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Product Strategy in Indian Market; Comparative Analysis of Korean and Japanese
Multinational Companies
Heejin KIMPh.D. Candidate of Business Management
Graduate School of EconomicsThe University of Tokyo
Research Interest
Can you see this
key hole?
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Multinational Companies’(MNCs) Product (Development) Strategy satisfying the needs of local customers.
・Should MNCs localize their product development function to their target market? Or, can they manage the globally various needs while concentrating PD on their headquarter?・If they localize PD, what processes and organizational changes are required? And what are the difficulties and outcomes?・In both cases, how the headquarter of a MNC and local subsidiary build their division of labor? And, how can they effectively transfer local market needs to their R&D?
This presentation is about…・MNCs competition in electronic industry of India, focusing on
their product strategy.
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I. Indian Market and MNCs
• MNCs in India• Korean and Japanese electronic firms: history of their competition in India• Product strategy
II. Academic Discussions
• International Business :Evolution of Multinational Companies• Globalization of R&D: findings and limits• Global product development: new approaches
III. Case Studies
• LG Electronics India, Pvt. Ltd.• Sony India Pvt. Ltd.
IV. Conclusion
• Implications of the case studies• Future research plan
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I. INDIAN MARKET AND MNCS
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1. Multinational Companies in India2. Korean and Japanese Electronics Firms3. Product Strategy
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* Source:A.T.Kearney, 2005
1. Multinational Companies in India
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1. Multinational Companies in India
Financial year-wise FDI inflows data (Amount US$ Million)
Financial Years Total FDI Inflow Percentage growth over previous year
2000-01 4,029
2001-02 6,130 (+)52%
2002-03 5,035 (-)18%
2003-04 4,322 (-)14%
2004-05 6,051 (+)40%
2005-06 8,961 (+)48%
2006-07 22,826 (+)146%
2007-08 34,853 (+)53%
2008-09 35,180 (+)1%
2009-10 37,182 (+)6%
2010-11(Up to Aug.) 11,390
Cumulative Total 175,941
* Source: Face Sheet on FDI, Ministry of Commerce and Industry, India (2010.8)
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1. Multinational Companies in India
Statement on sector-wise FDI Inflows (Amount US$ Million)
No. Sector Amount of FDI Inflow
Percentage with total inflows
1 Service Sector 24,861.64 20.86
2 Computer Software and Hardware 10,330.47 8.67
3 Telecommunications 9,985.00 8.38
4 Housing & Real Estate 8,895.49 7.46
5 Construction Activities 8,347.39 7.00
6 Power 5,304.71 4.45
7 Automobile Industry 4,709.70 3.95
8 Metallurgical Industry 3,742.74 3.14
9 Petroleum & Natural Gas 2,883.37 2.42
10 Chemical 2,641.99 2.22
11 Trading 2,459.87 2.06
12 Electrical Equipment 2,183.52 1.83
* Source: Face Sheet on FDI, Ministry of Commerce and Industry, India (2010.8)
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1. Multinational Companies in India
West
South
East
North
Examples of MNCs
*Source: KOTRA(Korea Trade-Investment Promotion Agency) 2010
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2. Korean and Japanese electronic firms
1980s 1990s 1995~ 2000s 2005~ 2010s
Major
Economic
Policy
Korean
Firms
Japanese
Firms
Comm-unist
RegimePartial Liberalization of Economy Abolition of
Protectionism
JV with BPL
*Source: web pages of each company
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2. Korean and Japanese electronic firms
Ranking
Refrigerator Washing Machine Air-conditioner Color TV
Company MS Company MS Company MS Company MS
1 LG 29.4 LG 30.6 LG 32.0 LG 26.2
2 Whirlpool 24.9 Samsung 16.4 Samsung 20.6 Samsung 17.1
3 Samsung 17.2 Whirlpool 15.9 Voltas 9/0 Sony 10.3
4 Videocon 6.0 Videocon 9.6 Videocon 6.5 Onida 8.9
5 Electrolux 5.1 Onida 4.6 Onida 5.4 Videocon 7.0
6 Haier 1.0 Electrolux 2.9 Electrolux 4.6 Philips 6.3
7 Voltas 0.5 Haier 1.0 Hitachi 2.9 Sharp 1.4
8 - - - - Haier 0.8 Panasonic 0.8
Market Share of Major Consumer Electronics (2006)
* source: Chindia Journal 2008.1
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2. Korean and Japanese electronic firms
Changes of Market Share / Color TV (2000-2004, India)
*Source: http://www.businessworld.in/sep2004/news13.asp
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2. Korean and Japanese electronic firms
Marketing
Distribution Networks
Localized Product
Etc, etc.
LG and Samsung’s success factors are…
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3. Product Strategy
* Some product Localization Efforts
Cricket GameInto TV set, caption of 15 local
languages, Strengthened Speaker
Sari-washing courseAuto-cooking of more than 100 Indian Dishes
Key-holeCool-pack
More space for Vegetables
Crest Guru:Solar energy –
chargeable mobile phone
15Heejin KIM, Tokyo University2010/11/25*Source:http://www.businessworld.in/index.php?option=com_content&task=view&id=1123&Itemid=1179
3. Product Strategy
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Until very recently, most of Japanese makers compete with global models in India.
3. Product Strategy
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To sum up this chapter…
1. As one of the biggest market in the world, India attracts many MNCs, and their competition is getting intense.
2.Concerning Korean and Japanese electronic companies, LG and Samsung show superior market performance even though they are late comers.
3. Focusing on their product strategy, it gets obvious that Korean makers take product adaptation strategy while Japanese counterparts pursue global product strategy.
II. ACADEMIC DISCUSSIONS
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1. Theories explaining FDI2. Globalization of R&D3. Localization of Product Development
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1. Theories explaining Foreign Direct Investment
Hymer(1960,1976)
[Ownership Advantage]The primary advantage that a firm bring to foreign markets is its possession of superior knowledge.
Caves(1971)
The bond between FDI and the transfer of firm-specific knowledge was first made explicit in Caves’ article. Johnson(1970)
McManus(1972)Magee(1977)
・Knowledge as public good (it can be transferred at zero marginal cost)・market for the sale of this knowledge isimperfect
BuckleyandCasson(1976)
[Theory of Internalization]Because of the public character of knowledge, which results in the two critical properties of being easily transferred and hard to protect, firms operate a network of plants on a worldwide basis.
Vernon(1966,1971)
Product lifecycle Theory
Dunning(1981,1993)
Eclectic Paradigm
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Rugman(1980)
MNCs arises due to the internalization of the failure of the market for information.
Teece(1977),(1983)
Technology is not a public good!He analyzed 27 projects to find that he cost of transfer to range from 2 to 59% of total costs .(Transfer experience and recipient capability matter)
Hennart(1988)
Expands the notion of Tacit knowledge to explain internalization.
Kogutand Zander(1993)
・The MNC arises not out of the failure of markets for buying and selling of knowledge, but out of its superior efficiency as an organizational vehicle by which to transfer this knowledge across borders.・They empirically shows that the less codifiable and the harder to teach is the technology, the more likely transfer will be wholly owned operations.(not licensing or JV)
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1. Theories explaining Foreign Direct Investment
Global Integration
Local Responsiveness
Research
Development
Manufacturing
Marketing
Sales
* Source: Bartlett and Ghoshal (1989)
I-R GridShowing each functions’ positional differences
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Year USA Canada France Germany Italy Japan U.K.
1981 6.2 7.4 7.2 1.2 4.3 0.1 8.7
1982 6.5 10.7 4.8 1.3 4.7 0.1 NA
1983 6.5 16.7 4.6 1.4 4.3 0.1 6.8
1984 6.5 17.2 6.5 1.5 6.2 0.1 NA
1985 6.5 14.3 6.9 1.4 6.1 0.1 11.1
1986 6.8 13.7 8.0 1.4 7.3 0.1 12.2
1987 7.3 16.9 8.7 1.5 6.9 0.1 12.0
1988 8.2 18.1 9.2 2.1 6.6 0.1 12.0
1989 9.5 116.9 10.9 2.7 6.5 0.1 13.4
1990 11.1 17.7 11.1 3.0 7.3 0.1 15.5
1991 NA 17.7 NA 3.1 5.1 0.1 16.0
Percentage of R&D financed from foreign sources, selected countries, 1981-1991
*Source: National Science Board, Science and Engineering Indicators, US Government Printing Office, Washington, D.C., 1993
2. Globalization of R&D
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*Sources: 1. Dunning (1994), 2. Gates (1995), 3. Roberts (1995),4. Patel (1995), 5. Buderi et al. (1991), 6. National Science Board (1991), 7. Kumar (1995), 8. OECD (1996). (Zedtwitz and Gassmann, 2002)
Increase of R&D Internationalization in Europe, US, and Japan
2. Globalization of R&D
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2. Globalization of R&D
Category Papers Main Issues
Trend of global R&D
Granstrand, Hakanson and Sjolander(1993) A.Garybadze and G. Reger(1999)Niosi (1999)
・Many researches point out( and empirically investigate) that globalization of R&D is obvious trend worldwide.
Purpose and motivation of global R&D
Cheng and Bolon(1993)Hakanson and Nobel(1993)Odagiri and Yasuda(1996)Florida(1997)Kuemmerle(1997)
・To explore local knowledge resources and to exploit home bases’ technology. To support local manufacturing facilities
Role and type of overseas R&D units
Ronstadt(1977)Pearce(1989)Hakanson and Nobel(1993)Nobel and Birkinshaw(1998) Niosi (1999)
・Local adaptor, international adaptor, international creator・Transfer technology units, indigenous technology units, global product units, corporate technology units
Organization and coordination of overseas R&D units
Nobel and Birkinshaw(1998)Reger(1999)Chiesa(1996)Gassmann and Zedtwitz(1999)Asakawa(2001)Ambos and Schlegelmilch(2004)
・control mode and communication systems among R&D units・organizational tension arises among HQ and overseas R&D units
Location of overseas R&D units
Kenny and Florida(1994)A.Garybadze and G. Reger(1999)Kuemmerle(1999)Zedtwitz and Gassmann(2002) Sugiyama(2003)
・Basic research unit locate flexibly while factory supporting development unit locate close to the manufacturing site.・Concentration of research units in Europe, Japan, America・Globally, R is concentrated while D is dispersed.
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3. Localization of product development
Advantages and disadvantages of product development localization
Advantages Disadvantages
Communication and Coordination Cost
Technology spillover/property right
Economies of Scale
Proximity to manufacturing
facilities
Proximity to Customers
Rich engineering resources
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Product Standardization Product Adaption
Pros ・The Triad(U.S., Western Europe, and Japan) constitutes the major markets, accounting for the bulk of world market potential. Consumers in these markets have become fairly homogenous, making standardization feasible. (Ohmae 1985)
・Marketing program is largely a local issue and the best course of action for a product ought to differ from market to market(Buzzell 1968; Hill and Still1984, Wind1986)・Customs and traditions tend to persist
(Fournis 1962)
Cons ・Introduction of new global brands may well cannibalize the existing brands(Douglas and Wind 1987)
・Adaptation philosophy has been mainly an outcome of lack of vision on the part of multinational companies. For this reason, such companies are likely to disappear and be replaced by truly `global corporations`(Levitt 1983)
3. Localization of product development
Product standardization/adaptation controversy
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3. Localization of product development
・Should MNCs localize their product development function to their target market?To answer this question, micro-level organizational analysis is required.
Target market
identification
Need identificat
ion
Idea generation
Concept developm
ent and selection
Specification development
Detailed engineering
Pilot testing
Pilot production
Production starts-up
✔To which extent of these activities, a local subsidiary is in charge?✔ How the local subsidiary transfer their information(knowledge) effectively to HQ(home country)?✔ How HQ integrates the multi-source knowledge and embodies that into a successful new products?
Ex. Product development process
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To sum up this chapter…
1. Theories explaining FDI by multinational companies have been developed since 1960s, giving high attention to global R&D recently.
2. R&D globalization is obvious phenomenon in many industries, and in many countries, which encourages rich discussions in academics. However, most of the existing global R&D literatures focus on the trend itself or classification. Also, in most cases, their analytical unit is ‘R&D’ itself, which is too big to draw out practical implications to companies.
3. Here, to analyze localization of product development , well-balanced perspectives are necessary. In addition, transfer and integration of knowledge among sub-activities of product development processes should be carefully investigated to provide meaningful understanding.
3. CASE STUDY
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1. LG Electronics India Pvt., Ltd.2. Sony India Pvt., Ltd.
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1. LG Electronics India Pvt. Ltd.
Year Event
1997.2 LEGIL establishment (100% green field investment)
1997.5 Launched Refrigerator, washing-machine, CTV
1997.7 Plant building started(Noida)
1997.9 Open 18 LG shops
1998.1 Launched A/C
1998.4 Started Production at Noida
1999.3 Started MWO(Microwave Oven) Production
1999.12 ISO 9002, ISO 1402 certificated
2003.3 Started Compressor Production
2004. 10 Inaugurated the Pune Plant
✤History
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*Source: web-pages of LEGIL(www.lge.com/in)
1. LG Electronics India Pvt. Ltd.
Function Noida Pune
FSE(Korean Advisors)
17 4
Finance&Administration
224 22
Human Resources 56 18
Sales & Marketing 632 19
Consumer Service 214 09
R&D 145 67
Manufacturing 336 84
Shop Floor 782 152
Total 2760
*Source: LEGIL (2005)
✤Financial Performance ✤Manpower
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• Branch office: 51• RAO (Regional
Assessment office):79• (Total 130)
Company’s reach
• Dealers:1350• Distributors:889• AWD: 130• (Total 2369)
Sales Channel
• ASC, ASP:480• SSD:500• (Total 980)
Service Channel
• Mother warehouse:1• Stock Point:73• (Total 74)
Logistics
✤ LGEIL`s Sales and Service Networks in India
1. LG Electronics India Pvt. Ltd.
ASC: Authorized service centersASP: Authorized service providersSSD: Sales and service dealers
* Source: LEGIL (2005)
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1. LG Electronics India Pvt. Ltd.
✤ LG Brand Shops
“India is a heterogeneous nation, and it is important to have planning and resourcing specifically for each region. We are spread more widely across the country than most local companies that have been in business here for 30 years.”(*Source: LG MD K.R.Kim’s interview with McKinsey)
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1. LG Electronics India Pvt. Ltd.
✤ Product Development Efforts in India
Market Survey
• Pre-marketing survey• Investigating products of competing firms• Analyzing development plans of core parts
Line-up Planning
• Setting product strategy• Drawing unique sales points
Model Development
• Cost Analysis• Localization – Modification decision
Launching
• Customer response monitoring• Solving field claim
TDR Meeting
Managing Director
Sales & Marketing
Plant Manager
R&D
✔Heavy emphasis on detailed market survey to seize customer needs✔ Keeping price premium strengthening differentiated functions
✔ Weekly TDR meeting (Tear Down Reengineering) ✔Realizing concurrent engineering by regular communications among R&D, sales& marketing, and manufacturing.
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“When a competitor firm left for Thailand, for example, we tried to recruit some of its engineers but decided in the end not to hire them. In the ten years those people had been working for that company, we discovered, they had done little to improve the products it was trying to sell to the local market. It turned out that this company’s R&D department back home had been doing most of the work, with only a few modifications carried out here. It’s true that LG imports the basic technology from South Korea, but in India we are responsible for 90 percent of the subsequent R&D work; only 10 percent gets done in South Korea. We spend a billion rupees a year here on research. “(* Source: LG MD K.R. Kim’s interview with McKinsey)
1. LG Electronics India Pvt. Ltd.
✤ Product Development Efforts in India: The ex-MD of LGEIL say…
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New design center opened in Feb. 2010
✤ Product Development Efforts in India: further steps are taken
1. LG Electronics India Pvt. Ltd.
・Extension of industrial design department in LGEIL to independent design center ・Brainstorming, sampling, pilot modeling, and displaying become available in one place, with strong support of IT infrastructure.
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1. LG Electronics India Pvt. Ltd.
✔ LGEIL seems to focus on product localization strategy further strengthening local R&D function.
✔ LG Electronics implemented similar strategy (insight products)in other emerging markets such as Brazil, Russia, China, where LG takes high market share as a result.
✔ Localization of product development is thought as one of the very effective way to transfer and implement local market knowledge to product development process.( But, there are many obstacles and difficulties..)
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✤History
2. Sony India Pvt. Ltd.
Year Event
1994 Set up Sony India (New Delhi)(100% green field investment)
1996 Plant built-assembling started
2004 Close audio plant of Haryana
2005 Close TV plant
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2. Sony India Pvt. Ltd.✤ What happened very recently!
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*Source:http://www.businessworld.in/index.php?option=com_content&task=view&id=1123&Itemid=1179
✤ Compared to 2006…
2. Sony India Pvt. Ltd.
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2. Sony India Pvt. Ltd.
✤ It surely has a strong brand image!
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✤ Also the highest brand equity! (recent data)
2. Sony India Pvt. Ltd.
*Source: Nielsen(2010)
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2. Sony India Pvt. Ltd.
250 Brand ShopsAcross the Country
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2. Sony India Pvt. Ltd.
✤ Sony’s product development for local market
Is done in Shinagawa Technology Center
MD of
India
MD of
Brazil
MD of
U.S.
Japanese Engineers
✔ Twice a year, there held a product planning meeting in Shinagawa T/C, where managing directors of worldwide subsidiaries are gathered .✔ Various ideas are proposed and discussed by the MDs, and one global design and its features (and sometimes some derived models) are decided. ✔ Japanese engineers do the specification and engineering works to realize the new product.
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2. Sony India Pvt. Ltd.
Monolithic Series (Global Design) Monolithic Series NX500 in India
✤ Sony’s production adaptation in India
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2. Sony India Pvt. Ltd.
✔ Sony seems to focus on global product strategy with minor adjustment to each country. ✔ Thus, its product development function is heavily concentrated to HQ ,while trying to open its communication channels with foreign subsidiaries. ✔ Sony’s case provide a good example of a MNC that has a good market performance without localizing R&D to the market.
IV. CONCLUSION
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1. Implications of the case studies2. Future research plan
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Localized Centralized
Successfulunsuccessful
Market perform
ance of localized products
Product development activities of a MNC
・LG ( India): Home appliance ・Sony ( India): TV
・Panasonic ( China): DVD player
・DENSO ( Korea): Meter Cluster
・DENSO ( India): Wiper System
・Alpine ( China): Car Audio
・Hyundai ( China): Automobile
・Samsung ( India): Home appliance
・Samsung ( China): Mobile phone
・Bosch( Korea): Car Electronics・Delphi ( India): Car Electronics
・LG ( Thailand): Home appliance
・Hitachi ( Thailand): Home appliance
1. Implications of the case studies
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2. Future research plan
✔ Particular interests in transfer and implementation of “Tacit overseas knowledge”
・Tacit knowledge largely ‘indwells’ in the minds of people as perspectives on, or images of, reality (Polanyi, 1966)・Difficulty in codification and transfer is a central attribute of tacit knowledge. (Grant, 1996; Nonaka, 1994; von Hippel, 1994; Zander and Kogut, 1995)・The inherent difficulties in its codification and communication -> key differentiator, and important strategic resource(Conner and Prahalad, 1996)
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✔ Some examples of “Tacit overseas knowledge” (Takeuchi and Porter, 1986)
・Campbell’s canned soups- mostly vegetable and beef combinations packed in extra-large cans-did not catch on in soup-loving Brazil. A post-mortem study showed that most Brazilians housewives felt they were not fulfilling their role if they served soup that they could not call their own. Brazilian housewives had no problems using dehydrated competitive products (such as Knorr and Maggi), however, which they could use as a soup starter but still add their own ingredients and flair.・Johnson & Johnson’s baby powder did not sell well in Japan until its original package was changed to a flat box with a powder puff. Japanese mothers feared that powder would fly around their small homes and enter their spotlessly clean kitchens when sprinkled from the plastic bottle. Powder puffs allowed them to apply powder sparingly.
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Observing consumer behavior
with personal perspectives and interpretations
Sharing observed and interpreted tacit knowledge with
members of project teams
(marketing-R&D linkage)
Implementing the tacit knowledge to
new products(Engineering)
2. Future research plan
✔ Hypothesis:Successful localized products are outcomes of effective processes (of interpreting, transferring, and implementing overseas tacit knowledge), not the automatic result of localizing product development activities.
✔Further field researches and questionnaire survey are being planned.
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