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Essay: A Report Analysing IKEA’s FDI Strategy in Poland, With Relation to Dunning’s Paradigm

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1.1 History of the Firm

IKEA’s roots can be traced as far back as 1943, in the small Swedish village of Älmhult. Its founder, Ingvar Kamprad, was a mere 17 years of age when he formed the company. Although nowadays, IKEA is a household name with regards to furniture and home décor, originally they primarily sold stationary, wallets, table runners and jewellery. However, in 1948, locally sourced and manufactured furniture was added to the range of products sold by the company, the initial response to this new line was positive and in turn IKEA began to focus its primarily on the production of furtniture. This was a great success, in 1958 the first IKEA store was opened in Sweden, and following on from this, over the next 30 years the firm expanded rapidly across Europe- opening stores in: Norway, Denmark, Austria, Germany, France and the Netherlands and even entered markets in new continents, such as the USA and Australia. Following on from the success of this expansion, in the 1990s and 2000s IKEA continued to expand into unexplored territory and entered markets in countries such as: Czech Republic, Hungary, Poland, Spain, China, Russia, Japan and more recently, India (2018). (IKEA, 2018: online).

1.2 The Firm Today

As of November 2018, IKEA boasts an impressive 425 stores in 52 countries around the globe, selling a 9,500 products across the IKEA range, which in turn generate a total revenue of €36.3 billion which then subsequently translates to €2.5 billion in net profit. (IKEA, 2017:online). The overarching business objective of IKEA is to offer a wide range of furniture and household appliances/accessories that are both affordable and aesthetically pleasing. One of the key aspects that can be attributed to IKEA becoming a staple household name is due to the fact that they offer the range of products worldwide, both in-store and online. Another factor is the ease of assembly/installation with their furniture, as to cut down on costs to both the firm and the consumer, the majority of IKEA’s products are flat packed and require the consumer to follow the simple instructions and assemble the furniture themselves. (IKEA, 2017:online).

1.3 IKEA and Poland

Admittedly, whilst IKEA originally expanded and subsequently invested into the Polish market back in 1991 with the opening of its Warsaw branch, interestingly enough despite it’s close proximity to Sweden, as of 2019 it currently has 11 stores, which can be argued to be a relatively low number when amount in other countries. For example, France has 33 stores in comparison. However, conversely, in 2015 IKEA reported that 25.5% of the wood used to produce IKEA products was sourced from Poland. (IKEA, 2015:online). This in turn raises the question as to whether IKEA prefers Poland’s location as a tool for manufacturing rather than retailing. This is further supported through the fact that there are 16 IKEA factories operating within Poland, which co-operate with over 70 Poland based suppliers (IKEA, 2015:online), highlighting perhaps a desire to focus more on the manufacturing/distribution of IKEA products within Poland and other stores worldwide as a result of this, as opposed to bringing in more sales revenue from the opening of extra stores.
Following on from this, in 2010 IKEA began construction on ‘one of the most important business projects in Eastern Poland’ (PAIH, 2010:online), a new manufacturing plant in Orla, the plant utilises a new production process technology to produce ultra-thin high density fibre boards (or UT-HTF). The total cost of the investment was €140m and will also generate 230 jobs for the local economy in the Orla district. Valon Kone (2012:online) states that Orla was chosen as the destination for the investment due to the plants proximity to the raw materials required for the production of UT-HTF, i.e. wood.

This clear example of FDI and the reasons that underline as to why it was carried out will serve as the case study within the report when conducting analysis using Dunning’s (1977) paradigm. However, before delving into said analysis of IKEA’S FDI strategy, it’s important to outline and define the key terms that will serve as the foundation of the report.

2.1 Dunning’s Paradigm (1977): Overview

Dunnings eclectic paradigm (1977) is a theoretical framework proposed by John. H Dunning, that offers insight into the explanation of as to what factors influence ‘both the initial expansion of MNEs by foreign production and the subsequent growth of their activities’ (Stoian, 2008:351). The key takeaway from Dunning’s Paradigm (1977) is that ultimately there are three independent, reinforcing sub paradigms/variables that determine as to whether an MNE carries out FDI. These sub paradigms are: Ownership advantages (or O advantages), location advantages (or L advantages) and finally internalising advantages (or I advantages).

2.2 Ownership Advantage (O)

Stoian (2008) states that ownership advantages are vital to an MNE’s ability to compete and subsequently succeed in operating within a foreign market. She then further states that these advantages can compensate for the substantial initial cost of a firm beginning to operate in a foreign market, due to the fact that domestic producers (i.e. the firms competitors) do not have these added costs, it’s imperative that firms possess these advantages as a means to outweigh the competition. This is further supported by Markusen (1995) who further expands by stating that knowledge-based assets are arguably more important than capital-based assets in determining the undertaking of FDI, as they are easier to transfer into a foreign market as opposed to capital-based assets. Furthermore, he also highlights that the transfer of knowledge based assets between additional facilities is considerably cheaper and in turn won’t affect the firm’s operational performance, which will be of utmost importance when entering a foreign market and competition will be fierce. Key examples of Ownership advantages are: brand name, patents, access to specific/advanced technology.

2.3 Location Advantages (L)

Whilst O advantages play an important factor determining FDI, there should also be location advantages present in the target country that the MNE will benefit from if it were to move production abroad as opposed to continuing in their home country. Examples of location advantages include: proximity to production resources, lower production costs, cheaper labour, large demand in destination country’s market etc. Markusen (1998) further expands on this when he highlights that an MNE that wishes to carry out efficiency seeking FDI will want to move production to a country where their products are cheaper to produce, whilst firms who are seeking to carry out horizontal FDI should choose a country in which market demand and consumer tastes are substantial.

2.4 Internalising Advantages (I)

The final sub-paradigm that makes up the OLI Theory (Dunning, 1977) are internalising advantages, which mean that it’s more beneficial for the firm to transfer its ownership advantages into foreign markets within the firm via FDI, as opposed to outsourcing/licensing production to a another firm within the host country. Dunning (1993 )expands on this when he says that essentially, internalisation is a choice between a firm undertaking FDI or franchising a firm within a foreign market to exploit O advantages possessed by the franchisor. Due to fears of market failure and local firms within the foreign market dissipating the O advantages through licensing, MNE’s will tend to internalise high value added production activities, as a means to gain leverage/power within a foreign market.

2.5 Concluding Remarks

Whilst Dunning’s eclectic paradigm (1977) offers insight into the determining factors that MNE’s take into account when moving producing abroad, the theory does have its limitations. Most notably being that due to the fact that the theory is very content specific, and as a result, one size doesn’t fit all. Rugman (2006) states that the link between O and L factors becomes jaded/intertwined, he then further supports this when he highlights that if a firm can benefit from cheaper production resources offered abroad (an L advantage), the firm can then utilise this as an ownership advantage. Dunning (2001:177) refutes this when he states that the eclectic paradigm ‘is not to offer a full explanation of all kinds of international production but rather to point to a methodology and to a generic set of variables’. He then also notes that the application of the theory depends entirely on the firm’s motivation for FDI.

3.1 Applying Dunning’s Paradigm (1977) to IKEA

As the Dunning Paradigm (1977) is made of three independent sub-paradigms, these being O advantages (or Firm Specific Advantages), L advantages and I advantages, the analysis of the FDI strategy and its motives will be broken up into three parts in the interest of the flow of the report.

3.2 IKEA’s Ownership Advantages

Due to the sheer size of IKEA and success today, and its subsequent access to resources, capital and technologies, it’s obvious that this in turn enables the firm to utilise a wide variety of ownership advantages as a means to gain a comparative advantage over their competitors.

The most obvious of these O advantages IKEA’s strong position in the global furniture market, as stated previously, nowadays IKEA is a staple household name, with a business model that is focussed on delivering affordable products whilst maintaining the balance between aesthetically pleasing design, function and design. As a result of this, the demand for IKEA’s products will be considerable wherever they decide to undertake their FDI, Dunning (2000) further supports this view when he states that ownership advantages that relate to the possession and subsequent exploitation of monopolistic power in turn creates barriers to entry to firm who do not possess them. Lundan (2010) also supports this view when she argues that international expansion leads to the firms size increasing and subsequent access to economies of scale, allows the firm to gain a competitive advantage, however she also notes that it may affect organisational performance which can be seen where she infers that as the firm grows in size, it becomes more difficult to manage. This is further supported by Rugman and Verbeke (2004) who highlight that as a firms global scale increases, so do its institutional/organisational issues.

However, whilst increasing in size and benefitting from economies of scale can effect a firms organisational efficiency (Lundan, 2010), because IKEA has been operating for a considerable amount of time, they will in turn have developed organisational practices which will subsequently make the managing of said issues more streamlined. Expanding on this further, a key example of this would be through the introduction and implementation of the IWAY (IKEA, 2015) framework which serves as the ‘minimum requirements for environmental and social & working conditions when purchasing products, materials and services’ (IKEA,2015:online), within this framework suppliers must adhere to the regulations/requirements set by IKEA and suppliers market as critical are assessed and given extra supervision as their business operations may be potentially damaging to the environment or their employees’ health etc..
Finally, Buckley & Hashai (2009) highlight that in certain cases, a firms ownerships advantages don’t always have to be developed from the investing firm and its subsequent home country and instead can be acquired when the firm invests abroad. This is particularly true in the case of IKEA and the Orla manufacturing plant as the process technology used by the plant was developed by the German based firm Dieffenbacher. It should be noted that Lundan (2010) expands on this by illuminating that process/technological ownership advantages adhere to the resource based view if the resources are rare, valuable and difficult to imitate or substitute by competitors. However, as IKEA has not developed this advantage themselves this doesn’t apply in this instance.

3.3 IKEA’s Location Advantages

As stated previously in the report, the key underlying location advantage that IKEA possesses as a result of undertaking FDI in the Orla district is the proximity to raw materials used in the production process (i.e. wood) of their products. Furthermore, the importance of wood to IKEA and its production process can be seen where they report that two thirds of the interior fittings in the IKEA product range are made from it (IKEA,2015:online), therefore it comes as no surprise as to why they’ve chosen the Orla district for the location of the manufacturing plant. This has a knock on effect as both operational efficiency and operational costs will improve as time constraints will be decreased due to less distance between the suppliers and the manufacturing plant which in turn will lower transportation costs as well. This is further supported by Dunning (1993) who highlights that a host country’s access and quantity of natural resources plays a vital role in determining whether a firm undertakes FDI or not. Hymer (1977) also backs this up where he argues that location advantages and the firm’s behaviour/organisational performance are intertwined and affected by one another.

Another key location advantage is illuminated by Djankov et al (2002) who argue that good market rules and regulations and subsequently governance in the province and therefore country, are of the upmost importance to firms seeking to invest abroad. A key example of IKEA capitalising on this can be seen where 25% of the construction costs of the plant were subsidised by the EU’s ‘Innovation Economy- Operational Programme’ (PAIH,2010:online), this clearly showing that support offered by the EU and also the host country’s governments are one of the factors determining where a firm invests abroad. Craig & Douglas (2005) further support this by stating that by choosing to invest in a country in which governmental and economic market stability is strong, will in turn lead to an increase in organisational performance.

Finally, Brouthers et al (2009) highlights that another deciding location advantage considered by MNE’s is its proximity to other potential target markets and other nations in which the firm is already operating in. This can be seen in the instance of IKEA’s FDI strategy as Poland is in close proximity to both Russia, a market which IKEA has already ventured into, and Ukraine, an economy in which recently IKEA has expressed desire in entering (Bloomberg, 2018). This will be of considerable interest to IKEA as the manufacturing plants close proximity to said markets will in turn further lower operational and transportation costs, and therefore affect organisational performance positively.

3.4 IKEA’s Internalisation Advantages

There are a multitude of factors that are apparent in the case study that detail as to why IKEA have chosen to further invest in intertwining the manufacturing process into their value chain (Porter, 2004).

One of the key factors considered was by opening the manufacturing plant with the new process technology, by internalising it they are able to use it as a tool to improve strategic control over competitors and in turn offer products of higher quality, whilst rival firms will be unable to. This will in turn affect IKEA’s market power positively. Furthermore, considerable investment was put into R&D projects within the plant which in turn can also lead to more process and technological innovation and therefore can potentially further increase the gap between IKEA and its competitors.

Furthermore, Dunning (2003) highlights that one of the key reasons as to why MNE’s internalize their advantages is due to the fact that it will subsequently lower transaction costs and avoid potential issues in production/distribution than if the production process was to be licenced out to a third party firm. This in turn obviously grants IKEA a larger sense of control over the production process, and means that it can continue operating to their desired standard. It should also be noted that internalisation is intertwined with the previous aspects of Dunning’s paradigm (1977) as by internalising the production process has further improved the benefits IKEA will gain from economies of scale, through cheaper costs of production, labour and the proximity to the resources. Erdener & Shapiro (2005) highlight that backwards integration with regards to the value chain is undertook as means to lower operational and transactional costs, and therefore it’s clear to see that this is the route implemented by IKEA.

4.1 Ethical Issues Faced by IKEA When Undertaking FDI

The primary ethical issue faced by IKEA when constructing the Orla manufacturing plant was that of an external environmental nature, due to the plants close proximity to Poland’s UNESCO protected Bialowieza Forest, one of the last primeval forests in Europe, there was extensive outcry from environmental organisations such as Greenpeace and the WWF over the fear deforestation caused by excessive logging. However, IKEA demonstrated a positive CSR policy with regards to these complaints, and vowed not to buy or source raw materials from this forest. (Equal Times, 2017). This act of CSR gained support from the environmental groups as stated previously, wood from Poland accounts for a whopping 25.5% of products sold in IKEA’s product range are produced from Polish sourced wood (IKEA,2015:online).

However, in recent times, tensions may arise further as the EU has recently charged the Polish government with illegal logging after they claimed that it was necessary to combat a spruce beetle outbreak. Although, ultimately, in the court ruling, the EU found that ‘Polands own documents showed that logging posed a greater threat to Białowieża’s integrity’ (The Guardian, 2017:online). Whilst admittedly, this doesn’t affect IKEA directly as they’ve previously stated to not damage the forest, it may cause tensions to arise with regards to logging/wood processing in general, which is obviously serves as the root for two thirds of IKEAS product range (IKEA,2015:online).


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