BUS 553 Module 1 Why Firms Go Abroad Example

Shipping Machines or Building a Base: Why Firms Trade and Invest Abroad, and What a Seafood Equipment Maker Should Do in Vietnam

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MBA Program, Aspen University

BUS 553: Global Corporate Finance

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Shipping Machines or Building a Base: Why Firms Trade and Invest Abroad, and What a Seafood Equipment Maker Should Do in Vietnam

Badger Seafood Systems, a composite manufacturer in Green Bay, Wisconsin, designs machines that peel shrimp, fillet fish and grade seafood by size. Its customers have been processors in Alaska, Norway and Iceland. Over the past two years, inquiries from Vietnam, one of the world's largest exporters of farmed shrimp and pangasius catfish, have multiplied as processors there automate to cope with rising wages. Badger's board wants to know whether and how to pursue this market. This paper explains why firms trade and invest abroad and applies that understanding to Badger's choice.

Which Firms Go Abroad

Discussions of globalization often imply that every company sells internationally. The evidence says otherwise. Bernard et al. (2007), using data on U.S. firms, found that exporting was rare: in 2000, only about 4% of U.S. firms exported, and among exporters, the top 10% accounted for about 96% of exports. Exporters were larger, more productive, paid higher wages and were more capital and skill intensive than firms that did not export. Selling abroad requires fixed costs, from learning foreign regulations to building distribution, that only firms with an advantage can cover.

Badger fits the profile of an exporter. Its machines embody patented peeling technology, and its existing customers in Norway and Iceland show that it can compete abroad.

Exporting or Investing

Firms that go abroad choose between shipping from home and producing or operating in the foreign market. Helpman et al. (2004) studied U.S. exports and foreign affiliate sales across industries and found that firms sort by productivity: the least productive serve only the home market, more productive firms export, and the most productive invest abroad, because they can cover the larger fixed costs of foreign operations and save on transport costs and tariffs. The choice also depends on the industry: where fixed costs of foreign operations are low relative to trade costs, investment is more common.

Dunning's Framework Applied

Dunning (1988) proposed that firms produce abroad when three conditions hold. Ownership advantages are assets the firm controls that rivals lack; Badger's are its peeling technology, its engineering know-how and its reputation for uptime. Location advantages are features of the foreign country; Vietnam offers rapidly growing demand, lower service labor costs and proximity to other Southeast Asian processors. Internalization advantages arise when the firm gains more by doing the work itself than by licensing or contracting; for Badger, service quality is critical, since a stopped peeling line costs a processor thousands of dollars an hour, and licensing its technology to a local manufacturer would risk losing control of it.

The framework suggests that Badger should keep manufacturing in Wisconsin, where its ownership advantages are rooted, but that the service function, where location and internalization advantages are strong, may belong in Vietnam.

The Vietnamese Market

Vietnam's seafood processing industry has grown into one of the largest in the world, built on farmed shrimp in the Mekong Delta and pangasius catfish raised along the river. Processing has long relied on large numbers of workers peeling and filleting by hand. As wages have risen and buyers in the United States, Europe and Japan have demanded consistent sizing and traceability, processors have begun to automate. Competition comes from European equipment makers with established agents in the region and from lower-cost machines made in Asia. Badger's advantage is the yield of its peeling machines, which recover more meat per pound of shrimp than rival designs, a difference that matters greatly to processors with thin margins.

What Service Means to Buyers

Interviews with eight Vietnamese processors during a sales trip revealed that their first question was not price but service: how quickly a technician could arrive when a machine stopped, and whether spare parts were stocked locally. Several had bought European machines and waited weeks for parts during peak season. For capital equipment that runs around the clock, local service is part of the product, which is why the options below differ mainly in how service is provided.

Three Options

The values come from Badger's forecast of machine sales under each option, discounted at 12%. Exporting alone limits sales, because processors hesitate to buy machines without local service. A wholly owned subsidiary offers the best service but its fixed costs outweigh the extra sales in the early years. The partner model offers most of the service benefit at lower cost.

Financial Considerations

Shapiro (2013) emphasizes that foreign operations must be judged on the cash flows they return to the parent, after local taxes and currency effects. Badger's machines would be priced in U.S. dollars, as is common in capital equipment trade, so its revenue would not depend on the Vietnamese dong, but service costs in Vietnam would. Payment terms matter too: Vietnamese processors typically pay in installments, and letters of credit through international banks would reduce collection risk.

Recommendation

Badger should enter Vietnam through a distributor-partner experienced in food processing equipment, train two of the partner's technicians in Green Bay, and lease a small spare parts warehouse in Ho Chi Minh City under Badger's own name. If annual sales in Vietnam and neighboring countries exceed $12 million for two consecutive years, Badger should convert the arrangement into a wholly owned service subsidiary, at which point its fixed costs would be justified.

Conclusion

Evidence shows that only firms with real advantages trade internationally, and that the most productive go further and invest. Badger has the advantages to export but not yet the volume to justify a full subsidiary. Dunning's framework shows that service, not manufacturing, is the function that belongs near Vietnamese customers. A partner model with Badger-controlled parts and training is the right first step, with a clear threshold for deeper investment.

References

Bernard, A. B., Jensen, J. B., Redding, S. J., & Schott, P. K. (2007). Firms in international trade. Journal of Economic Perspectives, 21(3), 105-130. https://doi.org/10.1257/jep.21.3.105

Dunning, J. H. (1988). The eclectic paradigm of international production: A restatement and some possible extensions. Journal of International Business Studies, 19(1), 1-31. https://doi.org/10.1057/palgrave.jibs.8490372

Helpman, E., Melitz, M. J., & Yeaple, S. R. (2004). Export versus FDI with heterogeneous firms. American Economic Review, 94(1), 300-316. https://doi.org/10.1257/000282804322970814

Shapiro, A. C. (2013). Multinational financial management (10th ed.). Wiley.