Technological Capabilities and Samsung's International Production Strategies in East Asia

Abstract

Between the late 1980s and the early 1990s, the international competitiveness of the Korean electronics end-product industry declined markedly. This occurred during a period of transition when there was a shift from export to international production. Major Korean electronics firms, newly established as MNCs, were under challenge. The new MNCs had to build technological capability to compete with established MNCs. New MNCs were under challenge in both domestic and global markets and they were confronted by increasing globalisation of production and research and development activities. No new Korean MNC felt the challenge more keenly than Samsung Electronics. This study uses a case study approach to pose questions about which strategies were relevant to success in the international operations of new MNCs. Of particular interest is the way in which the subsidiaries of Samsung Electronics in the ASEAN region and China maintained their international competitive advantage, and whether their competitiveness can be sustained in the long run. A longitudinal case study approach is used to assess the strategic management, organisational and technology acquisition questions that arise in the establishment and expansion of international operations of new MNC in the electronics industry. The first part of the study provides description of the relationship between the learning and development of Samsung' s technological capabilities and the nature of its foreign direct investment and competitive advantage during the 1970s, 80s and 90s. During the 1970s and 80s, Samsung mostly emphasised the development of 'easy-to-imitate capabilities' such as mass production capability, rather than 'difficult-to-imitate capabilities' such as design and product development and international management. Its mass production capability was the main motivation for foreign direct investment, but this is a temporary ownership advantage. The second part of the analysis assesses how Samsung' s subsidiaries in the ASEAN region and China established their competitiveness and it can be maintained. The capability to mass produce standardised components, achieving economies of scale, was the source of Samsung's early competitive edge. It had weaknesses in the field of product change, strategic marketing and international management. v The global competitive environment has shifted from cost-based competition to product change capability-based competition. In this environment, international competitiveness depends on the improvement and transfer of technological capabilities between headquarters and subsidiaries. Several factors determine success or failure in international production: the faster the production capability in a specific foreign location is earned, the better is the growth performance of a foreign subsidiary; an end-product subsidiary that quickly establishes with local component suppliers outperforms one that does not; the more proficient the international management capability gained through interactions in a similar foreign location, the better the performance of subsidiaries; and foreign subsidiaries with superior product-change capability outperform those with inferior capability. Weakness in product change and international management capability is a major handicap in the maintenance of international competitiveness. This is in part attributable to home country policy. Restrictive policies on inward foreign direct investment discouraged wholly-owned foreign subsidiaries from operating in Korea. This prevented Korean firms, like Samsung, from learning difficult-to-imitate technological capabilities including design and product development skills. Korea's regulation of outward foreign direct investment policy also discouraged firms from investing overseas, and ultimately inhibited domestic firms from gaining international production experience. This carries an important policy lesson for developing countries. A restrictive FDI policy, whether on inward or outward foreign direct investment, deprives domestic firms of the chance to learn difficult-to-imitate capabilities and inhibits the timely exploitation of short-lived advantages in international production - and is an inappropriate policy, unfavourable to sustaining the global competitive advantage of firms and nations.