Role of FDI in Developing Countries, Essay Example
International firms that have Foreign Direct Investment in China are facing tough competition from Chinese companies. The environment of the business these days is undermined by the shortages of skilled workforce and increased labor cost. The major cause of change in this business environment is because of the Chinese companies. They are giving tough competition to the firms having FDI in China. Despite the issues faced by the firms, the largest recipient of FDI stull remains China. FDI plays a crucial role in China’s tax revenue and trade generation. This paper will address the rise in China’s FDI and will elaborate various general factors that lead to this incline from the period of 2008 to 2014. In order to explain the factors and the impact of internationalization and FDI in foreign firms, a firm will be selected. The concept of international business will be used to explain the reason and surge of China’s FDI despite of various issues.
Background of the Company
The company selected for this is a US based company and that is ‘General Motors’. The company was established by President Harlow Curt ice in 1908. The company has no bad years, it had good and better years. It is the world’s 2ndlargest automobile company in terms of sales revenue behind Toyota. The company sales took lead in the year 2006. The company has reigned as a world leader in the industry of automobiles for the past 76 years. This is the longest duration for any other automobile company. Presently, the Chairman of the company and Cep Richard Wagoner runs General motors which was founded in 1908 (McFarlin & Sweeny, 2014).The company has around 324,000 employees globally and the Headquarters of GM is in Detroit Michigan. The company also has offices in Europe based in Zurich, Switzerland (Wei et al., 2014). The year 2006 was a very successful year for the company as it sold 9.1 million trucks and cars globally. These brands comprises of Cadillac, GMC, Chevrolet, Holden, Hummer, Pontiac, Saab, Vauxhall, Buick and Saturn etc. The company also has invested heavily in China. Gm has its offices in Shanghai, China (Morrison, 2014).
Three General Factors
There are 3 general factors which are the push and pull factors in internalization as identified by the OLI paradigm. There are a wide variety of theory pertaining to the embed business world. One of this eclectic model was given by Dunning J.H where he explained that how the companies internationalize their operations towards FDI i.e. creating international joint ventures, affiliates and acquisitions & mergers. The basic approach lies in the empirical and theoretical research done by Dunning in the year 1974 (McFarlin & Sweeny, 2014). His framework represented an enhancement in the over transaction approached of cost by including the ownership, location and transaction cost variables.
There have been diverse theories about the process of internationalization but the theory by Dunning i.e. the eclectic theory is the most recognized and relevant theory. This theory identified the 3 factors in international business (McFarlin & Sweeny, 2014). This theory attempts to integrate the past internationalization theories and proved a basic framework analyses. Dunning defends and argues his theory that the past theories are incorrect and partially correct. He explains every example of IDE by they are also not complete. Eclectic theory by Dinning is the most complete theory that briefly explains the process of internationalization. It comprises of several steps that are concrete and caters to process of internationalization (McFarlin & Sweeny, 2014). According to this process, every company needs to comply and invest properly abroad. The steps comprises of factors like the microeconomic (internal) and macroeconomic (External) factors impacting the company. Both of these factors are interrelated to each other (Morrison, 2014).
Ownership Specific Advantages (O)
Most of the previous studies are recapitulated by Dunning and combines to produce an eclectic theory. This explains the three general factors that in order to become the firm that is international, the firm needs to have competitive advantage in the local market. Companies’ assets signifies its core competencies that make the company different from that of its competitors (Morrison, 2014).This gives the company a chance to survive in the local market and then it needs to think about the activities of internationalization.
Locational Advantages (L)
Once the company has achieved ownerships benefits, the company needs to have the internalization value. If the company considers that it is beneficial for it to go abroad and the activities in foreign country will be more profitable then the company needs to find out which location will be best for it to invest. In order to do so, the company must study the environment of external factors (macroeconomic) that characterizes the countries receptors. In order to evaluate the feasibility to make the business success internationally (McFarlin & Sweeny, 2014). Once the company has setup the viability which comes positive, then it is time to take the decision and invest abroad.
The market of Asia has been one of the attractive market for international companies for a long time. In this region, the crowned jewel is China as this comprises of a lot of MNCs that have invested in this country to drive the earnings and revenue. Therefore, there is also no surprise that General Motors also saw a major importance in the market of China. The company started operations in Chinese market in the 1990s. The company has used the benefits of internationalization to penetrate the Chinese local automobile industry. There are several reasons why China and GM found attractive and pursued this strategy aggressively. The first is the reason of the high population of country. Chinese population comprises of 20% of the world population but its people owning vehicles are only 1.5%. So, this was the major advantage of going global for GM as it wants to tap this unexplored market.
GM’s operations in China lead to an increase in 13% of the market share in China mainland. This was due to the competitive advantage the company has and this comprise of constructs, design and selling auto mobiles. GM has a huge variety of brands like GMC, Chevrolet, Cadillac and others. The firm operates globally and is the biggest auto manufacturer because of its competitive advantages (Wei et al., 2014). Some of the major competitors of this company are Toyota, Nissan, Tata, Honda, Volkswagen etc. The company performs above par than its competitors. Like many other automobile manufacturing companies, GM is also facing rising threats, weaknesses, challenges because of the surge in the Chinese FDI and increased competitions from Chinese auto manufactures.
After the global financial crisis, the company needs to established new strategies and visions. With the restructuring of employees and tactics, this has led to the next GM strength. The new CEO Daniel Ackerson and the new management wiped out the bureaucratic structure of organization. This introduced a fresh and clean perspective to the business. The brand strong presence is also a positive advantage for GM. The establishment of the joint venture with the Shanghai Motor Corporation increased the position of GM. The investment was worth 1.6 billion $. At that time the market of China was very small with around 400,000 car sales (Chaudhuri & Mukhopadhyay, 2014). The expansion of GM into Chinese market was the reason of this. Not only there was lack of connection and knowledge in China, the regulation of China forced GM to establish the joint venture with SAIC. The US economic crisis in 2008, lead to a decline in the sales of GM. In the year 2009, there were 14 million cars in china sold, making China the biggest automobile manufacturer in the world.
In order to look at the competitive advantages the firm has, we must look at GM’s strengths which play a crucial role in the success of the company. It has a robust presence in both the local and global marketplace. The company has been a leader in this industry since 77 years until 2007 (Wei et al., 2014). The business of the company continues to expand and grow and its presence is increasing on a global scale. The company already operational in 158 countries. One of the brands of the company, Chevrolet performed record breaking sales of 4.05 million cars in the past year (Wei et al., 2014). Other major strength is the company’s location and global presence which helps to tackle the global competition.
Location of the company
The company is located in Detroit, Michigan US. The company also has global presence in Europe, China, Canada, UK and Germany. The company has a superb relationship in regards to international business. The company takes pride in consumer relationships and fosters international partnerships. The majority of the shareholders of the company are South Koreans, Daewoo auto Technology. These have collaborative firms in manufacturing and technology with different auto manufacturing companies. GM also has a joint venture with Shanghai Automotive Corporation industry in China. GM’s biggest national market is in US which is followed by UK, Germany, Canada and China (Morrison, 2014). GM is a very successful company if we talk about quality and standard. Presently, the analysis of the company shows some troubling challenges that are uncovered. It is facing a severe competition with the Chinese automobile companies. Since 1931, it has been the world’s leading automobile company in terms of sale (Morrison, 2014).
The company is involved in the manufacturing of automobiles and is the leader in automobile production globally. It also had a joint venture with SAIC China where it entered the market for internationalization benefits. The company is a behemoth as it has 15% global share and operates internationally (Wei et al., 2014). GM is one of the largest car companies in the world. In the year 2003, due to internationalization issues and global financial crisis, the company has lost its first mover advantage. China has become its biggest single market now (Wei et al., 2014). But, the Chinese market has a severe competition and General Motors is faced with an increased labor cost and lack of skilled workforce.
The company lies in the industry of automobile manufacturing. Since the last century, the culture of car has globally spread. As there are many other products, the global economy is shaped by car industry (Morrison, 2014). The automotive industry in Europe alone accounts for 12 million jobs. In the US, there are 8million jobs and in Japan there are 5 million job opportunities created by this industry. Because of all this manpower, the industry has been in a constant change (Chaudhuri & Mukhopadhyay, 2014).Modern cars with their electric system and drive by wire features are astonishing. This has given rise to the demanding requirements and new players especially in China. The increase in FDI in China and the tough competitions faced by Chinese companies, this industry has become a highly competitive one. GM and other global automobile manufacturers are facing severe challenges because of Chinese companies. This is because of the rise in the labor cost and also lack of skilled labor available. So, the emergence of Chinese companies and its economy have led to serious challenged for Multinational companies to profitably continue their operations in China (Morrison, 2014).
Pull and Push Factors
There are many pull and push factors that have led to the decline in GM market shares. GM still has competitive advantage because it has a huge presence globally. They also have an increased relation with the market of China. There are different ownership benefits that the MNC can have (Chaudhuri & Mukhopadhyay, 2014). One is the transfer within the Multinational firm located overseas at reduced cost. The firms base this on the factors of competition and the process of internalization. The relative attractiveness of the different location factors changes with that of the host country. So, the location can be a significant competitive advantages in terms of FDI. There are three push and pull factors that are linked with FDI;
- Economic Benefits: These comprises of qualities and quantities of the productions factors, communication, transport, size and scope of the market etc.
- Political Benefits: These comprises of specific and common policies of government that influence the FDI inflows, international production and intra firm trade.
- Cultural and Social benefits: these composites of the host country culture, language, attitude and preferences towards foreigners and the overall enterprise image (McFarlin & Sweeny, 2014).
Internalization and Ownership Advantages
The benefits of internalization have arisen eh answers for the failures of market. One example is the sellers and buyers have information asymmetry. This creates the quality uncertainty and the proper pricing. It is well explained by Dunning that there should be a benefit of internalization because the firms will use the ownership advantage to exploit internally rather than selling directly though the market spots (Morrison, 2014). They can also sell through other firms like licensing, joint ventures or management contracting. This benefit will lead to the hardships that will arise in controllable and enforceable contracts with potential partner’s overseas generating profit that is estimated to the true worth of the benefit being marketed (Chaudhuri & Mukhopadhyay, 2014).
Another benefit for internationalization is the profit margin and the margin on Chinese automobile market is average 30% whereas the global auto market has only 5%. The main reason behind is that the labor is cheap and skilled. The third reason is the existence of a limited competition. There is a limited mixture of competitors and producers in Chinese market. The last reason is that the government manages the introduction of new entrants (Morrison, 2014).There is a close management and high tariff in this country as to how the global companies could engage. This is a positive factors as GM could enter this market successfully and competition would be manageable.
Chaudhuri, S., & Mukhopadhyay, U. (2014). Role of FDI in Developing Countries: Basic Concepts and Facts. In Foreign Direct Investment in Developing Countries (pp. 1-17). Springer India.
McFarlin, D., & Sweeney, P. D. (2014). International Management: Strategic Opportunities & Cultural Challenges. Routledge.
Morrison, W. M. (2014). China’s economic rise: history, trends, challenges, and implications for the United States.
Wei, Y., Zheng, N., Liu, X., & Lu, J. (2014). Expanding to outward foreign direct investment or not? A multi-dimensional analysis of entry mode transformation of Chinese private exporting firms. International Business Review, 23(2), 356-370.
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