19 Assessing motives for international business.

Pliny Inc. (a US fictitious company), specializes in manufacturing some basic parts for sports utility vehicles that are produced and sold in the United States. Its main advantage in the United States is that its production is efficient and less costly than that of some other unionized manufacturers. It has a substantial market share in the United States. Its manufacturing process is labour-intensive. It pays relatively low wages compared to US competitors, but has guaranteed the local workers that their job positions will not be eliminated for the next 30 years.

It hired a consultant to determine whether it should set up a subsidiary in Mexico, where the parts would be produced. The consultant suggested that Pliny should expand for the following reasons. Offer your opinion on whether the consultant’s reasons are logical.

a Theory of competitive advantage: There are not many SUVs sold in Mexico, so Pliny, Inc., would not have to face much competition there.

b Imperfect markets theory: Pliny cannot easily transfer workers to Mexico, but it can establish a subsidiary there in order to penetrate a new market.

c Product cycle theory: Pliny has been successful in the United States. It has limited growth opportunities because it already controls much of the US market for the parts it produces. Thus, the natural next step is to conduct the same business in a foreign country.

d Exchange rate risk: the exchange rate of the peso has weakened recently, so this would allow Pliny to build a plant at a very low cost (by exchanging dollars for the cheap pesos to build the plant).

e Political risk: the political conditions in Mexico have stabilized in the last few months, so Pliny should attempt to penetrate the Mexican market now.