In Chapter 3, we discussed the motorcycle market in Vietnam. We saw that the considerations of comparative advantage suggested that Japan would export motorcycles to the Vietnamese market while importing rice. Indeed, beginning in the 1990s, exports of Japanese motorcycles to Vietnam began to increase significantly. The companies involved were Honda, Suzuki, and Yamaha, but the favorite motorcycle in Vietnam was Honda. Indeed, Tiep (2007) noted that “For a long period of time, Honda had become a common name for every motorcycle. Whenever someone saw a motorcycle, he called it ‘Honda’” (p. 302). However, in 1997, Honda began to produce motorcycles in Vietnam itself. This is not a possibility that we considered in Chapter 3. In that chapter, we implicitly assumed that there was only one means by which Japanese motorcycle manufacturers could serve the Vietnamese market, namely exporting. In practice, however, other means are available. As we begin to examine these other means, we move from the exclusive realm of trade to that of international production, the subject of Part II of this book.

As you will learn in this chapter, exports are one possible choice in a menu of options by which a firm can serve a foreign market. Another broad option is foreign direct investment (FDI). FDI involves the holding of at least 10 percent of the shares in a foreign productive enterprise, considered to be a threshold indicating management influence. A third broad option is contracting a foreign firm to carry out production in that country. Our first task in this chapter is to evaluate the three types of foreign market entry: exporting, contracting, and FDI. Our second task is to identify a set of motivations for international production. Our third task is to consider the entry mode choice decision. Finally, we provide a brief, historical overview of multinational enterprises (MNEs) and international production. This set of topics will give you the necessary background for the more detailed considerations of Chapters 10, 11, and 22. An appendix to the chapter explicitly relates FDI to the comparative advantage model of Chapter 3.