Technological Capabilities and Samsung's International Production

Strategies in East Asia

Young-Soo Kim

A thesis submitted for the degree of Doctor of Philosophy at the Australian National University

April1997

1 The issues

Korean electronics firms have been aggressively involved in learning and knowledge

accumulation over the past two decades. They have continued to improve their

capabilities through learning-by-doing. As a result, exports of the Korean electronics

products grew remarkably until the late 1980s.

However, there has been a great change. Korean consumer electronics manufacturers

have encountered difficulties to gain international market share through export in the

United States and Europe (Ernst 1994b: 15) at the same time their profitability began to

decline (Chung 1990: 17). It is noteworthy that the declining of international

competitiveness of Korean consumer electronics firms coincided with the late 1980s

when they started to invest in overseas international production. This is in contrast to

the situation until the late 1980s when export success was achieved from their home

base production.

From their establishment, Korean foreign manufacturing subsidiaries grew slowly, and

further growth is facing severe global competition. The overseas production activities

of Korean electronics companies lag well behind their Japanese counterparts, although

Korean firms have accelerated international production since the early 1990s. They have

also extended into the ASEAN region, as well as to China, Vietnam and India. The ratio

of overseas production to the total production has increased over time for Korea and

Japan, but it is much higher for Japan. For Korean electronics firms, the ratio increased

from 19 per cent to 27 per cent for colour televisions (CTVs) and from 16 per cent to

17 per cent for video cassette recorders (VCRs) during the period 1992-94. However,

the overseas production ratio of their Japanese counterparts also increased substantially,

from 67 per cent to 86 per cent for CTV s and 36 per cent to 71 per cent for VCRs

during the same period (see Table 1.1)~

1

Samsung, Goldstar and Daewoo intend to increase their overseas production ratio, in

line with a government-driven internationalisation strategy. However, it may be

impossible for Korean companies to catch up with their Japanese counterparts in the

expansion and depth of their international production activities.

Table 1.1 Overseas production ratio of the Korean and Japanese electronics industries (per cent)

1991 1992 1993 1994 1995 CTV Korea n.a 19 20 27 28

Japan 63 67 72 86 a n.a

VCR Korea n.a 16 n.a 17 20 Japan 29 36 48 71 b n.a

Note: The overseas production ratio in the table is the ratio of the unit quantity produced overseas divided by the total unit quantity produced overseas and in the home country. a Sharp's overseas production ratio. b Sanyo' s overseas production ratio

Source: Electronics Industry Association of Japan (1995), Tsuda and Shinada (1995), Junja-shinmun (28 February 1994), Hankuk-ilbo (10 April 1995), Jungang- ilbo ( 24 February 1995)

Technological capabilities and international production

Cantwell (1990, 1992) argues that strong technological capabilities generate a

competitive advantage for firms involved in international production. Field researchers

(Wyatt et al. 1985; Archer 1986) also suggest that many MNCs still believe that

technological superiority is the major means by which they maintain their global

competitive advantage. At the same time, Bartlett (1986), and Bartlett and Ghoshal

(1988) suggest that the organisation of technology has become a generic competitive

advantage. They imply that technologically and organisationally weak companies

embarking on foreign investment are likely to encounter difficulties in maintaining a

sustainable competitive advantage.

Apart from technological and organisational weaknesses, Korean electronics firms are

also weak in terms of international production experience. A comparison of Japanese

and Korean firms illustrates this point. From the mid 1960s Japanese firms like

2

Matsushita and Sanyo entered foreign markets in Southeast Asia establishing

international production bases, while Korean firms such as Samsung and Goldstar only

started manufacturing activities in Asia in the late 1980s. Clearly, there is a big

difference in the international management capability of firms that have accumulated

knowledge for a long period and those that have not. These differential capabilities raise

important questions for the managers of Korean electronics firms. What should be the

strategic behaviour of Korean electronics firms in international expansion and operations

in their competition with firms which possess superior capabilities in technology,

organisation and international management? What are the innovation strategies that

will allow Korean foreign subsidiaries to survive and grow in a rapidly changing global

competitive environment, when competing with technologically and organisationally

strong MNCs? This study deals with the case of Samsung's electronics sector as an

example of a major Korean electronics firm.

Technological capabilities and lnternationalisation by Korean Firms

For Korean electronics firms in particular, the learning and upgrading of technological

and organisational capabilities has become one of the major issues in the emergence of

global competition since the late 1980s. Indeed, technological capabilities are

complementary to organisational capability including managerial capabilities (Cantwell

1991; Ernst 1997). Hobday (1995) argues in studying NICs' firms that there are different

technological levels between the production process and product innovation. Bloom

(1992: 55), in a study of the Korean electronics industry, suggests that the level of

production technology is high, but that design and product development is weak. Ernst

(1994b) points out that Korean electronic firms' weaknesses are related to product

differentiation capabilities, although they have a high level of production capability. It is

commonly argued that there is an imbalance between production and product change or

innovation in the technological capabilities of Korean firms 1 •

1 Itami (1992:101) suggests that 'a firm can function only if the technologies of product development, manufacturing, and distribution are on the same level'. According to this view, the performance of Korean electronics firms in foreign expansion and operations may lack effectiveness partly because of uncoordinated technological capabilities.

3

The organisational capabilities of Korean firms are also weak. Bloom (1992: 93) argues

that organisation of R&D within the corporate sector in Korea is ineffective, either in

terms of the management of research and development personnel, or in terms of

R&D organisational structure. Korean research and development institutes tend to be

hierarchical. This style of organisation is very effective for production activities, but

completely ineffective for research and development.

Global competition and Korean electronics firms' internationalisation

Industries exhibiting or evolving towards a global pattern today include the producers of

commercial aircraft, TV sets, semiconductors, copiers, automobiles and watches. A

firm's competitive position in one country is significantly affected by its position in other

countries, and rivals compete with each other on a truly world-wide basis (Porter

1986:18). Doz and Prahalad (1991: 146) note that sources of competitiveness shift from

location-specific factors to firm-specific factors, and to overall organisational capabilities.

Firms coordinate the use of resources to respond to short-lived opportunities because

competitors increasingly achieve parity in access to resources (including technology) in

various parts of the world. Accordingly, researchers need to shift their emphasis from

physical infrastructure and the resource deployment of diversified MNCs to their

information processing networks and to resource mobilisation (Doz and Prahalad 1991),

as well as learning and developing core competences.

The global electronics industry can be classified as an oligopolistically competitive market.

Competition used to be dominated by American and Japanese companies which often

established a relationship with competitive and cooperative elements. European

companies had been reduced to a secondary role. Other actors played a fairly marginal

role, at least until quite recently. A few new Asian MNCs finally entered this global

oligopoly in a few select sectors and technological fields such as consumer devices

including VCRs, PCs and computer peripherals, and semiconductor commodities, in

particular DRAMs (Ernst and O'Connor 1992: 54).

Korea's electronics industry has been operating under an oligopolistic market structure in

which four major firms, Samsung, Goldstar, Daewoo and Hyundai, all associated with

4

chaebol, have played a crucial role. These companies accounted for 56 per cent of all

electronics production, 41 per cent of all foreign technology agreements and employed

80 per cent of all the private research staff in the industry until the late 1980s. Of these,

Samsung, Goldstar and Daewoo received 80 per cent of the 1988 quota allocation agreed

on for exports of CTVs to the European market (Bloom 1992: 106). In addition

Samsung and Goldstar accounted for over 80 per cent of the total sales value realised by

the big four, amounting to 23.4 per cent and 22.9 per cent of the total sales of Korean

electronics products. Samsung, a latecomer, first established an electronics firm in 1969,

while Goldstar set up in 1959. According to Bloom, 'Goldstar was the pioneer in the

consumer electronics industry, but was overtaken by Samsung in the 1980s, following

Samsung' s success in exporting TV s and later microwave ovens and VCRs. The key to

Samsung' s success is undoubtedly its aggressive acquisition of foreign technology and

pursuit of foreign markets, combined with its integrated production facilities' (Bloom

1992: 29).

Under the oligopolistic market structure of the Korean electronics industry, 'follow-the­

leader' behaviour is a typical strategic response in production activities (Jun 1995: 169).

The two arch-rival companies, Samsung and Goldstar, are very sensitive to each others'

moves to other countries. (Jun 1995: 169). Jun and Simon (1992: 195) also identify a

bunching pattern of Korean foreign direct investment in the consumer electronics industry

where Samsung and Goldstar tend to follow each other into the same overseas regions

(see Table 1.2).

In 1985, the Japanese yen appreciated rapidly following the Plaza Accord. Japanese

firms' international competitiveness through exports decreased drastically, and they

established production bases overseas, not in NICs this time, but mainly in ASEAN

countries. Along with strategic moves by end product manufacturers, component

manufacturers also moved to Southeast Asia (Tsuda and Shinada 1995). International

production activities by the Japanese MNCs have accelerated during the last several years

(see Table 1.3)2 •

2 Of cumulative Japanese electronics electrical equipment investment until 1988, 29 per cent went to developing Asia (Ernst and O'Connor 1992:146). From 1988 to 1989, there were substantial increases in

5

Table 1.2 Time gap in strategic moves of two Korean competitors, 1982-90

Region Location FirmA FirmB Gap (B-A)

North America United States 1982 1984 2

Mexico 1988 1988 0

Europe West Germany 1987 United 1989 1987 2 Kingdom 1990 1989 1 Italy 1982 Portugal 1990 Spain

Southeast Asia Thailand 1988 1989 1 Indonesia 1990 1990 0 Philippines 1989 Malaysia 1990

Others Hungary 1990 Egypt 1990 Turkey 1987 1989 2

Source: Jun and Simon (1992: 196)

Table 1.3 Japanese and Korean electronics firms' foreign direct investment in Asia, 1984-92

Japanese firms Korean firms

1984 65

6

1985 47

5

1986 111

9

1987 1988 184 164

17 36

1989 154 37

(Number of cases)

1990 1991 1992 121 120 96 78 68 94

Source: Ministry of Finance of Japan, cited by Tsuda and Shinada (1995) and Bank of Korea, cited by EAIK(1993)

A new challenge to Korean electronics firms as new MNCs under global competition is

that they cannot avoid competition with established MNCs. This did not occur during

their home-based production stage until the late 1980s. Prior to the mid 1980s when

Japanese FDI in the electronics industries in East Asia, rising by nearly $US 1 billion. Malaysia has emerged as a major manufacturing base for Japanese consumer electronics manufacturers, particularly for VCRs (Ernst and O'Connor 1992).

6

Korean firms had mostly been engaged in domestic production, acting as subcontractors

and/or OEM suppliers, they were not likely to be competitors of Japanese MNCs. But

changes occurred in the late 1980s when technologically weak Korean firms began to

establish foreign production bases where technologically strong established MNCs were

also manufacturing similar products (Table 1.3).

The Samsung group and its organisation

Samsung was first incorporated under the name Samsung Commercial Company in 1938

by the Japanese educated Lee Byung-Chull. The company was originally located in

Taegu, a city in southern Korea, and employed 40 people. Samsung expanded rapidly

and opened foreign branches in Manchuria, northern China and Beijing as a first step to

accessing foreign markets.

Later, in 1947, the company moved from Taegu to Seoul, and Lee established an

international trading company, Samsung Mulsan in November 1948, concentrating

especially on imports. Samsung Mulsan grew rapidly and became one of Korea's top ten

companies by 1950. In May 1975, Samsung Corporation was designated as the number

one general trading company by the Korean government (Cho 1983).

In 1995 the Samsung group was the world's fourteenth largest corporation, with 28

affiliated companies in the field of electronics, engineering, chemicals, trade and finance

and consumer products, covering 65 countries. In 1994, the Samsung group

restructured its affiliated companies under five different business sub-groups comprising

electronics (five affiliates), engineering (four affiliates), chemicals (three affiliates), trade,

finance and information service (six affiliates) and consumer products (three affiliates)

(Table 1.4). These sub-groups were controlled by the chairman's secretariat (Figure

1.1).

7

Figure 1.1 Organisational structure of the Samsung Group

Source: Compiled from company data in 1995

The electronics sub-group, which accounted for 26.1 per cent of the Samsung Group's

total sales, played a significant role as a leader in high technology industries. It was

composed of five different affiliated companies: Samsung Electronics Co., Ltd (SEC),

Samsung Electro-Devices Co., Ltd (SED), Samsung Eletro-Mechanics Co., Ltd

(SEM), Samsung Corning Co., Ltd (SC) and Samsung Data System Co., Ltd. Of

these, SEC accounted for 75.6 per cent of the total electronics sales and initiated the

semiconductor business (Table 1.5). In the early 1990s the semiconductor business

achieved remarkable success in the production of DRAMs, and enjoyed a dramatic

growth in sales. SEC had seven business divisions: audio and visual, home appliances,

telecommunication systems, information systems, semiconductors, domestic sales

division and global operation division (Figure 1.2).

8

Table 1.4 Sales and business lines of the Samsung sub-groups, 1993

Sales EmQlo~ees Remarks billion won % persons %

Electronics 10,786 26.1 71,805 37.5 Electronics, semiconductors, information and telecommunications

Engineering 4,045 9.8 20,173 10.5 Heavy industry, construction, engineering and aerospace

Chemical 679 1.6 1,892 1.0 Petro-chemicals and integrated chemicals

Trade, finance and 23,622 57.1 70,748 37.0 Trading, insurance etc. information

Consumer products 2,231 5.4 26,685 13.9 Textiles, new paper, property development, hotels etc.

Total 41,364 100 191,303 100

Source: Compiled from company data and Jun and Kang (1994)

Samsung Electronics' technological capabilities and overseas expansion

In the late 1970s Samsung started to establish overseas sales subsidiaries in the United

States. The sales subsidiary acted mainly as a liaison office between the headquarters'

export department and original equipment manufacturer (OEM) buyers and foreign

distributors during the early stages of overseas expansion. During the 1970s, Samsung's

technological capabilities were limited to assembling TV sets and producing simple

components.

During the 1980s Samsung set up production plants in high labour cost economies in

the United States and the United Kingdom. Samsung's strength was its production

capability in assembling standardised TV s, VCRs, microwave ovens, audio products,

and components (Table 1.6).

9

Table 1.5 Sales and employees of the electronics sub-group, December 1993

Sales Employees Products billion won % persons %

SEC 8,154 75.6 47,800 66.6 Semiconductors, consumer and industrial electronics, telecommunications

SED 1,218 11.3 10,300 14.3 Colour picture tubes, computer monitors, liquid crystal displays, computers

SEM 731 6.8 7,020 9.8 Tuners, fly back transformers, deflection yokes, computer-related components, cable TV tuners

sc 421 3.9 3,115 4.3 Glass bulbs, soft ferrites

SDS 260 2.4 3,750 5.0 Local area networks, information technology, consulting

10,786 100 71,805 100

Source: Compiled from company data and Jun and Kang (1994)

However, these operations lacked technological capabilities and suffered from

weaknesses in product change capability and the linkage between production and

international marketing functions. Weaknesses in research, product design and

development, manufacturing and distribution were also apparent.

Strong external pressure was one of the main reasons for investing in the United

States. From the beginning of the 1980s CTV imports from Japan, Korea and Taiwan

became a controversial trade issue in the United States. In response, in 1981 Golds tar,

Samsung's arch-rival in the domestic and US markets, shifted its market serving strategy

from exporting to overseas production with the establishment of a CTV manufacturing

subsidiary in the United States. Under threat from Goldstar's strategic move, Samsung

made its first foreign direct investment in Portugal only a few months later.

Subsequently, in 1984, Samsung established CTV manufacturing plants in the United

States. The US-based production subsidiary performed well for several years, but began

to close its plants from the late 1980s.

10

Figure 1.2 Organisational structure of the Samsung Electronics' group, 1995

Electronics Group

Samsung Advanced Institute of Technology

Engineering Group

SED

SEM

sc

SEC

SDS

Chairman

Chemicals Group

Source: Compiled from company data, 1995

Chairman's Secretariat

Consumer Product Group

Finance & infor­mation Service

Group

Global Operation Division

Domestic Sales Division

Audio & Video Business

Home Appliances Business

Telecommunication System Business

Information System Business

Semiconductor Business

11

In 1988 Samsung established a plant in Mexico and also extended its activities into

Southeast Asia3 • At this stage, Samsung's competitiveness mainly derived from its

production capability, although there was growing concern about the need to upgrade

its design and development capability. Ernst (1994b), Bloom (1992) and Hobday

(1995) claim in their study of the Korean electronics industry that technological

capability in product design and development4 is very weak, but that Korean firms have

a relatively high production capability. Samsung became involved in international

production despite its weak technological capabilities5 • This is a totally different set of

circumstances from those surrounding the entry into international production of the

MNCs of developed countries such as Toshiba, NEC, Matsushita, Sharp, Sanyo,

Thomson, and Philips .

During the 1990s, partly because of an improvement in its technological capabilities,

Samsung's overseas production rose, with an expansion in the production of

technologically more sophisticated products in addition to standardised consumer

products (Table 1.6). Yet international expansion by Samsung has proceeded

cautiously. At the same time, the profitability of Samsung Electronics decreased

drastically although sales grew steadily, a situation quite different from that pertaining

until the late 1980s (Figures 1.3 and 1.4). Lee (1995) argues in his study of Samsung's

globalisation that Samsung had first to overcome a variety of obstacles stemming from

Korea's own historical and cultural circumstances.

3 In 1988 Samsung and Goldstar, with no experience in production activity in Asia, established CTV plants in Thailand and started production in 1989. The aim was to set up a low cost supply base under the pressure of Japanese subsidiaries producing low end CTVs for the global market. The standardised low end segment of the market had long been the Korean CTV manufacturers' market.

4 For the end-products of consumer and industrial electronics, Korean product innovation capability is negligible at present. The level of production capability is high but weak in design and product development capability (Bloom, 1992: 16).

5 By the early 1990s Korean chaebol electronics firms still had uncoordinated or unbalanced technological capabilities between manufacturing, distribution and design and development and this is obviously an unfavourable technological position for achieving competitiveness. Bloom (1992), Koh (1992), Jun and Han (1994) suggest that although they have sales and manufacturing subsidiaries worldwide, there are many problems in Korean chaebol electronics firms' organisational capability in managing technology and innovation.

12

Table 1.6 Technological capabilities and overseas expansion: the case of Samsung Electronics

1970s 1980s 1990s Key activity Unrelated Entry into DRAM Organisational

diversification restructuring

Main sources of Joint venture partners Original equipment Acquisitions, Joint-capabilities and overseas training manufacturer (OEM), development, strategic

foreign licensing and alliances and in-house training R&D

Level of technological A moderate level of Relatively high level of Advanced production capabilities production capability mass production capability (TV s, VCRs,

(simple assembly of capability (TV s, VCRs, microwave ovens, TV s and standardised microwave ovens & DRAMs& components) DRAMs). components).

Marginal level of minor Weak in major change product change capability (weak in (negligible in product design and innovation). development). No strategic marketing. Marginal level of Very weak in linkage strategic marketing. capabilities (de-linkage Weak in linkage of functional activities). capability (de-linkage Weak in international of functional activities). management capability. Improving international

management capability.

Locations of foreign USA (sales subsidiary) USA, Portugal, UK Indonesia, Malaysia, production Thailand, Mexico China, Vietnam, India,

Turkey, Hungary.

Product items made by CTVs, microwave CTVs, microwave overseas subsidiaries ovens, VCRs, ovens, VCRs, audio

refrigerators products, refrigerators, washing machines, CPTs, CDTs, tuners, VCR motors and heads, VCR drums, DRAMs.

Performance of Unsuccessful operation Slow growth of end-subsidi~ Eroduct subsidiaries

Source: Compiled from Bloom (1992), Ernst (1994b) and author's research.

In 1993 Chairman Lee Kun-Hee announced the Frankfurt Declaration in which

Samsung's 'New Management' 6 movement was launched through both radical

6 In 1988 the second chairman of Samsung, Lee Kun-Hee succeeded the late Lee Byung-Chull. Choi (1995) explains that he basically played the role of a caretaker during the initial five years, occasionally nudging his senior executives. He may have needed the time to fully appreciate the extent of the problems

13

organisational reform and cultural transformation. This involved three important

strategic priorities: (1) quality-oriented growth, (2) globalisation and (3) multi-faceted

integration.

One of main objectives of the new approach to management was to set up an

organisational culture which would efficiently and effectively respond to rapidly

changing environments. At the same time, Lee believed that in order to maintain its

competitive advantage, Samsung would have to upgrade its technological capabilities in

product innovation and development and in international management, which require

long-term strategic vision.

Expansion through foreign production was neither easy and nor smooth until the early

1990s due in part to lack of cooperation between group affiliates, mainly caused by this

organisational inertia. As argued by Choi (1995), Chairman Lee Kun-Hee perceived that

the root of the problem was embedded in organisational culture. Samsung concentrated

on addressing the organisational inertia which had grown over 50 years, while

accelerating internationalisation. Since 1993, the speed of overseas investment has

accelerated. An example of international expansion was in China during the time of the

'New Management' movement in Samsung.

Research issues

From the discussion above, it can be seen that it is important to address the specific

technological and organisational factors which would explain Samsung' s dynamic

internationalisation process as well as the operations of its foreign subsidiaries, which

were associated with its declining profitability during 1989-93. Related questions are:

how has the 1993 organisational reform affected Samsung' s internationalisation process

and the subsidiaries' operations and does it guarantee sustainable competitiveness for

its foreign subsidiaries?

at Samsung. When he launched the 'new management' movement in 1993, it was the biggest program of corporate restructuring ever attempted in Korea (Choi 1995: 78).

14

Figure 1.3 Margin on sales: Samsung and Goldstar, 1988-93 4

3.5

3

2.5 -<>-samsung

...... --<>-- Goldstar ~ 11.) u 2 ~ 0..

1.5

0.5

0+---------~~---------+----------~----------+---------~

1988 1989 1990 1991 1992 1993

Source: Compiled from company data, cited by Kim and Campbell (1994)

Figure 1.4 Samsung Electronics' sales growth, 1986-95 18,-------------------------------------------------------,

16

14

12 ~ .~ 10 ;::::: :E en 8 ~ ~

6

4

2

0 86 87 88 89 90 91 92 93 94 95

Source: Compiled from company data (1995) and Kim and Campell

This thesis seeks to address the following three specific questions:

1. How has Samsung built its technological capabilities and how have these capabilities

affected its international competitiveness and dynamic internationalisation process

from the 1970s to the 1990s, in response to a changing external environment?

15

2. How have Samsung' s foreign subsidiaries located in the ASEAN region and China

organised relations with headquarters and other subsidiaries as well as key functional

activities such as production, component sourcing, marketing and design and

product development in exploiting existing capabilities and building ne)V

technological capabilities? How have their efforts to maintain a competitive

advantage in response to changing technological capabilities and technologically

strong MNCs' affected their strategic actions?

3. What are the strengths and weaknesses of Samsung's internationalisation process

and foreign subsidiaries' operations in the ASEAN region and in China from the

perspective of capability transfer and building by technologically weak MNCs?

Where did these characteristics come from? What are the implications of

maintaining a competitive advantage for foreign subsidiaries which are facing global

competition?

Methodology and structure

Why a longitudinal study?

The sources for this study are primarily internal Samsung publications, including

monthly bulletins relating to international production, technological development and

organisational processes, as well as interviews conducted at Samsung in Seoul in 1994.

The organisation of Samsung' s international production networks was also reviewed

through interviews with managers who worked for subsidiaries in the ASEAN region

and with managers in China during 1995.

Melin (1992) observes that few empirical studies are founded on longitudinal studies of

internationalisation. In other words, the dynamic process of internationalisation has been

weakly represented. Most articles have been based on cross-sectional methods and

static models. The strategic management field state is still dominated by cross-sectional

researchers who gather data from organisations they know almost nothing about (Miller

and Friesen 1982: 1014).

16

According to Huff and Reger (1987:227), 'there is danger in believing that statistically

rigorous, narrowly focused studies are superior to the rich, complicated understanding

that results from careful understanding of a few organisations'. At the same time, there

seems to be an increasing consensus among researchers that longitudinal research would

enables a better understanding of organisations. The need for more research on the long­

term internationalisation of MNCs should also be noted (Melin 1992; Welch and

Luostarinen 1988). The history and background of firms is of importance. Collis

(1991) calls attention to the administrative heritage of a firm.

Detailed empirical study is useful because normative analysis based on a degree of

speculation within a conceptual framework without any empirical support is on the rise

and needs examination against the facts. For instance, as Melin (1992) says, 'empirical

studies of the process school also have further weaknesses because researchers within

this school have mainly used the clinical research method, which, however, is seldom

explained in detail. There are exceptions, of course, like the methodology adopted by

Bartlett and Ghoshal (1989).

The study looks at an example of a latecomer Korean MNC, newly established and

actively involved in international production. One reason to choose this sample ftrm is

that the literature on global strategic management and international business of newly

established MNCs rarely includes examples apart from established MNCs from the

United States, Japan and Europe. Here the focus is on a detailed longitudinal case study

of Samsung Electronics Co. (SEC) and its affiliated ftrms such as Samsung Electron­

Devices Co. (SED), Samsung Electro-Mechanics Co. (SEM) and Samsung Corning Co.

(SC).

The structure of the thesis

Chapter 2 sets out the analytical framework. Chapters 3, 4 and 5 review the

development of technological capabilities, product-market position and the features of

Samsung's internationalisation process during the 1970s, 1980s and 1990s. In the these

chapters, the following questions are addressed:

17

1. How did Samsung go about developing its technological capabilities, and what were

the trade-offs involved in the sequencing of their development?

2. What are the main strengths and weaknesses at each stage of the development of its

technological capabilities?

3. How has Samsung's approach to the development of its technological capabilities

affected the product-market position and the development of its intemationalisation

process in response to the changing external environment?

Chapters 6 and 7 analyse the development of Samsung' s overseas production activities

in Southeast Asia and China and the key features of Samsung' s foreign operations in

terms of inter-organisational cooperation and interaction. There is a particular focus on

the relationship between: ( 1) different business functions within a firm, including

production, marketing and purchasing, and design and development functions (2)

subsidiaries and headquarters (3) different subsidiaries, and (4) subsidiaries and other

socio-economic actors. Chapter 8 summarises the findings, and the theoretical and

strategic conclusions.

18

2 Analytical Framework

To provide a clear understanding of the key research questions raised in the previous

chapter, this chapter provides a theoretical framework within which the process of

internationalisation of new MNCs and their foreign subsidiaries in Southeast Asia and

China may be analysed in detail. More specifically, this chapter provides the foundation for

an explanation of ( 1) the strategic behaviour of major Korean electronics firms in acquiring

technology, establishing and expanding their foreign operations and (2) desirable global

management strategies which allow their ftrms' foreign subsidiaries to survive in the face

of global competition. In doing so, this chapter sheds light on the following issues: (1)

ftrm-speciftc capabilities and competitive advantage; (2) acquiring and developing

technological capabilities; (3) internationalisation of ftrms; and ( 4) the growth and

competitiveness of new MNCs and their foreign subsidiaries.

Firm-specific capabilities and competitive advantage

A resource- and capability-based view of firms A resource-based view of strategy, as Barney (1991), Peterab (1993) and Wernerfelt

(1984) note, sees the firm not through its activities in the product market, but as a unique

bundle of tangible and intangible resources. This view concentrates on the internal

resources of the ftrm. In particular, as Peterab (1993) says, this view emphasises the

inherent immobility or stickiness of valuable resources and the time and cost required to

gain those resources. According to a resource-based approach, in order to imitate these

resources, other firms would need to go through the same time-consuming process of

irreversible investment or learning.

A resource-based view of ftrms has been translated across units of analysis from nation

states to industries to firms (Bartlett and Ghoshal 1991: 9), providing an insight into the

strategic behaviour of multinational companies (Prahalad and Hamel 1990). Firms are at

any one time uniquely described by the unique set of resources they have accumulated. A

firm's history matters. Irreversible resources are in effect variables in a ftrm's optimisation

process, and their future path must be dependent on their current resource level (Collis

19

1990). Consequently strategy is constrained by, and dependent on, the current level of

resources (Collis 1991; Tallman 1991). This view is in contrast to the mainstream

economic perspective which sees resources as immediately accessible in factor markets.

Capabilities and competitive advantage

Capabilities are firms' strategic assets (Winter 1987) and important for firms to sustain

their competitive advantages (Bartlett and Ghoshal, 1991:9). They provide much stronger

predictors of performance than industry characteristics (Rumelt et al. 1991). Amit and

Schoemaker (1993) say that capabilities differ from resources, which generally consist of

know-how, financial and physical assets and human capital, and that 'capabilities refer to a

firm's capacity to deploy resources, usually in combination, using organisational processes,

to effect a desired end. Therefore, capabilities are based on developing, carrying and

exchanging "information-based intangible assets" through people'.

The notion of competitive advantage (Porter 1985), which provides the means for

computing product-based advantages at a given point in time in terms of cost and

differentiation, provides little insight into the process of knowledge acquisition and skill

building (Hamel 1991: 83). Unlike Porter's view, Teece, Pisano and Shuen (1990) and

Teece and Pisano (1994: 544-545) suggest that firms' competitiveness should be based on

learning and developing firm-specific capabilities in response to a changing environment.

From a capability-based view of firms, there are two important implications related to

firms' competitive advantage which differ from Porter's view. The first is that capabilities

generally cannot be bought; they must be built (Teece and Pisano 1994: 553). The second

is that a firm's competitive advantage stems from its internal capabilities and is conditioned

by a firm's learning trajectory history.

Acquisition and development of technological capabilities

Knowledge and competence are useful things for a company to have. Learning productive

knowledge - in the form of an experience curve - has been the central focus of

discussion in the literature (Winter 1987: 159). Some practitioners and academics suggest

that learning is the only sustainable source of competitive advantage (Stata 1989; Williams

20

1992). One of the three important goals of a MNC is that it must develop internal learning

capabilities so as to be able to innovate and adapt to future changes (Ghoshal 1986: 427).

Chandler (1990:36) adopts a similar view arguing that the creation, maintenance and

expansion of organisational capabilities are the keys to competitive advantage.

Learning IS 'a process by which repetition and experimentation enable tasks to be

performed better and more quickly and new production opportunities to be identified'

(Teece and Pisano 1994: 544). According to Teece and Pisano (1994: 544-545), learning

has several key characteristics. Firstly, learning requires coordinated search procedures

through social and collective processes, such as the teacher-student or master-apprentice

relationship and through joint contributions to the understanding of complex problems.

Secondly, organisational knowledge is generated by new patterns of interactions or a new

logic of organisation. The patterns of interactions are resident in group behaviour and/or

individual behaviour. Thirdly, inter-organisational learning can be a vehicle for new

organisational learning, helping firms to recognise dysfunctional patterns of interactions,

and preventing strategic blindspots.

One of the key strategic questions in learning is what sorts of knowledge and competence

are worth developing (Winter 1987: 173-174). There are in general two element of

knowledge. The first is the public knowledge elements of technology which covers all

codifiable information and know-how such as engineering blueprints and designs, generic

scientific knowledge, management manuals, material specification, and quality assurance

criteria. The second is that tacit and firm-specific knowledge element of technology which

is embodied in the organisational routines and collective expertise or skills of specific

production, encompassing product, R&D and marketing teams (Ernst 1997).

One weakness in a capability-based view of firms is that the notion of capability is vague.

It does not identify clearly the concrete source of capability which should maintain a firm's

competitive advantage. Firms can learn and build technological capabilities in a variety of

ways. The greatest distinguishing feature is whether they do so internally, based on their

own R&D, design and engineering activities, or whether they rely on external linkages

such as foreign technology suppliers, universities or public research institutes, the R&D

21

laboratories of other private firms, specialised engineering companies, design houses or

software firms (Ernst 1997). For firms from developing countries such as Korea, Taiwan

and Brazil, the acqusition of foreign technology has been an important instrument for

building firm-level technological capabilities (see Ernst 1997; Kim Linsu 1993; San Gee

1990; Dahlman and Frischtak 1993).

Table 2-1 Subsets of firms' technological capabilities

Production Capability

Minor change capability

Major change capability

Strategic marketing capability

Linkage capability

Cultural capability

International management capability

Characteristics Production capability is that which relates to the knowledge and skills used in plant operations, where shopfloor experience and 'learning-by-doing' continue to play an important role. Three broad types of activities are included within this category: production management; production engineering; and repair and maintenance of physical capital (Ernst 1997).

A firm's role is to improve and adapt continuously its products and processes. This refers to the vast area of adaptive engineering and organisational adjustments involved in the incremental upgrading of product design and performance features, and of process technology. Minor change capability is probably one of the most important elements in successful technological catching-up strategies (Ernst 1997).

The knowledge and skills 'required for the creation of new technologies, that is, major changes in design and core features or products and production processes. This includes in particular new product ideas, applied and some basic scientific knowledge, and the ability to develop patentable ideas' (Ernst 1997).

Mainly depends on whether producers can build close links with customers and identify their needs in time. This includes the knowledge and skills required for collecting market intelligence, for the development of new markets, for the establishment of distribution channels and for the provision of customer services. Rather than exploit given markets, strategic marketing aims primarily at the development of new markets and the continuous improvement of the firm's competitive advantages (Ernst 1997).

Knowledge, skills and organisational competence are necessary for the transfer of technology at three different levels: within the firm, from one firm to another, and between the firm and the domestic science and technology infrastructure. Such linkages are important between:

- marketing and production, with feedback from consumer complaints and suggestions leading to product improvement;

- production and design, where continuous interaction between production engineers and designers leads to a bottom-up approach to design whose main concern is cost and ease of manufacturing; and

- R&D, marketing and production, with joint product development teams consisting of R&D, marketing and production people responsible for the product throughout all stages of its development cycle, right up to final manufacturing, which has led to a substantial acceleration of 'speed-to-market' (Ernst 1997).

This is related to the organisation as a whole. It incorporates the habits, attitudes, beliefs and values of the individuals and the groups which comprise the organisation (Hall 1993: 610).

The ability of a firm to operate internationally. The capability, as defined by Tan and Vertinsky (1995), is manifested in the existing network of subsidiaries in the region, the number of countries in which the firm operates, and the length of experience in the target host countries.

22

Sources: Ernst (1997), Tan and Vertinsky (1995), Hall (1993)

Ernst (1997) defines technological capabilities as follows:

the acquisition of the public knowledge element of technology and the development of the tacit, firm-specific knowledge ... which goes beyond engineering and technical know-how and which includes organisational know-how as well as knowledge of behavioural patterns, for instance, of workers, suppliers and customers.

Ernst's notion embeds 'complementary assets' such as marketing skills as well as

organisational capabilities in technological capabilities. Another two factors, namely

international management capability (Tan and Vertinsky 1995) and cultural capability (Hall

1993) are embedded in the notion of technological capabilities in the present study. The

subsets of technological capabilities comprise (1) production capability, (2) change

capability (minor and major), (3) strategic marketing (4) linkage capability (5)

international management capability and (6) cultural capability (see Table 2.1).

lnternationalisation of firms

lnternationalisation and firms' external factors Many empirical studies have shown that factor endowments and local market availability,

as well as government policy have strongly influenced the propensity of firms to invest in a

particular country. Buckley and Dunning (1976), Hollander (1984) and Horst (1972)

have identified the significance of trade barriers. The existence of tariffs and non-tariff

barriers is one of the important factors that determines foreign production.

Dunning (1987), in his statistical study to determine the motives for international

production of firms from newly industrialised countries, found that the magnitude of

foreign direct investment is significantly related to the extent to which a country engages in

international trade. Similarly, Chen (1983), Jo (1981), and Schieve and Hsueh (1985) in

their studies of Hong Kong, Korea and Taiwan, maintain that outward foreign investment

is closely interrelated to export activities. British multinationals are no exception. Between

1970 and 1993, 94 per cent of them engaged in export activity prior to undertaking

foreign investment (Nicholars 1983: 620). In particular, J o (1981) argues that outward

foreign investment from Korea should be considered as a process of expanding overseas

23

markets. Currency appreciation in Japan, Korea and Taiwan, together with import

restrictions imposed by the United States and Europe, have acted as 'push' factors.

The export market, whether identical to the production location or not, is obviously

another crucial factor determining where international production facilities should be

located. The relationship between exporting and foreign production should not be

ignored when explaining the internationalisation of MNCs.

Knickerbocker (1973) argues in studying the timing of international production by MNCs

that oligopolists normally follow each other into new foreign markets, wishing to avoid

destructive competition and to safeguard their own interests. This is understood as a risk­

minimising strategy and is verified by empirical work. There was a good deal of bunching

of Japanese electronics firms in the United States and in the European auto and consumer

electronics industries in the mid 1970s (Dunning 1993: 72). It was also evident in

Canadian and European foreign investment in the United States as well as in US

investment in Europe (Flower 1976). One weakness of this model is that there is no

theoretical rationale for the first mover's internationalisation.

Vernon ( 1966) attempts to bridge international trade theory with international investment

theory in his product life cycle model. He identifies several stages in the life cycle of a

product: introduction, growth, maturity, and decline. Each of these has different

implications for the internationalisation of the company. In the mature stage, when major

markets have been saturated and the product standardised, a company moves its

production facilities into countries with low labour costs. Vernon's model mainly focuses

on the country level, although it also takes the company level into account, and emphasis

is placed on the developmental view of the re-localisation of production activities. An

important element of the theory is that sequencing change is related to characteristics of

the various countries such as availability of technological know-how, demand and labour

costs (Melin 1992: 103). The model, however, is weak in dealing with products with a

short life cycle and in explaining the behaviour of firms which develop new products and

undertake research and development activities (Vernon 1979). Macroeconomic,

oligopolistic competition and product life cycle views of internationalisation underestimate

24

factors internal to firms which respond to external factors in determining their international

strategies.

lnternationalisation and firms' internal factors

Hymer (1960: 48) asserts that international production involves the transfer of a package

of internal assets such as technology, management skills and enterpreneurship as a means

of transferring knowledge that investing firms must possess in competing with indigenous

firms in the host country. Thus, possession of superior intangible assets or capabilities

such as technology and information, managerial, marketing and entrepreneurial skills, and

organisational systems may give rise to foreign production. Hymer's view on transferable

assets- the sources of economic rent- is in general limited to monopolistic advantages,

while suggesting the significance of intangible resources and capabilities in determining

foreign direct investment. Hymer's emphasis, as Dunning (1993: 70) says, is placed on

the organisation of economic activity by MNCs as a means of advancing monopoly power,

rather than on managerial roles such as reducing costs, improving product quality or

reinforcing innovation.

Do capabilities matter in firms' international expansion? Firm-specific capabilities are to be

understood as one of the firm-specific ownership advantages, generally accepted in

theories of foreign direct investment as a sufficient condition for a firm to undertake

international production. In other words, a firm should have at least some transferable

capabilities which generate a competitive advantage in international production and

economic or organisational rents in the foreign market (Lall 1980; Kumar 1990; Owen

1982).

Cantwell ( 1990) argues that a firm's technological capabilities closely interact with

international production and a technologically stronger firm may possibly undertake

international production more quickly than a technologically weak firm. Many empirical

researchers confirm the positive relationship between R&D and the propensity of firms to

make investment abroad (Tan and Vertinskey 1995). This particularly applies to Japanese

companies in the 1980s (Kogut and Chang 1991). Kimura (1989) claims that the foreign

investment of Japanese firms increases as their technological capabilities increase.

25

Equally importantly, international management capability- the ability of a firm to operate

internationally - has an effect on a firm's activities in international expansion. Foreign

direct investment is positively related to experience operating in a foreign country (Tallman

1991) and multinationality (Caves et al. 1980). Experience of operations in less developed

countries is a source of advantage to Third World MNCs (Lall 1983: 262), suggesting

that their managerial adaptability, skills and experience are important advantages in foreign

operations. The capabilities of MNCs are embedded in the existing network of subsidiaries

in the region, the number of countries in which they operate, and their experience in the

target host country (Tan and Vertinsky 1995).

There are two problems with this analysis of the internationalisation of firms. The first is

that it may overemphasise the individual characteristic of firms themselves. This does not

allow for an analysis of the effect of global competition on firms. The second is that new

MNCs do not have the same firm specific sources of competitive advantage as established

MNCs. For example, new MNCs are constrained in competition by their lack of

technological capabilities relative to established MNCs.

Jnternationalisation as a dynamic strategic process

The internationalisation process model (Johanson and Wiedersheim-Paul 1975) explains

that a firm sequentially increases its international involvement, from initial export activities

to the establishment of international production units. The logic of this behaviour is based

on 'its gradual acquisition, integration and use of knowledge about foreign markets and

operations, and on its successively increasing commitment to foreign markets' (Johanson

and Vahlne 1977).

This model focuses on market knowledge and foreign market commitment. Thus, it is

necessary to learn through the development of experiential knowledge about foreign

markets in order to overcome differences between any two countries in terms of language,

culture, education level, business practice and legislation (Melin 1992: 103). Firms start

international production in markets with the lowest perceived uncertainty; in other words,

countries that they can understand.

26

The significance of the internationalisation process model is that it provides an alternative

view on foreign investment and international production as dynamic patterns in a firm's

growth, compared with the dominant theory of foreign investment. This is the eclectic

paradigm1 (Dunning 1980, 1988) with its emphasis on transaction costs and factor costs as

its main explanatory variables.

However, the shortcomings of the internationalisation process model, accepted by

Johanson and Vahle (1990), are that it is limited to the early stage of internationalisation

and it is too deterministic. Thus, it provides little insight into the international expansion

process taking place in experienced companies which have learned through decades of

international activities. Similarly, the stage models describe developmental history as the

result of predetermined elements and pre-programmed forces (Melin 1992:104). Hence,

the consequences of unforseen environments are not handled readily (Stubbart 1992).

Moreover, the stage models downplay managers' independent strategic choices (Melin

1992: 104). Another problem related to the models is their disregard for the differences

between individual firms (Stubbart 1992).

Earlier researchers identify a combination of external and internal factors as the basis of

good strategy formulation (Learned, Roland and Andrew 1961; Andrew 1971 ). As

strategy is concerned with the optimal application of resources a firm possesses relative to

competitors, internal and external aspects should be analysed (Collis 1991: 65). In

analysing the global bearing industry, Collis ( 1991) demonstrates the benefits of

combining an internally focused analysis with the external orientation of industry and

competitive analysis. Strategy can neither be separated from external environments nor

from organisational processes such as quality of management, culture and history (Bower

and Doz 1979; Collis 1991).

1 The eclectic paradigm argues that involvement in foreign production is explained by three sets of advantages: ownership, internalisation and location. Although there have been attempts to make the internalisation theory more dynamic and more behavioural in its orientation, it does not explain the dynamic process of international expansion, merely the existence of the multinational enterprises (Buckley 1990).

27

Bartlett and Ghoshal (1991: 13) draw attention to new research issues connected with

environment, strategy and organisation. Melin (1992: 111) calls for further research on

new patterns of internationalisation of MNCs in the 1980s and 1990s in which internal and

external forces interplay in the dynamic strategic process.

The definition of strategy in this thesis, as taken from Itami and Numagami (1992), is a

dynamic design of the activities of the entire firm, the fundamental policy which determines

the basic framework of the various activities of the firm and the basic principles of its game

plan in the marketplace (Itami and Numagami 1992: 119). Firms' environmental

characteristics and their internal capability levels establish the primary constraint on

strategic choice.

In a similar vein, Lyles ( 1990) argues that one of the most important areas of strategic

management research is relating internationalisation to global competition. In a study of

Korean electronics firms' foreign investment in developed countries, Jun (1987) argues

that the Korean firms' foreign direct investment can be understood as the early stage of the

internationalisation process of less developed countries' firms. Market commitment was

the most important driving force for Korean firms to invest in the United States.

In addressing Samsung's internationalisation from the 1970s to the 1990s, the views of

Bartlett and Ghoshal (1991: 13), and Melin (1992) are adopted in this study as analytical

tools along with organisational learning and global strategic management.

New MNCs' and foreign subsidiaries' growth and competitiveness

Capability and time-based global competition

Transaction cost analysis has proved useful in analysing specific types of inter­

organisational relationships in a North American context such as relationships between US

firms and their suppliers (Doz and Prahalad 1991: 148). Transaction cost theory generally

underlies empirical observations about the practice and operations of MNCs (Kogut and

Zander 1993: 420).

28

Transaction cost theory is an economic theory of organisational structure. This theory

relies on 'technological and economic determinism to dictate efficient firm structures under

static conditions' (Tallman 1991: 70), where cost-based competition is the main concern.

There are, however, several criticisms of the transaction-cost theory of MNCs. They

include: (1) its failure to distinguish re-investment from new investment, and beginner

firms from companies that are advanced in international expansion (Forsgren 1989: 29);

(2) its focus on the entry decision in isolation from and without reference to a firm's

strategic impact in a global network of operations (Hill, Hwang and Kim 1990); and (3) its

deficiency in explaining foreign direct investment in the context of entrepreneurship and

management (Hertner and Geoffrey 1986: 4).

The shortcomings of this type of theory, as pointed out by Forsgren (1989: 29), possibly

derive from its limited focus which assumes that a firm can be understood without a

knowledge of its history and an understanding of its specific relationships with other

companies. Hence, there is a tendency to describe all foreign direct investment in terms of

the process of entering foreign markets in order to exploit firm-specific assets and

resources and through internalising firm-specific assets (Buckley 1987, 1990; Casson

1987). This approach neglects the dynamic and strategic behaviour of firms in the

development of firm-specific technological capabilities, however.

In contrast to transaction-related MNC theory, Kogut and Zander (1993; 1995: 420)

suggest that MNCs are efficient means by which knowledge is learnt and transferred

internationally through networks of subsidiaries. Kogut and Zander (1992: 637) argue

that

Competition among firms is based upon their differential capabilities, and their capabilities to expand by the creation and replication of new knowledge faster than the imitative and innovative efforts of competitors.

An important implication arising from Kogut and Zander's views on global competition is

that technological capabilities and the speed of technology transfer are more important

than competition on the basis of cost alone.

29

New MNCs' capabilities

In general, new MNCs do not have the advantage of brand names or consumer loyalty, nor

do they produce new or exclusive products. In most cases, they operate in industries using

standardised technologies (Wells 1981; Lecraw 1981). Nambudiri et al. (1981) and

Lecraw (1981) point out that the product innovation capability of new MNCs is inferior to

that of established MNCs, in that they produce simple, low end products which are not

usually produced by firms in industrialised countries. This capability, however, does not

constitute a competitive advantage for the new MNCs when competing globally because

established MNCs are involved in the production of product lines similar to new MNCs.

Giddy and Young (1982) maintain that the unique firm-specific advantages of new MNCs

from developing countries tend to be imitative strategies such as adaptive marketing skills

and production expertise.

An important implication of these studies is that the advantages of new MNCs are

relatively 'small and temporary' because of their low technology content. The issue for

new MNCs, it is assumed, is how to maintain their 'small and temporary' competitive

advantage. More specifically, these studies point to the need for continuous transfer of

technological capabilities from headquarters to foreign subsidiaries. In turn, foreign

subsidiaries require improvements in the services and technology they receive from the

parent company, in addition to exploiting current knowledge and capabilities.

Inter-organisational/earning

From the discussion above, the development of foreign subsidiaries' technological

capabilities is essential for new MNCs' growth and the maintenance of their international

competitiveness. Two questions to be raised are that what kind of technological

capabilities should new MNCs be concerned about and how should they be built. Although

very little attention has been paid to the conceptual and theoretical frameworks used to

analyse diversified MNCs and their management (Doz and Prahalad 1991: 145), a network

approach along with organisational learning shed light on MNCs' capability building

process.

30

In the case of MNCs whose technological capabilities are embedded into subsidiaries'

networks world-wide, a subsidiary's capabilities are at least affected by changes in the

technological capabilities of the headquarters and of other subsidiary networks. Ghoshal

and Bartlett (1990) suggest that subsidiaries should participate in a worldwide sharing and

development of knowledge, and that the relations between MNC subsidiaries and their

specific industrial settings should be studied using a network approach. This is because

MNCs can be viewed as an inter-organisational network in which the relationships between

operating units form a multinational network2 • Capability development of MNCs is not

created by organisational arrangements, but by the interactions with customers, suppliers

and competitors rather than interactions in the general market (Holm et al. 1995: 97). A

key asset of an MNC is the diversity of the environment in which it operates. This

diversity provides it with broader learning opportunities (Ghoshal1987: 431).

Ghoshal and Bartlett (1990) call for a detailed analysis of innovation processes, stressing

different patterns of interactions between affiliates and headquarters, and among affiliates.

Equally importantly, subsidiaries interact with various kinds of socio-economic actors in

the host locations, as argued by Von Rippel (1988), Hakansson (1987), Laage-Hellrnan

(1989), and Lundvall (1988). Relations with local component suppliers and scientific

infrastructure are crucial for the technological development of a firm.

Kogut and Zander posit that MNCs' future growth and expansion lies in a combination of

the firms' knowledge acquired in the horne base with the gradual accumulation of learning

in the foreign market. Thus cooperative action among related firms is of great importance

because 'it is this notion of the firms as a repository of social knowledge that structures

cooperative action that lies at the foundation of an evolutionary theory of the multinational

corporation' (Kogut and Zander 1992: 627).

Importance of local responsiveness and the growing market in Asia Doz and Prahalad (1991: 149) point out that the issue of whether, and how, organisations

adapt to their environment has been central to organisation theory for decades. In

2 More specifically, as defined by Ernst (1994a: 91), 'networks can exist within a firm (intra-firm networks) or between companies (inter-firm networks). Intra-firm networks link together, within a firm under different divisions and business functions, such as R&D, design, engineering, procurement, production, marketing, and sales and customer services'.

31

particular, MNCs are generally seeking 'national responsiveness' and 'global integration'

simultaneously by means of achieving economies through their global network.

Although globally standardised products or 'global products' are, perhaps, the one feature

most commonly identified with a global strategy, the idea of a fully standardised global

product that is identical all over the world is a near myth that has caused great confusion.

Such products are very rare and hard to attain (Yip 1992: 60) and 'global design' is still

very much a concept rather than a reality (Fischer 1995).

The traditional strategy of innovation, namely 'centre-for-global' in which the creation of

new products and processes using the centralised resources of the parent company is not a

successful element of global strategy (Bartlett and Ghoshal 1991). Similarly,

institutionalised R&D, in transnational or global companies, no longer works the way it

used to in the face of global phenomena (Fischer 1995: 120).

Exportability of a product into a foreign market is enhanced by consideration of national

idiosyncrasies in taste and style (Fischer 1995: 125). In response to major market

differences, Sony, Toshiba and other global consumer electronics firms actually vary their

design considerably (Fischer 1995: 124) through their design houses overseas. For new

MNCs, local responsiveness is more important than global integration, given that they are

weak in product innovation and development, and international management.

Japanese electronics firms are launching Asia strategies as a response to increased regional

market demands due partly to rising per capita income levels in Asian countries. Iijima

(1993: 42) argues that their Asia strategies reflect the growing importance of Asian

markets, and the declining importance of the American and European markets for Japanese

companies operating in Asian countries.

In 1992, Sony's Asian Strategy Conference in Singapore articulated a corporate strategy

for taking advantage of business opportunities in the Asia Pacific region. Sony identified

the Asia Pacific region as the fastest growing market in the world, setting a goal for a rapid

increase in regional sales of products produced in Asia, by roughly 20 per cent now, to 50

per cent (lijima 1993: 42). Kinoshita (1994: 4) also observes that almost all interviewed

32

firms are committed to major new investment projects in China, and that all of them

clearly indicated that the huge growth potential of the market was the main motivation for

such investments.

Asia is characterised by very heterogeneous demand patterns and highly segmented

product markets and the rapidly growing electronic market has shifted from a sellers' to a

buyers' market (Ernst 1994c: 48). In line with the growing importance of local and

regional markets in Asia and heterogenous demand patterns, Japanese MNCs have

emphasised upgrading product innovation and development in the region. Ernst (1994c:

4 7) notes that Japanese electronics firms now place great importance on market

intelligence and product customisation in order to adapt their production systems to the

idiosyncrasies of each location. Iijima (1993: 42) suggests that it is necessary for Japanese

firms to be located in Asia to produce products that closely match local tastes and satisfy

the needs of local consumers. It is also important to incorporate the needs of Asian users

into these products during the design stage.

The main objectives of Japanese electronics firms in industrialised countries are (1) an

expansion of overseas basic research centres and (2) the establishment of an increasing

variety of 'satellite R&D centres' that conduct cooperative research with foreign

companies, universities and research institutes. However, the innovation management

strategies of Japanese electronics firms in Asia are shaped by a very different set of

objectives.

In the region, the primary concern for Japanese MNCs is to provide adequate support

activities for their expanding international production activities (Ernst 1994c ). For

instance, Japanese manufacturers like Toshiba view their Asian production subsidiaries not

as simple assembly plants assigned a part of the production process, but as an integrated

production base, including product development and design functions to satisfy local needs

(Iijima 1993; 42). This is, in essence, the main reason for the recent expansion of the so­

called 'Design and Development (D&D)' activities of Japanese firms into East Asia (Ernst

1994c).

33

Unlike the competitive environment in the 1980s where cost-based competition on the

basis of cheap labour by means of mass production of technologically standardised

products was important for Korean electronics firms, product innovation and development

capabilities are now more important for Korean firms operating in Asia and exposed to

global competition. More importantly, their new challenge to enhance international

competitiveness is to ensure that product change capability is quickly built through inter­

organisational relations between headquarters and subsidiaries, and between different

business functions within the subsidiaries.

Towards decentralised relationships

Bartlett and Ghoshal (1991: 14) point out that the control structure of hierarchical

organisations has been eroded by de-layering and transformed by the power of information

technologies into a network form where the management of horizontal information flows is

at least as important as control is in the classic vertical processes. Ohmae ( 1990) calls for

a reappraisal of the role of headquarters due to the growing importance of regional

headquarters. There is an increasing need for integrated linkages (or networks) to

establish cooperation and interdependency between different business functions in a firm

(Ernst 1997) and between different firms (Contractor and Lorange 1988; Mowery 1989).

The current trend, as Hedlund and Kogut (1992) point out, has been toward a greater

sharing of global decision taking among managers of MNCs as well as a more lateral

exchange of information and ideas.

Upgrading functional capabilities and the development of organisational capabilities are

driven by the interaction between closely related, mutually dependent firms, exchanging

information concerning a firm's needs, capabilities, and strategies with regard to

manufacturing, logistics and development (Holm et al. 1995)3 • Integration of new

products into manufacturing is turning to 'product-process simultaneous design' (deToni

and Zipponi 1991) associated with such concepts as 'design for manufacturing' and

'design for assembly' (Boothroyd and Dewhurst 1987; Whitney 1988). At the product

design stage, potential problems in the manufacturing system associated with the

3 Networks provide firms with three kinds of knowledge in terms of innovation: (1) technological knowledge, (2) business knowledge and (3) institutional knowledge as well as a network position in which the relationship contributes to the maintenance of other subsidiaries' relationships (Holm et al. 1995).

34

introduction of new products can be resolved early on, and the whole process can be

speeded up.

Although the cultural clash between scientists and engineers in product development

sequences is not new, differing time horizons, academic disciplines, commercial pressures

and work ethos all create barriers between R&D, production and marketing, and the

interface between production and component purchasing has become particularly critical in

new product development4 • Equally importantly, the need for interaction between

production and sales and marketing increases as national markets vary in their tastes and

requirements, necessitating local modifications in the products (Howells and Wood 1994).

Highly centralised organisation, decentralised control and interaction through two way

communication is important to the capability development of Korean electronics firms'

foreign subsidiaries. Indeed, the mode of inter-organisational cooperation and interaction

by which capabilities or knowledge is learnt, transferred and recombined in a efficient way

in response to competitors' action is crucial for MNCs to maintain a dynamic competitive

advantage in the face of global competition.

lnternationalisation of research, design and development

Research & development is seen as a corporate weapon. Interest in the globalisation of

R&D by MNCs has increased alongside an increasing awareness of the relevance of global

strategy in competition between leading firms. The organisation and location of R&D

abroad has largely been understood as a responsive process where R&D is deployed in the

most optimal way to defend and secure market power (Howells and Wood 1994:33).

Pearse and Singh (1992) illustrate two objectives of overseas R&D facilities.

Locally-responsive R&D may involve either 'adaptation' or 'development' work. The former seeks to adapt well-established products (or processes) to meet local requirements, and, as indicated earlier, may often represent an attempt to achieve the

4 Ford of Europe's vice-president for product program, vehicle engineering and design acknowledges that 'product engineers and manufacturing engineers must be in the same country, and ideally in the same office and you cannot achieve simultaneous engineering by telephone or video conference' (Fischer 1995: 120). The CEO of General Electric in the US has observed 'the winners in these global games will be those who can put together the world's best in design, manufacturing, research, execution, and marketing on the largest scale. Rarely are all of these elements located in one country' (Fischer 1995: 110). Imai (1992) emphasises the speed of interaction between production, marketing and R&D, and between manufacturers and suppliers of machines and equipment in the process of technology development.

35

effective implementation of later stages of the traditional product cycle (or playing a role in a centre-for-global approach). Such adaptation work is carried out in support laboratories. The second type of locally-responsive work envisages the development of much more distinctively original product-variants (within the MNC's existing technological scope) and may be seen as either facilitating a local-for-local approach, or, more ambitiously, as an attempt to achieve a geographically differentiated set of innovations from recently-evolved central technology. This local development work is carried out by locally-integrated laboratories.

Established MNCs carry out overseas R&D in order to achieve the most effective

penetration of important foreign markets with adapted variants of their current generation

of products. Thus distinctive local needs, in terms of market characteristics or production

environment, demand R&D support which is likely to be most effective and responsive

when located in close conjunction with the other functions of marketing and /or production

(Pearse and Singh 1992: 6).

The role of overseas R&D facilities may support or enhance the competitiveness of their

parent companies by meeting needs such as the development of distinctive products and

new areas of technology. In particular, such R&D facilities may develop their activities in

the light of oligopolistic competition, that is, in response to strategic moves by R&D

facilities of rivals or perceived opportunities (Pearse and Singh 1992: 7).

According to recent research on the globalisation of R&D5 by established MNCs, overseas

R&D facilities are playing a much greater and more creative role than was formerly the

case (Perace and Singh 1992). Hedlund (1986, 1993), Bartlett and Ghoshal (1989) and

Dunning (1993) indicate that international production networks and international R&D

facilities have been organised within established MNCs. Under a global oligopolistic

market structure, the Korean electronics MNCs are under pressure to take strategic

counter action in the internationalisation of R&D.

5 Nestles has decentralised R&D in order to correct a situation where its formerly centralised (and heavily academic) R&D department had been transformed into a network of strategic business units (SBU). Each SBU now includes a research co-ordinator, responsible for two-way communication with the labs, which are encouraged to view the SBUs as clients (Fischer 1995: 119).

36

Summary

This chapter has discussed new MNCs' technology learning, internationalisation and the

operation of foreign subsidiaries from the viewpoint of capability-based firms in general ,

and global strategic management in particular. A framework for analysing these issues has

been laid out.

From the discussion above, five key points can be extracted:

• Firstly, according to a capability-based view of firms, which is different from an

industrial organisation-based view, a firm's competitive advantage is rooted in its

capabilities. Firms' capabilities must be built and are in part conditioned by their

previous technological base and learning trajectory.

• Secondly, acquiring and developing firm-specific technological capabilities are sources

of sustainable competitive advantage. Effective learning requires close coordination

and interaction between different organisations. Technological capabilities which

embrace marketing and organisational capabilities are important sources of competitive

advantage. Unlike established MNCs, Korean firms' technological capabilities are weak

in product change and international management experience. In particular, they exhibit

an imbalance between product and production capabilities.

• Thirdly, traditional FDI and international production theory in general fail to shed light

on the behaviour of new MNCs engaged in international expansion. FDI or

international production by new MNCs should be seen as a strategic process in which

firms make a decision to move overseas after consideration of their internal

technological capabilities and the external environment.

• Fourthly, the electronics industry is exposed to global competition. A firm's

competitive position is affected by that of other countries' firms. In the new

competitive environment from the late 1980s to the early 1990s, Korean electronics

firms were forced to compete with established MNCs in global markets.

37

• Finally, one of the distinguishing characteristics of the changes in global competition in

the 1990s is that cost-based competition has been gradually shifted to 'capability and

speed-based competition'. A dilemma of new MNCs in this change is that they in

general possess technological capabilities of a 'small and temporary' nature relative to

established MNCs. Emerging regional trading blocs such as the EU, NAFTA and

AFT A have put pressure on Korean electronics firms to accelerate their international

production. To respond quickly to local or regional needs in Southeast Asia and

China, it is important that Korean firms internationalise their R&D investment and

develop decentralised relationships between headquarters and subsidiaries.

The factors that have a greater impact on the dynamic process of internationalisation of

Korean electronics firms are internal technological capabilities and the changing nature of

global competitive environments. From this starting point, Samsung's internationalisation

will be analysed in more detail in Chapters 3 to 5. Samsung's internationalisation before

and after its organisational reform will be addressed in Chapters 6 and 7. The activities of

Samsung' s foreign subsidiaries in Southeast Asia and China will also be examined from the

perspective of inter-organisational relationships and of global strategic management.

38

3 Production capability and the early stage of international expansion

The high performance of Samsung Electronics in the mid 1990s can in general be

attributed to an aggressive program of acquiring foreign technology supported by

intensive staff training. In addition, the external environment was particularly favorable

to the DRAM business. On the other hand, it is generally accepted that Samsung's

organisational capability, although acknowledged to be one of the best among Korean

firms, was inferior to that of established MNCs until the early 1990s. Samsung's

chairman, Lee Kun-Hee, criticised organisational inertia and urged all employees to pay

attention to this during the organisational restructuring of the early 1990s. He believed

that the source of the negative aspects of the organisational culture was the previous

organisational system in which emphasis had been given to short-term performance,

derived partly from the 'profit centre' system that had been introduced in the early 1970s.

Samsung was able to achieve mass production capability within a relatively short period

through intensive training, although this capability was mainly in the assembly of final

products. At the same time, international marketing channels had been established by

Samsung Corporation, an affiliated general trading company, which became one of the

best venues through which SEC was able to access the international market. In the early

stages of overseas expansion, Samsung established two foreign subsidiaries: the first

foreign sales subsidiary in 1978 in the United States and the Portugal-based CTV

production subsidiary in 1982.

This chapter examines (1) Samsung's entry into the electronics business, (2) the learning

and developing of production capabilities, (3) the relationship between production

capabilities and product-market position, and (4) technological capabilities and overseas

expansion.

39

Entry into the electronics business

There was virtually no accumulated technology in the Korean electronics industry at the

start of the 1960s (Bloom 1992:13). In promoting the learning of foreign technology, the

Korean electronics industry greatly benefited from Japanese and American knowledge.

From the late 1960s to the early 1970s, foreign direct investment by Japan and the United

States in Korea was extremely important to the initial development of the electronics

industry. In the late 1960s many foreign electronic manufacturers were actively looking

for a low cost offshore production location for the assembly of ICs and transistors.

Motorola, Signetics, Fairchild and Control Data set up wholly-owned subsidiaries in

Korea during this period (Table 3.1). In most cases, these components were exported to

the United States. At the same time, the large US and European retailers, including

Sears, J.C. Penny, Montgomery Ward and Dixons were searching for low cost suppliers

(Bloom 1992: 28).

A little later, Toshiba, Sanyo and NEC rushed to establish offshore production facilities

in Korea to take advantage the cheap and highly disciplined workforce (Table 3.2). In the

late 1960s, Japanese electronics manufacturers had to overcome three external forces:

yen appreciation, increased labour costs and trade friction with Europe and the United

· States in the export of TV s. These difficulties encouraged them to begin overseas

production in East Asia.

In the mid 1950s Samsung had entered two manufacturing sectors: sugar in 1953 and

textiles in 1956 (SED 1990). Common characteristics of these two products included a

huge domestic demand and the need for mass production. Using equipment imported

from Japan and Germany, one of Samsung's major objectives was to increase its

production capacity (Jun and Han 1994). Samsung had experienced mass production

through learning-by-doing for more than a decade in the manufacturing sector prior to its

entry into the electronics industry in 1969. The timing of its market entry was significantly

influenced by the government's industrial policy. In 1968 when the Korean government

introduced the Electronics Industry Promotion Law, Samsung entered the electronics

market. It is also not coincidental that Samsung entered the international DRAM market

in 1983 when the government introduced its semiconductor promotion policy.

40

Table3.1 Wholly owned US foreign subsidiaries in Korea, December 1969

Name offoreign Year of Products Investment Name of company investor approval ~$US thousand~ Fairchild 1966 Silicon transistors, 2,145 Fairchild Semikor

diodes

Signetics 1966 ICs, diodes 1,679 Signetic Korea

Motorola 1967 Transistors, ICs 7,544 Motorola Korea

IBM 1967 Computer servicing 952 ffiMKorea

Control Data Far East 1967 Memory planes 500 Control Data Korea

Oak n.a TV tuners, switches 2,290 Oak Electronics

AMC 1968 Magnetic heads 315 AM Korea

DorankoCo. 1968 Car audios 600 Korea Doran Co

Komy 1968 ICs 432 KIEC

Source: Compiled data of Electronics Industry Association of Korea (1989: 39)

Samsung' s business development team, which was newly established within the Samsung

Corporation and searching for foreign technology sources, approached several foreign

manufacturers, namely, Zenith, Warwick, Matsushita, Sony, NEC, Mistsubishi, Grundig,

·Telefunken and Ericson (SEC 1989:114). It had considered cooperation with American

firms because they might provide huge markets, but Samsung finally chose Sanyo and

NEC as joint venture partners (SEC 1989).

Samsung's entry into the electronics industry had four important features. Firstly, its

electronics business was influenced significantly by its experience in manufacturing textiles

and sugar which required mass production. Secondly, from the outset, its business used

imported foreign technology and was characterised by a close relationship with Japanese

electronics firms. This was assisted by the informal contacts of Lee Byung-Chull, who had

41

Table 3.2 Foreign joint ventures in Korea, December 1969

Name of foreign investor Year of hwestment Share Products approval ($US thousand) proportion

(foreign vs local)

Royal Pac (US) 1965 88 40:60 Radios, TVs

Komy(US) 1965 76 75:25 Transistors, diodes

USKM(US) 1966 224 51:49 Transistors

Signetics 1967 20 50:50 Glass capillaries

Hahn-American (US) 1969 145 65: 35 HybridiCs

Toshiba (Japan) 1969 1,400 70:30 Silicon transistors

Illinoise Condenser (US) 1969 50 50:50 Condensers

Sanyo (Japan) 1969 6,000 50:50 Silicon transistors, ICs, condensers

Francriff (US) 1969 100 30:70 Service

Crown (Japan) 1969 140 60:40 TVs,radios, cassette recorders

NEC (Ja12an) 1969 3,500 50:50 Cathode ral: tubes

Source: Compiled from EIAK (1989: 39)

been educated in Japan. Thirdly, Samsung was a market follower, with a strong market

leader in Lucky Goldstar, a firm that had already been operating in the electronics industry

for almost a decade. From the start, it was inevitable that Samsung would require a

catching up strategy. Finally, Samsung Corporation, which was the holding company,

implicitly or explicitly, influenced SEC's international marketing activities for a couple of

years.

Learning and developing technological capabilities

In this section, Samsung's way of learning and developing technological capabilities and

its weaknesses and strengths in the sequencing of its development trajectory in the early

stage of technological learning are addressed. In the context of the close complementarity

42

between organisational and technological factors, the characteristics of Samsung's

organisational culture emerge. Investigation of the chairman's secretariat and the profit

centre system as well as examination of other factors such as the diversification strategy,

learning through intensive training and obstacles to learning about international markets

shed further light on the organisation's culture.

The chairman's secretariat and profit centre system

Centralised control over affiliated companies by the chairman's secretariat and the profit

centre system were the two major factors that significantly influenced Samsung's business

operations in the 1970s. In turn, these factors influenced the affiliated companies which

tended to pursue short-term goals. This short-term strategy has continued to influence the

mode of Samsung's international production in the 1980s and 1990s.

Figure 3.1 Performance of SEC: sales and profits, 1970-7 4

700 14000

600 12000

500

400 c::::J profit

10000

300 ~sales

= 8000 ~ 0

s:: 200 = = 0

100 0

:..::= sooo:S -..... ..... s 0 s

-100 74 4000

-200 2000

-300

-400 0

Source: Compiled from SEC (1989)

Lee Byung-Chull, the founder of the Samsung group, was apparently a typical risk-averse

entrepreneur, whose style was generally contrary to that of Chung Ju-Young, the

founding entrepreneur of the Hyundai Group, which had its origin in the construction

sector. According to Jun and Han (1994:140) Lee's style was characterised as 'calculated

risk-taker' or 'analyser'. When expanding businesses, Lee emphasised that the CEOs of

affiliates should recognise their weaknesses (Jun and Han 1994:57) and must on no

account generate deficits (Jun and Han 1994: 134-35).

43

In 1975, soon after SEC suffered losses during the first half of 1970s, the profit centre

system was introduced (Figure 3.1). The prime objective was to manage efficiently several

group affiliates through qualified professional managers. This was in contrast to other

chaebol companies, whose family members were deeply involved in the management of

· affiliated companies.

Under this system each affiliate was independently responsible for its performance, but in

reality chief executive officers (CEOs) of the group's affiliated companies were not able

to exercise their management authority properly partly because the chairman's secretariat

exercised centralised control. It is noteworthy that the chairman's secretariat remained the

most important organisation in managing the group affiliates until the late 1980s. A

centralised control mechanism was deeply embedded in the organisation of most of the

electronics affiliates for nearly two decades, although Samsung wished to maintain a

balance between centralisation and decentralisation within this system, as Jun and Han

(1994: 108) say, through 'coordinative decentralisation'.

Samsung gradually decreased the control of chairman's secretariat after Lee Kun-Hee

took over the chairmanship in 1988. Under the new chairman, the CEOs of each affiliated

company have been given more responsibility. The president of the Samsung Research

Institute, Lim Dong-Sung states that the new chairman's power is probably only ten per

cent of his father's (Economist, September 1990). The centralised control mechanism of

the chairman's secretariat was still a controversial issue in 1995. Given the

decentralisation that had taken place, it can be seen from this that the degree of

centralised control by the chairman's secretariat would have been extremely high during

Lee Byung-Chull' s period.

During the 1970s, each CEO possessed a limited authority to manage the finn. The major

control mechanism was internal audit and personnel management of senior executive

managers who were drawn from the ranks of decision makers in affiliated companies.

Each affiliate looked keenly at the direction set by the chairman's secretariat.

Consequently, each affiliated company's autonomy was limited. As explained by Jun and

44

Han (1994: 123), CEOs were unlikely to exercise their full authority in managing the

company because the owner of the firm was directly involved in the management. SEC's

five CEOs were replaced during 1969-75 when it suffered losses (SEC 1989).

In order to lessen managerial risk, the prime concern of each affiliate was the achievement

of short-term1 rather than the long-term goals. This impacted on Samsung's

diversification strategy: a typical way to diversify business was internal market seeking

among affiliated companies through which they were able to reduce transaction costs and

secure markets. This strategy was parallelled in other manufacturing industries. In the

petrochemical and electronics sectors, for example, there were cases in which several

firms were joined together and vertically integrated, and were thus involved in intra-group

transactions.

The chairman's secretariat also acted as a coordinating mechanism in resolving conflicts

that might occur among the group's affiliated companies. However, this mechanism did

not operate well. For instance, different affiliates tended to produce the same product.

In the 1970s, SEC produced TV sets and so did Samsung-Sanyo. SEC was also engaged

in the production of CRT glass bulbs and tuners etc. (SEC 1989), as were other affiliates

such as Samsung-NEC. The same situation applied in the 1980s, for instance, when all

three companies (SEC, SEM, SST) were producing personal computers (Domicity 1988).

The uncooperative nature of intra-group interaction in Samsung is basically a result of

mismanagement of the profit centre system, as evaluated by Jun and Han (1994). Each

affiliate was expected to take responsibility for its own performance with limited

managerial authority. Competition rather than cooperation between affiliated companies

was prevalent. Samsung's evaluation of the profit centre system in the mid 1980s was

that 'each affiliated firm tended to pursue short-term goals and created undesirable

competition between the different profit centres' (Jun and Han 1994:121). This

unproductive administrative heritage embedded in the 'profit centre' system was not

1 See Yu Seongjae (1989) and Koh Dong-Jin (1992), who have identified Samsung's short-term strategic view.

45

conducive to successful intemationalisation in the 1980s and 1990s, finally leading to

organisational reform in 1993.

Unrelated diversification

As it strove to mimic the strategies of its Japanese counterparts, Samsung learnt a number

of different technologies associated with its movement into unrelated diversification.

Simultaneously it incorporated various kinds of foreign technological capabilities for the

manufacture of commodities such as home appliances, audio and visual products,

telecommunications, computers and semiconductors. In consumer electronics, Samsung's

aim was to become a vertically integrated electronics firm: 'from materials to components

to end products, including consumer and industrial electronics' (SEC 1989), an aim

typically adopted by Japanese major electronics firms2 • This caused an imbalance in

technological capabilities between production and product innovation, which eventually

led Samsung to lose its international competitiveness in consumer and industrial products

in the 1990s. I will discuss this further in Chapters 4 and 5.

In December 1969, SEC established a joint venture finn, Samsung-Sanyo, with Sanyo

(40 per cent) and Sumitomo Trading (10 per cent) and then in January 1970, another

joint venture company, Samsung-NEC was established, with NEC (40 per cent) and

Sumitomo Trading (10 per cent). According to the two joint venture agreements with

Japanese partners, Samsung alone had local market sales rights, while Sanyo and NEC

had the export rights. It was not until the mid 1970s that Samsung was able to distribute

its products within the domestic market, generating high profits due to domestic market

protection. Until this time, Samsung had no choice but to sell its products on the

international market through its joint venture arrangement (SEC 1989).

In December 1973, Samsung formed another 50:50 joint venture company with Coming

Glass Works of the United States to produce glass bulbs for cathode ray tubes (CRTs) .

. 2 Samsung (SEC 1989) claims that to achieve this, it needed a large industrial complex to build several plants. It therefore bought a single block of land of about 1.5 million sq. m. This was larger than San yo's electronics complex in Japan in the late 1960s.

46

Samsung' s strategic goal in its dealings with Corning Glass Works was to learn a broad

range of manufacturing, marketing and management techniques. Accordingly, in contrast

to the two previous joint-venture operations, Samsung voluntarily handed over its

management rights to its US partner, Corning Glass Works, for the first three years (SC

1994). Of the three joint venture partners, NEC and Corning Glass Works currently act

as share holders, while Sanyo divested all its holding in Samsung. This meant that SC and

SED have continuously maintained a long-term relationship with two foreign joint venture

partners, but SEC has noe .

In March 1973 Samsung-Sanyo Parts, from which SEM originated, was set up. Its

shareholders were Samsung-Sanyo, SEC and Sanyo. This company was to produce

tuners, DYs, transformers and condensers. In 1974 Samsung acquired the Korea

Semiconductor Co. (KSC),4 a joint venture between the Korea Engineering &

Manufacturing Co. and Integrated Circuit International Inc., a US flfl11. Samsung then

further diversified into the telecommunications sector. In December 1977, Samsung­

GTE was incorporated. SEC had a 51 per cent share and GTE a 49 per cent share of the

company. Samsung-GTE produced and marketed electronic private automatic branch

exchanges (EP ABX), which had been developed by the Korea Institute of Science and

Technology (KIST). Furthermore, Samsung decided to acquire the Korea

Telecommunications Company (KTC), a state-run telecommunications corporation

established in 1977, to produce electronic switching exchanges (ESS) for the local Korean

market in collaboration with BTM of Belgium, a subsidiary of ITT (SST 1987).

The principle of diversification stems from internal market seeking. Samsung first

established Samsung-Sanyo, whose aim was to assemble consumer electronics products

such as TV sets. Subsequently, Samsung-NEC (later SED) and Samsung Sanyo Parts

3 It is interesting to note that in the 1990s the component affiliates performed better than the end product producer (SEC), and that SC, whose learning process was different from the others, has become one of the world's top three glass products manufacturers.

4 This was the beginning of its semiconductor business and the first step in accumulating chip production technology enabling SEC to move into the DRAM market in 1983. Its decision to enter the field of semiconductor manufacturing was five years earlier than that made by its competitor, Goldstar, which acquired Daehan Semiconductors in 1979. Complementary metal oxide semiconductor (CMOS) technology was available in KSC at that time.

47

(later SEM) was set up. It supplied components, CRTs, and tuners or FBTs to

Samsung-Sanyo and Samsung-NEC and became a buyer for Samsung Sanyo Parts,

purchasing diode yokes for TV sets. Samsung-NEC also became a buyer for Samsung

Coming, purchasing glass bulbs for CRT production. There were few risks to this

diversification because of the imitation of Japanese strategies and the market security

among the affiliated companies (Figure 3.2).

Improving production capability through intensive training

Jun and Han (1994), Archambault (1991) and Koh (1992) in their studies of Samsung

accept in general that Samsung's training is very demanding. In the 1970s its strength lay

Figure 3.2 Samsung's diversification: internal market seeking strategy

Samsung- Sanyo

ICs

Samsung-Sanyo Part Samsung Corning Korea Semiconductors

Source: SEC (1989), SED (1990) and SST (1987).

in the training of its employees as a means of accumulating production capability.

Originally, the impetus for learning foreign technology came from Samsung's founder,

Lee Byung-Chull, who had close connections with Japanese business (Jun and Han

1994). In order for Samsung, a market follower, to catch up with the market leader,

Goldstar, intensive training of employees was essential.

The method Samsung employed to learn foreign technology was to acquire

simultaneously public and tacit knowledge. In addition to using foreign patents it initiated

48

technical assistant agreements with the technology supplier which trained Samsung's

technicians. This is noteworthy because of the emphasis placed on continuous training.

Through incremental learning processes, from the simple to the sophisticated, production

capability gradually improved. At the beginning, only the final process of the assembly

was carried out, but later more sophisticated processes were introduced as the firm's

production capability improved. For instance, Samsung was able to produce black and

white CRTs first, and later it was able to manufacture colour CRTs. The same method

was applied to glass bulb manufacturing. Originally, production capability was established

through the production of radios and refrigerators. Subsequently it was applied to the

production of televisions: initial black and white TV production was later extended to

colour TVs. Eventually, this production capability was used in the development of

DRAMs in the 1980s.

The frrst intake of 63 Samsung-NEC employees was sent to NEC in Japan, from

September 1969 to February 1970, to master the skills of assembling technologically

simple products. On their return from Japan in May 1970, Samsung-NEC started

production (SEC 1989). In June 1970 the company again sent seven employees to Japan

for two months' training on vacuum tubes. They were followed by eleven employees for

training on black and white CRTs. By December the company was successfully

assembling black and white CRTs (SEC 1989). In accordance with a technical assistance

agreement, NEC technical experts came to Korea annually to train 80 Samsung-NEC

technicians (SED 1990). In October 1977 when NEC licensed Samsung-NEC to produce

colour picture tubes, fifteen Samsung-NEC technicians were sent to NEC-Japan for one

to four months' training, and in 1979 another fifteen technicians were sent. The overseas

training activity also continued with Sanyo and other companies regardless of nationality

so that Samsung was able to improve its production capabilities quickly by interacting

different manufacturers.

In November 1969 Samsung-Sanyo sent 43 employees to Osaka and Tokyo for five

months' training to master the skills of assembling radios and black and white TV sets

(SEC 1989). In 1973 when the technical assistance agreement was renewed, Samsung­

Sanyo sent four technical staff to Sanyo Japan to learn about the production technology

49

for refrigerators and air-conditioners (SEC 1989). In 1977, KTC made a licensing

agreement with ITT, its subsidiary ITTI and BTM to produce electronic switching

systems known as MIOCN. Between 1978 and 1981, in accordance with the agreement,

KTC sent a total of 101 employees to BTM, Belgium for training, between 1978 and

1981 for periods of four to twelve months while BTM in turn dispatched 35 technical

staff to KTC for technical assistance and training (SST 1987). In September 1977

Samsung sent two employees to Honeywell in the United States to learn about

semiconductor technology.

One of Samsung' s main strengths was in assembling components and end products. There

was a rapid increase in export market demand for TV products and as SEC's production

increased, the demand for core components produced by its affiliated part suppliers such

as SED, SEM and SC increased accordingly. Although component production gradually

improved, 5 SEC was not able to purchase all the components produced by affiliated

firms. Therefore it was necessary for them to find non-Sarnsung buyers in Korea or

Japan.

Samsung concentrated on the improvement of production capability, to the detriment of

other technological capabilities such as product design and development, international

marketing and international management. There were three categories of production

capability during this period: final assembly of consumer-oriented end products, assembly

of components made by the three electronics components firms and assembly of chips.

During the 1970s, Samsung was able to spread this production capability amongst

· several products, diversifying its product lines from black and white TV sets into VCRs

(SV-7700), microwave ovens (RE-705D), washing machines (SEW-3501), refrigerators

(SR-180 and SR-201 TD), electronic calculators (DX-44), electronic watches, air

cleaners and cameras (SEC 1989). In December 1972 , SEC started black and white

TV production, and by October 1979 it had produced 7 million sets. From June 1976,

5 In July 1978 the linear IC (9KA-2101) was developed (SST 1987:177). In September 1978 the IC package assembly became available. The semiconductor sector supplied only a small proportion of Samsung's internal demand, so many ICs were imported until the late 1970s (SST 1987:179). SED, SEM and SC were also actively involved in the production rather than the import of core components.

50

it began to make two CTV models- SW-C3761 and SW-C3762- and by the end of

· 1979, production had reached nearly 1 million sets. The production of black and white

CRTs reached 10 million units by November 1979 and many were exported. SEM also

increased its production of speakers, condensers, tuners and DY s.

Due to the availability of CMOS technology, KSC was able to produce CMOS logic

products in the early 1970s. In 1975 the integrated circuit (IC) for light-emitting diode

(LED) electronic watches was developed. In 1976, KSC produced two kinds of consumer

electronics IC: the microwave oven chip and the quartz analog watch chip (SST 1987:

174-177). In June 1977 it acquired bipolar transistor technology and produced ten types

of transistor for black and white TV sets and audio products. Consequently, the

localisation ratio of components for black and white TV sets increased from 60 per cent

to 90 per cent (SEC 1989:177).

In July 1978 Samsung began the production of linear ICs (9KA-2101) (SST 1987:177).

The semiconductor sector supplied only a small proportion of Samsung' s internal

demand, so a large quantity of ICs was imported until the late 1970s (SST 1987:179).

Samsung also produced silicon gates and electronic switching systems (M lOCN).

The three affiliates, SED, SEM and SC, were also actively involved in the production of

. core components. By 1976, SEM had produced core CTV components such as the tuner,

deflection yoke and flyback transformer, and production started in 1978 (SEC 1989). In

June 1977 the ten kinds of transistor needed for black and white TV s and audio products

were produced by SED and in September 1978, it started to produce 20-inch black and

white electron guns. SC was only involved in the final assembly process, importing panel

· and funnel glass bulbs and neck tubes from PGV, Asahi Glass and Sovirel, which is also

known as Thomson Video Glass (SC 1994). From the late 1970s, however, SC could

undertake more advanced glass bulb production. In June 1975, a glass fusion factory was

set up to make glass bulbs for the panels and funnels, and in 1979 SC exported 60 per

cent of its glass bulb production, while the remainder was supplied to domestic buyers

(SC 1994).

51

During the 1970s, Samsung increased its manufacturing capability through the intensive

training of employees, particularly shop-level technicians. However, this improvement in

production capability was at the expense of upgrading technological capabilities in design

and product innovation as well as international marketing. Samsung had only a marginal

product change capability and imitated foreign products through reverse engineering.

These imbalanced technological capabilities resulted in constraints on internationalisation

as external changes took place. Typical cases will be discussed in Chapters 4, 5 and 6.

Linkage capability and international market knowledge

Although SEC tried to get direct access to other international distributors,6 gaining

international marketing knowledge was difficult because its partners, Sanyo and

Sumitomo, directly initiated all export marketing activities. When the agreement with

Japanese partners was renewed in 1972, the original export marketing contract, which had

been unfavourable to Samsung in gaining foreign market knowledge, was terrninated7 •

SEC gained from the renewed agreement with Sanyo and Sumitomo in developing

international marketing channels, but it was difficult to acquire technology from Japan.

Take the case of the VCR and the microwave oven. In the mid 1970s Samsung tried to

get access to technology for the two products, but no foreign licensing was available.

Samsung had no choice but to get it through 'reverse engineering' (SEC 1989: 248-50).

In 1976, SEC formed a product development team to dismantle a Panasonic microwave

oven. The project was successfully completed in 1978. The same approach was taken in

· the development of the VCR through 'reverse engineering'. In 1979, Samsung succeeded

6 SEC's first subsidiary, Tokyo Samsung Engineering Co., got access for SEC to Mitsubishi's marketing network in 1971 and SEC obtained an order for 5,000 black and white TV sets for the US market under the brand name of 'Uncle Sam'. In 1973, SEC exported black and white TV sets to the US company MGA and electronic calculators to Casio as well as Hermek in Europe and Hatzlack in the United States.

· In 1974, SEC contracted with Beltrans, a European buyer, to export radios (SEC 1989: 171). In 1975, SEC's compact stereos were exported to AGS of Canada as were radios to Zenith on an OEM basis. The first export of CTVs was in April1976 to Panama. In 1978 SEC established sales channels with Zenith of the US and exported amplifiers on an OEM basis (SEC 1989).

7 The termination of the original contract must have been one of the main reasons that Sanyo divested from the joint venture and withdrew its entire share from Samsung. This is in contrast to the relationship with NBC where NBC retained about 10 per cent of its share in SED, and Corning Glass Works held a considerable proportion of shares in SC.

52

in developing its own VCR (SV-7700) through trial and error. It appears that the 1970s

approach to product development continued until the late 1980s. There was no

improvement in creative development unless a similar sample or manual was available

(Jun and Han 1994: 317). This impeded Samsung's expansion through product

differentiation in the 1980s and 1990s.

In 1972 when Samsung terminated its marketing contract with Sanyo, SEC had a chance

to interact independently with foreign distributors. Direct interaction was not feasible,

however, because it conflicted with the interests of Samsung Corporation. Samsung

Corporation was the founding business entity of SEC and appointed by the government as

the first general trading company amongst Korean chaebol companies. The prime

objective of the Samsung Corporation was to increase its export volume in order to

conform with the export-led industrialisation policy driven by Park Chung-Hee's regime8 •

Consequently, Samsung Sugar Co and SEC became major sources of export

commodities.

Table 3.3 Export of electronics commodities by general trading companies: Samsung Corporation and Daewoo (Unit: $US million), 1978-80

1978 1979 1980

Sam sung Daewoo Sam sung Daewoo Sam sung Daewoo

USA 795 170 832 277 889 178 Japan 78 7 41 3 40 5 Canada 77 0 181 0 148 0 Germany 22 79 93 58 66 85 UK 17 21 59 32 47 38 France 38 32 49 9 14 28 Hong Kong 15 10 22 4 131 0 Malaysia 0 0 6 0 7 0 Indonesia 8 0 3 0 8 0 Singapore 1 0 0 0 7 0

Source: Cho (1983: 244-47)

8 Cho (1983: 47) states that a major imperative of the chaebol groups was to meet Park ChlDlg-Hee's policy because they recognised that their groups' survival was directly associated with his approval. Thus they rushed to set up general trading companies in 1975 when instructed to study the establishment of GTCs.

53

During the 1970s, the Samsung Corporation, rather than SEC, initiated international

marketing (Table 3.3). SEC had no choice but to postpone plans to increase its

international marketing knowledge partly because of its lack of bargaining power in

dealing with Samsung Corporation.

Samsung Corporation distributed a large proportion of the electronics products

manufactured by SEC, through its international branch offices (Cho 1983). It was not

until 1978 that SEC engaged in direct marketing through its own affiliates. A large

volume of TV s was distributed by the branch offices of the Samsung Corporation where

electronics marketing experts were rarely stationed. It was only in 1977 that SEC was

able to set up an independent export department within SEC (SEC 1989:261). As a

consequence, 'on-the-spot-information' gained in the international market, which is

essential for product planning and product development functions, was not properly

shared. In 1978, SEC established a US sales affiliate (SEA), which was the first means of

gaining access to foreign market knowledge.

In a sense, one may argue that the Samsung Corporation created a synergistic effect in

sharing its international marketing capability with SEC. However, SEC was not able to

accumulate foreign marketing knowledge independently and the knowledge acquired by

Samsung Corporation was not properly transferred to SEC. This is one possible

explanation as to why SEC has suffered from a lack of international marketing capability

during the 1980s and 1990s.

Technological capabilities and product-market performance

This section examines relations between Samsung's production capability and product­

market positions. Focus is placed on the relationship between production capability and

the diversification of product lines, and the relationship between the production capability

and the US market.

54

Production capability and the diversification of product lines

Table 3.4 shows that in 1979 Samsung had three strategic products: black and white TVs,

refrigerators and cassette radios. In 1982, the CTV became the most important product,

accounting for 30.5 per cent of total production. In turn, the share of black and white

TVs decreased from 31.5 in 1979 to 13.8 per cent in 1982. A similar decrease applied to

refrigerators and cassette radios. However, production of microwave ovens and VCRs

grew rapidly during 1980-82.

Table 3.4 Share of production by major products, 1979-82

1979 1980 1981 1982

million % million % million % million % won won won won

CTVs 16,347 7.0 54,255 23.2 141,754 38.3 156,006 30.5

Black & white 72,837 31.5 76,108 32.5 83,299 22.5 58,932 13.8 TVs VCRs 35 1,613 0.6 83 12,990 3.0

Microwave ovens 256 0.1 1,259 0.5 15,507 4.1 47,436 11.1

Audio cassettes 23,185 10.0 15,921 0.8 19,861 5.3 27,883 6.5

Stereos 9,820 4.2 7,448 3.1 10,694 2.8 10,441 2.4

Refrigerators 56,441 24.4 24,013 10.7 42,041 11.3 50,757 11.9

Washing 9,352 4.0 7,133 3.0 8,830 2.3 8,747 2.0 machines ICs 9,701 4.2 7,906 3.3 12,612 3.4 13,289 3.1

Source: SEC (1989: 294)

Given this expansion of product lines, Samsung' s aim was to apply mass production

capability gained through the production of TV sets to two strategic products - VCRs

and microwave ovens. One might say this was an attempt to create synergy. Accumulated

production capability for these products has been the foundation for overseas expansion

through the international production stage in the 1980s and 1990s. As stated earlier,

Samsung's production capability was, to a large extent, final assembly. A large

proportion of components was imported from Japan. SEC started production of CTVs in

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1978 (Table 3.5), but SED only began production of colour CRTs used for CTVs in

1980. Glass tubes had also to be imported because SC was only able to manufacture

glass bulbs for black and white CRTs: production of colour CRT glasses began only in

1983 (Table 3.5). Most ICs needed for the CTV assembly such as chroma ICs were

totally imported from Japan.

Table 3.5 Production of CRTs and glass bulbs, 1970-83

Year Black and white Black and white Colour picture Colour glass bulbs CRTs glass bulbs tubes (hundred million (thousand units) (hundred million (thousand units) won)

won 1970 1971 40 1972 161 1973 398 1974 458 1975 694 18

1976 1,053 42 1977 2,673 62 1978 2,695 112 1979 3,353 124 1980 4,204 154 100

1981 4,528 188 392 1982 2,559 109 833 1983 3,672 165 1,522 72

Source: Compiled from SED (1990: 556) and SC (1994: 586).

The high dependency of component sourcing on Japan led Samsung to encounter

difficulties in CTV production because Japanese component suppliers tended to control

the supply of core components. Samsung claims (SST 1987) that an attempt to

circumvent the dependency on Japanese suppliers was one of the reasons that motivated

Samsung to enter the DRAM business in 1983.

To maximise the exploitation of its mass production capability, it was essential for SEC

to move into the US market. Samsung Corporation became an international marketing

channel for SEC and the United States provided Samsung with a market that required a

large volume of standardised products.

56

Figure 3.3 shows that improving technological capability is associated positively with

SEC's performance. Samsung's performance of sales and profit during the second half of

the 1970s was much better than that in the first half. The chairman's secretariat replaced

several CEOs during 1970-75 when performance was low. Samsung CEOs had preferred

to choose product items which would satisfy short-term profit goals. From the CEOs'

perspective, it was natural to emphasise short-term performance. Similarly, R&D

investment in product innovation which might have guaranteed the firm's long-term

competitive advantage was postponed. This might explain why Samsung's product

change capability in consumer electronics in the 1980s and 1990s did not improve

significantly.

Figure 3.3 Performance of Samsung Electronics: sales and profits, 1970-80

25 400000

20 350000

15 300000

§ IIIIIIProfit 250000 ] ..... 10 "' - -o-sales ] ::s 200000 ~

tl) 5 tl) ~ 150000 ~ """' """'

0 70 71 72

100000

-5 50000

-10 0

Source: Compiled from SEC (1989)

Due to an improvement in production capability, and an expansion of overseas marketing

networks, which were mainly initiated by Samsung Corporation after 1975 when it was

appointed as a general trading company, SEC recorded a high performance during the

second half of 1970s. Sales and profits increased rapidly (Figure 3.3). There were two

reasons for this achievement: the production and international marketing functions were

entirely separate and there was a high dependency on the US market. The separation of

production and international marketing continued until the early 1990s and finally became

an obstacle to upgrading capability in product innovation and development due partly to

the de-linkage of international marketing and manufacturing departments within the

57

' . ·.1

company. The US market environment became a significant external factor which

· influenced Samsung to determine the timing and the location of its international

expansion.

Production capability and the US market

For Samsung, the United States was a strategic market where SEC could exploit its mass

production capabilities by manufacturing low end standardised products such as TV s,

stereo systems and cassette radios. Of course, there was a common interest between SEC

and Samsung Corporation: the former was to increase production volume in order to

maximise the utilisation of its production capability and the latter was to increase its

export performance, maintaining a better relationship with the government. In other

words, both shared a common interest in volume-oriented growth.

In 1978, a surprisingly high 85 per cent of the total of SEC's exports reached the United

States (SEC 1989: 332). This result is closely associated with the high degree of

marketing resources allocated to the United States by the Samsung Corporation. Of

several export commodities, the TV set was the most important product for SEC. There

was an extremely high export share of TV sets during 1977-79. They accounted for 81.6

per cent in 1977, 78 percent in 1978 and 79.2 per cent in 1979 (Table 3.6). Export ratios

varied by product items: 55 per cent for black and white TVs; 100 per cent for CTVs; 20

per cent for cassette stereos; and 70 per cent for audio systems (Table 3. 7). At this time,

all CTV s produced in Korea were exported because the government did not allow the

CTV broadcasting system to operate .

. In 1977 Samsung started production of CTV s by importing a large proportion of

components from Japan, but faced a serious problem because the US imposed voluntary

export restraints on CTVs imported from Korea in 1978 after only a year's production.

The avoidance of trade barriers was an urgent task because if the US market was lost,

then products such as VCRs and microwave ovens which were to follow would find no

market. SEC's production capabilities would be useless without the US market, and

securing this market was a prime objective.

58

Technological capabilities and overseas expansion

This section deals with the events that led to international expansion. Firstly, Samsung set

up its first overseas sales subsidiary in the United States, and established the first foreign

production subsidiary in Portugal in 1982. This section also emphasises the relationship

between Samsung's technological capabilities and this international expansion as well as

putting forward an evaluation of its strategies.

External environment

From the late 1970s there was controversy regarding imports of colour TV sets from

Japan, Korea and Taiwan in the United States (Bellance 1987). As noted earlier, the US

export market was highly restrictive towards CTV s imported from Korea. The United

States and Korea started to negotiate a voluntary export restraint (VER) from November

1978 when Korea's bilateral trade surplus with the United States increased rapidly: it

rose to $US 1 billion in 1978 from $US 0.67 billion in 1977 (Table 3.8), which coincided

with the fact that Samsung was about to engage in mass production of CTV s. The quota

was set up to limit the quantity of exports until June 1982. Exports amounted to 381,000

sets in 1980 and 553,000 sets in 1981 in accordance with the VER.

Table 3.6 Export proportion by product , 1977-79

1977 1978 1979

million won % million won % million won % B/WTVs 16,075 81.6 20,981 43.0 40,043 57.1 CTVs 21,423 44.0 15,493 22.1 Sub Total 16,075 81.6 42,404 78.0 55,536 79.2 Cassette radios 814 4.1 1,241 2.5 4,422 6.3 Stereo audio systems 1,290 6.5 2,321 4.8 7,121 10.2 Others 1,530 7.8 2,776 5.7 3,055 4.4 Total 19,709 100.0 48,742 100.0 70,134 100.0

Source: SEC (1989 : 260)

Korean production of CTVs began only in 1974, eight years behind the production of

black and white TVs in 1966. It was not until December 1980 that there was a demand

for CTVs in the domestic market (EIAK 1989: 154). Until this time, Korean CTV

manufacturers had to export all their products. Competition for a share of the export

market between Goldstar and Samsung increased. In 1978, Goldstar set up a US based

59

sales subsidiary, and in 1981 it established a US based CTV plant with a capacity of

500,000 units annually. Goldstar's measure was an effort not only to overcome the trade

barriers in the expectation of future restrictions on the import of CTV s, but also to take

the first-mover advantage in an oligopolistic competition. It was inevitable that Samsung

would take counter action.

Table3.7 Export ratio of major products, 1977-79

1977 1978 1979 Total Export B/A Total Export B/A Total Export B/A {A~ {B~ {A} {B~ {%~ {A~ (B~

million million % million million % million million % won won won won won won

Black and white TVs 42,325 16,075 40 60,829 20,981 35 73,836 40,043 55 CTVs n.a n.a n.a 21,423 21,423 100 15,493 15,493 100 Cassette radios 3,855 814 25 10,038 1,241 12 23,185 4,422 20 Stereo systems 1,911 1,290 60 3,535 2,321 70 10,801 7,121 70

Source : Data compiled from SEC (1989: 260)

The establishment of the first overseas sales subsidiary in the US

In July 1978 Samsung established its first overseas sales outlet, Samsung Electronics

America Inc. (SEA) in New York. Operations began in June 1979, seven months after

voluntary export restraints on CTV s were enforced by the US government in November

1978. Samsung claims that SEA had two strategic purposes: one was to intensify US

marketing activities through direct sales and the second was to increase the sales of

Samsung brand name products to the US market (SEC 1989: 246). To this sales

subsidiary, Samsung appointed as President Mr. F. Dileo, a US marketing specialist.

SEC's trajectory of technological development is closely related to the location of SEA.

The United States was the strategic location for SEC to exploit its mass production

capability because it provided SEC with a market which exactly fitted its technological

capabilities.

There are two relevant issues to consider when discussing SEA. First, the establishment

. of SEA was an important attempt to accumulate foreign market knowledge. This was

partly because of SEC's willingness to avoid international marketing dependency on

Samsung Corporation. A continuous effort had been made by SEC to establish foreign

60

branch offices as exports increased. However, the offices' activities were limited to

gathering market information rather than taking a more independent role because

Samsung Corporation still took the major initiatives in international marketing, serving

OEM buyers and major foreign distributors. Samsung Corporation's objective was to

maintain the number one position in the general trading companies amongst Korean

chaebol trading companies. The US market was the one of the best locations in which to

achieve its objective of increasing exports. However, the timing of the establishment of

SEA by SEC was a near-sighted strategy. SEC moved at the last minute and it was only

set up after the US action on voluntary export restraints.

Table 3.8 Korea's exports and imports to and from the United States, 1972-80

1972 1973 1974 1975 1976 1977 1978 1979 1980

Exports

US$' 000 758,974

1,021,182 1,492,168 1,536,287 2,492,573 3,118,648 4,058,345 4,373,929 4,606,625

Source: Korea Foreign Trade Association (1991)

Imports

US$' 000 647,225

1,021,182 1,700,816 1,881,144 1,962,907 2,447,439 3,042,950 4,602,581 4,890,248

Trade Balance

US$' 000 111,749

-180,702 -208,529 -344,857 529,666 671,209

1,015,395 -228,652 -283,623

SEA became the first platform from which Samsung accumulated US market knowledge

and transferred that knowledge to its production and design functions. However, the

organisational arrangements that facilitated de-linking between production and export

marketing did not allow 'on-the-spot-information' to be transmitted to the relevant

departments. More importantly, no relevant functional groups were available to interact

with each other because the product design and development activities associated with the

headquarters were not properly functioning during the 1970s. This continued until the

early 1990s and led to significant obstacles to the upgrading of product change capability

in the 1980s and 1990s.

61

Portugal-based CTV production plant

According to Samsung (SEC 1989) SEC recognised the need for overseas production in

Europe in 1978. In 1979, SEC sent a survey team to Europe to investigate likely

locations. In March 1982, when Goldstar set up a US-based CTV plant in Alabama, SEC

also set up a new joint venture, Samsung Electronics Portugal Inc. (SEPI), in

cooperation with Portuguese TV manufacturer (Emacet) and the English-based TV

marketing distributor (MRI). In the venture, the share proportion of the SEPI was SEC

. (55 per cent), Emacet (35 per cent) and MRI (10 per cent). The total capital investment

was $US 4.69 million and Sarnsung received three per cent of the royalties for its

production technology given to SEPI. In addition, fifty per cent of the components were

supplied from Korea, while Emacet had sales rights in Portugal, Spain and the Portuguese

and Spanish colonies in Africa. MRI had the same sales rights in England. This was the

first overseas production plant and was set up six years after Samsung started the

production of CTVs by importing foreign technology.

An important feature of the Portuguese overseas production project is that it uncovered

Samsung's weakness in international management capability. SEC set out a strategic

objective to accumulate international management capability in engaging overseas

production so that it could use that knowledge for the operation of the US-based CTV

plant in 1984.

Building the CTV plant in Portugal was Sarnsung's strategic response to Goldstar's

action. SEC seemed to regard the Portuguese plant as a pilot project. Under oligopolistic

competition, SEC was forced to take a counter measure to Golds tar's strategic move so

that it could protect its market share in the United States, which had possibly decreased

through Goldstar' s action. However, given that Goldstar' s huge capital investment

(about $US 20 million) in foreign production was equivalent to SEC's total profits in

1978 and 1979 (see Figure 3.3), Samsung felt it would be risky to implement the same

overseas production plant without experience. Sarnsung (SEC 1989) acknowledges that

the possibility of establishing a US-based CTV plant had been investigated since 1980,

but this investment was postponed until experience in foreign production had been

acquired.

62

However, Portugal was unlikely to be the best location to accumulate international

production experience, given the fact that Samsung's need was to prepare for the US­

based CTV plant. Because of the different socio-economic environments in Portugal and

the United States, the experience gained from the Portuguese plant was not particularly

relevant to the operation of the US-based CTV plant.

In contrast, prior to the establishment of its US based CTV plant in 1974, Matsushita set

up a pilot project in Puerto Rico, a US territory, in 1965. This provided cheap labour and

avoided tariffs when exporting to the United States and Matsushita also accumulated

useful foreign knowledge for nearly ten years before beginning operations at its US-based

CTV plant (Kinugasa 1982).

Summary

In this chapter, I have examined the process whereby Samsung built up its technological

capabilities in the 1970s and its impact on the corporation in the early stages of its

internationalisation. Samsung learnt and accumulated technological abilities through its

relations with joint venture partners, and through foreign licences, mostly from Japan and

the United States. During this period, Samsung's major focus was on upgrading

production capability through training.

By the end of the 1970s, Samsung had considerably improved its assembly capability

through the mass production of black and white TV sets. There was a marginal level of

product change capability when Samsung imitated Japanese VCRs and microwave ovens

through 'reverse engineering.' In addition, SEC shared its international marketing

capability with Samsung Corporation, an affiliated general trading company, rather than

. building its own foreign marketing channels.

Samsung's international expansion began with the establishment of a US-based sales

subsidiary and a Portugal-based CTV plant. Samsung's internationalisation process was

strongly motivated by Lucky Goldstar, a market leader which had made a strategic move

. overseas under an oligopolistically competitive market structure in the expectation of

increasing trade barriers in the future with the United States. Samsung's international

63

expansion was a defensive strategy in response to Goldstar's action. External factors were

a significant driving force for Samsung to move overseas. However, the pattern of

'follow-the-leader' was determined by the nature of SEC's technological capabilities. For

instance, in 1981 Goldstar moved to the United States, while in 1982 Samsung moved to

Portugal. Goldstar went directly to the United States, its major export market, but

Samsung did not. This direction was due not only to the risk-averse organisational

culture that was established through the influence of top management, but it was also a

result of the 'profit centre' system which was under strong centralised control. Samsung

gained international production experience in Portugal prior to foreign production in the

United States, in contrast to Goldstar, which immediately established its US-based CTV

plant without any prior experience of international production.

64