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UNDERGRADUATE DISSERTATION

‘Contrasting the strategic role of firms in the economic development of Ecuador with that of South Korea using

Ghemawat CAGE distance framework’

BA in Business and Management by

Maria Eliani Fabre Herrera

Dissertation supervisor:

Monika Kostera

March 2017

Word count = 11,997

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TABLE OF CONTENTS

ACKNOWLEDGEMENTS……………...………………………………………………1 ABSTRACT…………………………………………………………............................2 CHAPTER 1: INTRODUCTION ............................................................................ 3 1.1 Context ................................................................................................... 3 1.2 Research Aims ...................................................................................... 3 1.3 Research Importance ........................................................................... 4 1.4 Research Rationale ............................................................................... 4 1.5 Research Framework ............................................................................ 4 1.6 Structure ................................................................................................ 5

CHAPTER 2: LITERATURE REVIEW .................................................................. 6 1.7 Introduction ........................................................................................... 6 1.8 Country Competitiveness ..................................................................... 6 1.8.1 Industry-Level Determinants ............................................................... 7 1.8.2 Country-Level Determinants ................................................................ 7

1.9 The Role of Firms .................................................................................. 7 1.9.1 Location Advantages & Firm-Specific Advantages ............................. 8 1.9.2 Firm-Level Determinants ..................................................................... 9 1.9.3 Influencing Factor Creation ................................................................. 9 1.9.4 Organising Principles & Technological Innovation ............................ 10

1.10 Ghemawat’s CAGE Framework ......................................................... 10 1.10.1 Geographic Distance ..................................................................... 11 1.10.2 Cultural Distance ........................................................................... 11 1.10.3 Administrative Distance ................................................................. 13 1.10.4 Economical Distance ..................................................................... 13

CHAPTER 3: METHODOLOGY ......................................................................... 18 1.11 Introduction ......................................................................................... 18 1.12 Research Purpose .............................................................................. 18 1.13 Methodology ........................................................................................ 18 1.13.1 Research Philosophy ..................................................................... 18 1.13.2 Approach ....................................................................................... 18

1.14 Methodological choice & Time Horizon ............................................ 19 1.14.1 Financial and Efficiency Metrics .................................................... 20 1.14.2 Customer Metric ............................................................................. 21 1.14.3 CAGE Distances Analysis ............................................................. 22

1.15 Strategy ................................................................................................ 22 1.16 Techniques and Procedure ................................................................ 25 1.16.1 First Research Question: Strategy of firms .................................... 25 1.16.2 Second Research Question: Replicability of strategies ................. 29

1.17 Research Ethics .................................................................................. 30 1.18 Limitations ........................................................................................... 31

CHAPTER 4: CASE STUDY OF ECUADORIAN AND SOUTH KOREAN COMPANIES ....................................................................................................... 32

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1.19 Introduction ......................................................................................... 32 1.20 Case Study A: Strategies used in firms from Ecuador in contrast to South Korea .................................................................................................... 33 1.20.1 Case A.1. Key Performance Indicators .......................................... 33 1.20.2 Case A.2. Strategy ......................................................................... 62 1.20.3 Case A.3. Productivity of firms ....................................................... 63

1.21 Case Study B: Contrasting Ecuador & South Korea through CAGE analysis ........................................................................................................... 64 1.21.1 Cultural Distance ........................................................................... 64 1.21.2 Administrative Distance ................................................................. 66 1.21.3 Geographic Distance ..................................................................... 67 1.21.4 Economic Distance ........................................................................ 69

CHAPTER 5: IMPLICATIONS ............................................................................ 74 CHAPTER 6: CONCLUSION & RECOMMENDATIONS .................................... 75 1.22 Which strategies were used in firms from Ecuador in contrast to South Korea? (Internal Factors) ................................................................... 76 1.23 Can Ecuador replicate the techniques used by South Korea to stimulate rapid growth? (External Factors) ................................................. 76 1.24 Strategic Role of Firms ....................................................................... 77 1.25 Recommendations .............................................................................. 78

REFERENCES .................................................................................................... 79 Appendix ............................................................................................................ 87 1.26 Survey: Customer Satisfaction for Ecuadorian companies ........... 87

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LIST OF FIGURES Figure 1. Resource-Based View ............................................................................ 8 Figure 2.Firm-Level Determinants ......................................................................... 9 Figure 3. Case Study Strategy ............................................................................ 22 Figure 4. Procedure followed for measuring Economic Development ................ 26 Figure 5. Comparison of yearly averages of Revenue Growth Rate from South

Korean and Ecuadorian companies ............................................................. 46 Figure 6. Customer Satisfaction: Comparison between Ecuadorian and South

Korean companies ....................................................................................... 59 Figure 7. Cultural Similarities & Differences ........................................................ 64 Figure 8. South Korea Merchandise Exports with Shading Based on Partners

Imports in 2010 ............................................................................................ 68 Figure 9. Ecuador Merchandise Exports with Shading Based on Partners Imports

in 2010 ......................................................................................................... 68 Figure 10. Total GDP of Ecuador and South Korea in 2016 ............................... 69 Figure 11. GDP per capita of Ecuador and South Korea in 2016 ....................... 70 Figure 12. Income inequality from Ecuador and South Korea in 2016 ................ 71 Figure 13. Unemployment of Ecuador and South Korea in 2016 ........................ 72 Figure 14 Strategic Role of Firms ........................................................................ 75

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LIST OF TABLES Table 1. Cultural Distance Framework ................................................................ 12 Table 2. Administrative Distance Framework ...................................................... 13 Table 3. Economic Distance ................................................................................ 14 Table 4. Synthesis of main theoretical frameworks from the Literature .............. 16 Table 5. KPIs Methodological Framework ........................................................... 19 Table 6. Yearly Exchange Rate from Korean Won to US Dollars ....................... 20 Table 7. Likert Scale ............................................................................................ 21 Table 8. Contribution to GNI in 2015 ................................................................... 24 Table 9. Analytical methods from previous studies ............................................. 25 Table 10. Metrics used for analysing performance ............................................. 27 Table 11. Formulas to measure the KPIs ............................................................ 28 Table 12. GLOBE scale ....................................................................................... 29 Table 13. South Korea: Financial, Internal Business and Learning & Growth

Metrics .......................................................................................................... 33 Table 14. Ecuador: Financial, Internal Business and Learning & Growth Metrics

..................................................................................................................... 36 Table 15. South Korea: Revenue Growth Rate (RGR) ....................................... 39 Table 16. South Korean GDP from 2007-2012 ................................................... 39 Table 17. Yearly Exchange Rate from Korean Won to US Dollar ....................... 40 Table 18. GDP growth rate of South Korea in year 2013-2015 ........................... 40 Table 19. Three main export partners of South Korea in 2014-2015 .................. 41 Table 20. One Korean Won in other currencies .................................................. 42 Table 21. Countries yearly conversion rate from Korean Won ............................ 42 Table 22. Export partners from South Korea in 2014, 2015 ................................ 43 Table 23. Ecuador: Revenue Growth Rate ......................................................... 43 Table 24. Ecuador’s GDP from 2007-2012 ......................................................... 43 Table 25. Industry sector of Ecuadorian companies ........................................... 44 Table 26. Market Share of Ecuadorian Industries in 2014 & 2015 ...................... 45 Table 27. South Korea: Net Profit & Percentage change per year ...................... 47 Table 28. China GDP growth .............................................................................. 48 Table 29. LG Chem main Competitors Net Profit in 2013 ................................... 49 Table 30. Ecuador: Net Profit & percentage change per year ............................. 50 Table 31. Expenses of Pronaca in year 2012 & 2013 ......................................... 51 Table 32. Expenses of Pichincha Bank from 2011 to 2013 ................................. 51 Table 33. Percentage Share of Revenue to GNI ................................................. 52 Table 34. Number and Location of Supermarkets from The Favorita Group ...... 53 Table 35. Profit margin of Ecuador & South Korea ............................................. 54 Table 36. South Korea: Asset Turnover Ratio ..................................................... 56 Table 37. Ecuador: Asset Turnover Ratio ........................................................... 57 Table 38. South Korea: CSI ................................................................................ 58 Table 39. Ecuador: CSI ....................................................................................... 59 Table 40. South Korean and Ecuadorian firm-strategies .................................... 62 Table 41. Comparing the Administrative Distances from South Korea and

Ecuador ........................................................................................................ 66 Table 42. Natural Resources as a percentage of GDP ....................................... 72

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ACKNOWLEDGEMENTS

I would like to give particular gratitude to Prof. Monika Kostera for her guidance

throughout the dissertation process. The support and advice received from her

have been extremely valuable for me to complete and continuously improve this

piece of work.

I would also like to thank Mr. Tizian Römmelt for his immense support in throughout

the writing of this paper. The financial knowledge shared to me has been essential

for the advancement of this work. Further, I am grateful to my family for all the

encouragement given for the completion of this study.

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ABSTRACT

The following study discusses the strategic role that firms have on the economic

development of a country. For this, two countries were selected;; South Korea and

Ecuador. Both countries experienced an economic boom in 1980. However, some

years later Ecuador had a pitfall in their economy. On the other hand, South

Korea's economy upraised. The study analysed two areas;; the strategies made by

both countries, and the replicability of these strategies.

In order to achieve this, firstly, a longitudinal exploration since 1980 to 2015 of the

Key Performance Indicators (KPIs) from five companies of each country was

analysed. The results showed, South Korean companies focus more on a

differentiation strategy, which opposes to the strategies undertaken by Ecuadorian

companies.

Secondly, the study continued by contrasting the distances of both countries,

therefore, enabling to see how replicable were the strategies of South Korea to the

Ecuadorian companies. For this Ghemawat's CAGE distance framework was

utilised and demonstrated the vast administrative, economical and geographical

distances from both countries, which refrained Ecuadorian companies from

replicating the South Korean strategies.

This study concludes and support the literature by implying that the strategies used

by firms affect productivity, therefore, competitiveness and economic development

of a country.

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CHAPTER 1: INTRODUCTION

1.1 Context The second oil shock, which occurred in 1979 as a result of an oil supply decrease,

drove the prices to rise substantially (Archanskaïa et al. 2012). For countries like

South Korea, who are importers of crude oil, the latter represented a negative

impact on their economy. However, for exporters such as Ecuador, the situation

was the opposite. (De La Torre, 1987). Regardless of the international context,

both countries managed to strengthen their economy in the beginning of 1980.

Despite Ecuador had a more promising economic development than South

Korea,it is struggling to develop. Conversely, South Korea, whose institutions were

unreliable and its economy, depended on counterfeit production (Chang, 2009),

started a process of forward engineering which allowed them to develop.

Moreover, the economy of both countries was in a similar situation. However, what

did Ecuador do differently than South Korea? In addition, to what extent these

decisions, prevented the country to ensure a continuous development? The course

of this study focuses on contrasting the roles firms occupied in each country and

the impact these had on the competitiveness of their respective country.

1.2 Research Aims The overall aim of this study focuses on understanding into which extent are firms

favourable for the development of economies. In order to achieve it, Ecuador and

South Korea cases are utilised as a foundation for achieving the absolute

objective. Furthermore, this study targets the following research questions

1. Which strategies were used in firms from Ecuador in contrast to South

Korea?

2. Can Ecuador replicate the techniques used by South Korea to stimulate

rapid growth?

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1.3 Research Importance Generally, there has been an array of studies analysing the factors affecting

economic development of a country. Nevertheless, the contrast between Ecuador,

characterised by fraudulent institutions and a fragile economy, and South Korea a

developed country;; has not been researched before. Therefore, allowing this study

to contribute with a pioneering perspective on the effect that firms, along with its

different strategies, from these countries have upon the competitiveness of their

respective country.

The question here is whether the techniques used in South Korea can be applied

in Ecuador or what other factors are at work. As a result, this study is of high

significance as it reflects on real-life situations, which have not been previously

explored.

1.4 Research Rationale

The reason for selecting Ecuador and South Korea firstly, relied on the economic

situation experienced by both countries in 1980, as previously discussed.

Consequently, situating them in a similar economic stage at a specific period.

Secondly, the analysis of two opposite countries, in terms of their economic

development, will enable a wider and richer exploration of the varied decisions

taken by each country and will show the reasons for the success of South Korea

in comparison to Ecuador. Therefore, learning through the contrast of a developed

and an underdeveloped country.

1.5 Research Framework

Ghemawat (2001), suggests that distance between countries matters. He depicts

a model, which include Cultural, Administrative, Geographical, Economical

(CAGE) distances which affect firm strategies and decision-making. Furthermore,

this framework enables the comparison of the distances entailed between South

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Korea and Ecuador. Therefore, enabling the analysis of whether the strategies

made by each country can be replicated in the Ecuadorian firms, or cannot.

1.6 Structure The following dissertation is divided into four sections. Firstly, the literature review

will analyse the most relevant existing studies concerning the topic of research.

Secondly, the methodology will explain the methods used for acquiring the primary

and secondary data. Thirdly, the evaluation of the Case Study A & B will be

undertaken, in order to understand the strategies concerning to each country, as

well as, the extent of which these can be replicated and the overall implications.

Lastly, the conclusion will synthesise and give further recommendations for this

study.

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CHAPTER 2: LITERATURE REVIEW

1.7 Introduction

The purpose of this chapter is to explore and to critically analyse previous studies,

which aid in answering which specific roles firms undertake for improving the

economy of a country. In order to achieve this, firstly the exploration of the main

determinants that support productivity generation will be evaluated.

Secondly, the firm-level determinants will be further explored and related to the

role of firms. In order to achieve this, firm strategy theory will be analysed,

therefore, understanding the process in which firms manage their strategies.

Thirdly, the CAGE model will be explained and combined with previous theories.

Therefore, determining ‘distance’ as an essential factor when contrasting two

countries.

1.8 Country Competitiveness

Countries that are capable of creating higher wealth than its competitors are

defined as competitive. In order to have this advantage, productivity is essential.

The latter highly depends on the quality of the product or service offered and the

efficiency of which these are produced. Additionally, productivity is affected by

industry, country (external factors), as well as, individual, and firm-level

determinants (internal factors) (Shenkar et al. 2015).

The authors suggest that the impact a country competitiveness has upon firms, is

high. To begin with, it affects the location into which firms aim to operate. Secondly,

it determines the industry in which the country will have a competitive advantage.

Thirdly, it affects the level of innovation developed by firms. Generally, all these

aspects eventually affect the strategy of firms. The following external factors are

considered.

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1.8.1 Industry-Level Determinants The macroeconomic business environment is essential for the competitiveness of

the industry. According to Porter’s Diamond (1990), the components for

strengthening or weakening an industry are fourfold;; factor & demand Conditions,

supporting industries and rivalry.

1.8.2 Country-Level Determinants At this level, political, economic, and legal stability are the cornerstone for

productivity. In order to attain it the following components need to be resilient;;

institutional System, infrastructure, macroeconomic soundness, education &

science, internationalization.

Generally, these factors are external forces, which affect firm performance.

Therefore, the behaviour of firms will be influenced by the context in which they

reside. However, Coulter (2005), suggests that strategies are elaborated by scanning and evaluating not only the external environment of a firm but also the

firm context. This allows companies to utilise different methods to achieve their

strategies.

1.9 The Role of Firms There has been previously discussed three aspects, which affect competitiveness.

Nevertheless, these components would become obsolete without the presence of

firms. In other words, without external factors, such as, an infrastructure, no

companies would be founded. However, without companies no infrastructure

would be able to be constructed. In other words, it is a cyclical dependency where

firms play a major role in initiating it. This is feasible through the capability of firms,

to gather an array of knowledge, capital, and resources, which can be deployed in

various markets without being so affected by the industry and country-level

determinants.

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1.9.1 Location Advantages & Firm-Specific Advantages This enables to build on the idea that the previous components are essential for

businesses to be productive by exploiting the Location Advantages (LAs) (Cuervo-

Cazurra et al. 2014). For instance, if firms reside in country X that possesses a

high country and industry levels, then their performance will be benefitted.

Nonetheless, it is not necessary the existence of a perfect market or an attractive

country for firms to influence the environment, which affects country

competitiveness, that is, country, industry and individual-level determinants. For

instance, by developing Firm-Specific Advantages (FSAs), in other words, the

internal capabilities and resources for value creation;; create a competitive

advantage (Barney & Mackey, 2016).

Figure 1, depicts the positional advantages, the resources and capabilities (FSAs)

that a firm generates. These advantages reflect the strategy employed by the

business, that is, cost leadership or differentiation strategy. Overall, these

complement to the generation of value within the company.

Figure 1. Resource-Based View

Source: Adapted from Barney & Mackey, (2016)

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1.9.2 Firm-Level Determinants There are three factors from firms which affect productivity, these are;;

technological innovation, organising principles and factor creation, as seen in

Figure 2. The two first are some of the FSAs a company can develop for

contributing to factor creation.

1.9.3 Influencing Factor Creation Factor creation is the ability of firms to develop strong internal resources and

capabilities (FSAs), which allow them to develop a competitive strength. For

instance, by investing in R&D firms can develop innovative products, which create

a competitive advantage. Therefore, it can influence the environment that affects

the competitiveness of a country, as seen in Figure 2.

Figure 2.Firm-Level Determinants

Source: Shenkar et al. 2015, pp. 177

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1.9.4 Organising Principles & Technological Innovation Moreover, as long as the organising principles of a firm focus on differentiation

strategies, companies can develop a competitive advantage vis-à-vis to

competition. For instance, Kaizen system allowed Toyota to become more efficient

when manufacturing cars, as well as, to be successful in international markets

(Womack et al. 2007).

Additionally, technology & innovation are also essential for making business

operations more efficient and effective, which strengthens the differentiation

strategy of a firm. For example, IT has been one essential factor for optimising

efficiency on operating costs within the Brewery Industry (Johnson et al. 2008). However, in this highly competitive industry, this specific FSA is highly replicable.

Thus, a continuous development and creation of technology and innovation is

needed to maintain an advantage from competitors.

1.10 Ghemawat’s CAGE Framework Previous models have debated the importance of geographical distance and to

some extent the cultural distance. Ghemawat (2001), supports the idea that

distance matters, however, there is a contribution of a wider view of what distance

means. Moreover, internal distance or measurable aspects such as GDP per

capita, as well as, an external distance such as linguistic differences should be

accounted for (Ghemawat, 2011).

Furthermore, firms then need to think about borders or distances when making

strategies. Moreover, the role of firms depends widely on the distance factors

entailed between different countries. Ghemawat (2001) considers the following

factors affecting distance.

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1.10.1 Geographic Distance The ‘Gravity Model of International Trade’, created by Jan Tinbergen (Squartini &

Garlaschelli, 2014) explains that the wider the distance between two countries, the

lower the trade. Distance, according to the model can be explained by the income

level, economic size, physical distance, access to the ocean, and common borders

shared by two or more countries.

Nonetheless, information technology has allowed the reduction of physical

distances. For instance, technological savvy businesses such as eBay, which use

up-to-date technology for improving their logistics, have allowed trade from

countries which have a high geographical distance between each other (Hortaçsu

et al. 2009). Moreover, it does not only reduce geographical distance but also

costs. Consequently, the Internet of Things have allowed the emergence of cyber-

physical systems where connectivity is the pattern (Laudon & Laudon, 2016). As

a result, leaving the gravity model as an outdated archetype, which needs to be

carefully considered and adjusted to the current environment.

Krugman (2004) opposed this view by indicating that despite the reduction in

transportation costs enabled by technology, borders still matter and only if two

economies are geographically close there will be an agile economic development.

Generally, this theory would suggest that technology is, in fact, reducing to some

extent physical distances but it does not cover many other types of distances.

1.10.2 Cultural Distance According to Huntington & Brzezinski (2007), culture affects the levels of cohesion,

fragmentation and conflict between countries. Culture allows the development of

an identity, which affects behaviours. These can positively or negatively affect the

chosen trading countries, as well as, the level of trading.

Moreover, culture has been highly debated. Hofstede’s study has been one of the

most influential in the last decade. This aimed to measure the cultural

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characteristics of societies (Hofstede, 2011). However, the study was too simplistic

as culture is an intangible aspect of society, therefore, making it difficult to measure

it.

The GLOBE research furthers the analysis of culture commenced by Hofstede. It

bases on the examination of value orientation through nine cultural dimensions;;

uncertainty avoidance, power distance, institutional collectivism, in-group

collectivism, gender egalitarianism, assertiveness, future orientation, performance

orientation, and humane orientation (House et al. 2004). Nonetheless, the model

still does not take into consideration the abstract concept of culture.

Moreover, Ghemawat (2001) contributes to previous research about culture by

exploring two perspectives of culture the internal and external.

Table 1. Cultural Distance Framework

External distance (bilateral/plurilateral/ multilateral attributes)

Internal distance (unilateral attributes)

Different languages Traditionalism

Different ethnicities/ lack of connective ethnic or

social networks Insularity

Different religions Spiritualism

Differences in national work systems Inscrutability

Different values, norms, and dispositions

Source: Ghemawat (2011), p. 55

The variables presented show attributes which can be shared with two or more

countries (bilateral/plurilateral/multilateral attributes), as well as, variables shared

with one country (unilateral).

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1.10.3 Administrative Distance Table 2. Administrative Distance Framework

External distance (bilateral/plurilateral/multilateral attributes)


No colonies ties Closed economy

No shared regional trading block Lack of membership in international organisations

Different currency Weak legal institutions

Lack of common legal system Lack of government check and balances

Political hostility Societal conflict

Political/expropriation risk


From the two distances presented, the internal distance allows firms to distinguish

the risk when selecting a trading country. Institutional voids are the core

explanation from all the aspects presented. Peng et al. (2009) explains the

institutional based view as the presence of weak and corrupted institutions in some

countries, which affect the development of external firms wanting to invest in those

countries.

Chang (2009) contradicts this view by suggesting that if an institution is bribed by

a capitalist but invests the money wisely by creating productivity, corruption may

not disrupt the economy of a country. In a perfect world, this view may be certain,

nevertheless, in a highly greedy society, most of the times corruption does

negatively affect the economy of a country.

1.10.4 Economical Distance Ghemawat suggests that economic size of a country affects the scope of trade.

For instance, lack of human, financial and natural resources, as well as, poor

infrastructure and distribution force companies to develop different strategies and

to undertake different roles for permitting internal growth, as well as, national

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growth. In other words, firms in a poor economy differ their strategies radically, in

comparison to firms in a developed economy.

Trade is essential for the economic development of a country;; therefore, it is

essential for firms in a country to engage with countries that possess low distances.

As a result, reducing the risk for firms. However, it is also important for countries,

which are underdeveloped, to trade with countries, which can allow knowledge-

creation. Ghemawat includes the following factors for measuring economic

distance.

Table 3. Economic Distance

External distance (bilateral/plurilateral/ multilateral attributes)


Different consumer incomes Economic size

Human Resources Low per capita income

Natural Resources Low level of monetization

Organisational capabilities Limited resources


The variables explained are essential when projecting maps, which portray other

countries according to how essential these are from the viewpoint of the focal

country (Ghemawat, 2011). As a result, firms can make strategic decisions about

which country to trade with. Additionally, a successful trade can contribute to the

competitiveness of a country, consequently, the economic development of a

country.

Throughout the literature presented, the economic development of a country is

affected by its competitive level or productivity. Similarly, the latter is influenced by

individual, institutional, country and firm factors. In terms of the firm, its external

environment accelerates and eases its development. Nonetheless, by developing

the internal capabilities, firms can influence in the factor creator of a country.

Moreover, the explanation about the influence that distances have in the decision-

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making of countries provides an overview of how CAGE can be used to contrast

countries from a focal perspective. Therefore, focusing only on the necessary

information, which is relevant to a specific country.

As a result, the literature helps to clarify the strategic role that firms have for helping

to develop the economy of a country, even if there exist market imperfections. It

also succeeds in explaining different tools for explaining the factors affecting the

development of a country. Further, it also discusses the importance of CAGE

distances when contrasting countries. Nevertheless, it fails to answer the specific

question about the role that firms have in Ecuador and South Korea. Further, it

does not solve the query about whether or not Ecuador can replicate the

techniques used by South Korea.

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Table 4. Synthesis of main theoretical frameworks from the Literature

ROLE OF FIRMS

Authors Data Country of Analysis

Approach for Analysis Key Findings

Shenkar et al. 2015

Analysis from past studies

United Kingdom

Book

Country Competitiveness affect economic performance

Cuervo-Cazurra et al. 2014

Semi-structured interviews to three government officials, and 14 managers of hotels and travel agencies

Costa-Rica

Case Study- mapping of multidimensional key events

Firms can take advantage from Location and develop competitive advantage from it

Barney & Mackey, 2016

Composition and analysis of previous research

United States

Framework development

Resource-Based View, firms can create location advantages by developing Firm Specific Advantages

Shenkar et al. 2015

Analysis from past studies

United Kingdom

Book

Firm-Level Determinant

DISTANCES AFFECTING PERFOMANCE OF COUNTRIES Authors Data Country Approach for

Analysis Key Findings Ghemawat, 2011

World looks from the perspectives of 163 different countries

163 countries

Rooted maps

CAGE FRAMEWORK

Laudon & Laudon, 2016

Collection of past theoretical strudies

United Kingdom

Book

Technology reduces geographical distance

Hofstede, 2011

100,000 IBM workforce

50 countries

Cross-cultural Studies

Differentiates cultures on the basis of an array of dimensions

17

GLOBE research

17,000 mid-level managers, 100 CEOs and 5,000 senior executives in a variety of industries

24 countries

International Research Report

Study of the relationships among societal culture, leadership and organizational practices

Peng et al. 2009

Analysis of previous literature

China

Perspective Paper approach

Institution Based-View

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CHAPTER 3: METHODOLOGY

1.11 Introduction The justification for the process, the reasons for the data selected and the sources

of data is explained in this chapter. Consequently, the clarification of the

procedures, as well as, the development of a logical structure utilised in this study

for answering the proposed research questions, will be achieved.

1.12 Research Purpose The purpose of this study is to understand which strategic role firms can undertake

to boost economic development. In order to achieve it, this study contrasted two

different countries. The aspiration is to learn by contrasting success and failure,

instead of analysing only success. Therefore, this research investigated the

reasons for the success of South Korea, as well as, the explanation for the failure

of Ecuador, in terms of firm strategy.

1.13 Methodology 1.13.1 Research Philosophy In an attempt to understand the situation of the research question, a pragmatic

epistemology arose. In other words, the worldview behind this study centres upon

the usage of observable phenomena and subjective meanings as valid knowledge

for interpreting data. In addition, this is supported by the ontological view, which

Saunders et al. (2015) defines as the adoption of multiple perspectives for

answering the proposed research question.

1.13.2 Approach The origin of this study emerged from observing the surprising fact regarding the

astonishing development of South Korea, in contrast to, the stagnation of Ecuador,

after both countries experienced a similar economic development in 1980.

According to Pearse, the abductive approach focuses on the explanation of facts

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observed, through the construction of theories (Psillos, 2011). For this reason,

abduction was utilised for encountering the reasons behind this situation.

Moreover, Czarniawska (2014) suggests that when utilising a pragmatic

philosophy, abduction is useful for covering various perspectives, which may

explain the phenomenon studied. Therefore, reassuring the use of abduction for

the current research.

1.14 Methodological choice & Time Horizon In order to achieve diversity of data, multiple mixed methods were used in the

analysis of the Key Performance Indicators (KPIs), as well as, the CAGE analysis.

In terms of the KPIs, the following were examined, as seen below.

Table 5. KPIs Methodological Framework

KPIs metrics Time Horizon

Method Data Sources

Financial (Net Profit, Revenue

Growth Rate) & Internal

Business (Asset turnover ratio-

Efficiency)

1980-

2009

Qualitative

secondary

data

Journals

specialised in Asian

and Latin American

markets

2010-

2015

Quantitative

secondary

data

Annual Reports,

Financial

Statements

Customer (Customer

Acquisition, Customer

Retention)

2016 Quantitative

primary &

secondary

data

Interviews,

Statement of

Financial Position

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1.14.1 Financial and Efficiency Metrics In terms of the financial and internal business metric, a longitudinal analysis, which

entails data from 1980 to 2009, was obtained through qualitative secondary data.

Moreover, from 2010 onwards quantitative secondary data will be collected. This

is mainly to achieve triangulation, that is, a broader understanding and stronger

interpretation of what is being analysed.

In this specific report, in order to show transparency and reliability of the data used,

only financial statements, which followed the IFRS, were used. Further data

sources, will be mainly obtained through journals and annual reports respectively.

The currency adopted for portraying the quantitative data is the dollar ($), as it is

the international currency used mainly in business. In addition, as this currency is

used in Ecuador, this study only needed to exchange one currency;; the Korean

Won (KRW). Therefore, maintaining part of the data obtained, as it was

encountered. In terms of the exchange rate, in order to express the most exact

data, this research adjusted the exchange rate at the year where the financial data

was produced, as seen in table 6.

Table 6. Yearly Exchange Rate from Korean Won to US Dollars

Year Yearly Exchange Rate 2010 0.0008654 2011 0.0009035 2012 0.0008883 2013 0.0009137 2014 0.0009496 2015 0.0008844

Source: Adapted from Foreign Exchange Services, 2017

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In addition, the respective yearly average arithmetic mean was used. This was

preferred to geometric mean, as it did not identify the central tendency. On the

contrary, it summed all the values of each specific year and calculated a more

accurate average.

1.14.2 Customer Metric Moreover, this metric was acquired from a cross-sectional time horizon, therefore,

providing current perspectives and opinions from individuals in the year 2016. This

enabled to measure how the other KPIs have affected individuals’ opinions at the

current stage.

In terms of South Korea, the data was obtained from the financial reports of each

company. However, due to lack of data availability from the Ecuadorian

companies, primary research was undertaken. For this, a five-question survey was

carried out to 117 people;; 63 females and 54 males, between 25-60 years old living

in the two main cities from Ecuador;; Guayaquil and Quito.

The design of this survey was based on a Likert scale, as it was the most suitable

method for acquiring accurate responses (Saunders et al. 2015).

Table 7. Likert Scale

Scale Meaning 1 Strongly disagree

2 Disagree

3 Neither agree nor disagree

4 Agree

5 Strongly agree

See Appendix

22

1.14.3 CAGE Distances Analysis After analysing the KPIs and the strategies of Ecuadorian and South Korean firms,

the context of each country was measured from a cross-sectional approach. The

aim is to answer the extent to which the strategies of South Korea can be replicated

in the current Ecuadorian context. For this, secondary quantitative data was

utilised in each component of the CAGE framework. This was mainly obtained from

the World Bank, GLOBE database, Ghemawat database, United Nations

Commodity Trade Database and World Income Inequality Database. This enabled

the comparison and contrast of the distances entailed by both countries. Generally,

these explanations aim to be integrated into the theoretical framework discussed

in chapter two.

1.15 Strategy This study contrasts two countries;; Ecuador and South Korea. In order to obtain

an understanding of the context from each country, the case study strategy was

utilised. The latter was a holistic multiple-case design, which according to Yin, aids

in explaining different suggestions for the situation being studied (2015).

Figure 3. Case Study Strategy

Source: Yin, 2015

Context 1: Ecuador

Case 1: 5 Ecuadorian firms

Context 2: South Korea

Case 2: 5 South Korean firms

Multiple-Case Design

23

Within this case study, the unit of analysis explored are, firms. These have a high

impact on the economy of a country. For instance, firms serve as a seedbed of the

economy. In other words, competition is stimulated, and employment is created.

As a result, firms can boost economic development despite the existence of market

imperfections within a country. Moreover, for each country, there was a case where

five firms were evaluated.

Further, firms were selected under the following parameters. Firstly, they needed

to provide a high contribution to the Gross National Income (GNI) of the country.

In this study, GNI was preferred from other economic indicators as it measures the

total income of an economy regardless of whether the income is obtained

nationally or from foreign business. In other words, the South Korean companies

selected sell internationally, therefore, the Gross Domestic Product (GDP) may be

declared elsewhere than South Korea. Nevertheless, by using the GNI it is

possible to measure the income made by the companies in that specific country.

Secondly, the selected companies needed to have high revenues in 2015, to

contribute to the total GNI of the country (Revenue/Total GNI) and to be created

before or on 1980. Consequently, allowing the longitudinal study of the strategies

made since that specific point. Generally, the companies seen in Table 7, were

elected.

24

Table 8. Contribution to GNI in 2015

Firms Contribution to GNI

Revenues* Foundation Operating Sector

Ecuador The Favorita Group

2% 1950 1945 Supermarket chain

The Rosado Corporation

1% 1052 1887 Supermarket chain

Pronaca 2% 1133 1936 Food Processor company

Pichincha Bank

1% 1132 1979 Bank

National Brewery

1% 503 1906 Brewery

South Korea

Samsung Electronics

13% 177,365 1938 Electronic company

Hyundai Motors

6% 81,330 1967 Car manufacturer

Posco 4% 55,258 1968 Steelmaking company

Kia Motors 3% 43,798 1944 Car manufacturer LG Chem 1% 17,871 1947 Chemicals &

polymers, industrial materials, IT & electronic materials

*in million US Dollars

Source: Adapted from Hyunday Motors (2015), Kia Motors (2015), LG Chem

(2015), National Brewery (2016), Pichincha Bank (2016), Posco (2015), Pronaca

(2016), Samsung (2015), The Favorita Group (2016), The Rosado Corporation

(2016),World Bank (2016)

25

1.16 Techniques and Procedure 1.16.1 First Research Question: Strategy of firms The first research question aims to identify the strategies used by Ecuadorian &

South Korean firms. According to this, it was encountered in previous studies the

employment of KPIs metrics for analysing firm performance & firm strategy, as

seen below.

Table 9. Analytical methods from previous studies

Author Indicators

Area of study

Keeble et al. 2003 Economic, Social,

Environmental KPIs

Sustainability

performance at corporate

and project level

Kernan et al. 2011 Resource Constraint

Metrics (RCMs) and

Customer Misery Index

(CMI) KPIs

Overall performance of

SMEs

Wu, 2012 KPIs & BSC strategy

map

Strategy analysis for

banking institutions

Ishaq et al. 2014 Financial and Customer

KPIs

Overall Organisational

Performance

Ngacho & Das, 2014 Time, cost, quality,

safety, site disputes and

environmental impact

KPIs

Overall performance of

development projects

Within these studies, these techniques were utilised for measuring performance

and then linked to the economic development of a country. As seen in the literature,

firm-level determinants create productivity, which helps increase the

competitiveness of a country, therefore economic development. In order to achieve

this, firstly firm-level determinants were analysed through KPIs. According to Shen

26

(2013), KPIs give a broader view of essential aspects of organisational

performance for the success of the organisations analysed.

Secondly, the strategies used by these companies were identified. Therefore,

enabling the analysis of the firm’s productivity. Thirdly, the impact on the

productivity upon the competitiveness and economic development of their country

were encountered. Overall, resulting in the following analytical model.

Figure 4. Procedure followed for measuring Economic Development

Overall, as the KPIs vary according to the focus of analysis. Within this research,

the indexes and ratios were cautiously selected to specifically understand the

differences in performance of Ecuador and South Korea. Consequently, analysing

the strategies from each country and pinpointing the effect that these strategies

had on the success of South Korea and failure of Ecuador, see Table 10.

Economic Development

Country Competitiveness

Productivity of firms

Strategy of firms

Key Performance Indicators (KPIs)

27

Table 10. Metrics used for analysing performance

Ecuadorian Firms South Korean Firms KPIs metrics The Favorita Group Samsung Electronics Financial (Net Profit,

Revenue Growth Rate)

The Rosado Corporation Hyundai Motors Customer (Customer

Acquisition, Customer

Retention)

Pronaca Posco Internal Business (Asset

turnover ratio ->

Efficiency)

Pichincha Bank Kia Motors

National Brewery LG Chem

28

These metrics were measured through the following formulas.

Table 11. Formulas to measure the KPIs

Financial Metrics Internal Business- Efficiency Metrics

Customer Satisfaction Index (CSI) Metrics

• Revenue Growth Rate

Revenue Growth Rate (RGR)=

(Year 2 - Year 1)/ Year 1))

RGR Loading Average= (Sum of

companies’ revenues in Year 2-

Sum of companies’ revenues in

Year 2)/ Sum of companies’

revenues in Year 1)

• Net Profit

Percentage Share of Revenue to GNI= (Yearly revenue sum/ Total GNI)

Profit Margin= (Yearly profit sum/

Yearly revenue sum)

Asset turnover ratio=

(Yearly

revenue/Yearly total

assets) (Jones

2013).

Ranking from 0

(not satisfied) to

100 (very

satisfied)

29

1.16.2 Second Research Question: Replicability of strategies Moreover, the second research question is answered by using the CAGE distance

model. Distances between Ecuador and South Korea were measured to analyse

the replicability of the South Korean strategies. Consequently, understanding the

extent into which the techniques used by South Korea can be replicated or

adapted. Further, the measurements of each component of the CAGE

encountered in the literature review were adapted to fulfil the research question.

a. Cultural Distance Cultural aspects were measured according to the GLOBE model. For this, the

following measurement was used.

Table 12. GLOBE scale

1 Very low

2 Low

3 Relatively low

4 Medium

5 Relatively high

6 High

7 Very high

These aimed to situate the level of;; Uncertainty avoidance, Power distance,

Institutional collectivism, In-group collectivism, Gender egalitarianism,

Assertiveness, Future orientation, Performance orientation, Humane orientation;;

according to each country.

b. Administrative Distance This area was measured by comparing and contrasting data, which identified the

Trading bloc, Currency, Legal Institutions, Strength of Institutions from Ecuador

and South Korea.

30

c. Geographic Distance Physical Distance was the centre of analysis. This is mainly because the study

aims to portray the impact that location has in terms of trade.

d. Economic Distance The economic situation of each country was analysed by measuring the;; Economic

size (Total GDP), Consumer incomes (GDP per capita), Income inequality,

Availability of natural resources, Rate of unemployment. Consequently, giving a

broader view of how the economy could also affect the replication or adaptation of

the strategies encountered.

Further, in terms of the software used, firms were mainly analysed through

spreadsheets in excel and depicted through charts and graphs, these allowed to

give meaning to the data collected. In addition, the use of rooted maps, that is,

maps that portray other countries from a focal country was mainly utilised to portray

the impact geographic distance had upon trade.

1.17 Research Ethics The current research follows the code of conduct disposed by Durham University.

Firstly, this research does not target any children or vulnerable people, only adults

of sound mind over the age of 18 will be included. In addition, in order to safeguard

the identity and opinions of the participants involved in the survey, the data will be

confidential and will not be given to third parties. In addition, consent was taken to

every participant surveyed before the data was utilised in this dissertation.

Moreover, the obtained data will be stored and discarded safely. Lastly, every

secondary data will be referenced to the according to the author.

31

1.18 Limitations One of the key problems from this research relies on the scarce data in some

periods. Despite, the use of qualitative, quantitative, primary and secondary data

enabled to fill some missing points;; a wider access to data in earlier periods would

have enriched the analysis undertaken. However, for the aim of this study, the data

obtained meets its purposes. Moreover, as this research is a case study;; the

resonance and results of it are limited solely to this case study.

32

CHAPTER 4: CASE STUDY OF ECUADORIAN AND SOUTH KOREAN COMPANIES

1.19 Introduction The analysis of the results obtained from the methodology previously explained

will be discussed in this chapter. The following multiple case study was divided into

two sections.

Firstly, the Case Study A aims to answer the first research question, that is, ‘Which

strategies were used in firms from Ecuador in contrast to South Korea?’ For this,

the five Ecuadorian, as well as, South Korean firms were analysed through the

following procedure. Firstly, the KPIs selected were synthesised and analysed.

Secondly, the strategy was extracted from the KPIs previously examined, and

compared between the overall results from both countries. Then, these were

related to the extent into which these strategies affected productivity, therefore,

economic development.

Secondly, the Case Study B focuses on resolving the second research question.

In other words, ‘Can Ecuador replicate the techniques used by South Korea to

stimulate rapid growth?’ In order to achieve this, CAGE distances were measured.

This considered the degree into which differences between both countries could

harm the replication of the strategies used by South Korea.

Lastly, these two results were complemented and enabled to answer the topic

being discussed, that is, ‘The role of firms for the economic development of

Ecuador in contrast to South Korea’.

33

1.20 Case Study A: Strategies used in firms from Ecuador in contrast to South Korea

1.20.1 Case A.1. Key Performance Indicators I. Financial, Internal Business and Learning & Growth Metrics:

1980-2010. Table 13. South Korea: Financial, Internal Business and Learning & Growth Metrics

Firms 1980-1990 1990-2000 2000-2010 Samsung In 1980, the production

of the air conditioner and colour television was started. In 1981 the first exports to Canada and the development of sales subsidiaries in Germany were undertaken. On 1984, their first Videocassette Recorders (VCRs) were exported to the USA. Between 1986 to 1987 a substantial investment on Research and Development (R&D) was made.

In 1990, the resources were mainly allocated to the development of Innovative technologies, such as the world’s first 33” double-screen TV and the lightest PCS from this time. Between 1998 to 1999 the mass production strategy was utilised, which provided them with first-mover advantages.

Electronics such as mobile phones and televisions were the most heavily invested. On the year 2003, the company began to be recognised by being a leading worldwide IT company, in well-known magazines and rankings. In 2004, they strengthen their Russian and American mobile phone market. Between 2005 and 2010 LCD screen, as well as, other technological products were developed.

Kia Motors

In 1986, a new car model called Pride was introduced. Through the export of the car model to the US in 1987, 100-Million-dollar revenue was generated. By 1989 Kia

Between 1992-2000 Kia invested on the development of five different car models. On 1998 the firm merged with Hyundai.

On 2001, Kia received the Korea Quality Award. As a result of positive future predictions in 2002 the production units were increased which showed a positive effect in 2003 due to an

34

opened a new plant in South Korea.

increase in sales. This same year a new R&D institute was opened. Between 2004-2009 new plants in China were set-up. A better product quality management was implemented. Sales shifted towards more luxurious cars. A focus was set to more environmentally friendly engines.

LG Chem Between 1982 to 1987 four plants were set-up in South Korea.

By 1996 India’s Hindustan Polymers was acquired. By 1999 two million global depository receipts were issued and IT and electronic materials were produced.

During this period the expansion through strategic Mergers and Acquisitions (M&A’s) and the setup of more plants were achieved. As well as, the investment of process and product R&D.

Hyundai Motors

Entered the South American market, by exporting the car model Hyundai Pony, through Ecuador. By 1987, the car model Excel was introduced in the US market. In 1989, Excel surpassed one million units of overseas sales.

During 1990 to 1999, the development of a new engine type, the introduction of new car models and a production increase occurred.

Between 2001-2006 the company introduced its first diesel hybrid powertrain car was developed and an increase of South American exports was attained. The African and Middle East market penetration was initiated and new plants were set-up. On 2007, the cars were adapted according to the regulations of the European market. Between 2009 to 2010 hybrid cars were launched as an

35

environmentally friendly alternative.

Posco Between 1981-1983 the company completed the extraction of crude steel from Pohang works. This was then followed by other crude steel works.

By 1987 a new research & technological institution was established. Between 1987-1990 the company carried out their second big project;; “The Gwangyand work”. On 1988, their initial public offering was announced. Between 1994 to 1995 the company was listed on New York and London stock exchange.

On 2000 the company was privatised. Between 2003 and 2005 the expansion toward China, Japan, India, Mexico and Vietnam;; took place.

Source: Adapted from Samsung Electronics, 2015;; KIA Motors, 2015;; LG Chem, 2015;; Posco, 2015;; Hyundai Motor Company, 2017

In table 10, it is shown that the four companies, except for Posco, focused on the

development of new products and international expansion. Moreover, during 1990

to 2000, all companies invested in the development of technology and undertook

mergers and acquisitions, corroborating from what Shenkar et al. called the firm-

level determinants, which are essential for a country competitiveness.

The following ten years, the strategy was to improve the quality, increased their

exports and transformed their products into environmentally friendly. In general,

the process followed by South Korean companies was characterised by exports &

new product development, technological development and the acquisition of new

36

companies through Mergers and Acquisitions (M&A’s), higher product quality

through R&D and the improvement of environmentally friendly products.

Table 14. Ecuador: Financial, Internal Business and Learning & Growth Metrics

Firms 1980-1990 1990-2000 2000-2010 The Favorita Group

Open new stores;; Supermaxi and COMOHOGAR in major cities like Guayaquil and Quito. During this period, an expansion could be seen in these two cities.

Another expansion was undertaken to the city Cuenca. The merchandising stores, Radioshack, and Bebemundo were established.

New branches were established in the city Manta. An environmentally Friendly picture was built through the implementation of biodegradable plastic bags for their supermarket chain.


Opened the merchandising stores;; Ferrisariato, Mi Juguetería and Mi Comisariato in Guayaquil.

An enlargement of the product portfolio was undertaken.

Between 2002 to 2010 the company opened their first large supermarket and opened new branches in the cities of Portoviejo, Guayaquil, Machala and Riobamba.

Pronaca On 1981, the farm food division was founded. On 1985 the second plant for bird incubation was set up.

In 1990, the diversification from animal goods to human and animal food was seen. In the same year, they started exporting some of their products to retailers across Ecuador. On 1997, two new plants were set up.

In the year 2000, Pronaca started exporting to Colombia.

37

Pichincha Bank By 1981 the bank celebrated their 75 years of business establishment

In the years 1990-2000 resources were allocated to R&D, to improve the efficiency of processes and the implementation of new technologies necessary for modern banking

Set up new branches in the national market.

National Brewery

The newly established plant in Guayaquil started production. In 1983, first exports to Colombia began.

In 1990-2000 a strong investment in R&D was undertaken. The outcome of this was the implementation of new machinery in their plans which increasing the product quality and the launch of various new beer brands into the market.

In the year 2000-2010 the strategic focus was on an increase in revenue through a deeper penetration on their home market.

Source: Adapted from Bolsa de valores Quito, 2016

The majority of Ecuadorian companies focused on augmenting their national

market, while very few spread internationally Overall, the trend taken by

Ecuadorian firms in the three periods of time entails the following;; creation of new

divisions, new product development, national expansion.

South Korean companies were exporting since the first decade. These decisions;;

however, could have been influenced by external factors, what Shenkar et al.

identifies as industry and country- level determinants, as discussed in the

literature. Indeed, even before the first decade analysed, South Korean companies

enjoyed the security of belonging to national business group (chaebols), created

by their governments (Carney, 2008).

38

These protected the companies from external competition and allowed them to

develop their internal resources and capabilities. In other words, reaffirming what

Cuervo-Cazurra et al. state about location advantages. However, Ecuador’s

government did not protect their companies;; therefore, external competition easily

entered the Ecuadorian market (Hey & Klak, 1999). Consequently, from the

perspective of Cuervo-Cazurra et al.;; Ecuadorian firms may not have been capable

of developing and improving, as there were no location advantages to exploit.

However, the results from this table demonstrate the opposite. Firms can become

competent despite the existence of external factors. For instance, despite Ecuador

had a free non-regulated market;; the National Brewery was able to export

internationally by developing their own FSAs, suggested by Barney & Mackey in

the literature. However, the possible mistakes may have been produced by the

following factors. Firstly, on the narrowed expansion of their new product

development. Instead of a wider internationalisation exposure of their product.

Secondly, despite they invested in R&D (FSAs) it did not mean they achieved an

effective R&D. Moreover, it also seems R&D was solely focused on product

development and diversification, nevertheless, not on process innovation. Thirdly,

Therefore, the absence of strong internal factors or firm-specific advantages was

a detriment to the development of firms. Consequently, supporting the theory

explained in the literature that through strong FSAs firms can become successful.

39

II. Financial Metrics from 2010-2015.

Revenue Growth Rate Table 15. South Korea: Revenue Growth Rate (RGR)

YEAR Samsung Electronics

Hyundai Motors

Posco Kia Motors

LG Chem

RGR Loading Average

2010 N/A N/A N/A N/A N/A N/A 2011 5.37% 21.26% 18.92% 6.63% 21.58% 12% 2012 31.23% 6.74% -9.30% 7.54% 0.86% 14% 2013 15.42% 6.32% -2.73% 3.63% 2.33% 9% 2014 -9.61% 6.25% 8.24% 2.84% 1.39% -2% 2015 -9.45% -4.04% -7.09% -2.07% -16.64% -8% Source: Adapted from Samsung Electronics, 2015;; KIA Motors, 2015;; LG Chem, 2015;; Posco, 2015;; Hyundai Motor Company, 2017 The given table enumerates data about the yearly RGR of South Korea starting

from 2010 to 2015. From 2010 to 2013, all the companies depicted a positive

percentage, aside from Posco who plummeted in year 2012 and continue dropping

in year 2013. Internal difficulties from the steelmaking company may be the

rationale behind this occurrence. Steel production in South Korea increased by

4.5% from the previous year (International Trade Administration, 2016).

Moreover, a sharp increase is observed for all these companies in year 2011 &

2012. This increase may be explained by the positive recovery from the financial

crisis in 2008.

Table 16. South Korean GDP from 2007-2012

Year 2007 2008 2009 2010 2011 2012

Total GDP*

1123 1002 901.935 1094 1202 1223

*in billion US dollars

Source: World Bank, 2017

40

The given table enumerates data about the yearly RGR of South Korea starting

from 2010 to 2015. Between 2010-2013, all the companies depicted a positive

percentage, aside from Posco who plummeted in the year 2012 and continue

dropping in the year 2013. Internal difficulties from the steelmaking company may

be the rationale behind this occurrence. Steel production in South Korea increased

by 4.5% from the previous year (International Trade Administration, 2016).

Moreover, a sharp increase is observed for all these companies in the year 2011

& 2012. This increase may be explained by the positive recovery from the financial

crisis in 2008.

Table 17. Yearly Exchange Rate from Korean Won to US Dollar

Year Yearly Exchange Rate 2013 0.000913667 2014 0.000949583 2015 0.000884416

Source: Foreign Exchange Services, 2017

As outlined in the table the rate increased by 2014 and decreased by 2015. As a

result, values should have been higher in 2014 than in 2015. Nonetheless, the

loading average shown contradicts this theory. Moreover, the drop in the exchange

rate occurred in 2015 cannot be compared to its colossal decrease of 8%. Consequently, the currency exchange rate is not the reason for this plunge.

Another possible explanation for the decline in 2014 and 2015 can be the economic slowdown of the time. These are further visualised in the following table.

Table 18. GDP growth rate of South Korea in year 2013-2015

Year 2013 2014 2015 GDP growth (annual %) 2.90% 3.34% 2.61% Source: World Bank, 2017 The table shows that in the year 2014, GDP growth accelerated. This was then

followed by a slowdown of its growth in 2015. However, the RGR table presents

41

two negative values, not only one. In 2014, the economy augmented their growth

speed. Therefore, cannot justify the drop in revenue experienced by the South

Korean companies studied. Moreover, in 2015 the GDP slowed down,

nonetheless, this reduction cannot be compared to the decline that these South

Korean companies had. As a result, the economic slowdown does not explain the

fall occurred in 2014 and 2015.

Furthermore, the companies selected are export dependent. Therefore, any factor

affecting the exports can have a significant impact on their revenue.

Table 19. Three main export partners of South Korea in 2014-2015

Countries % Export Volume in 2014 % Export Volume in 2015 China 25.36% 26.66%

US 12.32% 13.63%

Hong Kong 4.75% 5.91%

Japan 5.63% 4.58%

Source: UN Comtrade Data, 2017

The illustrated table shows the exports to the main trade partners of South Korea

in the year 2014 - 2015. The countries, which South Korea exported most in the

year 2014 and 2015, were China and U.S. Both are equivalent to 37.68% from the

total sales in the year 2014, as well as, 40.29% in 2015. Therefore, if an alteration

of the strength of the Korean Won existed, then sales could have been negatively

impacted in those respective years.

42

Table 20. One Korean Won in other currencies

Country 2013 2014 2015 China (Yuan) 0.005624 0.00585 0.005553

US (Dollar) 0.000914 0.00095 0.000884

Japan (Yen) 0.089219 0.10044 0.106996

Hong Kong (Dollar) 0.007091 0.00737 0.006685

Source: Bleaney, 2009

In the year 2014, all the countries showed a stronger Korean Won than the

previous year. Therefore, making it visible that the Korean Won strengthen which

may have affected the level of exports in 2014. Moreover, for 2015 the Korean

Won exchange rate decreased, except for Japan, whose exchange rate continued

increasing in the year 2015. For this reason, table 16 showed a decrease of export

percentage like Japan. Moreover, there are similar cases to Japan, as depicted in

Table 18.

Table 21. Countries yearly conversion rate from Korean Won

Countries 2013 2014 2015 Singapore (Dollar) 0.089219 0.100440 0.106996 Indonesia (Rupiah) 9.546361 11.251083 11.833848 Germany (Euro) 0.000688 0.000715 0.000797 Brazil (Brazilian Real) 0.001900 0.002430 0.002500 Russia (Rouble) 0.029117 0.036465 0.053988 Source: Adapted from Foreign Exchange Services, 2017

The countries presented in the table, demonstrate a similar trend than Japan. Their

currencies weakened against the Korean Won. For this reason, it is visualised the

rates augmenting year after year. In 2014, 1KW represented 0.036465 Roubles.

However, this value increased by 2015. Consequently, South Korean exports to

these particular countries decrease, as the level of sales may have fallen. The

following table shows the percentage exports to these countries.

43

Table 22. Export partners from South Korea in 2014, 2015

Countries 2014 2015 Singapore 4.17% 2.92% Indonesia 1.99% 1.53% Germany 1.32% 1.21% Brazil 1.55% 1.07% Russia 1.76% 0.91% Source: UN Comtrade Data, 2017

In general, South Korean total exports declined from $573 billion in 2014 to $526

billion in 2015 (UN Comtrade Data, 2017). From the total China and US were the

largest countries for exporting, nonetheless, by adding up the weak partners, the

level of exports was affected.

Table 23. Ecuador: Revenue Growth Rate

Year The Favorita Group


Pronaca Pichincha Bank

National Brewery

Averages

2010 N/A N/A N/A N/A N/A N/A 2011 31% 17% 11% 29% 6% 22% 2012 8% 13% 10% 11% 13% 10% 2013 4% 8% 8% 3% 10% 6% 2014 1% 2% 8% 13% 8% 5% 2015 2% -2% 6% -1% 3% 1% Source: Adapted from Bolsa de valores Quito, 2016 The supplied table outlines the revenue growth rate of Ecuadorian companies. The

year 2011 and 2012, presented substantial growth rates.

Table 24. Ecuador’s GDP from 2007-2012

Year 2007 2008 2009 2010 2011 2012 GDP 51.008 61.763 62.52 69.555 79.277 87.925 *in billions of US Dollars


44

Similar to South Korea, Ecuador experienced a sharp increase of GDP between

years 2011 and 2012. Therefore, advocating the significant growth values obtained

by Ecuadorian companies in these years.

Moreover, by the year 2013, a deceleration of revenue growth was initiated.

Economic growth, annual consumption, and employment rate began to decline

gradually at this year. For this reason, there was a revenue growth downturn. The

drop of the crude oil may explain this. As Ecuador is highly dependent on oil

exports, this alteration heavily affected the overall economy. Therefore, as a result

of the high dependence of South Korean firms upon their external environment

their FSAs can still be impacted by its external environment, therefore reassuring

what Shenkar et al. argue about country & industry-level determinants.

In addition, to provide with a clearer perspective about the rates encountered in

2015. Each company will be analysed according to their corresponding industry

sector. Ecuador is divided into seven industries;; Manufacturing, Wholesale &

Retail Trade, Mine exploitation, Other services, Agriculture & Fishing, Transports

& Communication and Construction (Dirección de estadística económica, 2017).

The companies selected, are situated in the following sectors.

Table 25. Industry sector of Ecuadorian companies

Company Industry La Favorita Group & El Rosado Corporation

Retail Industry (Supermarkets)

Pronaca Manufacturing industry (Food products) Pichincha Bank Financial Industry National Brewery Manufacturing industry (Beverages) Source: Adapted from Dirección de estadística económica, 2017

45

Moreover, each industry obtained the following market share. Table 26. Market Share of Ecuadorian Industries in 2014 & 2015

Industry 2014 2015 Retail Industry (Supermarkets) 819 783 Manufacturing industry (Food products) 1,443 1,480 Financial Industry 4,183 4,351 Manufacturing industry (Beverages) 1,985 2,040 *in million US Dollars Source: Adapted from INEC, 2017 According to Table 26, the retail industry had a negative market growth of 4% from

2014 to 2015. In comparison to El Rosado, the industry had a weaker performance.

In other words, the -2% of revenue growth from El Rosado represents a good

performance when comparing it to the whole industry. Nonetheless, it is still

weaker than its competitor The Favorita Group . The latter achieved a 2% revenue

growth, which was firstly outlined as a gradual decrease of their revenue growth.

Nevertheless, when comparing it to the industry growth rate, The Favorita Group

outperformed the market. Therefore, Ecuadorian firms in the year 2014 and 2015

were able to develop stronger FSAs, which allowed them to be resilient to external

detriments. Therefore, partly contradicting what Shenkar et al. suggest about the

impact that industry-level determinants have upon firm-level determinants.

Similarly, Pronaca also surpassed its industry with a 5% of revenue growth, in

comparison to the 3% achieved by its sector. These may be a consequence of two

reasons. Firstly, internal processes or FSAs may have become more efficient.

However, in the following KPIs, Ecuadorian companies did not attain a strong

efficiency rate. The other reason may be explained by market domination. In other

words, small companies in this sector are expelled from the market. This enables

big companies to increase their market share. Obando (2015), who declares that

the Ecuador possesses an oligopoly, supports this. Consequently, a small number

of firms will be the ones taking advantage of this market.

46

Moreover, the National Brewery had the same revenue growth rate than its

industry, that is, 3%. Therefore, the company had a good performance;; however,

their strategies could have been improved. Lastly, Pichincha Bank shows some

shocking rates. The financial industry accomplished a market growth of 4%,

whereas the company had a -1% revenue growth rate. In this situation, the

company has underperformed the market. This portrays disadvantages against

other competitors, which can absorb this market share loss. Therefore, the

company should consider new strategies.

Figure 5. Comparison of yearly averages of Revenue Growth Rate from South Korean and Ecuadorian companies

Source: Adapted from Samsung Electronics, 2015;; KIA Motors, 2015;; LG Chem, 2015;; Posco, 2015;; Hyundai Motor Company, 2017, Bolsa de valores Quito, 2016

The supplied figure compares the revenue growth rate from the selected

Ecuadorian and South Korean companies. The Ecuadorian sample shows a

sharper increase than South Korean firms do, in 2010. However, South Korea

outperforms Ecuador in 2012 & 2013. Therefore, the South Korean firms selected

demonstrated a more stable recovery, from the financial crisis of 2008, than the

Ecuadorian companies observed did. This may result from a wider development

of FSAs.

-‐0.1

-‐0.05

0

0.05

0.1

0.15

0.2

0.25

2010 2011 2012 2013 2014 2015

Grow

th Rate

Years

Total Average Revenue Growth Rate

South Korea

Ecuador

47

As a result of the South Korean dependence on exports, the strengthen of the

Korean Won in 2014 and 2015, resulted in a decline of the revenue growth from

the selected South Korean companies. Contrarily, most Ecuadorian firms

outperform the growth rate from their industries. This was the result from the

oligopoly existing in most Ecuadorian markets.

According to this, despite South Korean companies were highly influenced by their

external industries and the economies from an array of countries;; Ecuadorian firms

showed the opposite. These had a good performance, regardless of their industry

performance, by developing strong FSAs. However, in both cases, industry-level

determinants still need to be considered to know which strategies to utilise best

within the market operating.

Net Profit from 2010- 2015

Table 27. South Korea: Net Profit & Percentage change per year

*in million US dollars * percentage change Source: Adapted from Samsung Electronics, 2015;; KIA Motors, 2015;; LG Chem, 2015;; Posco, 2015;; Hyundai Motor Company, 2017

Years Samsung Electronics

Hyundai Motors

Posco Kia Motors

LG Chem Net Profit Averages

2010 14,177 5,193 3,637 2,460 1,904 5,474

2011 11,909 (-16%)

7,323 (41%)

3,343 (-8%)

3,180 (29%)

1,960 (3%)

5,543 (1%)

2012 22,262 (87%)

8,044 (10%)

2,250 (-33%)

3,433 (8%)

1,338 (-32%)

7,465 (35%)

2013 28,878 (30%)

8,217 (2%)

1,238 (-45%)

3,488 (2%)

1,161 (-13%)

8,596 (15%)

2014 22,223 (-23%)

7,264 (-12%)

529 (-57%)

2,843 (-18%)

811 (-30%)

6,734 (-22%)

2015 16,848 (-24%)

5,757 (-21%)

-85 (-116%)

2,327 (-18%)

1,020 (26%)

5,173 (-23%)

48

The table provided, presents information of the net profit obtained by the studied

South Korean firms. To begin with, Samsung, Hyundai and Kia presented a

positive percentage change from 2010 to 2013. The net profits seemed to grow,

except for Samsung in the year 2011. In this year, the company heavily invested

in “The Next Big Thing” campaign, which aimed to position Samsung Electronics

ahead from its competitors (Haroun, 2016). This may have resulted in the transitory

drop of revenues;; however, the investment seemed to be recovered in 2014, as it presented a positive 87% percentage change.

Additionally, as it was already analysed. This increase may have occurred as a

result of the recovery from the financial crisis. Nevertheless, despite this trend,

Posco and LG Chem presented a gradual decrease from 2013 to 2015. The fall of

the net profit for all the selected firms can be explained by the effect that the

strengthen of the Korean Won had upon the level of exports. However, for the year

2011 to 2013, the drop in revenues from Posco and LG Chem may have another

explanation.

For the company Posco, the deceleration from the economic growth of China, the

biggest steel consumer in the world, from 2011 to 2013 had an enormous impact

steelmaking companies (See Table 28.). This resulted in a reduction of prices, demand & profits of steelmakers globally (Bloomberg, 2014).

Table 28. China GDP growth

Year 2010 2011 2012 2013 GDP growth (annual %) 10.64% 9.54% 7.86% 7.76%


49

Moreover, the level of competition may have also affected the profits attained by

Posco. The company is only the fourth-biggest steelmaker in Asia, however;; still

have competition from Japan, and China itself. Therefore, steelmakers from China

had a preference, as these are national products.

Further, LG Chem presents a decrease from the year 2012 to 2013. Similar to

Posco, demand for petrochemicals declined in 2013. Moreover, the strong won

also affected the level of exports from the company. However, in comparison to

their competitors, LG Chem performed better, as observed in Table 29.

Additionally, the company achieved it by expanding their technology-based

products while securing high-energy efficiency (LG Chem, 2014).

Table 29. LG Chem main Competitors Net Profit in 2013

Competitors Net Profit * LG Chem 1,161 Samsung SDI CO. 234 Sony Corp. 441 *in million US Dollars


Additionally, LG Chem presents a growth of net profit in the year 2015, despite the

strong won and the decrease of exports. This occurred as a result of the company

expanded the ratio of differentiated high-profit products (LG Chem, 2016).

Therefore, it enabled them to obtain higher profits from the sales made.

50

Table 30. Ecuador: Net Profit & percentage change per year

Years The Favorita Group



National Brewery

Net Profit Averages

2010 92 31 234 79 81 61

2011 145 (59%)

33 (7%)

32 (32%)

97 (22%)

94 (16%)

80 (31%)

2012 170 (17%)

35 (6%)

37 (17%)

66 (-32%)

110 (17%)

83 (4%)

2013 176 (4%)

34 (-3%)

34 (-9%)

54 (-19%)

122 (11%)

84 (1%)

2014 187 (6%)

33 (-3%)

44 (30%)

56 (4%)

138 (13%)

92 (9%)

2015 192 (3%)

22 (-32%)

46 (4%)

59 (5%)

119 (-14%)

88 (-4%)

*in million US dollars * percentage change Source: Adapted from Bolsa de valores Quito, 2016 The shown table presents the yearly net profit from the selected Ecuadorian

companies from 2010 to 2015. To begin with, Pronaca and National Brewery, both

belonging to the manufacturing industry in Ecuador, presented an augmentation

of profit between the years 2010 to 2015. However, in 2015 The National Brewery

plunged its profits, most likely as a result of the economic crisis. Moreover,

Pronaca also decreased its profits but in the year 2013. This was the result of the

increase in expenses between 2012 and 2013, as seen in the following table.

51

Table 31. Expenses of Pronaca in year 2012 & 2013

Expenses 2012 2013 Total Expenses 749 826

Sales cost 633 690

Operational & Administrative Costs 106 112

Financial Costs 10 11

Other Expenses 0 12



As depicted in table 31, expenses rose. This may have been due to inefficient

internal processes, or to the lack of readiness to confront the earlier stages from

the recession occurred in 2015. Nonetheless, the latter may not have happened

as the company had an increase in profits in 2015. Therefore, efficiency was

missing.

Similar to Pronaca, in 2012 and 2013 Pichincha Bank had a drop of profits. The

company had higher expenses, which made their profits to fall, as seen in below.

Table 32. Expenses of Pichincha Bank from 2011 to 2013 Expenses 2011 2012 2013 Total Expenses 784 913 952



Consequently, just as Pronaca, processes need to become more efficient in order

to reduce expenses and maximise profits. When referring to the commerce

industry, The Favorita and El Rosado Corporation present distinct results. On one

hand, The Favorita shows a continuous increase of profit throughout the whole

period. On the other hand, El Rosado Corporation presents a gradual increase in

profits in 2011 and 2012 but these plunge in the year 2013 onwards. As already

52

mentioned, the company may have been affected by the economic recession,

which influenced since 2013. Nonetheless, due to The Favorita success, it can be

said that there was potential for profit growth. As a result, El Rosado Corporation

should improve its efficiency in order to achieve higher profits, therefore, their

performance.

Table 33. Percentage Share of Revenue to GNI

Year South Korea

Ecuador

2010 28.45% 5.64%

2011 29.77% 6.18%

2012 31.00% 5.99%

2013 32.03% 5.78%

2014 29.87% 5.69%

2015 27.03% 5.78%

Source: World Bank, 2017 The table presented, shows information regarding the level of market share

attained by the whole South Korean and Ecuadorian firms selected in this study.

In general, it is observable that the market share of South Korea is considerably

larger than the Ecuadorian one.

As previously explained, the expansion strategies undertaken by Ecuadorian

companies encompassed only national major cities, like Quito or Guayaquil.

However, there was no evidence of companies expanding to small towns.

Consequently, the number of companies is not equally distributed across Ecuador.

For instance, The Favorita Group has only 46 supermarkets in Ecuador.

53

Table 34. Number and Location of Supermarkets from The Favorita Group

Source: Supermaxi, 2017

Moreover, as seen in table 34, these are only located in thirteen provinces,

however, Ecuador possesses twenty-four provinces. In addition, from the 46

stores, the majority are located in two cities. However, when comparing these

results to South Korean companies, for example, Hyundai;; the latter presents

exceptionally higher number of stores nationally and internationally (Hyundai,

2017).

This may be the consequence of two reasons;; these companies have rooted

themselves in the South Korean market, as well as, have expanded internationally

which allowed them to have a wider market for development. Nonetheless, one

major fact, which needs to be considered, is the economic level from the eleven

remaining provinces. Can consumers in these provinces are capable of affording

products from these supermarkets, or they prefer small corner stores, which are cheaper.

ECUADOR Quito 20 Guayaquil 11 Cuenca 4 Ambato 2 Loja 1 Machala 1 Riobamba 1 Portoviejo 1 Manta 1 Latacunga 1 Salinas 1 Santo Domingo 1 Ibarra 1 Total 46

54

According to this, Ecuadorian companies are in a market with high economic

distances between developed and undeveloped provinces. Therefore, the

economic development is concentrated on one group of provinces. However, it is

more likely that the remaining provinces will develop in the future. Therefore,

Ecuadorian companies need to be prepared to continue expanding efficiently and

effectively. For this, R&D and new technologies, which aid in the improvement of

products and processes is fundamental. Lastly, at a later stage, Ecuadorian

companies should also start considering international expansion as one of their strategies.

Table 35. Profit margin of Ecuador & South Korea

Year South Korea Ecuador 2010 9% 8% 2011 8% 9% 2012 10% 8% 2013 10% 8% 2014 8% 8% 2015 7% 8%

Source: Adapted from Bolsa de valores Quito, 2016 Table 35, shows the profit margin achieved by all the companies studied. Both

countries present similar percentages. However, South Korea surpasses Ecuador

but in a small percentage. Moreover, as previously explained, South Korean

companies developed M&A’s with other firms. However, the Ecuadorian firms

selected, have not done any of these business arrangements.

The M&A’s were recorded, in the financial statements of these South Korean

companies;; as expenses. Therefore, if these investments would be taken away,

costs would decrease, consequently, profits would be higher. Nonetheless, in

order to say that Ecuadorian companies achieved the same profit margin as South

Korean companies, the former should have presented higher ratios than the ones

obtained.

55

For this reason, if South Korean companies are making more investments than

Ecuador but the profit ratio is still similar;; then Ecuador needs to invest in more

process efficiency (firm-level determinants) to increase their profit.

56

III. Internal Business from 2010-2015

Efficiency- Asset Turnover Ratio

The Asset Turnover Ratio demonstrates the amount of revenue generated in terms

of asset value. The value differs according to the sector analysed. Sectors with

large asset infrastructure, like steel works, telecommunications tend to attain a

ratio of 0.10. On the contrary, sectors with minimal assets, such as consumer

staples, consultancies, usually obtain a ratio of 2.00 (Jones, 2013).

Table 36. South Korea: Asset Turnover Ratio

YEAR Samsung Electronics

Hyundai Motors

Posco Kia Motors

LG Chem

Averages

2010 1.151 0.707 0.888 1.533 1.536 1.163 2011 1.060 0.711 0.879 1.428 1.483 1.112 2012 1.111 0.695 0.802 1.458 1.403 1.094 2013 1.068 0.654 0.712 1.316 1.327 1.015 2014 0.895 0.606 0.735 1.147 1.245 0.926 2015 0.829 0.557 0.777 1.077 1.088 0.865 Source: Adapted from Samsung Electronics, 2015;; KIA Motors, 2015;; LG Chem, 2015;; Posco, 2015;; Hyundai Motor Company, 2017

Considering what has been previously mentioned, South Korean companies are

situated as having large asset infrastructure. Therefore, a ratio of 0.10 is relatively

good. According to this, then South Korean companies have a high efficiency in

terms of the revenues produced in terms of their assets. On average, they achieve

a ratio of 1.029, which is 0.929 more than the overall average.

57

Table 37. Ecuador: Asset Turnover Ratio

Year The Favorita Group



National Brewery

Averages

2010 4.184 4.031 2.632 1.318 0.547 2.542 2011 1.451 2.400 1.773 1.477 0.834 1.587 2012 1.702 2.079 1.315 1.210 0.892 1.440 2013 1.635 1.909 1.453 1.115 0.955 1.413 2014 1.488 1.761 1.406 2.236 0.979 1.574 2015 1.452 1.695 1.463 1.268 1.041 1.384 Source: Adapted from Bolsa de valores Quito, 2016 According to Jones, Ecuadorian companies are more situated as consumer

staples, therefore, should have a ratio of 2, except for Pichincha Bank which is in

the financial sector, as these entail large assets which are at the same time

liabilities. Many companies presented a high ratio in 2010. However, as it was

previously explained these may have been therefore from the recovery of the

economic crisis of 2008.

However, the following years, ratios started to fall, especially for National Brewery

who had the lowest ratios from 2011-2015. This is mainly because, throughout

2010 to 2014, Pichincha Bank had fewer sales in comparison to its assets. Despite

sales increased through that time, the company could not surpass a number of

assets.

Overall, South Korean companies present a high level of efficiency in comparison

to Ecuadorian one. This was achieved through the high levels of investment in

innovation and technologies, which enable these companies to improve their

processes, reduce cost and improve performance.

58

IV. Customer Satisfaction Index (CSI): 2016 Table 38. South Korea: CSI

Firms Customer Satisfaction Hyundai Motors 92 Kia Motors 83 Samsung Electronics 83 LG Chem 83 Posco 82 Average 84.6


The Customer Satisfaction Index presented in the above table outlines positive

values. As it was already discussed, South Korean companies presented lower

Revenue Growth Rates than Ecuadorian firms. In addition, the RGR represents

the level for business expansion, the higher it is, and then more opportunity there

is to expand. However, South Korean rates were low or negative values.

Therefore, the South Korean market may be highly competitive. In order to

strengthen the loyalty from their customers;; their strategy should focus on

customer relationship management (CRM).

Moreover, Asian businesses have been trying to escape from the designation of

counterfeited or low-quality products (Stiglitz, 1996). Therefore, high-quality

products and services are necessary for demonstrating these brands can be trusted, not only for national consumers but also specially on international ones.

59

Table 39. Ecuador: CSI

Firms Customer Satisfaction The Favorita Group 75 The Rosado Corporation 65 Pichincha Bank 62 Pronaca 59 National Brewery 56 Average 63.4

On the other hand, the market power from the Ecuadorian enables them to

succeed without considering much the satisfaction of consumers. Even the highest

ranking, being 75 reaches the lowest satisfaction from the South Korean

companies presented in Table 38. However, it is important to understand the

behaviour from Ecuadorian consumers. As it enables to analyse whether or not

consumers want and desire a better product/service quality or if they do not. It

varies according to Culture. This will be further discussed in the Cultural Distance

within Case B.

Figure 6. Customer Satisfaction: Comparison between Ecuadorian and South Korean companies


0102030405060708090

100

Customer Satisfaction

60

The presented graph compares the customer satisfaction ranking of all the

companies selected. All South Korean companies outperform the Ecuadorian

ones. It was previously considered that Ecuador possesses an oligopoly. For this

reason, it is less likely for companies to improve consumer satisfaction, as they

have a high market power, as there are less substitutes where the consumer can

go.

Nevertheless, it is essential for them to improve. In other words, unless Ecuador

opts to have a close economy, especially international competition will increase.

These entail higher standards and provide better alternative for consumers.

Consequently, if these companies want to remain at the top of consumer’s choice,

then it is important to increase the quality of their products and services, which will

allow them to have better relationship with consumers.

Moreover, an increase of perceived quality from consumers, enable companies to

charge a premium. Therefore, becoming more competitive at the national level but

also at an international position.

61

V. Resources & Capabilities South Korea There are many capabilities developed by South Korean companies during 2010-

2016. Firstly, these are highly innovative companies. The use of technology has

positive effects on the efficiency, and profits achieved. Moreover, these companies

differentiate through a high customer satisfaction, which enable them to become

more competent nationally and internationally.

Ecuador On the other hand, Ecuadorian firms seem to have various opportunities to take

advantage from but do not develop to the level they could. However, one major

resource identified was that Ecuadorian companies take advantage of their local

knowledge. In other words, the national expansion has allowed Ecuadorian

companies to have a high level of understanding of consumer behaviour.

Nevertheless, there are several capabilities, which need to be developed.

By developing these FSAs, it was seen throughout the analysis how these

companies were capable of dealing with an array of external factors, such as

industry or country-level determinants. This proves the possibility for firms to

develop without necessarily having a perfect market, stated by Barney and

Mackey.

62

1.20.2 Case A.2. Strategy Throughout the analysis, the differences from South Korean to Ecuadorian

companies, in terms of the strategies applied, were analysed. In general, the

following strategies were encountered,

Table 40. South Korean and Ecuadorian firm-strategies

South Korea Ecuador Differentiation Strategy Partly Differentiated, partly cost

Leadership strategy

Investment in R&D, Expansion of

technology-based products

Less investment in R&D and

technologies

High efficiency Low efficiency

International Exporting, Mergers &

Joint Ventures

National expansion- leading to

domination of local know-how

High customer satisfaction (high

competition)

Medium to Low customer satisfaction

(oligopoly)

High service/ product quality Medium to Low service/ product quality

From the carried out study these were essential strategies employed by South

Korean and Ecuadorian companies during the period of 1980-2016. However, it

does not state these are the only strategies used, other possible strategies may

have also been applied in that period, but are not analysed within this study.

Further, the strategies undertaken by South Korean companies reassures what

was discussed in the literature about the firm-level determinants. Shenkar et al.

suggested that technology and organising principles (differentiation) lead to higher

productivity. This is observed in South Korean companies, which also influenced

on factor creation. As these had a contribution to the GNI of the country.

63

1.20.3 Case A.3. Productivity of firms Productivity was defined in the literature as the efficiency for a product to be

produced. According to this concept then, South Korean companies are

productive, whereas Ecuadorian companies are not.

Moreover, in terms of productivity, it was encountered in the research that one

Ecuadorian company outperform the efficiency standards. However, this study

firstly encountered that only efficiency does not guarantee productivity, as other

factors, such as customer satisfaction in terms of quality;; are essential too.

Secondly, the productivity of one firm may not affect the country competitiveness.

For this reason, it is necessary that many strong firms become productive, in order

to affect the competitiveness of a country, therefore, their economic development.

Overall, South Korean companies developed strong strategies, which allowed

them to generate solid FSAs. However, despite these strategies seem easily

replicable;; these still need to be adapted to the new market. For this reason, the

CAGE analysis will give a broader understanding of how these strategies should

be applied in Ecuador, as well, as to which current strategies to keep or modify.

64

1.21 Case Study B: Contrasting Ecuador & South Korea through CAGE analysis

1.21.1 Cultural Distance

Figure 7. Cultural Similarities & Differences

Source: Adapted from GLOBE, 2016

The table above presents the GLOBE analysis, which ranks these nine attributes

on a scale of 1 to 7, 1 being low and 7 being high. Moreover, South Korean and

Ecuadorian culture, at first glance, depicts very similar trends, with some

exceptions like institutional collectivism. Both countries expect power to be equally

distributed and are cohesive towards their families or organisations (In-group

collectivism).

Moreover, both countries are risk-averse. However, South Korea developed a

calculated risk. In other words, by researching the market of entry, by anticipating

mistakes, and by being prepared to any unexpected situation, these companies

01234567

Scores

GLOBE factors

Cultural Characteristics

South Korea

Ecuador

65

were capable of succeeding while still taking risks. Therefore, making their

strategies successful.

For instance, Samsung developed the campaign “The Next Big Thing” (Samsung

Electronics, 2015), which consisted on entering the US market and competing

against Apple. Despite their strong competition, they were capable persuading

consumers to prefer Samsung. This data shows that the strategy of international

exporting, as well as, M&A’s, adopted by South Korea should be replicated by

Ecuadorian companies. Therefore, enabling international expansion, but through

measured risks.

Moreover, both countries share a high score in assertiveness and performance

orientation. Firstly, in terms of assertiveness, individuals can be confrontational if

they disagree with something. Secondly, if individuals perceive a performance

improvement, they tend to reward this advancement. As a result, giving a wider

perspective of how consumers can react to an increase in product/service quality.

If Ecuadorian companies would increase, their quality consumers would be more

satisfied, consequently, more eager to reward the company by purchasing the

product constantly. Therefore, an adaption of the Korean customer-centric

strategy;; in other words, a high service / product quality;; would have a positive

impact on the revenue of Ecuadorian companies, would allow them to have a

higher part of market share, and creates competitiveness in international markets.

66

1.21.2 Administrative Distance Table 41. Comparing the Administrative Distances from South Korea and Ecuador

Variables South Korea Ecuador Trading bloc ASEAN Free

Trade Area

(AFTA)

Union of South

American Nations

(UNASUR)

Currency Korean Won Dollars

Legal Institutions Strong, Protective

Government,

Politically Stable

Weak/Corrupted,

Protective Government,

Politically unstable

Strength in institutions Medium Low, existence of

institutional voids

Source: Adapted from Basabe-Serrano 2013, Kim, 2000, Trading Economics,

2017, Transparency International (2017)

In terms of institutional power, Ecuador and South Korea partly differ. South Korea

has a more stable system than Ecuador. The latter suffers from political instability,

high corruption and high levels of institutional voids. Institutions in Ecuador are not

trustable, which increase the risk of investment. Therefore, investors at a national

and international level are not so willing to invest high amounts of capital in

Ecuadorian companies.

This confirms that weak institutions affect economic development, as suggested in

the literature by Peng et al. For this reason, the generation of innovation is less

likely to occur, as there is lack of capital to develop new products and processes.

Overall, if Ecuadorian companies aim to attract foreign capital, as means of

support for the generation of innovation;; they should build up international

67

subsidiaries, which enable to reduce the risk of institutional voids. Therefore,

attracting foreign investment to the companies, which indirectly affects the country

competitiveness.

However, Ecuador benefits from its currency. Firstly, internationally investment on

innovative ideas is easier to achieve trough the US Dollar, than through the Korean

Won. This is mainly because the presence of the dollar demonstrates stability and

trustworthiness in terms of the exchange rates fluctuations.

According to this, Ecuadorian companies should take advantage of the currency

and their trade bloc, in order to adapt the strategy of R&D and technology

development endorsed by South Korea. This means, Ecuadorian entrepreneurs

should position themselves more in the technology branch, which is more difficult

to replicate if possessing an Intellectual Property (IP) protection. This will also allow

their product/services to become competitive in markets outside of their trade

block.

1.21.3 Geographic Distance As discussed in the literature, geographical distance affects which countries are

selected for trade. According to this, South Korea and Ecuador are remotely

situated from each other. One locates on the western hemisphere and the other

on the eastern hemisphere. For this reason, not all strategies undertaken by South

Korea can be replicated by Ecuador. In other words, the trade partners from each

country will differ.

An example for this is presented in Figure 8 & 9. This shows two rooted maps of

the merchandise exported by South Korea and Ecuador between 2007- 2010. The

difference from these maps is that these portray other countries, with respect to a

particular focal country. In other words, these will portray the imports of other

countries according to South Korea and Ecuador’s total export in merchandising.

68

Figure 8. South Korea Merchandise Exports with Shading Based on Partners Imports in 2010

Source: United Nations Commodity Trade Database (UN Comtrade), Ghemawat,

2016

Figure 9. Ecuador Merchandise Exports with Shading Based on Partners Imports in 2010

Source: United Nations Commodity Trade Database (UN Comtrade), Ghemawat,

2016

69

When comparing both maps, it is visible the enormous difference between South

Korea and Ecuador’s exports. The former has higher export levels to China,

Indonesia, Hong Kong, and other Asian countries. Nonetheless, Ecuador exports

more to North, Central and South America. This confirms the theory of the Gravity

Model, where geographic distance has an effect on the selection of trade partners.

As a result of this high distance, it is essential to notice than when making exports

or M&A, Ecuadorian companies should adjust to the market needs of their main

export partners. By adapting their product portfolio, the creation of new products

and mergers should aim to satisfy the market entered.

1.21.4 Economic Distance Figure 10. Total GDP of Ecuador and South Korea in 2016


When observing at the total GDP there is a significant difference between both

countries. As already discussed in Case A, South Korean companies had a better

performance than Ecuadorian one, from 1980 to 2015.

$-‐

$200.00

$400.00

$600.00

$800.00

$1,000.00

$1,200.00

$1,400.00

$1,600.00

Ecuador South Korea

Billion

Dollars

Countries

Total GDP

Economic size (Total GDP)

70

Moreover, according to Shenkar et al., firms can develop factor contribution or the

capacity of improving the competitiveness of the country. This is depicted in figure

11, where the economic size of South Korea is fourteen times higher than the one

from Ecuador. In other words, it is not a coincidence that firms performed according

to the GDP of their correspondent country. However, it is certain that there are

other factors, which may have a major stake on positively contributing to the

competitiveness of a country.

Figure 11. GDP per capita of Ecuador and South Korea in 2016


Moreover, when observing the individual consumer income, there is still a wide

difference between South Korea and Ecuador. South Koreans earn 4.38 times

more than Ecuadorians.

Ecuador, $6,205

South Korea, $27,221

71

Figure 12. Income inequality from Ecuador and South Korea in 2016

Source: World Income Inequality Database (WIID 3.3), 2017

Now when observing, which countries have higher income inequality, Ecuador

presents higher inequality than South Korea. In general, Ecuadorians make an

average of 6K per month but this amount is concentrated on high economic

classes.

As a result, not all customers are capable of affording wide amounts of money in

innovative products. For this reason, Ecuadorian companies should innovate but

only products that the majority of consumers can, and are willing to purchase.

Through efficiency, it is also possible to reduce costs. Moreover, as mentioned in

the geographical distance, the main export partners share similar characteristics

to Ecuador. Therefore, not only Ecuadorian consumers are more willing to buy

these products, but also consumers from the exporting partners.

0

10

20

30

40

50

60

Ecuador South Korea

Gini

Countries

Income inequality

Income inequality

72

Figure 13. Unemployment of Ecuador and South Korea in 2016


As observed in the graph, Ecuador presents a good employment percentage.

Nevertheless, it is essential to take into consideration that developing countries

have a high level of people unemployed, who are not registered. As a

consequence, the unemployment rate of 4.5% does not represent the real situation

of the country. Moreover, Ecuador still suffers from low qualified, inexperienced

individuals, who do not enable companies to have a strong Human Resource. For

this reason, Ecuador should also develop and implement a strategy, which

nurtures, educate, and skill up individuals, which present a long-term interest in

the company. As a result, quality will be improved;; efficiency and effectiveness will

be gained.

Table 42. Natural Resources as a percentage of GDP

Country Ecuador South Korea Natural Resources 14.756% 0.036%


0 1 2 3 4 5

Ecuador

South Korea

% of Total Labour Force

Coun

tries

Unemployment

Unemployment

73

In addition, as seen in Table 42, Ecuador possesses a high percentage of natural

resources. Consequently, enabling companies to invest in innovation regarding

natural resources. Throughout 1980 to 2016 no company has developed a creative

system which helps to use natural resources in the most efficient and effective

way. This may be because natural resources are perceived as a low-income

sector;; however, if the necessary technologies are utilised, the natural resources

owned can be transformed into higher value products, which can become more

valuable for the country.

Overall, Ecuador cannot completely replicate the strategies from South Korea;;

however, these can be adapted to the current situation of the firms in this country.

By adjusting these strategies and by developing new ones, companies can have

an opportunity to succeed and contribute to the economic development of the

country.

74

CHAPTER 5: IMPLICATIONS In general, there are several implications, which can be derived to Ecuadorian

companies. Firstly, firms should focus on the development of non-replicable

innovations. This can be achieved through the creation of new technologies.

Moreover, industries should be shifted, from a manufacturing to a service sector,

specifically to the IT industry. The more creative and innovative businesses

become;; the higher the opportunity is to succeed in international markets.

Secondly, Ecuadorian firms should internationalise. They should invest in feasible

external countries, which give them the opportunity of growth and expansion. For

example, by undertaking mergers with national and international companies,

Ecuadorian firms will not only be capable of growing their market share but also to

acquire technology expertise, managerial knowledge and other FSAs. By learning

these, Ecuadorian firms will be capable of utilising this knowledge for improving

their own business processes.

Thirdly, Ecuadorian companies should be open to investors. Capital is essential if

wanting to develop new technologies, as well as, to advance the growth from

innovative products, processes, and services. For this reason, as strong

institutions attract national or foreign investors, companies should create

international subsidiaries, which enable them to reduce the risk of institutional

voids from Ecuador.

Lastly, in order for this to happen, the human resource should be trained with new

techniques, and soft skills development, which are needed for improving their

efficiency and effectiveness at work. As a result, cost of employee development

may rise;; however, overall costs can be reduced and quality can be increased.

75

CHAPTER 6: CONCLUSION & RECOMMENDATIONS

Based on to the analysis already discussed, the contrasting strategic role of firms,

have strong effects on the economic development of each country, as seen below.

Figure 14 Strategic Role of Firms

Overall, the strategies undertaken by Ecuadorian and South Korean firms were

affected by internal and external factors. These, enabled the development of

strong or unsuccessful strategies, which affected the productivity, and

performance of the firms analysed. Consequently, positively or negatively affecting

the development and competitiveness of their respective country.

76

1.22 Which strategies were used in firms from Ecuador in contrast to South Korea? (Internal Factors)

The internal factors affecting the strategic role of firms, which were analysed

through financial, internal business and customer KPIs, showed the following

results. On the one hand, Ecuador had an absence of strong FSAs. The country,

developed weak internal resources, which were reflected in their weak financial

results. Consequently, negatively affecting their performance. On the other hand,

South Korea benefitted by developing strong R&D, as well as, technological

development. Thus, achieving more efficient processes and high-quality products.

Moreover, the results demonstrated a higher customer satisfaction from the

products and services delivered by the South Korean companies, in contrast to the

Ecuadorian ones.

Through the analysis of the KPIs, the strategies encountered for South Korea were

characterised by differentiation, efficiency, quality and internationalisation.

Conversely, for Ecuador the strategies were based on low efficiency, low

innovation, medium to low quality and only national expansion.

1.23 Can Ecuador replicate the techniques used by South Korea to stimulate rapid growth? (External Factors)

In terms of the external factors, the CAGE framework allowed to explore whether

or not the strategies, which were successful in South Korea, could be replicated in

Ecuador.

Moreover, the data showed astonishing results. From all the distances, the cultural

distance was the only one, which did not show significant differences. The GLOBE

model showed that between Ecuador and South Korea there is only a medium

cultural distance, as both countries showed similar power distance, assertiveness,

77

future orientation and uncertainty avoidance characteristics. Further, the other

aspects vary but only by a small scale.

However, there was a high administrative distance, due to the political instability,

the high corruption, and the institutional voids existing in Ecuador, in comparison

to South Korea. Moreover, the internationalisation strategy Moreover;; the

internationalization strategy of South Korea cannot be replicated into Ecuadorian

companies. This is a consequence, of their geographic differences making them

to have different trading partners.

Lastly, if developing a revolutionary product in Ecuador, two issues appear. To

begin with, intellectual property is weak, so the invention can be easily replicated.

This will lower the incentive for companies to invest in such innovations.

Further, as a result of the low workforce capabilities and economic inequality from

Ecuador;; innovative products are not so affordable for the whole population.

Therefore, the strategies cannot be replicated.

Instead, these need to be adapted in the following ways. Firstly, to focus on

developing non-replicable innovations, which can be afforded by the majority of

the population. Secondly, to focus on trading partners, which have a near physical

distance to Ecuador. Thirdly, to attract capital from national and international

investors. Lastly, to invest in human resource training.

1.24 Strategic Role of Firms

In general, the strategies from South Korean firms outperformed the ones utilised

by Ecuadorian companies. However, throughout this study, both countries

demonstrated the importance that firms have, for improving their economy. The

effectiveness of the South Korean strategies was strongly linked to the productivity

of firms, therefore, competitiveness and economic development of South Korea.

Consequently, this study shows the importance of the strategic role of firms upon

78

the development of a country. Nonetheless, it is essential that not only one, but

many firms to become productive, in order to create a positive collective impact on

the economy of their country.

1.25 Recommendations Further recommendations are to analyse a wider number of companies from both

countries to give a clearer picture of other strategies, which may not have been

mentioned in this paper. Moreover, the use of more primary resources from 1980

to 2017 would also benefit the development of this paper. Therefore, enabling

more enriched results. In addition, further research may include other countries

with similar patterns to have a better contrast if there is really a correlation between

the appearing patterns. Lastly, different KPIs can be utilize to further the analysis

of the performance and strategies of firms.

79

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Appendix 1.26 Survey: Customer Satisfaction for Ecuadorian companies

The questionnaire designed here is part of my academic degree and full

confidentiality of your data will be maintained. Hence please answer the questions as accurately as possible

A. Personal Information

Please tick the most appropriate box: 1. Age: to 24 25 to 34 35 to 44 45 to 54

55 to 64 65 to 74 75 or older

2. Gender: Female Male

B. Buyer Behaviour (please choose one option unless indicated other wise)

How satisfied are you about these companies?

Please choose one

-------Thank you ----

Strongly disagree

Disagree Neither agree nor disagree

Agree Strongly agree

Favorita Group (Megamaxi, Supermaxi) provides high-quality services and products, as well as, a good environment when shopping.

Pronaca (Gustadina, Mr. Pollo, Plumrose) gives outstanding products which reach my overall satisfaction.

Pichincha Bank offers efficient services and satisfies my expectations as a consumer.

National Brewery (Pilsener, Manantial water) delivers high-standard products in terms of quality and taste.

Corporación El Rosado (Hipermarket, Mi Comisariato, Ferrisariato) meets my standards in service and product quality.

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