An optimal production method for penetrating foreign markets: Standardization, localization, and flexible technology

This paper examines firms' production strategies for supplying products tailored to the target country's local taste: developing a new localized variety and modifying an existing variety to fit the local taste. Adopting the concept of the flexible technology in industrial organization theory, the paper develops a simple theoretical model to examine when and why exporters or multinationals adopt flexible technologies to serve multiple markets. The results suggest that firms with basic varieties that are considerably different from the variety demanded by the local country are likely to develop localized varieties to serve the country, whereas those with basic varieties that are considerably similar to the demanded variety are likely to modify their existing varieties. In some circumstances, even when foreign production has an intrinsic cost advantage over exporting before the application of a flexible technology, firms may choose to be exporters by adopting the technology. In addition, the results indicate a possible industry equilibrium: Firms with basic varieties that are considerably similar to the variety demanded by the local country are likely to modify them and become multinationals, whereas those with basic varieties that are considerably different from the demanded variety are likely to develop new localized products and become multinationals. Otherwise, firms are likely to modify their existing platforms and become exporters.