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Entrepreneurs without money (XXI): El Salvador possible entrepreneurship journey with China. Geographic Context.

phyllis-schlafly-location-is-the-key-to-most-businesses-quote-on-storemypic-254c0Good afternoon. Let´s continue with our saga Entrepreneurs without money. Today is the twenty-first episode. As previously announced, today we will continue learning about the basic questions we should ask ourselves when analyzing the geographic context of the project: “El Salvador-China possible commercial relations”. The geographic context means location. Have you heard the following phrase: Location is everything. Well, that is true to many, particularly for China.  China, as a factory of the world, is looking for strategic locations to expand their market power.  For China, the possibility to enter into Latin America has been a pretty trial and error strategy over the last 20 years.

Let´s start. The geographic context is defined, as the specifics of the geographical focus of entrepreneurial firms in terms of their global, national, regional and local place. Nowadays with the globalization, the geographic context is multidimensional and beyond the multinational. An entrepreneur may decide to produce in several sites, ensemble in another location, sell globally via online, and register his or her company in another one.  This context can include the mobility of innovative entrepreneurs in different geographical areas with different regulations, laws, networks, etc. that affect their ability to innovate.

Nowadays, any entrepreneurial endeavor can emerge as a multinational company (MNC). Sticking to the definition of an MNC, any entrepreneurial start-up engaged in producing and selling goods or services in more than one country is an MNC.  MNC consists of a parent company and subsidiaries. The parent company is located in a headquarters location (where the strategic apex and support staff and some parts of the technostructure are located). And an MNC has at least 3 or more foreign subsidiaries, with a high degree of interaction among the units. Some MNCs have upwards of 100 foreign subsidiaries scattered around the world.

emerging_multinational_companies_from_china.jpgJust for a moment, let´s think about President Xi Jinping. If his country is seen as an MNC, this means that China has specialized in the production and export of goods for almost every industry we can imagine. The production of those goods is done with the highest relative efficiency and lower costs compared to other countries. This  Chinese MNC may import other goods from other nations, products such as petroleum from Venezuela, or others which other countries can produce relatively more efficiently. The China  Multinational Country is composed of several companies (local and international) which act as multinationals, and all of them are the starting point of  Chinese international trade businesses.

joseph interpretingBut let´s go back to the origin of international business. The transfer of goods and services across national borders has happened for several thousand years. If you read the Bible, we can see strategic decision making in the history of Joseph. Joseph was a corporate strategist (Read Genesis 41). He advised to the rulers of Egipt to establish that nation as the granary of the middle east.  Joseph interpreted two dreams of the Pharaoh, which were directly related to Egypt economy fundamentals. Joseph advised to harvest and store as much grain (food) as possible during the first set of seven years so that when the seven years of famine arrived, the Egyptians will have what to eat and become a provider to the rest of the countries which were not prepared”.

the wealth of nationsSince then and for centuries, countries have been doing international businesses. This is not new.  In 1776, Adam Smith, wrote; “what is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage”. In 1776, Adam Smith was introducing the concepts of value-added and the doctrine of the comparative advantage between nations.

full_map-un-856dWith time, after the first and second industrial revolution, the two World Wars, the third industrial revolution and now that we are starting to deploy the fourth one, things are changing in the map. There are groups of countries denominated as the core of the World Economy – The USA, Japan, Canada, Australia and Nations of Western Europe. It seems to me, now China wishes to be part of these buddies.  China has become the “factory of the world” and has invested in skills, know-how, and knowledge in manufacturing and production of almost everything at lower prices. The core nations are relatively homogeneous in terms of living standards, lifestyles, economic organization, and, guess what is happening: the core economies are realizing that China is more than “made in China”.

barbie dollLet´s understand it with a basic example: A single Barbie doll is designed in California, made in more than 10 countries: parts and clothing of the doll are made in Japan, China, Hong Kong Malaysia, Indonesia, Korea, Italy, Taiwan. It is assembled in Mexico and other countries, and finally, it is sold in more than 150 countries all over the world. Why is Barbie made in these countries and not in El Salvador? Simple answer: The value added is better in all those particular countries. In any part of the Barbie doll value chain – product development, design production, assembly, marketing, logistics, technology, etc.  The value added depends on differences in labor costs and unique national attributes or skills.

After reading the Barbie Doll example, the main question to ask China, when exploring the geographic context, is: What is the value added that El Salvador has to offer to China? In what industries? Why is El Salvador so important for China from the perspective of the geographic location? Why El Salvador?

As raw materials seekers, what does El Salvador represent for the Chinese? Shrimps? Coffee? Tropical fruits? I am sure there are better options for China priority industries in other geographic locations.

As market seekers, what is the main interest of China in our country? Is our port location a better hub than the rest of our neighbors, such as Guatemala-Honduras-Nicaragua? Panama has a channel. We don´t have one. What is the point of El Salvador for China logistic interests in the region?

As cost minimizers are Chinese companies seeking out and invest in our location, because of lower cost production? I doubt this is a valid reason for China entry strategy to Central America using our country. They are already working with Costa Rica. The answer is by comparing our labor costs and skills in relation to the Chinese ones.

As global leaders, does China seek to validate a new development model in Latin America, using El Salvador as a “pilot project”?

Latin America has been a strategic ally for the USA. We have traded with North America for decades.  El Salvador has more than 2.7 million Salvadorans living in the USA. And our main exports market is the USA. What does China mean for us here?

Does China wish to introduce a new strategic model to work with Latin America in our country? Does China wish to innovate with a new entry strategy in El Salvador? Or is China looking to expand its strange entry strategy model used in Africa in our country? What type of strategic vision, strategic concept and actions do they wish to do with us in terms of the typical foreign expansion sequence:

typical foreign expansion sequence.jpg

And in terms of El Salvadoran political, economic and social interests, what are we “really” looking for in China? What does China represent in our expansion to Asia? Geography can kill or raise an entrepreneur!

To be continued. Stay tuned!

Thank you.

Source references used to write this article:

Disclaimer: All the presentation slides shown on this blog are prepared by Eleonora Escalante MBA-MEng. Nevertheless, all the pictures or videos shown on this blog are not mine.  I do not own any of the lovely photos or images posted unless otherwise stated.

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