Bachelor thesis Finance
Topic 76: Entrepreneurship around the world
“Why do corporations expand abroad
and how do they arrange this?”
Academic Year: 2011-2012
Supervisor:
L. Lu
Student:
ANR:
Word Count:
Youri Jacobi
944894
6.589
Abstract
There are many Dutch companies which have already decided to expand abroad. Since the
last decades, there has been more academic interest in this phenomenon called offshoring. It is
important for Dutch companies to know whether expanding abroad can give them higher
profits and to have knowledge about the risks of investing in offshoring.
In this thesis, the advantages and the risks of going offshore and the current patterns and
trends in the way Dutch multinationals arrange their expansion will be analyzed. There is a
relationship between the economic sector in which the company is active in and the location it
decides to go offshore. Each host country can offer different comparative advantages, such as
the availability of natural resources, less strict legislation rules, tax advantages and high
educated inhabitants.
An important reason for manufacturing companies to go offshore is to reduce their costs.
They try to achieve this by expanding to Eastern European and Asian countries, where the
employees demand less salary. Service providing companies want to improve their customer
services by being located in the same country as their customers live in and by hiring local
employees who have the same language and the same culture as their customers. Besides,
there are other reasons for companies to go offshore, such as the opportunity to access pools
of highly skilled talent around the world.
To gain information for this thesis, several experts have been interviewed and existing
literature has been reviewed.
2
Table of contents
Chapter 1: Introduction
P. 5
1.1 The problem background
P. 5
1.2 The problem statement
P. 7
1.3 Research questions
P. 8
1.4 Thesis structure
P. 8
1.5 Methodology and academic relevance
P. 9
1.6 Research Methods
P. 9
Chapter 2: Reasons for expanding abroad
P. 10
2.1 Case study
P. 10
2.2 Economic sectors
P. 12
2.3 Financial advantages
P. 13
2.4 Other advantages
P. 14
Chapter 3: Risks of going offshore
P. 16
3.1 Risk factors
P. 16
3.2 Reshoring
P. 18
Chapter 4: Arranging the internationalization
P. 20
4.1 Comparative advantages of countries
P. 20
4.2 Internationalization in the manufacturing industry
P. 21
4.3 Internationalization in the service industry
P. 22
3
Chapter 5: The performance of multinationals
P. 25
5.1 Results
P. 25
5.2 Patters of internationalization
P. 26
Chapter 6: Conclusion
P. 27
References
P. 29
Appendix
P. 32
Personal relevance
P. 32
Research related newspaper articles
P. 32
4
Chapter 1: Introduction
1.1 The problem background
The Netherlands is a small country in a large world. Therefore all major corporations in The
Netherlands work together with companies in other countries. Since offshoring affects the
Dutch economy, it has important economical and political relevance and is a matter of great
debate. Offshoring may increase Dutch unemployment, since some manufacturing and service
providing jobs will be transferred abroad. However, it may also create new job opportunities,
since the expansion needs to be supervised. Besides, offshoring might increase the economic
growth and can have an positive effect on the Dutch economy, since it creates opportunities
for greater entrepreneurship in The Netherlands and increases the profits of Dutch companies.
Companies which decide not to go offshore will perform well in the short run, because they
are familiar with the current market. However, in the long run this familiarity with
competition and cooperation will lead to a loss of insight in opportunities and threats. The
company will have less experience in handling with market changes compared to its
competitors, and thus have a competitive disadvantage (Barkema & Vermeulen, 1998).
On the contrary, companies which do decide to expand abroad will get experience with
different markets and will be motivated to innovate their goods and production processes.
Besides these financial advantages, the company will get a better reputation among its
customers, suppliers and its employees. Therefore it is smart for companies to go offshore.
Expansion to a host country is not a problem nowadays. The transport of goods to other
countries is getting faster and cheaper. Multinationals decide to produce their goods in one
part of the world, and to sell them in another part of the world. The government decided to
decrease their protection policies and there has also been a decrease in the number of
5
geographically protected market niches. These factors made it possible for entrepreneur firms
to view their operating domains as international (McDougall & Oviatt, 2000).
Since the last decades, there has been more academic interest in entrepreneurships expanding
abroad. The entrepreneurial process stresses personal perspectives like planning, evaluating
and acting. The entrepreneurs need to be able to identify opportunities, and need to act and
manage on that, depending on their mechanisms for adapting and reassessing. They have the
responsibility for the corporation, and thus they are taking risks and getting rewards on it
(Cunningham & Lischeron, 1991).
There are many foreign market entry modes including exports, licensing, joint venture and
foreign direct investments. When exporting, companies move and sell their produced goods in
another country. Since the goods are not produced in the target country, there are no
investments in foreign production facilities required. Licensing permits the company to use
the property, such as trademarks or production techniques of the licensor, in the target
country. A joint venture is an alliance of several companies, so that they can combine their
strengths and are stronger together against their competitors. Foreign direct investments
means that the company owns the facilities in the target country directly. Especially foreign
direct investments have increased extremely over the last few decades. Results of previous
studies examined that multinational diversity leads to more companies choosing for foreign
start-ups rather than acquisitions (Barkema & Vermeulen, 1998).
There are plenty of reasons that multinationals decide to build factories in different parts of
the world. They can choose to build their production factories in developing countries,
because of the lower labor costs. On the contrary, other companies decide to maintain their
factories in their domestic country, because in this way they have more control over the
6
production processes and it becomes easier to produce innovative and high quality products.
This thesis will focus on the factors which influences the expansion of Dutch companies
abroad and will analyze comparative advantages of several countries and world parts.
Related questions have been researched by Daniels and Bracker (1989). Their study posed
whether the profits of a company are higher when there is higher reliance on foreign sales and
when there is greater dependence on foreign production. They concluded that the outcomes
can be different, depending on the degree of labor intensity. Since some firms have a close
producer to customer relationship, they have lower costs when they are located near the
customer. However, their study only examined companies from the United States of America,
in the period 1974 till 1983, so the results might be different in other parts of the world.
Besides, many factors have changed in thirty years. For example, there used to be more
governmental protection with higher trade barriers for expanding abroad. Nowadays there
might be different motives for companies to go offshore and there are less international
barriers.
1.2. The problem statement
When a company plans to expand abroad, it probably has several reasons for that decision. In
any event, the entrepreneur expects to have more advantages by going international, like low
production costs or higher market share, than disadvantages, such as high transport costs or
high risk. For an entrepreneur to gain maximum advantage, he needs to make a decision about
how he would like to arrange the internationalization. Some firms suddenly decide to strike
the production process in The Netherlands and then start building a new factory in Eastern
Europe. Other companies might decide to build a new factory in Asia. Do some countries
offer competitive advantage on the production processes or on other factors?
7
1.3 Research Questions
To investigate the factors and reasons why a company should expand abroad, the main
question of this thesis is:
“Will a company that goes offshore have higher profits
and does this depend on how the company arranges the expansion?”
In order to answer the main question, there are two research questions that will have a central
position in this thesis:
1) What are the advantages and risks for a company to expand abroad?
2) Is there a relation between the way a company arranges its business operations and the
comparative advantages that countries around the globe offer?
1.4 Thesis Structure
The structure of the thesis is as follows:
In the next chapter, the experts which have been interviewed will be introduced, the
differences between the economic sectors will be explained and the main reasons for
expanding abroad will be outlined. In the third chapter, all the risk factors of going offshore
will be analyzed, which may result in reshoring. In chapter four, several firms will be
analyzed on the way they have arranged their expansion, with respect to the comparative
differences of countries around the world. In the fifth chapter, the outcomes of the previous
chapters will be used to investigate whether the performance of a multinational depends on
how the company arranged its expansion. Besides, an overall pattern of several Dutch firms
which have expanded their business operations abroad will be analyzed. Finally, the sixth
chapter gives a general conclusion about the subject of this thesis.
8
1.5 Methodology and academic relevance
The decision to expand abroad is still a big issue for multinationals nowadays. Every day
there are corporations that decide to relocate their business operation.
In this thesis, several Dutch companies which have expanded abroad in recent years will be
analyzed. There is a difference between companies which have relocated their business
functions abroad, called offshoring, and when existing business functions or processes are
contracted to a third party, called outsourcing. Only offshoring activities will be analyzed in
this thesis. As a result, companies which have not yet decided whether they should expand
abroad or should stay domestic, can use the results of this thesis to evaluate whether it is
useful to relocate their business operations. Multinationals which are already located in
different parts of the world can check whether their breakdown in production and/or
administration processes have resulted in having the maximum profits as possible.
In this thesis, the factors which influence expansion abroad are being investigated, in relation
with the cultural differences in parts of the world. Other researchers can make use of this
thesis to gain more knowledge about corporations going offshore. Since only companies in
The Netherlands have been analyzed, it is also possible to take this thesis as a reference for
future research.
1.6 Research Methods
The subject of this thesis is being investigated by reviewing and synthesizing existing
literature. To incorporate novel empirical components in order to gain more insight,
information and knowledge in the way Dutch multinationals expand abroad, several experts
from various Dutch companies have been interviewed. Contact information about the experts
is available on request.
9
Chapter 2: Reasons for expanding abroad
2.1 Case study
Several experts have been interviewed from both a manufacturing company and a service
providing company. Besides, an expert who advises Dutch companies that want to expand
abroad has been interviewed. The following experts have been interviewed:
J.J.J.W.G. Moors
Jurgen Moors is advisor Euregio / International Affairs at the chamber of commerce Limburg.
He has been interviewed on Friday 6 April from 13:00 till 14:00 inside the chamber of
commerce in Roermond.
The chamber of commerce advises and supports companies with their business operations.
Jurgen Moors is responsible for the coordination and cooperation of the five chambers of
commerce between the Euregio Maas-line and he advises Dutch small and medium
enterprises which want to expand abroad.
P. Dirks
Paul Dirks is accountant at Ernst & Young Maastricht. He has been interviewed on
Wednesday 11 April from 9:00 till 10:00 inside Ernst & Young’s building in Maastricht.
Ernst & Young is one of the world’s leading professional services organizations and one of
the “Big Four” accounting firms. Ernst & Young helps corporations to identify and capitalize
on business opportunities.
Paul Dirks has recently arranged the expansion of Ernst & Young to India, so that Ernst &
Young can offer better accounting services to enterprises located in India.
10
H. Schroijen
Harold Schroijen is Head of Sales Support at Van Aarsen International
Harold Schroijen has been interviewed on Friday 27 April, from 13:00 till 14:00, at his
company location in Heel.
Van Aarsen is one of the world’s leading companies in designing and constructing innovative
feed milling projects. Harold Schroijen knows everything about the relocation of Van
Aarsen’s machinery in Slovakia and the decisions and events that went out wrong.
These experts and companies have been chosen selectively, in order to gain as much variety
of information as possible from complete different corporations.
Jurgen Moors from the chamber of commerce gave much information about Dutch companies
going offshore in general. He talked about the advantages and risks for going offshore and
about comparative differences of countries for both manufacturing companies and service
providing companies.
Paul Dirks from Ernst & Young offered information about the reasons and risks for Ernst &
Young to go offshore. He told about the expansion to India, which has many similar aspects
of other service providing companies going offshore.
Harold Schroijen from Van Aarsen International told about the expansion of Van Aarsen in
Slovakia. He explained why this manufacturing company had chosen to expand to this
country and why they decided to relocate the business processes back to The Netherlands
again. This expansion shows the initial reasons for manufacturing companies to go offshore,
but also the problems that can occur.
I would like to thank Jurgen Moors, Paul Dirks and Harold Schroijen for their time and
contribution.
11
2.2 Economic sectors
Before analyzing companies expanding abroad, we need to distinguish different types of
companies. The economy of a country can be divided in the primary sector, the secondary
sector, the tertiary sector and the quaternary sector.
The primary sector consists of agricultural companies which directly retrieve and produce raw
materials and basic foods. These activities include agriculture, mining, fishing, hunting,
gathering, forestry and the extraction of oil and gas. The primary sector is usually the most
important sector in less developed or less industrial countries. To reduce the transport costs,
agricultural companies are closely located at the place of the raw materials. Therefore the
company has no advantages in expanding abroad. However, these raw materials can be
exported for direct sales to customers, or to companies which process these materials (Gilbert
& Watteville, 2000).
The secondary sector or industrial sector consists of manufacturing companies. They process
the products from the primary industry and manufacture finished goods. There can be an
economic advantage for manufacturing companies to build a factory in a country where the
employees get fewer wage comparing to the company’s home country (Gilbert & Watteville,
2000).
Companies from the service industry make up the tertiary sector. These companies provide
services and skills for other corporations and the general population. The quaternary sector
describes intellectual activities by providing information services such as information and
communication technologies and consultancy. There is still discussion whether the quaternary
sector should be included with the tertiary sector, as they are both service sectors. In any case,
12
the companies of the service sector make the largest sector in the Western countries (Gilbert
& Watteville, 2000).
This thesis describes entrepreneurship expanding around the world and thus focuses only on
manufacturing and service providing companies.
2.3 Financial advantages
There are many potential benefits for companies to internationalize. Empirical results based
on multiple-partial correlation coefficient methodology from related studies conclude that
there is a positive relationship between the current degree of international involvement and
excess market value of the company (Errunza & Senbet, 1981).
The most important way to gain financial advantages by expanding abroad are cost savings.
These savings can be achieved by the availability of cheaper labor force, the consolidation of
activities in fewer locations, and from economies of scale (Farrell, 2005).
Offshore establishments can provide a similar or an even better service level than which is
available in-house, at a lower costs. These establishments may also provide a manner to
respond to environmental uncertainty without increasing costs. Some companies want to
relocate their non-core activities offshore, so innovations will speed up and related benefits
will be obtained at lower costs (Bhalla et al., 2007).
Countries can also offer tax advantages. Companies may be able to relax their borrowing
constraint by accessing international capital markets, because they can pledge foreign
revenues with foreign sales as a form of international refund (Caballero & Krishnamurthy,
2002).
13
‘Are there any other financial advantages for companies to expand abroad?’
Cost savings be achieved by a currency advantage in different countries. Exchange rates
can be profitable in the host country.
There is also a big difference around the world in the height of the salary of the
employees and the cost of land and the building of factories. Abstractly it is noticeable
that the employees from Eastern countries get a significant lower salary than employees
in Western countries and also the prices of land and factories are cheaper in Eastern
countries.
In most Eastern countries there are less strict legislation rules. There are less workers’
right laws and the environmental regulations are not very strict. In many Western
countries the corporations need to meet some important environmental constraints, or
else they need to pay a fine. In the Eastern countries there are less mandatory rules to
protect the environment. Besides, there is a difference between countries around the
world about the costs for waste disposal (Jurgen Moors – Chamber of commerce).
2.4 Other advantages
Apart from the financial advantages for companies to expand abroad, there are some other
advantages in going offshore.
Let’s take an example from the accountancy world. Regardless of the international financial
reporting standards, which are principle-based accounting standards used in many parts of the
world, reports can vary slightly around the world and the legislation is different in each
country.
14
When a company goes international, it can increase its brand awareness and the company will
get a better reputation among its stakeholders, such as the consumers, suppliers and its
employees.
‘What are the reasons for Ernst&Young
and other service providing companies to go offshore?
It is very important for service providing companies to get a good connection with their
customers, in order to better fulfill their needs and to satisfy them. To get a good
connection, the service providers should be able to speak in the same language as the
customer and to understand his culture. Service companies try to arrange this by having a
company’s building closely located near the customers and by hiring and educating local
inhabitants for the interaction with their customers.
Another reason for service providing companies to go offshore is that services can vary
around the world. Since accountancy companies need to offer most of their services in
winter and spring months when they need to audit financial statements and give financial
advice to their customers, there is a demand for flexible local employees to help with
these services. Offshoring can help the Dutch employees to relieve their work stress,
since the foreign employees can take over some tasks. For these reasons Ernst&Young,
one of the largest professional accountancy firm in the world, decided to go offshore.
Several years ago they started pilot testing and nowadays Ernst&Young in The
Netherlands has organized several establishments abroad (Paul Dirks – Ernst & Young).
15
Chapter 3: Risks of going offshore
3.1 Risk Factors
It looks very profitable for companies to expand abroad, since there are many advantages, but
entrepreneurs need to keep in mind that it eventually can be very risky to expand abroad. The
quality of the products can decrease, with the consequence that a company can lose its good
brand reputation. It is also possible that a company fails in gaining the planned financial
benefits from going offshore. Therefore companies should be aware of all the risks of going
offshore.
There is a difference between operational risk and structural risk. Operational risk is the
possibility that processes will not operate smoothly after being offshored. Structural risk is the
possibility that relationships with service providers may not work as expected. Companies
only benefit from going offshore when they pick the right processes and take both the
operational risks and structural risks into account. (Aron & Singh, 2005).
Companies should also consider political risk, the likelihood that the host government
anticipates with unwanted actions which have an impact on the business operations
(Bunyaratave et al., 2009).
Most companies do not take into account all the risk factors. Executives make decisions based
on simple cost/benefit analyses without realizing, for example, that their service providers
will gain upper hand after they transfer processes. It is possible that service providers demand
higher prices after going offshore. Many corporations naively ignore these latent risks. In
accordance to several studies, half of the companies that relocate processes offshore fail to
generate the expected financial advantages (Aron & Singh, 2005).
16
Corporations should try to reduce their risk of going offshore to gain more profits. One
method companies can use to reduce their risk is called benchmarking. Benchmarking is the
activity of comparing the methods and performance of the company with other processes in
order to learn from them and to assess performance (Slack et al., 2010).
‘What are some methods to reduce the risk of going offshore?
Benchmarking is important for companies to secure the quality of their product, since it
could happen that the quality declines after a few months. Companies should make use of
a local auditor to supervise the location abroad and to guarantee the quality of the
products. Besides, it is important that the privacy of the customers and employees and
confidential client data are safe (Jurgen Moors, Chamber of commerce).
It is also important that a company can maintain control of their production and service
processes, to ensure the quality of their products and services. Otherwise, when the quality of
the products drop during a certain period, a company can suffer a loss of reputation.
Why do many companies choose for offshoring instead of outsourcing?
With offshoring, companies can maintain the auditing of the quality of the products and
the carefulness of their customer services on their own, instead of having a risk by letting
external companies arranging these important factors.
That is also the reasons why Ernst&Young decided for offshoring instead of outsourcing
(Paul Dirks – Ernst & Young).
17
To prevent problems like delay of transportation caused by providers, companies should use
juridical experts to make contracts and to secure redress for damages to tangible property.
However, offshoring activities can make juridical knowledge difficult for Dutch companies,
since some civil or criminally responsibilities are being judged according to the legislation of
the host country, while others are being judged to the juridical legislation of The Netherlands.
Therefore, Dutch accountancy companies are using segregated IT-environments for the office
abroad to use, to prevent juridical problems. (Koopmans, 2010)
So to reduce the risk of the expansion, companies should take in account many factors. The
companies should not underestimate these factors, since otherwise the company can face a
bad reputation. It costs a company money to ensure the quality of the products, which can be
difficult and expensive for small companies. Since there are large fixed costs to access
international markets, firm size plays an important role. These fixed costs can also be derived
from the minimum market capitalization qualifications to expand abroad or from the need to
go along with international accounting standards. (Saudagaran, 1998). Therefore only large
firms, with high income and good macroeconomic environments are likely to internationalize.
These companies tend to be large, grow fast, have high returns and high foreign sales
(Claessens & Schmukler, 2007).
3.2 Reshoring
When a company fails to gain benefits from offshoring, the corporation might decide to
relocate the production processes back to the home country. This process is called reshoring.
For example, Van Aarsen did not get the expected benefits from expanding abroad to
Slovakia, therefore they decided to reshore their production processes back to Heel in The
Netherlands.
18
Why did Van Aarsen initially decide to expand abroad and what went wrong?
For financial reasons, Van Aarsen decided to go offshore to Slovakia in 1995. They took
over an existing Slovakian company and started producing goods in Slovakia. However,
there was a big problem: the country was too communist. The Slovakian employer
followed a policy, that when an employee made a production mistake he would receive
less salary. Since the employees did not want to betray their colleagues, they didn’t report
any mistakes, resulting that many finished products contained production failures.
Besides, the Slovakian employees did not care much about the quality, but only about the
quantity and there were too many employees working with a low efficiency. After a few
years, the wages raised in Slovakian. All these factors together resulted in bad quality
products, while the cost advantages were much less than expected.
After having the Slovakian produced goods imported to The Netherlands, Dutch
employees had to repair many products in order to maintain Van Aarsen’s good brand
name and brand awareness, and thus resulting in even higher costs. Therefore Van Aarsen
decided, after 12 years of trying to improve the situation, to reshore most of their
production processes back to The Netherlands.
Van Aarsen had made a wrong decision by going offshore to Slovakia. Afterwards, the
company probably would have expanded to a country more eastern than Slovakia, where
the wages raise slower. Besides, it was a wrong policy to punish employees who had made
mistakes with a less salary, since the employees would try to hide their mistakes, which
resulted in a bad quality of the products. Van Aarsen has learned from it mistakes and
will probably keep most of its production processes in The Netherlands to avoid risk and
to ensure the quality of their products (H. Schroijen, Van Aarsen).
19
Van Aarsen has made a wrong decision in going offshore to Slovakia. Afterwards, they
Chapter 4: Arranging the internationalization
4.1 Comparative advantages of countries
Before the expansion, the company needs to investigate which country offers the most
advantages for their business operations and even which province or city is the best option.
The company needs to include several factors in its analysis, like where the ground is cheap
and what location the best option is to easily transport raw materials to their factories. When
corporations need to transport the materials via ships, the company needs to be closely located
to an harbor, whereas other companies prefer being located closely to an airport or closely to
highways.
When analyzing companies expanding abroad, it is possible to notice several trends in the last
decades. Most of the manufacturing and services jobs that occur in the companies at the
Eastern countries in terms of offshoring, are routinely and relative easier jobs, which are
being organized and monitored by Western countries.
Since product design and development processes are relative difficult to offshore, because
these work processes acquire higher knowledge, these processes stay in the Western countries
where employees demand a relative high salary. The manufacturing processes are being
offshored to Eastern European countries, where the people produce the goods and offer
services for a low salary. For instance, many clothing is being outlined in Paris, and
afterwards being produced in Bangladesh.
To make the decision of where a company should locate, it should seek for the best
combination of cost and other productive inputs, in order to maximize overall utility for the
offshore activity and its defining attributes. Factors like the costs of wages, education and
20
English language capability of the employees, the quality of the ICT infrastructure in the host
country and a stable and supportive host government all play a role in the offshore location of
a company (Bunyaratave et al., 2009).
4.2 Internationalization in the manufacturing industry
In the manufacturing industry, firms want to relocate their physical production processes in a
foreign destination mainly for financial reasons. Traditional comparative advantages of
countries emphasize factor endowments: the availability of basic factors of production, such
as cheap labor, inexpensive energy or the availability of natural resources. Some Western
European companies, like Renault or Van Aarsen, have relocated their production factories to
Eastern European countries:
Why did Van Aarsen decide to go offshore to Slovakia and not to an other country?
Van Aarsen initially had explicit reasons to chose for Slovakia. The Slovakian inhabitants
have a history with metallurgy and metalworking, so Van Aarsen expected that the
employees would produce products of good quality. There was also a cost advantage,
since the Slovakian employees demanded less wages comparing with Dutch employees
(H. Schroijen, Van Aarsen).
In general, labor force in Eastern European countries costs significant less comparing with
West European countries. There are also less environmental requirements in Eastern Europe,
which makes it easier and cheaper to produce the goods. The same applies for Asian
countries, like China and Korea.
21
What are popular countries outside Europe to go expand to?
China used to be an important country for corporations to go offshore. During the 1990s
China has made a transition from a planned economy to a market economy. All foreign
companies were welcome to start a factory in China and to compete with other companies.
The influence of China is clearly visible with all the toys and other consumer goods with
the label ‘made in China’. China is an attractive country to establish, however, in the
recent years there have been so many companies establishing in China, that in practice
nowadays only big companies, which demand factories for a high production volume, can
successfully start a new factory in China.
Therefore, Surrounding countries like India and Korea have become good alternatives for
companies to expand. These neighboring countries are currently offering the same
regional advantages as China used to offer, like cheap salaries and hardworking
employees.
Brazil and other Latin American countries also offer comparative advantages. In these
countries rubber and tobacco are adapted (Jurgen Moors, Chamber of commerce).
4.3 Internationalization in the service industry
More and more service offering companies are offshoring around the whole world. In order to
have optimal customer contact, they want to have an office as close as possible to their
customers and hire employees who speak the same language and have the same culture. The
companies also want to reduce costs by hiring low-waged but high educated employees. The
abundance and quality of human capital are increasingly important drivers of offshore
location decisions (Doh, 2005).
22
Service offshoring increases employment of high skilled employees and decreases the
employment of medium and low skilled employees. (Crinò, 2010)
Service corporations have started to invest in education in their host countries by accessing
talent pools. By innovating and educating new employees, the service companies want to stay
ahead of their competitors by even offering better services in the future and achieving even
more costs savings. (Koopmans, 2010)
There are different IT-enabled offshoring activities. We can distinguish (1) software
development activities and other IT-related development and maintenance; (2) business
process, such as payroll; and (3) customer care services, such as call centers (Bhalla et al.,
2007).
To give some concrete examples in the service industry, there are many companies which
have their customer service division and other information technology divisions relocated to
India, for example DELL, HP and Ernst&Young.
Why did Ernst&Young go offshore to India ?
Since 2007, Ernst&Young Maastricht has established two new accomodations in India, in
Delhi and in Bangalore, in order to be able to offer accounting services to enterprises
located in India. Reasons for service providing firms to expand to India are that Indian
employees in general have high knowledge and a high education. They are able to speak
many languages, while they receive significantly less salary comparing with employees in
Western countries (Paul Dirks – Ernst & Young).
23
Dell and HP have got technical support centers in India, where IT experts give customers
support via telephone or email to solve their technical issues, in order to improve the customer
experience for their products.
Call centers are not particular located in the lowest-wage locations, since it is very important
that the call centers share a common language with the countries of the parent companies, and
that the country features a strong ICT infrastructure. Common language bridges cultural and
psychic distance, facilitates company exchanges and results in lower transaction costs.
Countries that share a common language may also share other aspects of historical,
institutional, and cultural experience. Besides, language has a practical contribution when
offshoring, especially for call centers, since they require high levels of home-country
language facility (Bunyaratave et al., 2009).
Investors were initially attracted to India for cost reasons, but they have retained and
expanded their production facilities in India, because of the high quality of the workforce and
the positive externalities they have generated. (Dossani & Kenney, 2007)
24
Chapter 5: The performance of multinationals
5.1 Results
Whether a company can earn higher profits when expanding abroad, is different for every
enterprise. When going successfully offshore, companies can reduce costs, earn more
revenues, get higher market share and enhance their reputation. Through internationalization,
these companies get familiar with different markets and opportunities and threats and
therefore can get a competitive advantage.
However, a company should take the risk factors into account. There are many cultural
differences around the world. Understanding these differences is important for being
successful in going offshore. To ensure the quality of the products and services, the
establishments abroad need to be monitored. To start-up a new establishment, a company
needs to make investments, such as building an accommodation and educating new
employees. Eventually, these investments can pay back and will make the company be able to
earn higher profits.
It is difficult for small companies to make these investments and to be able to take in account
all the risks of going abroad. Therefore companies are merging together, to unite their
competitive strengths and to be ahead of their competitors. These companies will grow even
bigger when they internationalize and become multinationals. This process of
internationalization is clearly visible in the recent decades. Mainly big multinationals are able
to survive in the fierce business world, where competitors try to get as many market share as
possible, while corporations want to stay ahead of their competitors. The reducing travel times
around the world and better communication methods have made internationalization even
easier and more efficient.
25
5.2 Patters of internationalization
Since physical, geographical and cultural barriers for expanding abroad have been largely
conquered by the ongoing technological revolution, companies have decided to go offshore.
In many of these countries, such as China or India, there are excellent IT infrastructures and
these countries are developing superior transport systems. (Kedia & Mukherjee, 2009)
By analyzing manufacturing and service companies which have gone offshore in the recent
years, it is possible to see patterns and trends of internationalization. Manufacturing
companies have build factories in Eastern European countries and in Asia for financial
reasons.
Service providing companies internationalize around the whole world, to stay closely located
to their customers. Service providing firms also want to reduce costs, and try to achieve this
by employing high educated, low-wage employees who can offer services like technically
customer support. However, reducing labor costs is not longer the only strategic reasons
behind offshoring decisions. Companies also want to access pools of highly skilled talent
around the world (Lewin at al., 2008).
26
Chapter 6: Conclusion
In order to be able to answer the main question: “Will a company that goes offshore have
higher profits and does this depend on how the company arranges the expansion?”, the actions
and results of Dutch multinationals which recently have expanded abroad have been analyzed.
It is impossible to exactly calculate the higher/lower profits in currency, since it takes years
for Dutch multinationals to establish a company abroad and to gain full benefits from
expanding abroad. Therefore it is impossible to determine how the company would have
developed and what the profits would have been if the company had decided to not expand
abroad. Aspects like investments and lower wages can be calculated, but other aspects like
brand reputation and the quality of services are difficult to measure. However, after having
analyzed previous research and case studies, it is possible to state that when a company
succeeds to gain their planned financial benefits while having their operational and structural
risk factors controlled, the company will have higher profits when going offshore.
It is possible to see trends and patterns in the way firms go offshore, in terms that
manufacturing companies tend to reduce their costs with low labor forces, mainly in Eastern
Europe and Asia, and that service providing companies want to reduce costs by investing in
education in countries like India, but they also choose to expand abroad because they want to
serve their customers as good as possible and they are therefore located all around the world.
In order to earn as much profits as possible, companies want to stay ahead of their
competitors. Firms want to get a high market share and to reduce costs, and therefore they
need to merge with other firms and they need to internationalize. When firms do not innovate
and stay local, they cannot keep up in the modern world. So expanding abroad can indeed
offer companies higher profits. However, the level of success does depend on the way the
27
company arranges their expanding. The company needs to make several investments to go
offshore. There will always be risks whether the company will be able to earn more profits
with these investments. To reduce these risks, the company needs to monitor the quality level
of their products and services. This is easier for big multinational companies than for small
firms.
Since the communication around the world has become better, and the transport much faster,
internationalization is getting more and more important. There is a fierce competition between
companies, and they can only survive when they keep innovating and adept to the modern
world. One of these recent developments is that more and more companies decide to go
offshore. Academic knowledge in this phenomenon is therefore very important, since many
companies are going offshore in the modern, recent world, and maybe even more in the future
world if this trend sustains.
This thesis can be used as a reference for future research, where there results of this thesis can
be compared with other Western countries than The Netherlands, to ensure the patterns of the
internationalization of multinationals.
28
References
Aron, R., & Singh, J.V. (2005). Getting offshoring right. Harvard Business Review, Vol. 83,
No. 12, pp. 135-141
Barkema, H. G., & Vermeulen, F. (1998). International Expansion through start-up or
acquisition: A learning perspective. The Academy of Management journal, Vol. 41, No. 1,
pp.7-26.
Bhalla, A., Sodhi, M. S., & Son B. (2007). Is more IT offshoring better?: An exploratory
study of western companies offshoring to Southeast Asia. Journal of operations management,
Vol. 26, No. 2, pp. 322-335.
Bunyaratave, K., Doh, J. P., & Hahn, E. D. (2009). Separable but not equal: The location
determinants of discrete services offshoring activities. Journal of International Business
Studies. Vol. 40, pp. 926–943
Caballero, R., & Krishnamurthy, A. (2001). International and domestic collateral constraints
in a model of emerging market crises. Journal of Monetary Economics, Vol. 48, No. 3, pp.
513-548.
Claessens, S., & Schmukler, S. L. (2007). International financial integration through equity
markets: Which firms from which countries go global? Journal of International Money and
Finance, Vol. 26 , No. 5, pp. 788-813.
29
Crinò, R. (2010). Service Offshoring and White-Collar Employment. The Review of Economic
Studies, Vol. 77, No. 2, PP. 595-632
Cunningham, J. B., & Lischeron, J. (1991). Defining Entrepreneurship. Journal of Small
Business Management, Vol. 29, No. 1, pp. 45-61.
Daniels, J. D., & Bracker, J. (1989). Profit performance: Do foreign operations make a
difference. Management International Review, Vol. 29, No. l, pp. 6-16.
Doh, J. P. (2005). Offshore outsourcing: Implications for international business and strategic
management theory and practice. Journal of Management Studies, Vol. 42, No. 3, pp. 695–
704.
Dossani, R., & Kenney, M. (2007). The next wave of globalization: Relocating service
provision to India. World Development, Vol. 35, No. 5, pp. 772–791.
Errunza, V.R., & Senbet, L.W. (1981). The Effects of International Operations on the Market
Value of the Firm: Theory and Evidence. Journal of Finance, Vol. 36, No. 2, pp. 401-17.
Farrell, D. (2005). Offshoring: Value creation through economic change. Journal of
Management Studies, Vol. 42, No. 3, pp. 675–683.
Gilbert, L., & Watteville, A. (2000). Information and Communication Technology.
Heinemann, first edition.
30
Kedia, B. L., & Mukherjee, D. (2009). Understanding offshoring: A research framework
based on disintegration, location and externalization advantages. Journal of World Business,
Vol. 44, No. 3, pp. 250-261.
Koopmans, L. (2010). Do’s en don’ts van offshoring. De Accountant, Vol. 117, pp. 28
Lewin, A. Y., Manning S., & Massini S. (2008). A Dynamic Perspective on Next-Generation
Offshoring: The Global Sourcing of Science and Engineering Talent. Academy of
Management Perspectives, Vol. 22, No. 3, pp. 35-54.
McDougall, P. P., & Oviatt, B. M.(2000), International Entrepreneurship: The Intersection of
Two Research Paths. The Academy of Management Journal, Vol. 43, No. 5, pp. 902-906.
Saudagaran, S. (1988), An empirical study of selected factors influencing the decision to list
on foreign stock exchanges. Journal of International Business Studies, Vol. 19, No. 1, pp.
101-127.
Slack, N., Chambers, S., & Johnston, R. (2010). Operations Management. Pearson, sixth
edition.
31
Appendix
Personal Relevance
Next to academic relevance and knowledge benefits for companies which currently want to
expand abroad, there is a personal reason for writing this thesis. By analyzing the subject of
this thesis, I would like to get more insight in understanding which factors influence the
expansion of multinationals. Next semester I am going to study abroad to get more insight in
the culture of different countries. After my studies, I would like to work in a Dutch
multinational. I can use the investigations of this thesis about entrepreneurship around the
world in combination with my study abroad experience for a better achievement in my future
job.
Research related newspaper articles
To give examples of the importance of this research, here are several recent articles about
Dutch companies, like DSM and Philips, that decided to settle elsewhere. As a result, many
people in The Netherlands are losing their jobs.
200 less jobs at Philips
1 March 2012
Today, Philips announced to their employees that 200 of the 500 jobs at Philips Lighting in
Roosendaal will disappear. The majority of the production will be moved to Poland. Last year,
Philips already announced that worldwide 1400 jobs would be lost. The Dutch Labor-Union
wants to start an investigation about the usefulness and need of relocating two of the three
production lines to Poland.
Source: NOS
32
DSM wants to move financial services from Sittard-Geleen to India
1 March 2012
DSM wants to move a part of their financial services from Sittard-Geleen to India. It is about
140 jobs. At this moment there is an investigation about outsourcing to India.
India is becoming the heart of the financial services. All the orders and other financial
operations which occur in The Netherlands during the day are being sent to India at night via
internet. As a result, the administration will be updated the next morning.
Source: Limburgs Dagblad.
Strike at Philips Turnhout
29 February 2012
This morning, a spontaneous strike occurred in the factory of Philips in the Belgian Turnhout.
Reason for the strike is the relocation of a department which produces lamps to China. The
staff does not like that there had been no deliberation between them and the direction. On the
department there are only working 25 people, but the employees are afraid that this relocation
is a pilot project and that more departments will follow in the future.
Source: NOS
33