Literature Overview and Basic Information
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Ni, Fu-Chuan & Hung, Shih-Chang (2007). “Chiao Fu’s Overseas Investment Strategy.” Management Review, 39(2), 71–87.
I. Case Background: A Traditional Taiwanese Manufacturer Going Abroad
Chiao Fu is a traditional polyurethane foam manufacturer based in Taiwan. In response to rising production costs such as land and wages in Taiwan, as well as the relocation of its major customers, the company began investing in overseas manufacturing facilities in two locations: Mainland China and Thailand. Initially, both overseas markets experienced robust growth driven by the economic expansion of their host countries. The Thailand plant demonstrated stable growth, whereas the China plant faced intense competition due to the continuous entry of international and local competitors, which adversely affected its profitability. Moreover, changes in the overall market operating environment in China—including regulations, taxation, and rising costs—have increasingly challenged the China plant’s operations. In contrast, the Thailand plant benefited from Thailand’s stable political and economic environment and the advantages of regional economic agreements, resulting in consistent annual growth with stable increases in revenue and profits. Consequently, the company is confronted with three overseas investment decisions: (1) maintain the existing investment strategy by reinvesting profits locally while shifting focus toward higher-end markets; (2) relocate the China plant to a lower-cost region, which may risk losing customers; or (3) completely withdraw from the China market, which could negatively impact important customers also served by the Thailand plant.
II. Push and Pull Factors Behind Internationalization
The case of Chiao Fu reflects the factors that firms need to consider when pursuing internationalization. First, when examining the drivers of corporate internationalization, both push and pull factors are involved. Common push factors include changes in the home country’s operating environment, such as rising production costs, following customers’ international expansion, proximity to suppliers, or moving closer to service customers in specific overseas markets. Chiao Fu’s relocation from Taiwan to overseas markets exemplifies the push factor of increasing operational costs in the home country. Additionally, many Taiwanese firms are small and medium-sized enterprises (SMEs), for which customer orders and service need often constitute the most considerable influence on their internationalization. Chiao Fu’s movement alongside its customers to China and Thailand, aiming to source raw materials nearby, highlights the importance of customer service for Taiwanese SMEs. Common pull factors include larger overseas market size, lower labor, land, and construction costs, and the ability to access key resources such as raw materials, talent, or technology at lower costs. Chiao Fu’s expansion into the vast and economically rising markets of China and Thailand reflects this market pull factors.
III. Country Choice and Entry Mode: Distance and Process
Furthermore, when making internationalization decisions, firms consider two main aspects: which country market to enter and the mode of entry into that country. Regarding overseas markets, firms typically evaluate the differences between the home and host countries in terms of geographic distance, cultural distance, and institutional distance. Geographic distance refers to the actual physical distance between the two countries; cultural distance reflects differences in culture, language, lifestyle, and business practices; institutional distance captures disparities in regulatory frameworks, norms, and cognitive systems. Emerging markets often present less transparent and rapidly changing regulatory environments, as well as business norms that differ from those in developed countries. These factors expose firms to significant operational risks and market uncertainties when investing locally. Moreover, environmental differences between the home and host countries, coupled with a lack of understanding of the host market, often create the “liability of foreignness” for foreign firms, affecting their operational effectiveness and even survival in the host country.
Consequently, most firms tend to select geographically and culturally proximate regions for their initial internationalization efforts. Through a gradual learning process, they accumulate internationalization knowledge and market-specific insights to reduce the risks associated with overseas investments. Firms then progressively expand into other country markets. This incremental internationalization behavior is explained by the International Process Theory.
IV. Evaluating the Host Environment: PESTEL and Beyond
Regarding entry modes, common overseas market entry modes include wholly owned subsidiaries, joint ventures, and licensing/franchising arrangements. Although the case provides limited description of entry mode selection, firms entering overseas markets tend to adopt wholly owned operations when facing external market failures, information asymmetries, and high uncertainty. Conversely, joint ventures offer benefits such as knowledge acquisition and resource access.
Furthermore, when considering the operating environment, firms evaluate factors across three dimensions: macro-environmental factors, competitive environmental factors, and firm capabilities. The macro-environment can be assessed through PESTEL analysis, which examines six dimensions: Political, Economic, Social, Technological, Environmental, and Legal factors to evaluate the host country's operating environment. In this case, legal and economic environmental factors play significant roles, followed by social environmental influences. Particularly for traditional industries pursuing cost efficiency, declining market growth, and rising operational costs in the macro-environment often necessitate relocation to alternative overseas markets. For example, Chiao Fu faced cost challenges in the China market. As the operating environment continuously changes over time, firms must regularly reassess the impact of these six environmental dimensions and adjust their strategies accordingly. As the host country's market economy improves, standardized, cost-sensitive firms—such as Chiao Fu in this case—frequently encounter rising production costs and must continually seek host countries with lower production expenses.
V. The Growing Importance of Regional Economic Agreements
Regional economic agreements have become increasingly important for businesses. Beyond the global economic organization World Trade Organization (WTO), which aims to promote free trade in goods, services, and intellectual property by eliminating tariff and non-tariff trade barriers to facilitate fair trade and foreign investment, regional economic agreements significantly influence a country’s economic development and its ability to attract foreign investment. These agreements take various forms. For example, Free Trade Agreements (FTAs) eliminate trade barriers and tariffs among member countries while allowing members to set tariffs independently for non-members; the United States–Mexico–Canada Agreement (USMCA) exemplifies this type. Economic unions go further by reducing intra-regional trade barriers, implementing common external tariffs, and permitting the free movement of production factors such as labor and capital among member states, as seen in the European Union.
In Asia, key regional agreements include the Regional Comprehensive Economic Partnership (RCEP), initiated by the ten ASEAN countries along with China, Japan, South Korea, Australia, and New Zealand, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a free trade agreement covering multiple Asia-Pacific countries. The primary objective of these regional agreements is for member countries to reduce trade barriers among themselves. Additionally, bilateral trade agreements between two countries aim to reduce unfair trade practices and discrimination between nations.
As a result, investing in a host country that is a signatory to regional economic agreements allows firms to export products to other member countries at reduced or zero tariffs. Therefore, host countries that have signed more regional economic agreements tend to attract substantial foreign direct investment. These dynamic underscores the growing strategic importance of regional economic agreements in shaping global investment and trade patterns.
VI. Competitive Environment and the “Squeezed Middle.”
Competition factors consider a firm’s competitors within the competitive environment. Foreign-invested enterprises often possess abundant capital, advanced technology, and extensive international market experience, enabling them to operate in higher-end markets with superior technology and lower costs. In contrast, local firms benefit from a deep familiarity with the domestic market, stronger political and economic connections, and lower local production costs, allowing them to compete effectively on cost within the local market. This dynamic frequently places Taiwanese enterprises under pressure, caught in the middle of competition between these two types of firms.
A firm’s own capabilities including capital, technology, and resources—also significantly influence the operational performance of Taiwanese businesses in overseas markets. Moreover, many Taiwanese small and medium-sized enterprises (SMEs), constrained by limited resources, find it difficult to succeed independently. The support of local market networks and supply chain systems—through division of labor and cooperation along the production chain—enables production flexibility and rapid responsiveness to overseas customer demands. This prevents firms from being trapped in competition solely based on cost and often constitutes a critical success factor for Taiwanese SMEs operating abroad. Consequently, many Taiwanese SMEs rely heavily on building and maintaining network systems.
These network systems are frequently tied to specific geographic locations; once a firm leaves that geographic area, it must rebuild supply chain partnerships and seek suitable, capable, and cooperative suppliers. However, new operational sites may lack these essential conditions. Furthermore, establishing stable cooperative relationships within the supply chain requires time and sustained effort. Therefore, if Chiao Fu relocates its operations within the Chinese market, its existing networks would be significantly disrupted, potentially undermining its original competitive advantages. Conversely, by establishing stable supply networks and continuously collaborating with suppliers to improve processes, optimize product competitiveness, and reduce costs, firms can mitigate the pressures of relocating to lower-cost locations.
VII. Growth, Reinvestment, and Harvest Strategies
In local market operations, firms’ growth strategies often involve reinvesting profits back into the host market, demonstrating their commitment and importance to that market. Such reinvestment may take the form of expanding current operations, diversifying into other industries, or engaging in vertical integration—either upstream or downstream—to enhance efficiency. However, when facing poorly performing markets, Chiao Fu adopts harvesting strategies such as exiting the market or downsizing operations to mitigate the negative impact of an unattractive market environment.
Note: For detailed references, please consult the original article.
*The financial support of the Research Institute for the Humanities and Social Sciences, National Science and Technology Council, is gratefully acknowledged.