Internationalization process of industrial firms: a study on the auto-component manufacturers in India and Canada

Abstract

Recent studies have observed the increasing participation of firms from developing countries in international trade. They have significantly increased the size and scope of their activities across a range of industries including the capital intensive manufacturing sectors. The purpose of our study is to understand the internationalization process of industrial firms from a developing country context, as there has been limited research work in this area. We studied the process through a firm-level study of auto-component manufacturers from the Indian auto-component industry‘ This industry has significantly internationalized over the years, An important part of the internationalization process of industrial firms is their ability to develop strong relations with large international Original Equipment Manufacturer (OEM) customers. Since, the experience of Indian auto-component manufacturers in developing and maintaining leading international OEM customers is limited we investigate the factors influencing strong buyer-supplier relations among component manufacturers and leading OEM customers in a developed country context, the Canadian automobile industry. The results have implications for the internationalization process of Indian component manufacturers. Research Objectives: • Understand the internationalization process of auto-component firms from India. • Understand the changes at the level of the organizational functions and the capability building required to support the internationalization process of the firms • Investigate the factors influencing the formation of strong relationship between component manufacturers and their OEM customers from a developed country context and to draw inferences for the internationalization process of the Indian auto- component manufacturers. Methodology : To develop an in-depth understanding of the internationalization process, the study employed longitudinal case research methodology. Two firms with high levels of international activity were chosen from the Indian auto-component sector. Each case study covered the history of the international activities of the firms, starting with the initial phase of unsolicited exports. Data collection involved semi-structured interviews with the top management, the export manager, and functional heads within the organization. Multiple data sources including archival records and published reports were also used, To study on the factors influencing the strength of buyer-supplier relations between international OEMs and their suppliers, a survey was conducted among auto-component manufacturers in Canada. The survey questionnaire was sent to 602 Canadian component manufacturers and 98 usable responses were received. The responses yielded results on various dimensions of buyer-supplier relationship and factors influencing each of these dimensions. The results also provided insights into the outsourcing practices of vehicle and component manufacturers. Key Findings: 1. The study identified the following phases of internationalization by redefining existing classifications in literature to suit the Indian auto-component industry, namely no involvement, low involvement , active international and committed international based on their choice of markets, products, and mode of operations in the international market. • In the no involvement phase the firms a) served psychologically close markets, b) exported low-end standard products and c) operated through indirect exports. • In the low involvement phase the firms a) simultaneously entered both psychologically close and developed country markets, b) exported low-end, standard ‘components and some value-added products to the international aftermarket and c) used the mode of indirect exports. • In the active international phase the firms a) rapidly expanded their operations world- wide, b) introduced several value-added products including products made exclusively for the international, c) served the markets through indirect exports. • In the committed international phase the firms a) consolidated their markets by providing improved marketing support to agents and distributors, (b) entered into products unrelated to their existing line of business , and c) were involved in direct exports to international OEMs using a variety of modes. 2. The following changes were observed in the organizational functions along the different phases of internationalization: • Manufacturing and international marketing functions gradually adapt themselves to the requirements of the international markets across the phases of internationalization and reached a level of high involvement in the committed international phase. • Quality control, R&D and design and development, were highly involved towards the latter part of active international phase and across the committed international phase, with little involvement in the previous phases. • Purchase and HRD functions had only a medium level of involvement from the active involvement and committed international phases. • Finance function was low involved in the committed international phase also. 3. In the first two phases of internationalization the firms developed only experiential based intangible capabilities namely, positional and general management capabilities. In the latter half of the active international phase and in the committed international phase the firms made significant investments towards developing both tangible and intangible capabilities. Intangible capabilities developed include functional capabilities, regulatory capabilities and cultural capabilities. International OEM relations influenced the choice and speed of capability built among component manufacturers. 4. The important findings rom the survey of auto-component manufacturers from Canada include: • Tier-I and Tier-2 manufacturers use ‘partnership’ relation with their suppliers. • Manufacturing capability, product design capability, tastiness of the product knowledge and asset specificity of the investments made by supplier are important factors influencing the strength of buyer-supplier relations. • of association between buyer-supplier influenced only one dimension of buyer- supplier relations, expectations of continuity of relationship. 5. Some of the contracts formed by the Indian firms with international OEMs resembled ‘partnership’ relationship but most of them were based on the low-cost dimension only. The Indian firms in the study had low product design capability and tastiness of product knowledge as compared to their international counterparts. Implications: The study developed a phase model of the internationalization process of industrial firms from a developing country context. It also throws light on the functional changes done and capabilities built, in each phase. The need to involve functional managers early in the internationalization process of firms and to develop international standards of manufacturing and design capabilities to secure and sustain strong international OEM relations is emphasized. The study has implications for industry associations and government supported international trade promotion' programs towards developing and tailoring support programs depending on the industry context and phase of internationalization of firms.