Our company, AAB Motors Co., is a South Korean manufacturer and distributor of automobile and trucks motors and parts, based in Seoul. The company, which also conducts business in financial sector, employs 68,383 people worldwide. Currently, AAB has a market cap estimated in USD $28.9 Billion. (Forbes, 2017a)
BBC Automobile Group produces vehicles and automobiles parts as well. The firm, which headquarter is China, owns 67,205 collaborators. Its market cap is about USD $17 Billon (Forbes, 2017b).
Both firms initiated conversations with the purpose to establish a joint venture to pursue an innovation strategy setting up business in Canada. A committee has elaborated the report presented below to inform this Board about the main features of the referred partnership, evaluating the pros and cons of initiate operations in the country.
Canada´s Formal and Informal Institutions: an overview
Canada has a population of 36,2 million unequally distributed in function of its geographical landscape. With a Gross Nation Income (GNI) per capita of USD $ 43,155 and a Human Development Index of 0.913, the North American country stands in the #9 position joining the “very high human development” group (UNPD, 2015). In 2013, the country “generated revenues of $84.7 billion, accounting for 15 percent of North American vehicle production (2.37 million units)” (Government of Canada, 2017a). This figure demonstrates that Canada can be deemed as a relevant market, although this is not the core purpose of the cited joint venture.
Our committee developed a multidimensional analysis, utilizing the Institution-Based view as theoretical framework to evaluate formal (economic and commercial aspects; legal and political systems; innovation and property rights) and informal (culture and ethics) institutions in the country, as it follows.
Economic and Commercial Aspects
The projected GDP growth rate in 2016 is +1.3% and +2.1% for 2017 (Bank of Canada, 2017). The country has health levels of inflation, 2.1%, (right in the middle of its target), low interest rates, 0.5%, and an employment rate of 6.8%, one of the lowest rates in the last five years (Tradingeconomics.com, 2017). This data demonstrate that macroeconomic scenario is stable in despite of some spillovers of the last world economic crisis.
Exports and imports summed, in 2013, 61.9% of GDP (World Bank, 2015), which indicates medium openness to foreign trade. The percentage has decreasing over the last few years, a movement that has been also observed in other countries, due to the slowdown of globalization and the increasing of protectionist measures in international trade.
Foreign Direct Investment (FDI), by its turn, has increased in the last years, corresponding to 3.9% of GDP (World Bank, 2015). The country occupies the #65 position on the world rank. The Government of Canada claims that FDI flows have mirrored global movements flows, “demonstrating a marked tendency to move in tandem with the business cycle” (Government of Canada, 2017, p.1). Its evolution is demonstrated in the Exhibit 1.
Exhibit 1 – Inward FDI Flows to Canada (C$ Billion)
Source: The Canadian Trade Commissioner Service (2017)
From 2010 to 2013 Canada has accumulated $175 billion, making Canada the 10th largest recipient of global FDI flows and ranked 5th on a per capita basis (Government of Canada, 2017, p.2).
The Doing Business Report from the World Bank (2017a) ranks Canada on the 22th position. Amidst the main advantages of investing in the country, we must point out the ease for starting a business (#2 in the rank), getting credit, paying taxes and resolve insolvency issues. Some negative elements, however, are noted: the legal system is slow, jeopardizing the execution of contracts, obtaining electricity and dealing with construction licenses. The country needs to develop better process to facilitate international trade and the registration of property right, a theme that is of paramount importance for our strategy.
The investor can also benefit from a good logistic system: Canada ranks 14th in the Logistic Performance Index (World Bank, 2017b). Finally, the country offers total tax business costs up to 48% (Government of Canada, 2017c) and labor costs up 11.2% lower than in U.S (KPMG, 2017).
Exhibit 2- Canada Logistic Performance Index 2016
Source: World Bank, 2017b
Automobile industry facts and figures
Canada is one of the ten biggest automotive manufacturers in the world, counting on industrial plants that have 2.4 million units of installed capacity. About 85% of the vehicles are exported. The sector is also an important gear for country´s economic development, employing over 38,000 direct workers in 2013 (Govern of Canada, 2017a).
One of the main advantages of setting up businesses Canada is its proximity to the North American market. As a member of the NAFTA (North American Free Trade Agreement), we cannot ignore the opportunities that can be brought by the commercial agreements already signed with relevant markets as European Union
Canada automobile industry is completely integrated to the Great Lakes automotive cluster, enjoying the presence of several world-class suppliers (Automotive Invest in Canada, 2017). The Exhibit 2 displays the most important automotive assembly plants in Canada in 2015, which are located in Ontario´s region.
Exhibit 2 – Vehicles made in Canada: Assembly plants 2015
Legal and Political framework
Since Canada was a United Kingdom´s colony in the past, and, currently, it is a member of the Commonwealth of Nations, the country´s legal system is based on the English common law. The contracts elaborated during the transaction must, therefore, be suitable for the three firms, which have distinct legal backgrounds: South Korea is based on the civil law, while Chine developed its own legal system, in a mix of traditional Chinese philosophy and modern western influences. Thus, considering that common law system tends to be most flexible in comparison to the other two frameworks (Peng, 2016), this issue must be subject to closely oversight to prevent future misunderstandings and unnecessary costs resulted from eventual sues.
By the other hand, considering what Richard Scott called the regulatory pillar (2008), we can say that Canada has strong institutions, which warrant the compliance of the stablished laws and norms and, consequently, weaken harmful and opportunist practices that can raise transaction costs. Peng (2016) highlights that in locations that formal institutions are respected, the weight of informal relations is smaller. Good connections and political relationship are also important in this case, but, in general, they are not fundamental for business´ success.
Innovation and Property Right Issues
By analyzing this aspect, we can ratify that Canada is actually a good investment option for our firm, especially if we are focusing on innovation to outperform other companies. The Canadian government, through the Automotive and Transportation Industries Branch (ATIB), is making great efforts to promote technological advances by implementing programs and credit lines such as the Automotive Supplier Innovation Program (ASIP) and the Automotive Innovation Fund (AIF), which will offer $250 million to automotive firms to foment R&D in the sector.
The Innovation, Science and Economic Development Canada (ISED) is in charge of The Automotive Investment Attraction Hub to facilitate the prospection of new investors, providing business and technological information (Automotive Invest in Canada, 2017).
Regarding human resources, Canada population is the most educated among OCDE countries (OCDE, 2015).
Ethics and Culture
In addition to examine formal institutions is relevant to understand cultural aspects to identify eventual clashes that may emerge due to distinct set of norms and beliefs that rules people´s behavior in the country.
Hofstede (2017), using the 6-D Model, depicts Canada as a country highly individualistic, short-term oriented, indulgent and relatively masculine. The model also shows that Canadian people give little attention to hierarchical structures and can tolerate a certain level of uncertainty. The Exhibit 3 compares the three countries involved in the business negotiation from the cultural point of view.
Exhibit 3 – Canada in Comparison to South Korea and China
Source: Hofstede (2017)
As we can see, some issues are particularly critical for the sake of businesses transactions. Traits like individualism, indulgence and short-term orientation can be considered as an arrogant, rebel or inadequate behavior to Eastern people. AAB values, which search for “respect for diversity of cultures and customers” and claims to “refuse to be complacent” (AAB, 2017, online), pursuing new challenges, collaborate to minimize potential negative cultural effects.
To reduce even more these risks, the committee understands that recruitment and selection are key processes, in which the responsible team must identify professionals whose profiles adjust to the company´s spirit. Clearly, continuous training programs to reinforce organization´s philosophy are mandatory.
Regarding the pros and cons presented above, we agree with the settlement of a new plant in Canada. The contact with other firms in the supercluster located in Great Lake Region, the high talented human resources available in the country, less costly than U.S., and programs created by the government to foment innovation can contribute to the success of this endeavor. Besides that, Canada charges lower corporate taxes, offer good logistic systems and simpler demands when starting a new business. Last, but not least, the country offers good commercial prospects due to its proximity to U.S. market.
To overcome the liability of foreignness, however, the joint venture must focus on eventual legal impairments, that may result from distinct legal systems, language and the long time for legal analysis. Cultural differences can also represent a hurdle, which can be overcome by a well conducted hiring process and continuous training.
Finally, identifying several information about opportunities and risks in starting business in Canada is a fundamental step. After this process, however, AAB and BBCmust be prepared to join our firm´s resources and capabilities to so that we can benefit from the synergy effect.
Bank of Canada (2017). Monetary Policy Report – January 2017. Available at http://www.bankofcanada.ca/wp-content/uploads/2017/01/mpr-2017-01-18.pdf Access on: 27 February 2017
Forbes (2017a) The World´s Biggest Public Companies. Available at: https://www.forbes.com/companies/AAB-motor/ Access on: 19 February 2017
Forbes (2017b) The World´s Biggest Public Companies. https://www.forbes.com/companies/BBC-automobile/ Access on: 22 February 2017
Government of Canada (2017a). Canadian automotive industry. Available at: https://www.ic.gc.ca/eic/site/autoauto.nsf/eng/Home. Access on: 19 February 2017
Government of Canada (2017b) Boom, bust and recovery: Recent trends in inward FDI flows to Canada. Available at: http://tradecommissioner.gc.ca/canadexport/154946.aspx?lang=eng. Access on: 19 February 2017
Hofstead, G. (2017) What about Canada? Available at: https://geerthofstede.com/canada.html. Access on: 19 February 2017
KPMG (2017) Competitive Alternatives: National Rankings Available at: https://www.competitivealternatives.com/highlights/overall.aspx. Access on: 25 February 2017
Peng, M. W. (2016). Global3. Boston, USA: Cengage Learning.
Scott, W.R. (2008). Institutions and Organizations (3rd ed.). Thousand Oaks, CA: SAGE Publications.
UNDP (2015) Human Development Report 2015: Work for Human Development UNDP: New York, USA.
World Bank (2015). World Development Indicators database. Washington, DC. http://data.worldbank.org. Accessed 16 April 2015.
World Bank Group (2017a) Doing Business 2017: Equal opportunity for all. International Bank for Reconstruction and Development / The World Bank: Washington DC, U.S.
World Bank Group (2017b) Global Rankings 2016: Logistics Performance Index. Available at: http://lpi.worldbank.org/international/global. Access on: 19 February 2017