An examination of strategic foreign direct investment decision processes: the case of Taiwanese manufacturing SMEs. (small and medium-sized enterprises)(Strategic Management in the Asia Pacific: Perspectives from the Region)

Proposes that due to the worsening business environment in Taiwan in the 1980s many manufacturing enterprises, the majority being labour-intensive small and medium-sized enterprises (SMEs), were moving out to other developing countries. Explores how owner managers in the Taiwanese Electronic and Electric Appliances industry make a foreign direct investment (FDI) decision. Two semistructured questionnaires were designed to gather data about the respondents' decision-making processes. Reid research was undertaken in Taiwan by personal interview over a period of three months and in total 35 companies participated. Discusses how a company's internationalization experience and its size in terms of sales significantly influence the likelihood of a positive FDI decision. The likelihood of a positive FDI decision is also affected by owners' personal characteristics. Additionally the decision-makers appear to be influenced by Mends and partners. States that the companies that make a positive FDI decision perceive the work ethic in Taiwan as deteriorating. Posits that 78 per cent of the most recent FDIs are in China. the major benefits being sought are low production costs and abundant labour supply. Says the most important reason for selecting China as the host country is the same language and cultural similarities. Explains that most FDIs are to produce products which have a price advantage, hence the FDI creates a vertical integration with the mother company in Taiwan. Seems that Taiwanese manufacturing SMEs will continue investing overseas to seek competitive advantages.

Introduction

In the 1980s there were both economic and noneconomic factors impacting on Taiwan's economy and creating a worsening business environment (Chiang, 1994, p. 23). The main economic factor was Taiwan's huge trade surplus which had caused the appreciation of the New Taiwan (NT) dollar, the introduction of hot money into the economy and an increase in the money supply. As a consequence, Taiwan's industries had their competitiveness eroded due to the increases in operating costs, for example, real estate and labour costs. The main non-economic factor was the removal of martial law which then led to a growing labour movement, an environment protection movement, political confrontation between the ruling party and the opposition parties, and a deterioration of public security. The resulting instability also contributed to the deterioration of the investment climate.

Due to the worsening business environment in Taiwan in the 1980s, many manufacturing enterprises, the majority being labour-intensive, small and medium-sized enterprises (SMEs), were moving out to other developing countries (Kao et al. 1992, p. 12). The major purpose for their overseas investments was to seek competitive advantages that had been lost in Taiwan.

Private foreign direct investment (FDI) made by Taiwanese firms in ASEAN countries was popular. From 1963 to 1993, the total FDI amount (excluding the FDIs in China which the Taiwanese government defines as indirect investments), approved by the Taiwanese government was US$4.02 billion. Of which 51 per cent (US$2.05 billion) was in the ASEAN countries (Huang et al. 1994, p. 36). The FDI in these countries reached its peak in 1991, when it reached US$703 million, then it declined from 1992 onwards. In 1992 the FDIs in ASEAN countries declined to US$289 million, and most of the recent overseas investments have been to China. From 1991 to 1993 the total FDI amount approved by the Taiwanese government was US$3.36 billion. Huge capital outflow into China has now forced the government to re-examine its policy with regard to China.

To understand the stream of FDI from Taiwanese manufacturing SMEs, this paper examines the FDI determinants and significant variables involved in the FDI decision processes of Taiwanese manufacturing SMEs and explores the implications for the Taiwanese owner managers, the Taiwanese government and the interested host countries and companies.

Operational definitions

Small and medium-sized enterprises (SMEs)

The definition of a small and medium-sized enterprise differs from time to time and from country to country. In this research a Taiwanese manufacturing SME is defined as:

1 registered capital: not more than 40 million NT dollars;

2 employees: not more than 200;

3 a current factory licence.

Foreign direct investments (FDIs or DFIs)

A foreign direct investment is a term which is sometimes used interchangeably with terms such as foreign investment and overseas investment. In this context it is defined as either equity or capital investment by a Taiwanese company in a new or existing overseas enterprise. A portfolio, for example a stock investment, would not be considered as an FDI.

Conceptual framework

Figure 1 is the conceptual framework utilized for this research. There are three dimensions of factors which will affect an SME in making an FDI decision. They are external environments surrounding an SME, the networks around owner managers and the owner managers' background. From a long-term view, these factors will influence each other.

[Figure 1 ILLUSTRATION OMITTED]

An SME is surrounded by international, national and task environments. Changes from these environments may cause the SME to adopt new strategies to adapt to new circumstances (Bourgeois and Eisenhardt, 1988; Hitt and Tyler, 1991; Porter, 1980). For instance, entry barriers set by one country may force an SME to set up manufacturing facilities in that country in order to enter the market or to maintain its market share; a country's worsening political and economic environments, or an industry in decline, may cause firms to consider establishing in other countries to improve their competitive advantages. When such pressures occur, the owner managers will consider the company's objectives and may start thinking strategically. Meanwhile, the owner managers' attitudes (Gupta, 1984; Hambrick and Mason, 1984; Hitt and Tyler, 1991) and the social (Meyer, 1994) and industrial network (Bodur and Madsen, 1993) influences will affect their thinking and performance.

In this research there are three kinds of networks under survey. They are the social network, the industrial network and the network of relations between business and government. Social networks and industrial networks are dominated by Confucian philosophy (Chen, 1994; Wen and Hsiao, 1988) that focuses on human relations. Government has played an important role in Taiwan's economic development. The business-government relationship is also explored to examine the government's role in foreign direct investments.

The FDI decision-making process is examined using a framework which incorporates the concepts developed by Mintzberg and Aharoni. Mintzberg, Raisinghani and Theoret (1976) examined 25 cases of decision making and identified a basic structure which underlies an "unstructured" decision-making process. Aharoni (1966) in his doctoral research entitled The Foreign Direct Investment Decision Process classified the FDI decision making process into three phases, namely: the decision to look abroad, the investigation process and the decision to invest. These phases are similar to those of the Mintzberg model of identification, development and selection phases. In this research, the FDI decision-making process is examined according to the following phases: initiation and preliminary thinking, investigation, and evaluation and final decision making. The model is similar to those of Aharoni and Mintzberg; however, the titles of the three phases were amended into a framework readily understandable by the Taiwanese respondents.

Research method

Research samples

Almost half (408 projects) of the officially approved Taiwanese FDI projects (858 projects), between the period of 1963 to 1993, were from the Electronic and Electric Appliances industry (Huang et al., 1994, p. 13). The investment amount was about one-third (US$1.1 billion) of the total Taiwanese FDI amount (US$4.02 billion). Meanwhile the average FDI investment scale of the Electronic and Electric Appliances industry is small when compared to industries such as the Chemical Materials industry (6.05 per cent of total FDI projects …