A Case Study of Thailand's CP Group

ASIA PACIFIC JOURNAL OF MANAGEMENT, VOL. 15, 1633184 (1998) The international expansion process of MNEs from developing countries: A case study of Thailand’s CP Group PAVIDA PANANOND’ AND CARL P. ZEITHAML’ This paper reviews different streams of literature on Third World multinational enterprises (MNEs), highlighting the necessity to maintain a balance between exploiting existing resources and accumulating new competence. Using a case study research methodology, empirical evidence is presented on the international expansion process of the CP Group of Thailand. The paper attempts to explain the sequential growth and expansion of the CP Group into different technological and geographical areas. While existing resources feature prominently in determining the direction and the success of expansion, the accumulation of new expertise becomes even more significant in the long run. The paper also suggests a variety of theoretical and empirical issues which may be relevant in future inquiry on the internationalization process. 1. INTRODUCTION The study of the multinational enterprise (MNE) has been a fundamental component of the international business literature. Although the existence of MNEs can be traced back to the operations of international trading companies in the 17th and 18th centuries, the academic discourse on MNEs has generally been drawn from examples of MNEs originat- ing in advanced developed economies of the U.S. or Europe during the 1960s and 1970s. Since then, the world has witnessed the growth of foreign direct investment from newer sources such as those developing countries in East and Southeast Asia. Little is known, however, about these MNEs and their internationalization process into the world economy. Much of the early research studied firms that had already achieved a significant level of foreign investments. Many questions on the development process which preceded this stage remained unanswered (Welch and Luostarinen 19SS; Melin 1992; Smith and Zeithaml 1993; Yeung 1994a,b). This paper attempts to address such a gap. It describes and analyzes the internationalization process of Thailand’s largest multinational, the Charoen Pokphand (CP) Group, through a historical approach. The primary purpose of the paper is to extend the literature on Third World multinationals to include the dynamic aspect of the internationalization CCC 0217-4561/98iO20163-22 0 1998 BY JOHN WILEY & SONS (ASIA) LTD 164 P. PANANOND AND C. P. ZEITlIAML process. The paper starts by reviewing relevant literature on a Third World multinational and on the internationalization process of the firm. Then the historical development and the international expansion of the CP Group are discussed. The paper concludes that maintaining a balance between exploiting existing resources and accumulating new skills form the key to the survival and growth of the CP Group. Although results from a single case study of a Thai multinational should not be generalized as representative of all developing country multinationals, the CP case reveals interesting insights which can contribute to the literature on Third World MNEs. Furthermore, it presents a theoretical framework against which subsequent research may be compared. 2. LITERATURE REVIEW THEORIES OF THIRD WORLD /CIULTlNATlONAL ENTERPRISES Since the growth of foreign direct investment from developing countries started in the 1960s and gained momentum in the 197Os, there has been a corpus of theoretical and empirical literature on developing-country multinational enterprises. Although the amount of studies is relatively thin compared to studies on multinational enterprises from developed countries, the existing literature does represent a distinctive and growing stream of research which can be further enhanced. Research on MNEs from developing countries has grown out of core theories on multinational enterprise. The main argument is that developing country MNEs are different from their counterparts in developed countries in their characteristics and behavior. The main area of difference, which has been the focus of most literature on Third World MNEs, stems from the nature of ownership advantages possessed by developing country investors. While MNEs from developed countries are portrayed as benefiting from a large capital base, advanced technology based on R&D, or superior management skills, those from developing countries are usually known to be endowed with cheap labor, lower level of technology or ethnic ties. There are, however, different views among scholars studying the emergence and growth of Third World MNEs. In this paper, two groups are differentiated based on their views on Third World MNEs’ sources of competitive advantages. While the first group suggests that ownership advantages of these firms are derived from external country specific factors such as the possession of natural resources or cheaper labor cost, making these MNEs rely more on the exploitation of existing resources, the second group pays more attention to the capability of Third World MNEs in building up their proprietary advantages through a gradual accumulation of skills, information and technological effort. Two major models sharing the former view are the Investment-Development Path (IDP) formalized by Dunning (1981, 1988); Dunning d al. (1997); and the Product Cycle Model (PCM) formalized by Vernon (1966) and applied to Third World MNEs by Wells IKTERNATIONAL EXPANSION PROCESS OF MlUES FROM DEVELOPING COUNTRIES 165 (1781, 1783; see also Khan 1786). The latter view is proposed by two other models: the Localized Technical Change introduced by La11 (1983a,b) and the Technological Accumu- lation view applied to Third World MNEs by Tolentino (1993) (see also Cantwell and Tolentino 1790). The IDP argument is, in fact, not an explanation of the existence and growth of the firm. Rather, it aims to illustrate which countries would engage in outward foreign direct investment (FDI), and how the nature and level of this activity is related to the stage of economic development of the home country (Dunning rt al. 1997). The model suggests that a country’s inward and outward investment is partly a function of its level of economic development, and that the levels of inward and outward FDI flows of any country goes through predictable stages as the economy develops. The PCM model relies on the comparative cost explanation of international trade and investment in explaining the relocation of production units from developed countries to their less developed counterparts. The model suggests that new products are initially introduced and produced in high-income markets. It is only when the product becomes matured and standardized that new locations of production are sought in less developed countries to benefit from their lower labor cost. Wells (1981, 1783) picks up this concept and suggests that developing country enterprises derive their competitive advantages from adapting mature technologies to situations in their markets. Examples of these adaptations include: downscaling technology to smaller markets; making production more labor- intensive and more flexible; and replacing imported parts with local inputs. Although the two previously discussed models differ in their focus, they share a similar view that competitive advantages of developing country firms are derived from external country specific factors, i.e., the level of economic development or the low labor cost. This implies that developing country firms need to rely on price competition, and that the only areas where they can exploit their competitive advantages are in countries with similar or lower levels of economic development. Such implication points to a rather pessimistic future for developing country MNEs, suggesting that their competitive advantages are short-lived and can be eroded over time as local competitors and affiliates of other MNEs soon catch up. The scenario offers little hope for sustainable development and growth of Third World MNEs over the long run. Contrary to the above discussion, the Localized Technical Change and the Techno- logical Accumulation views propose that developing country firms are capable of creating sustainable ownership advantages which allow them to compete with competitors from advanced economies. La11 (198ja,b) argues that competitive advantages of developing country MNEs do not lie in frontier technology. Rather, they can take the form of adaptation of imported technology; development of products suitable for developing countries; or innovations of small-scale production techniques. The importance of innovation is similarly stressed by Tolentino (1993) who contends that the significance and complex- ity of technological innovation of firms from developing countries are largely determined by the cumulative process of technological accumulation through experience in interna- 166 I’. PANANOND AND C. P. ZEITIIAMI tional investment. Both explanations are based on the view that the firm is an institution which could accumulate competence through an evolution of an internal learning process (Cantwell 1997). This notion shifts the discussion on international expansion from a mere exploitation of resources to a new focus on the development of capacity through learning and accumulation of competence. Such a view is consistent with the literature on the sequential internationalization process (‘Johanson and Wiedersheim-Paul 1975; Johanson and Vahlne 1977, 1990). Known as the ‘Uppsala’ school, this literature stresses the importance

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