made
Custom-made
Modified
Selection phase
1. Screen
2. Evaluation-choice
Judgment
Bargaining
Analysis
Authorization
Supporting routines
1. Decision control
Decision planning
Switching
2. Decision communication
Exploration
Investigation
Dissemination
3. Political routines
Dynamic factors
Interrupts
Scheduling delays
Timing delays and speedups
Feedback delays
Comprehesion cycles
Failure recycles
X - c o u l d b e identified clearly; (x) -
Case 1
Case 2
Case 3
Case 4
Case 5
x
x
.
x
x
x
x
x
x
x
x
x
-
(x)
-
x
x
-
-
x
(x)
x
x
.
-
.
.
-
.
.
x
-
-
-
.
.
.
.
.
.
x
.
.
x
.
.
.
.
x
.
x
.
.
.
.
x
.
.
x
.
x
.
.
.
-
.
-
.
.
.
.
x
.
.
x
.
.
.
.
x
x
x
x
?
?
?
?
?
)
?
?
?
?
x
x
(x)
x
x
x
(x)
-
x
x
x
x
x
x
(x)
x
x
x
(x)
-
(x)
.
x
(x)
(x)
x
x
x
x
-
x
-
x
-
x
x
x
x
x
(x)
c o u l d be identified at least fimitedly; -
.
.
x
x
-
.
c o u l d n o t b e identified; ? - can't b e stated definitively.
gic decision p r o c e s s e l e m e n t s in the r e v i e w e d FDIs is p r e s e n t e d
in Table 3.
O n e of the m a i n l i m i t a t i o n s in the case studies r e p o r t e d was
that m o s t of the data w e r e g a t h e r e d ex p o s t a n d t h r o u g h interview w i t h only o n e key p e r s o n i n v o l v e d in the actual d e c i s i o n m a k i n g process. In m a n y cases FDI d e c i s i o n p r o c e s s e s s p a n
a long time p e r i o d a n d often m a n y individuals take p a r t in them,
w h i c h m a k e s s u c h p r o c e s s e s h a r d to study. T h i s o b v i o u s l y
partly explains, w h y they are n o t s t u d i e d more. H o w e v e r , m o r e
r e s e a r c h is n e e d e d , especially c o n c e r n i n g b o t h diagnosis, design, a n d b a r g a i n i n g routines, a n d the d e v e l o p m e n t of FDI decision m a k i n g in o r g a n i z a t i o n s o v e r time.
F r o m the m a n a g e m e n t p o i n t of v i e w s o m e of the r e v i e w e d
case studies in p a r t i c u l a r i n d i c a t e the c o m p l e x i t y of the FDI
d e c i s i o n - m a k i n g p r o c e s s a n d the n e e d of the m a n a g e m e n t to
c o m m i t itself to the process. Because different types of c o o p e r ation a r r a n g e m e n t s s e e m to h a v e i n c r e a s e d in the late 1 9 8 0 s
a n d early 1990s, it is n o t e w o r t h y that in two cases the F i n n i s h
firms h a d p r o b l e m s w i t h p o t e n t i a l j o i n t v e n t u r e p a r t n e r s a n d
in b o t h of t h o s e cases the FDI was later realized w i t h o u t t h o s e
p o t e n t i a l p a r t n e r s . Also in two o t h e r cases w h e r e a j o i n t v e n ture solution w a s c h o s e n , the o w n e r s h i p a r r a n g e m e n t was later
changed (in o n e case the change process was in progress). These
findings i n d i c a t e the r e l e v a n c e of a v e r y careful e v a l u a t i o n of
the m o t i v e s of the p o t e n t i a l j o i n t v e n t u r e p a r t n e r for the FDI
in the d i a g n o s i s - s c r e e n i n g - e v a l u a t i o n stages. If a j o i n t v e n t u r e
s o l u t i o n is m a d e , a c o n t i n u i n g analysis of the o p t i m a l o w n e r s h i p a r r a n g e m e n t is to b e r e c o m m e n d e d (this h o l d s t r u e also
FDI Decision Processes in Finnish Firms
in wholly owned FDIs). Finally, in acquisitions the development after making the FDI revealed that synergy effects were
lower than expected. Thus, overestimation of the synergy effects seems to be very c o m m o n in foreign acquisitions, which
should be taken into account during the diagnosis-screeningevaluation phases.
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