International Business - Foreign Direct Investment - Essay Example

Running head: INTERNATIONAL BUSINESS - FOREIGN DIRECT INVESTMENT International Business - Foreign direct investment Introduction China is a society where the government has tight control over operations of businesses, both for locals and foreign investors. But since the World Trade Organization (WTO) agreement was reached, the country is seen to be loosening its tight control of trade activities. As a result of the agreement, the scenario is slowly changing where foreign firms increasingly prefer the opportunity to establish wholly owned foreign enterprises (WOFESs). But as this may be evident, most still have to go the joint-venture route, which seems to be wide-spread among foreign and Chinese traders. Why has China, until recently, favored inbound FDI through the joint venture route? China still holds and implements its policy that discourages or sometimes bans wholly foreign-owned investment. Certain intangible aspects have been recommended for foreign investors to put into consideration in order to run a successful joint venture in China. These aspects are culture, common sense, law and understanding of finance which jointly complement each other in China business environment. Throughout the 1980s up to mid-1990s, Chinese government oversaw inbound FDI mainly through entry intervention where the government emphasized FDI project ratification in which the government was able to manipulate and influence FDI size, location, timing and sometimes partner selection. China way of dealing with foreigners which is partly contributed by the country’s culture and government policy largely exhibited lack of experience in dealing with most MNCs hence most of these corporations remained regulated (Grosse p.297). The concerns of China’s government during this period largely came to reflect regulation tendencies as to which industries should be opened to foreign investors and where FDI should be channeled to. Most enacted laws and regulations did not grant MNCs total control and operation powers instead these laws, rules and regulations became to be associated with how to control foreign company entry into the nation’s market (Grosse p.297). Carrying out research in 1993 Erramilli and Rao noted that joint venture as a preferred entry mode by MNCs become successful when the cultural space is relatively large between the host and home countries. Further the authors found out that there exist relationship between joint venture entry mode with “the level of the host country wellbeing, the level of host government restrictions, and the level of competition in the host country” (cited in Jiang, Cristodoulou and Wei par.3 ). At the same time literature postulate that MNCs entry mode decisions is largely affected and influenced by the host country’s investment policies. The popularity of joint ventures in China has been attached to numerous reasons with popular one being “direct or indirect government rules requiring them in a certain circumstances to do so” (Jiang, Cristodoulou and Wei par.3). Further joint ventures (JVs) in this country have resulted due to popular and widely held belief that JVs are likely to work with Chinese municipal governments well without much conflicts. China’s still command tight control of foreign trade where the theme as to why control is necessary has revolved around the need to protect the local firms, therefore through joint ventures China is able to grant only partial ownership rights to the foreign companies. The legal process of whole ownership in the China market is still complex and cumbersome, sometimes incurring delay; and as a result, it might lead into inconveniences and as a way of advising foreign investors China’s government normally indicate to the investors to embrace joint ventures approach in order to bypass some of the legal restrictions that might lead to inconveniences. China’s political system and structure is still criticized mostly by western countries, ironically most FDI operating in China come from these western countries. As a way to regulate them and cushion on their political influence either directly or indirectly, the government has seen Joint Venture approach to be the appropriate mechanism of monitoring and regulating political influence the MNCs may have. Lastly, China’s interests of importing foreign technology have been well catered for in Joint ventures hence government has continued to advocate for these kinds of FDI in order to get access to critical and beneficial technology of MNCs. Critically evaluate the costs and benefits of using the FISC approach to market entry for; the overseas MNE and the Chinese economy. Vanhonacker (2000) suggested that foreign investor shareholding corporation (FISC) was the appropriate entry mode to the Chinese market as compared to joint venture or WOFE (Wall and Rees par.6). FISC approach provides room for local partners in different locations of the country or product groups to have minor stake in business they surrender to the foreign investors. The local partners ‘loose’ their daily running of the business hence not directly involved in business decisions but as part-owners of the business they contribute indirectly top the success of the business (Wall and Rees par.6). FISC has to take place in different regions and therefore the MNCs have to meet costs of running multiple regional plants. Costs of running these plants are enormous since it is the parent company that has to appoint managers of the FISC plants, administrators, install technology, carry out marketing and advertisement, and in large part meet the registration and other legal required payments. On the other hand, this approach has become popular among MNCs due to its benefits: First, locals having partial shareholding in the company, the MNCs find it easier to utilize the locals in penetrating their products or services in China’s market. MNCs at the same time are presented with the opportunity to institute their perceived best management to run the FISC since locals have no decision in management matters. This may result into the parent company importing or selecting the best qualified candidates from the locals. Lastly FISC is better placed to obtain faster listings on the China’s stock exchange markets which in turn make it possible for the MNCs to raise more capital. FISC has benefited China in that it has been seen by authorities as ‘a passive and non-threatening’ means of political class fostering and encouraging industrial reforms indirectly. At the same time China is able to benefit from the technological know-how of the MNCs, benefits from the management styles of the MNCs and also, through partial ownership the locals are able to benefits from profits accrued by the MNCs. On the other hand, disadvantage that China may experience from this approach include: isolation of local expatriate in the management of FISC, local decisions may be bypassed by the management of these FISC, and local and appropriate technology may be disregarded. Conclusion China’s business environment is still characterized by tight foreign business control laws and regulation, culture and government involvement. Foreign investment in the country is guided by the Regulations for Guiding the Direction of Foreign Investment and the Catalog for Guiding Foreign Investment in Industries. Under these regulations China has grouped industries for foreign investment into four: encouraged, permitted, restricted and prohibited. Despite the tight regulations China upon implementation of WTO guidelines, it has become committed and today foreign investors have gained greater access to most sectors in the country. Therefore the most important thing for foreign investors in the country is to have adequate knowledge of China’s culture and its influence in business and bureaucratic government structures before deciding on the appropriate foreign entry mode in the country. Work Cited Grosse, Robert E. International business and government relations in the 21st century. Cambridge: Cambridge University Press. 2005. Jiang, Fuming, Christodoulou, Chris, and Wei, Ho-Ching. The determinants of foreign pharmaceutical firms’ FDI entry mode choices between joint venture and sole venture into China. N.d. 26 November 2010. http://www.innovation-enterprise.com/archives/vol/4/issue/1-3/article/1715/the-determinants-of-foreign-pharmaceutical-firms. Wall, Stuart, and Rees, Bronwen. International Business. 2004. (Attached notes). Read More