Supply Chain Management and the Importance of Informati1
Transcript of Supply Chain Management and the Importance of Informati1
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Supply chain management and the importance of information technology: outlook on
the European automotive industry
Maria Jos Alvarez Gil, or!ala "ulcsar and #ilan Aksoy
$niversidad %arlos &&&, Madrid, ' of March ())*
A!stract + he trends in the automotive industry changed radically from the !eginning
of the -)s. &ncreasing competition, ne/ systems and developments compelled the
companies to re+evaluate and re+design their investments and processes, !y
e0tending their net/orks to other parts of the /orld in order to gain more market. his
trend could !e o!served first in the 1estern+European countries and later in Eastern+
Europe. 1ith entering ne/ areas the companies had to face /ith several difficulties
coming inter alia from the decisions of supplier net/ork and information system
implementation. &n our study /e analyze the strategic decisions of ma2or carmaker
companies entering the Eastern+European market. 1e place special attention to
supplier decisions and E34 system decisions of the firms. 5ur research includes
three case studies of the 6ungarian automotive sector.
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I. Introduction
With the downfall of the socialist era in Eastern-Europe, the countries faced a complex
situation of multiple possibilities and threats. The transition process helped effectively the
adaptation to developed countries, although it required several radical changes, fast learning
skills and adequate strategic and organiational decisions.
This transition period was studied by many scholars before, as well as the effect of
foreign direct investment !"#$%& in the emerging countries and their beneficent'noxious
impact on the economies. (n interesting detail was the focus on multinational companies
!)*E% as the ma+or source of foreign capital inflow and the adapting government decisions.
$n our study we will analyse the appearance of multinational carmaker companies to
Eastern Europe, especially focusing on the situation of ungary and the re-structuring of the
automotive industry in the country. We take into account in such a context the #
investment decisions of the country as strategic actions with the combination of institutional,
financial, and organiational restructuring decisions.
(s we know from the literature, innovation and # activity became the highest priority
at the most successful companies after the /0s and recently the importance of knowledge is
increasing as a source of global competitiveness. $n general we can assume that the growing
complexity of products and processes, the multidisciplinary nature of present scientific and
technological advances forced the companies to develop new capabilities to meet these new
challenges !1sonka, 2003%.
The number of # collaborations and networks show big differences by sectors, regions
or countries. ungary became a relatively large share of "#$ in the 1EE 2region. With this
push of the economic activity, the innovation system was modernied. owever the linkages
&"#$4 "oreign #irect $nvestment21EE4 1entral and Eastern Europe
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between the different actors, legislations of the systems and their activities remained at a
relatively low level.
$n the first section we will introduce the theoretical framework, followed by the overview
of the transition process, with attention to the automotive industry, in the next section we state
our research questions and some methodological aspects and lastly we will summarie our
findings.
II. Theoretical framework
(s suggested by )eyer !2005% the transition economies have contribution to main theories
such as, the transaction cost theory !T1T%, agency theory !(T% resource based theory !6T%
and institutional theory !$T%. We argue that in such a context 6T and $T are the main
theoretical cornerstones.
6T places the main focus on idiosyncratic resources and capabilities as key drivers of
firm performance. esources constitute a basis for competitive advantage in a transition
context. $n a highly idiosyncratic environment, context-specific resources such as business
networks!7eng and eath, &883% and process-related capabilities such as strategic flexibility
!9hlenbruck et al., 200:% may be important. The context thus influences the way firms
manage their resources. Whereas processes of developing, transferring and exploiting
resources vary in the transition context. 7artner selection and organiational learning are also
highly important factors. The main challenge lies in identifying the resources and change
processes that create value in the specific context. The complementarities of resources are
believed to be crucial for the success of different strategically partnerships, such as alliances
or +oint ventures !;
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Thus, in a rapidly changing environment, local firms as they need to re-configure their
resources are interested in using alliances with )*Es to outcompete their local rivals !"ahy et
al., 2000%, and they seek partners with financial assets, technical capabilities, and marketing
savvy !itt et al., 2000, 200=%.
With the creation of alliances and ;ince the &8/0s, $T has become a ma+or perspective in the social sciences. $nstitutions
are typically defined as the ?rules of the game in a society? !*orth, &880, :%, which include
formal rules !laws and regulations% and informal constraints !customs, norms, and cultures%.
1EE researchers increasingly realie that institutions are much more than background
conditions, and that ?institutions directly determine what arrows a firm has in its quiver as it
struggles to formulate and implement strategy and to create competitive advantage? !$ngram
and >ilverman, 2002%. The role of institutions is particularly important in acquisitions. $n
1EE, the institutions surrounding privatiation set the context for foreign acquisitions, which
have a direct bearing on post-acquisition strategies !)eyer, 2002% and performance
!9hlenbruck and #e 1astro, 2000%. )ost research in this area has focused on the impact of
formal institutions on entry strategies. The recognition of informal institutions !*orth, &880%
is relatively recent. 7eng !200:% hypothesies that during the early phase of transition, when
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formal market-supporting institutions are less well developed and informal constraints
dominate, foreign entrants are more likely to use ;adler and >wain, &88=A udson and >champ, &885A 7avlBnek, &88/%.
1armakers by entering the European market were faced with several challenges, as strong
competition for potential investment pro+ects and other barriers. $n the end of the /0s the
Eastern countries became a potential market for carmaker firms where they saw many
opportunities, first of all the cheap skilled labor possibilities, favorable tax conditions and
other preferences of contracts from the governments.
The proximity of Eastern-Europe to the Western plants and subsidiaries was another
advantage, which connected the two regions for technological, production and transportation
collaboration. To provide the adequate quality and to facilitate process flow, the companies
adapted to different strategic actions and made distinct relationships with local suppliers. This
in turn involved the importance of the information systems and production systems to have an
efficient cooperation between the divisions of the companyCs subsidiaries. This fact leads us
to the following questions4 What was the key to success by the expansion to Eastern Europe
of ma+or carmaker companiesD ow important was the adequate cooperation between the
West and the EastD
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"or instance as the Western-European car market remained surrounded by direct and
indirect trade barriers. Tariffs, quota as well as single franchise dealer structures created a
large number of !institutional% barriers to entry. The opening up of the 1EE1 region inspired
many of the peripheral firms to try to enter through the ?backdoor?. 7>( !in umania, and in
7oland% and even )'@pel !in 7oland, and ussia% thus got outpaced by more adventurous
new entrants from (sia. >uuki and #aewoo targeted 1entral and Eastern Europe as a
production site to overcome European trade barriers and enter the western European market.
owever the international networking strategies of the car manufacturers show
remarkable differences. >ome rate the 1EE1 region primarily as a market, some as a
production site, some try to aim at both. These differences are triggered by the domestic
bargaining setting !the ?car complex?% of these firms, by the dynamics of the
internationalisation process itself, and by the reception in the host countries.
The strategies of the investing companies in Eastern Europe reveal the following common
characteristics. "irstly, although they also produce substantial volumes for the local market
they produce in, the prime strategic aim is exports to Western Europe. >econdly, to supply to
the Western European market. "or instance by FredefiningF components or supplying local
suppliers as second tier producers. Thirdly, they have made use of the frustration of local
governments to enter the area easily. !van Tulder, uigrok, &88/%.
(s the above implications suggest the tight relations in every aspect between Western
Europe and Eastern Europe aim the emergence of the companies to shape a Ccommon
languageC regarding processes, production and information systems.
IV. Supplier networks
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>upply chain management aims at optimiing the performance of business systems.
owever, nowadays a supply chain is often operated in a dynamic environment, thus the
optimal solution in a supply chain should change due to varying constraints. These constraints
can be either internal to the supply chain or part of the institutional context in which the
supply chain exists. "or instance, best practice for one organiation may not generate best
performance in another organiation in a different country. (ctivities of individuals and
organiations in a society should follow its invisible rules or mechanisms, which is defined as
the institution.
$n todayCs rapidly changing environment, suppliers are not only a source of materialsA they
can be a source of innovation. 6y working closely with suppliers, organiations can reduce
costs, improve quality, and shorten lead-times !Gaseter &88/A Gewis &885%. "or instance,
ondaCs collaboration with suppliers provides a competitive advantage !*elson, )ayo, and
)oody &88/%. #aimler1hrysler reduced costs by over H2 billion in &88/ using suppliersC
ideas !>tone &888%.
1ar makers of developed countries chose first tier suppliers among firms capable to
achieve continuously high techno-economic performance. This statement is especially true
today, when due to the high concentration worldwide and to the generally used !in automotive
industry% lean production. 6ig carmakersC affiliates usually do not rely on local background
industry potential. They continue cooperating with traditional suppliers. eplacing traditional
suppliers by local companies is a slow and burdensome process.
6ig carmakers have centralied purchasing system. This means that affiliates may only
employ new local suppliers with the permission of the mother company. The headquarters
evaluate applications of would-be suppliers after a long examination process of both product
and producer. Would-be partners are examined from various aspects. They have to suit with
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the expectations of the mother company, primarily the mother company looks at the following
aspects4 which technology is used by the firm, how is the quality of the offered product, and
its materials, how is management, how is corporate finance, how much free capacity is
available, whether the company is able to produce in large batches, whether there is #
staff available necessary for quick ad+ustments, retooling, whether there is tool production,
where is the plant located and lastly if the offered price is competitive.
( further problem is sie and the related lack of capital. 6ig carmakers reduce the number
of suppliers worldwide. They contract therefore large and properly capitalied firms in
1entral Europe. uuki opted for a reenfield investment in the country with the best and
most independent supply infrastructure, but with weak or no core firms. $n other 1EE1
countries, first tier suppliers had been strongly linked !often as subsidiaries% to the local core
firms. 6eing linked to the car complex of a more peripheral player like >uuki poses chances
but also problems for the !ungarian% suppliers. ungarian car suppliers to >uuki are
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Flocked-inF into a lower end producer4 ungarian production is for a relatively dated car, even
at the start-up of productionA furthermore, >uuki struck supply licenses with its ungarian
suppliers that precluded the ungarian firms from supply to other >uuki plants outside
ungary or to other customers in Western Europe.
ungary, >lovenia and >lovakia, are Cthe second tier countriesC. They have become
integrated in networks of component supply. The assembly operations they contain generally
share a lower local content, whereas their trade orientation is much more export oriented. The
country that has been most successful has been ungary, the only country in the 1EE1 region
up to now that tried to build up own car assembly capacity from scratch by attracting a non-
European investor. Therefore, the ungarian example deserves further analysis.
>uuki has the widest supplier network in the country. eneral )otors and (udi started
small-scale assembly operations in the country, these operations were bound to stay small or
even get downsied after regional reconfiguration efforts. We will further analye the position
of these three companies in the country.
$n summary we can state that ungary is primarily a component producer, which it was
already under ussian dominance. The components produced in ungary are engines, which
can be considered strategic inputs to the companies they supply to.
V. The role of Information technology ERP
Today, information and communication technologies play a key role in >upply 1hain
)anagement. >upply 1hain )anagement aims to integrate all key business processes
throughout the entire supply chain !@liver Webber, &8/2A 1ooperet al., &88IA andfield
*icols, &888A elms et al., 2000A Jnolmayeret al., 2002%. >ome of these processes can be
supported by E7!enterprise resource planning% software.
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>oftware vendors like i2, @racle, or >(7 are the ma+or developers of supply chain
managementsoftware.1onsidering the high costs involved in the implementation of >upply
1hain )anagement>oftware !ouldson, 200&, p. &8A coy, 200&'02, p. /I% is important
to analyse and evaluate the usage of such software solutions. !6uxman et al, 200=%
The business worldCs embrace of enterprise systems may in fact be the most important
development in the corporate use of information technology in the &880s. When used
appropriately, E7 software integrates information used by the accounting, manufacturing,
distribution, and human resources departments into a seamless computing system. (
successful E7 can be the backbone of business intelligence for an organiation, giving
management a unified view of its processes. 9nfortunately, E7s have a reputation for
costing a lot of money and providing meager results, because the people who are expected to
use the application do not know what it is or how it works. When E7 software fails, it is
usually because the company did not dedicate enough time or money to training and
managing culture-change issues.
"urthermore, the implementation of E7 systems often leads to organiational
changes. $n this case, the software may be considered a trigger for a supply chain redesign.
The chief reason for companies to implement such systems is a need for a common $T
platform. The implementation time is usually between &2 months and = years !this might vary
between 3 months and several years.%.
( survey study about the usage of E7 system in the automotive industry was
conducted by 6uxman et al !200=% where they asked &000 car manufacturers, suppliers and
distributors about E7. The authors found that =/K of the contestants has implemented or
plan to implement E7 solutions. "rom these contestants the ma+ority used a program
developed by >(7. Those companies who were not using this system named the following
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reasons as main balks, firstly that it was not necessary, secondly that the implementation is
costly or lastly that they could not find suitable solutions for their purpose in the market. The
main ob+ectives in the field of improvements were shortfall reduction, supply chain redesign
and the improvement of cooperation.
The results of this survey indicate that information technology and concerning systems
are becoming more important. owever, there are still some serious barriers to overcome in
their diffusion.
>till regarding the E7 and the implementation of information systems we need to
analye further aspects of this issue. We argue that such technologies will be key drivers to
success in the long run, by implementing it on a wider range of affiliates in car companies.
We would like to study how companies in the car industry can implement successfuly the
E7 system. What are the factors that help implementation mehodologies. "urthermore we
would like to analyse the potential long run benefits of such system by the implementation of
Eastern-European firms.
VI. Research uestions and !ethodology
(n important strand of literature has long focused on the motivations of investors and
the sources of competitiveness in emerging countries. The most widely accepted concept, the
so-called eclectic paradigm, developed by #unning, is distinguishing market-, resource-,
efficiency- and competence-seeking investment pro+ects. )ore recently, it has become an
equally important research question to assess the impacts of "#$ on local firms.
$n the following we will introduce our primary research interests. "irst of all we aim to
study the questions4
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RQ1: How efficient is the evolution of automotive industry in Hungary? Which
institutional factors are leaders in the relationships with foreign investors?
This aspect of "#$ is a critical source of debate and produced various paradox results in
past researches. @ur aim is to analyse in a deeper vision the existing foreign investment of
automaker companies in ungary from the transition period until recent time, by untangling
the two faces of partnerships and foreign ownerships in the country.
>econdly we would like to study the questions4
RQ: !s the supplier network of the ma"or car companies in the country efficient? What
kind of strategies #relationships$ can be observed by the companies with local supplier?
(s mentioned before, different companies follow different Lbest practiceC strategies with
suppliers. (lso we mentioned that to build up a local supplier chain is a burdensome process
for companies. We will analye and compare in our case studies the three ma+or car investors
in ungary and their supplier strategies.
M:4 #oes information technology contribute to the performance of the companiesD
#id the firms implemented the E7 system, if yes, did it contributed positively to their
performanceD
(s we mentioned before the importance of information technologies such as E7 will
be a key factor on the long run when we talk about cooperation between different plants,
departments and affiliates in Europe. Therefore we suggest studying further this issue
regarding the automotive sector.
$n the methodological part we will analyse three case studies, by reviewing the three
ma+or contributors to the ungarian automotive industry. $n the following we will give a hint
about the structure of the case studies and the evolution of these partnerships in ungary.
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"ungarian Su#uki
)agyar >uuki, a ;apanese-ungarian +oint venture located in Estergom, commenced
commercial production of compact cars in @ctober &882. $nvestment has totalled H230 million
by &88I. Then a further H&=3 million has been invested to produce a new small car, +ointly
developed with ), but assembled separately under >uuki and @pel badges in Estergom
and liwice, 7oland, respectively. The >uuki version is called Wagon N, and its production
is commenced in ;anuary 2000. The other new model, called $gnis, was introduced in (pril
200:, where output reaches &00 thousand units a year. #iesel engines were also added to the
product lines in *ovember 200:.
(s the company aims at substantially increasing its market share in Europe, and
introduces &0 new models until 200I. $n ungary, to add these new cars to the current
product lines, some H&00 million has been invested at the Estergom plant, doubling the
capacity to 200,000 units a year. The pressing and welding plants are to be extended, and a
new, water-based painting facility was added and the number of employees increased by =00.
(s ungary only +oined the E9 in )ay 200=, )agyar >uuki had to reach 30 per cent
E9 content in order to export it cars to E9 markets. )oreover, it bought certain parts from its
local suppliers O initially it only produced :0,000-=0,000 cars a year O but followed a single-
sourcing strategy. Therefore, it had very strong incentives to LnurtureC a local supply base in
the beginning. With ungaryCs accession to the E9, however, it has fundamentally changed,
and accordingly ungarian >uukiCs supplier strategy has been revised. Together with its
;apanese suppliers, it had conducted a thorough technological and financial audit, covering
literally every single aspect of doing business from purchasing inputs through production
methods and machinery, to accounting, sales and management. Then +oint efforts had also
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been made to improve the selected supplierCs technical level and economic performance,
when needed.
To sum up, ungarian >uuki has provided its ungarian and other 1entral European
suppliers with various sorts of technological and managerial knowledge !know-how% on
purpose, as it did need to LnurtureC a local supply base to reach the required 30 per cent E9
content as quickly as possible. To achieve this goal, it was inevitable to develop close co-
operation with the selected suppliers, previously accustomed to the standards and norms of
the planned economy, in order to LdriveC them into a different system, namely market
economy.
*ot all potential supplier have completed this on-the +ob training successfully, but most
of them have ad+usted to the new requirements, and now are able to meet the exacting demand
in terms of technological level, timely delivery, and efficient, profitable conduct of business.
$n that sense ungarian >uuki has significantly contributed to the diffusion of new products,
production processes as well as managerial and organisational innovations, i.e. to develop
suppliersC capabilities.
@nce the 30 per cent E9 content had been achieved, ungarian >uuki has not had
strong incentives any more to continue this supplier strategy. >ince then, it has made far less
significant efforts to develop its local supply base. The current assistance, however, is still not
negligible. $n short, the diffusion of technological and organisational innovations among
ungarian and 1entral European firms has been promoted actively and on purpose by
ungarian >uuki, while spillover effects, strictly defined, seem to be with low significance,
however we aim to analyse them further.
>uuki aims at a regional division of labour between its plants in the 1EE1 region as well
as in Western Europe !>pain%. The transportation of components from ungary to >pain have
increased in the past years and with that the emergence of stronger ties, and with that the
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efficient information flow became crucial. The logic for these producers is comparable to that
of #aewoo4 because they are no ma+or players in the European market themselves they search
for weak business partners and relatively weak governments. Their prime aim is the market of
the European 9nion.
$!%&pel
@pel ungary entgotthPrd, close to the (ustrian border, in
&882. $nitially ) @pel had invested over #):=00 million in the 1EE area. @pel (stras
were produced in ungary until #ecember &88/. 7arts purchased in ungary initially
accounted for merely = per cent of an (straCs value, then 8.3 per cent in &885-&88/.
(ctual output primarily depends on demand for @pel models in Western Europe as the
vast ma+ority of production had been exported to @pel assembly plants until &88/ !when cars
were assembled in >entgotthPrd%, and &00K is exported since then. #ue to these secure
markets, @pel ungary was in the black already in the second year of its operation. $t made
the third largest profits in ungary in &88I, and was the fourth largest exporter.
The end of car assembly has not meant that @pel would withdraw from ungaryA on the
contrary, further investment pro+ects had been completed to add gearboxes to the product
lines. Thus, gearboxes have also been produced in >entgotthPrd since >eptember 2000. "irst
(llison gearboxes for commercial vehicles, and then @pel had spent #) 2:0 million to build
a new gearbox factory with a capacity of 250,000 units a year for cars. The production of the
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(udi the third car producer +oined in &88/. @riginally (udi ( has invested in ungary in
a new engine manufacturing plant, its first &00 per cent-owned manufacturing base outside
ermany. (udi ungaria )otor Jft !()%, located in yQr, western ungary, was opened
in @ctober &88=. $t was the first engine plant in the world to manufacture five-valve, four-
cylinder, engines in commercial production. This new engine generation is built into (udi,
E(T, and >koda models. 7roduction of six- and eight-cylinder petrol
engines has also been re-located to yQr. )oreover, two new sport models, TT 1oupe and
oadster have been assembled since (pril &88/, and ;uly &888, respectively, at (). ( third
model, (: was added in 200&..@utput has been increased in several steps, and further engine
components have also been added to the product lines, (udi has, therefore continuously
invested in its yQr plant, amounting to over R 2:00 million by 200=.
(udi ( has not committed itself to increase the level of domestic sourcing. Gocal
suppliers account for 5 per cent of the value of engines assembled in yQr. (ll the ma+or
components of engines are machined in yQr, using imported casts. () managing directors
intend to purchase casts and forged parts from ungarian suppliers. >o far a few local O
usually at least partly foreign-owned O companies have won orders, shipping machined parts
for the engine plant and seats, aluminium and plastic parts for the car assembly plant. 1asts
are supplied by another foreign-owned firm based in yQr.
Their volume of investment made (udi one of the biggest investors in the ungarian car
industry, therefore we aim to analyse further their strategic decisions and the choice of the
ungarian market.
VII. Summary
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"oreign firmsC strategies in emerging countries, various elements and dynamics of
national innovation systems are with great importance in understanding the transition to
capital market structure. $n this period the focus is on attracting foreign investors and foreign
capital to the area. "or this reason it is more fruitful to create an attractive, favourable
environment for # and innovation by maintaining a sound, well-performing higher
education and research system, providing the necessary physical and institutional
infrastructure, facilitating industry-academy co-operation and other forms of networking. $t is
also of crucial importance to co-ordinate investment, trade, competition, regional
development, employment, education and innovation policy aims and tools to enhance
competitiveness.
iven key factors such as location, potential economic growth, prospects of increased
market share, high technical capabilities and levels of education, substantially lower labour
costs and the de facto extension of the E9 single market, it was a logical development that
Western European manufacturers move eastwards. )oreover, the regions national
governments aided by specific "#$-oriented agencies, offered subsidies and incentives which
proved enticing.
(utomotive investment activities across borders have significantly intensified in the last
twenty years in an attempt to cut costs via re-location of production, and to get closer to the
ultimate customers in emerging markets. These intensified investment activities have had
crucial bearings on the ungarian automotive industry.
The re-structuring of the ungarian automotive industry is due to some LpushC factors,
!i.e. the fierce competition among automotive companies and hence the pursuit of cost-cutting
via re-location of their production% but it also thanks to LpullC factors !i.e. the attractions of the
ungarian economic environment%.
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$t is worth to study the consequences and to analye strategic decisions of "#$ and
partnerships after more than a decade of transition period in the Eastern European area. We
contribute that to follow with the recent trends and actions of developed countries, a re-
actualiation of the incentives and goals is necessitated, and moreover a structural,
institutional and economical overview of the past years is needed in order to obtain an
adequate evaluation.
>upply chain management is a highly complex task in companies. $n ma+or car producer
companies it is a crucial aspect to success. )oreover in multinational, worldwide known
firms the decision of expanding the supplier network is with critical importance. egarding
the external factors, the cultural differences and ability to production, firms may face
difficulties. To obtain a local supply network in newfound environment is a challenging task
for investors. >trategic decisions on the creation of such a network differ among companies
due to their existing practices and supplier chains. Therefore it is important to study this
question and place a ma+or importance on existing trends and on future possibilities as well.
$n our study we argue that the adequate institutional surrounding of a country attracts
foreign investors. @nce the investors enter the new market they have to adapt to certain
expectations by the home contributors. The transfer of know-how, processes and practices
makes the cooperation between firms easier and can also lead to +oint learning and innovation.
To have an adequate flow of information between affiliates a common system should be used.
The implementation of such a system, as for instance E7, is often questioned by firms, due
to different reasons !for instance4 high cost involvement%. @ur study argues that to achieve
successful cooperation, the implementation of such system should be considered and
implementation methodologies should be considered as highly important decisions to the
companies.
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