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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.

    19

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