International Expansion and Outward Investment - Essay Example

Is the OLI paradigm Developed By John H. Dunning Applicable To The International Expansion And Outward Investment Behaviour Of Mainland Chinese Multinational Enterprises? Discuss This Question By Comparing The Cases Of Two Chinese Multinationals Of Your Choice, Analysing Their Direct Investments Outside Of Mainland China. Table of Contents Introduction 3 Background of the Topic 4 Objectives of the Study 6 Research Methodology 6 Review of Secondary Sources 7 OLI Paradigm 7 Comparison of the Cases 10 Case of Lenovo: Applicability of the OLI Framework 11 Case of Chinese National Petroleum Corp: Applicability of the OLI Framework 12 Analysis 13 Conclusion 15 References 18 Introduction With the changing modern day business context, organisations operating in dissimilar industries tend to adopt effective decisions for staying ahead in competition within the marketplace. It has been comprehended that such companies continuously seek for growth opportunities in order to ensure long-term sustainability (Dunning & et. al., 2008). Contextually, international expansion and outward investment have been regarded as amongst the most widely approaches adopted by the business units to sustain in this competitive landscape for longer period. In this regard, the factor concerning international expansion often relates with the approach of the business units in exploring better market opportunities and performing varied operational functions in an efficient manner. It will be vital to mention in this regard that in order to ensure better business performance along with ensuring long-term sustainability, business units posses the need to expand their operations on a continuous basis in emerging markets with effective internationalisation of business. The growth of any business unit in the present business environment is largely dependent on how it captures more markets with its operations and the same can only be happen with promoting internationalisation of business (Alon & et. al., 2011). Similar to the strategy of international expansion, outward investment is also directly related with the growth of business units at large. Conceptually, outward investment is a particular concept of global expansion of any business, which is utilised in the form of merger and acquisition or strategic alliance in certain scenarios. It is regarded as one of the most common forms of business expansion policy in the present day context. Moreover, the concept is primarily adopted by the business units with the intention of marking their presence in unexplored markets (Alon & et. al., 2011). Background of the Topic The study lays utmost focus on understanding the importance of internationalisation of business units in the challenging global business environment. Correspondingly, it also depicted the applicability and the relevance of the OLI theory of John H. Dunning towards the international expansion and outward investment behaviour of the multinational enterprises operating in Mainland China. The overall analysis of the study suggested that the theory or the paradigm of Dunning was primarily formulated or developed with the intention of enabling the companies to efficiently expand their business operations in the global market by understanding various determinants that can impact the business one way or the other. Precisely, there are three paradigms of the above stated framework of Dunning that include ownership, location and internalisation having individual significance and need (Alon & et. al., 2011). Notably, the paradigm of ownership enables the companies to understand the structure of the international market and likewise use their expertise, brand image and business experience to build their strategies of business expansion. Companies those are able to understand these factors efficiently could be able to ensure the development of better strategies with regards to internationalisation. The subsequent paradigm of the theory or the framework of Dunning includes location related issues of internationalisation. As per this particular paradigm of the theory, the availability of raw materials, labour as well as regulatory policies of a particular region have major influence upon the operations of the MNEs within the foreign business markets. It will be vital to mention that companies, which are able to acquire a better understanding of the external marketplace prior to the expansion of business, will certainly have greater chances of ensuring long-term sustainability and gaining superior competitive position. This particular paradigm of the framework introduced by Dunning enables the companies to understand the trend of the target markets in a better manner so that they can align the same with their respective business or operational objectives. This aspect can further allow business units to leverage opportunities provided by the global business markets. The next paradigm of the framework includes internalisation, which relates with the mode of entries that the companies select while entering into a particular market (Alon & et. al., 2011). There exist various entry modes for the companies in foreign business markets including franchising, joint venture and strategic alignment. Each of these modes has their own implications along with advantages and disadvantages. These factors need to be evaluated by the companies prior to selecting a particular mode of entry into a particular industry or market. Companies that choose the right mode of entry will have higher chances of gaining success from a long-term perspective. Collectively, it can be affirmed that companies must need to implement or evaluate the paradigms mentioned within the OLI framework to strengthen their policies of expansion by a considerable extent (Alon & et. al., 2011). However, this particular study intended towards gaining a better understanding of the applicability of OLI framework in the operations of the companies in Mainland China with the help of preparing case studies of the companies such as Lenovo and China National Petroleum Corporation (CNPC). Objectives of the Study In relation to the subject matter of the study, the following research objectives have been framed hereunder. To acquire in-depth understanding about the paradigms of OLI framework formulated by John H. Dunning To understand the importance of OLI framework in internationalisation of business To analyse the applicability of OLI framework in the international expansion outward investment behaviour of Mainland Chinese multinational enterprises with reference to the cases of Lenovo and CNPC Research Methodology The prime intent of the study is to determine whether the OLI paradigm developed by John H. Dunning is applicable to the international expansion and outward investment behaviours of the multinational enterprises operating in Mainland China. In this context, Lenovo Group Ltd. and Chinese National Petroleum Corp. have been taken into concern as the two Chinese multinational enterprises based on which the study will be conducted with analysing their direct investments outside of Mainland China. Thus, a qualitative research approach will be applied in order to conduct the study. Moreover, relevant data will be acquired from varied secondary sources such as scholarly based journals, articles and literatures to acquire better comprehension about the stated subject matter of the study. In addition, the collected data will be analysed and presented with the help of narrative analysis approach. It must be mentioned that in order to ensure reliability and accuracy of the overall outcomes of the study, only updated and reputed sources will be taken into concern with due focus on ascertaining distinct ethical norms and practices. The research issues and various implications of the same can be better comprehended from the data gathered from reviewing varied secondary sources. Review of Secondary Sources OLI Paradigm The OLI framework, which is also known as the “eclectic” approach in accordance with the study conducted on foreign direct investment (FDI), has been mainly formulated by the economist John H. Dunning. As per the report of University of Oxford (2014), the framework has proved to be quite flexible and effective for the multinational enterprises (MNEs) while performing their respective operational functions. The article depicted that OLI, which primarily stands for ‘Ownership, Location, and Internalization’, provides the organisations with the right domains wherein the multinationals need to invest their money or expand business operations. It is an underlying factor, which helps the firms to make effective decisions concerning internationalisation of business and operations. The article of University of Oxford (2014) also revealed that the ownership aspect associated with the OLI framework provides greater understanding about the costs incurred by MNEs while operating in a particular foreign country. The aspect concerning location, as portrayed within the OLI framework, focuses on addressing the issue of selecting a particular location in foreign country to conduct business operations for MNEs. Correspondingly, the factor of internalisation within the OLI framework depicts the ways based on which companies can operate efficiently in any foreign market. These three factors of the framework address certain major issues and challenges that the MNEs deal with while operating in a foreign marketplace (University of Oxford, 2014). The framework is often regarded as a holistic approach for identifying the determinants of outward investment in the present day business context. By taking into concern a particular case study of Greece, the country is seen to have grown immensely in recent times for its activities of investing in foreign markets particularly in the European nations. The companies operating within the nation have taken the plunge of using their ownership abilities in an efficient manner and likewise expanding their operations in the unexplored emerging markets throughout the globe. The investors of this particular region have proved that the policies and the theories propounded by Dunning are quite effective in comprehending the determinants of outward investment within their global business operations. Owing to the influence of the framework, companies operating in Greece have largely chosen to expand in such markets that are similar in context and size of the Greece markets (University of Oxford, 2014). Applicability of OLI Paradigm to Outward Investment and International Expansion The OLI paradigm framed by John H. Dunning is regarded as a key component, which is used for the purpose of determining appropriate investment decisions made by the business units operating in the global or domestic marketplace. As per the study of Narula (2010), the framework is being used by MNEs all over the world to address the issues and problems that arise during internationalisation and making investment related decisions. It has been comprehended that companies often use the ownership aspect of the paradigm in order to ensure better decision making for attaining maximum growth. International business is a particular discipline, which relates to the growth opportunities for the companies. However, business expansion policies often result in generating issues and challenges owing to numerous uncertainties prevailing within a marketplace (Narula, 2010). In this background, the study of Narula (2010) also revealed that with the help of the ownership aspect of the OLI framework, companies operating in the global environment might be able to revise their respective operational strategies and likewise grow businesses within the international markets. In precise, it can be affirmed that the ownership factor of the OLI framework enables the business units to understand the structure and the approach that can be adopted to deal with the challenges emerge while conducting varied operational functions. This particular paradigm of the framework is also important for the companies to comprehend the factors that can ensure sustainability and competitive advantage as compared to other firms in the global business environment. The paradigm is also important to determine the specific resources required by firms to establish their businesses efficiently within the global business market in relation to internationalisation of business. Thus, the study of Narula (2010) concluded that long term success is what OLI framework ensures for companies in their approach towards globalising business. In relation to the above context, the report of University of Kent (n.d.) affirmed that the components of the OLI framework found their relevance within the operations conduct by the companies in terms of outward investment and FDIs among others. Correspondingly, outward FDI is one of the most prominent approaches of the companies towards ensuring growth of business in the international markets in a wider dimension. The report further suggested that with the help of the components of the OLI framework, companies are able to understand the key aspects of a particular international market relevant to growth and sustainability. Accordingly, companies are provided with the opportunity to invest in the business domain of the region to obtain better returns. Understanding the trend of FDI of any particular region is quite vital for any company while making substantial investments. In this context, the role of the components of outward investment would be duly considered as quite vital by a considerable level (University of Kent, n.d.). Based on the study conducted by Dunning (2000), the paradigms of OLI work as efficient ways for companies to understand various theories relevant to business and likewise manage or frame their business activities. Notably, there are three specific paradigms of the OLI framework serving different purposes and importance. Dunning (2000) in this regard affirmed that the third paradigm of the framework i.e. internalisation enables the companies with the alternative means through which they could be able to invest or enter into a particular international marketplace in an efficient manner altogether. It aligns the core competencies of the business units with that of the specific requirements of the target market. Similarly, the second paradigm of the OLI framework i.e. location represents the specific location or attraction of a particular region that the business unit could be able to take advantage. This paradigm is regarded as quite crucial, which enables the companies to steer their operations to conduct outward investment in a positive manner. It is also used as a tool for predicting outward investment with regards to the present and past trend of FDI in a particular international market (Dunning, 2000). Comparison of the Cases In order to derive better understanding about the applicability of the OLI framework to the international expansion and outward investment behaviour, the cases of two Chinese multinationals including Lenovo and Chinese National Petroleum Corp have been selected. Moreover, a comparative analysis has also been made between the two cases in order to acquire a brief idea about the aforesaid subject matter. Case of Lenovo: Applicability of the OLI Framework Lenovo is regarded as one of the notable players operating within the global electronic sector, having it’s headquarter in Beijing, China. As per the study of Liang & et. al. (2011), it can be found that the Chinese multinational paid utmost attention on outward investment for attaining greater business growth and ensuring long-term sustainability. Specially mentioning, the fast growing approach of the Chinese firms has been aligned with their respective operations in association with the components of the OLI framework. FDI has been one of the common approaches of the Chinese firms in recent years with regards to business expansion and gaining sustainability. In this similar context, the study of Liang & et. al. (2011) depicted that the application of outward investment by the Chinese firms has been one of the most notable approaches made by them in recent years. The MNEs operating in Mainland China are constantly seeking towards gaining better control over the emerging foreign markets with the help of outward investment (Liang & et. al., 2011). This can be justified with reference to the example of the approaches made by Lenovo in the international marketplace. It must be mentioned that this electronic giant has been in a continuous spree to grow its business worldwide. Notably, the company has succeeded in formulating as well as managing outward investment aspect over the years because of developing itself as a better financially controlled unit. This can be aligned with adhering to the components of the OLI framework developed by Dunning (Liang & et. al., 2011). On the other hand, the study of Fleury & Fleury (2007) revealed that the OLI framework has been applied by the companies operating in certain emerging markets of the world while making effective decisions relating to internationalisation of operations. Contextually, the study reflected that Lenovo worked with more than one supplier while operating within the international business markets. This is mainly performed to ensure a balance in the inflow of business resources, which is quite prevalent in certain scenarios of international business (Fleury & Fleury, 2007). In this regard, the company has ensured better application of its ownership, which is one of the determinants of the OLI framework, to attain maximum profitability in terms of market share within the respective industry wherein it operates. Sun & et. al. (2012) stated that in order to enter into an emerging international market, business units require understanding the structure of the targeted market and likewise make effective decisions. Correspondingly, in order to establish its position within the global computer industry, the management of Lenovo has decided to acquire the PC domain of IBM, further ensuring itself with better brand image and sustainability in the global market. This approach has certainly enabled Lenovo to understand the global market in an efficient manner altogether. This aspect further reveals that the OLI framework has wider applicability within the operations of the companies operating in China, assisting them towards gaining long-term sustainability and high business growth (Sun & et. al. 2012). Case of Chinese National Petroleum Corp: Applicability of the OLI Framework China National Petroleum Corporation (CNPC) is a governmental company of China, having it’s headquarter located in Beijing, China. It is known as the largest integrated company for oil and energy in Mainland China. The growth of the company over the years is deemed to be aligned with the approach of internationalisation of business. The company has become the fourth largest corporation of the world in terms of scale of operations owing to its efficient operational approaches made over the years. In this regard, it can be claimed that the company is associated with the conduct of outward investment within the oil sector in Mainland China. Notably, around 70% of the investment agreements of the oil sector of China are formed through bilateral contracts and CNPC is identified to be associated with most of them. The company is identified to take outward investment related decisions to grow its business into the foreign business markets on a wider scale (Suliman & Badawi, n.d.). Correspondingly, CNPC results for more than 40% of the investments within the oil industry in the international markets. This fact reveals that the company remains much focused towards the approach of outward investment for ensuring greater business growth from a long-term perspective. It is important to note that in order to ensure unprecedented growth in business, there lays the requirement for the Chinese multinational enterprises or other organisations to internationalise the operations of their respective businesses to grow in an extensive manner. Specially mentioning, internationalisation of business can be in the form of operating in foreign markets, acquiring or aligning with foreign companies and investing in the operations of the business units outside the native country among others. In this background, CNPC has taken the approach of making outward investments in the foreign markets to ensure extensive business growth. This approach of the company can be aligned with the determinants of the OLI framework developed by Dunning (Gugler & Boie, 2008). A better understanding of the same can be gained from the analysis conducted hereunder. Analysis From the facts compiled from different secondary sources relevant to the subject matter of the study, it can be stated that companies operating in this challenging and competitive business environment must need to work in alignment with their objectives to ensure long term sustainability. In this regard, companies often seek to internationalise their respective business operations by operating efficiently in various regions along with making outward investments in the foreign markets. From a theoretical perspective, it can be affirmed that internationalisation mainly denotes expansion of a business in wider dimension towards attaining unprecedented growth at large. Identifiably, companies operating in this present day business world seek to expand their respective businesses by adopting and executing numerous effective strategies. However, the determinants highlighted in the OLI framework of Dunning provide a better understanding about the effectiveness of various measures that prevail during the internationalisation of business operations. The OLI framework, which is also known as the “eclectic” paradigm, works on three prominent factors including ownership, location and more importantly internalisation. All these aspects directly align with the market entry strategies of the companies operating within the global business environment. This can be better comprehended from analysing the operations perform by the companies including Lenovo and CNPC operating within the business markets of China (Fleury & Fleury, 2007; Suliman & Badawi, n.d.). Lenovo and CNPC are regarded as amongst the well recognised companies operating in Mainland China. These companies have grown rapidly in recent years owing to the adoption of the strategies concerning international expansion and outward investments. As per the OLI paradigm of ownership, companies make greater use of their brand name, innovativeness and past performances in order to extend their business operations in unexplored marketplace. Likewise, Lenovo has made effective use of its brand image and business reputation of being innovative to enter and operate into the market outside Mainland China, as a part of its business expansion strategy. Justifiably, the company has acquired PC section of IBM to take maximum benefit of outward investments made and likewise establish its operations to a wider dimension. Correspondingly, another vital paradigm of the OLI framework includes the aspect of understanding location while entering into an unexplored global marketplace. Location advantage of the paradigm primarily relates with the accessibility of raw materials, wage structures and governmental policies that influence internationalisation of business operations. In this context, companies that are able to ensure better understanding about the availability of valuable resources and the application of governmental policies can better design their respective business expansion policies at large. Companies including Lenovo and CNPC are identified to expand their respective businesses in unexplored markets by understanding the factors concerning resource availability and operational structure. Contextually, both the businesses have been able to take advantage of these factors owing to their operational experience and business understanding to grow company internationally. Hence, from the overall analysis, it is quite apparent that the OLI paradigm is widely applicable within the operations of the multinational enterprises in alignment with their international expansion and outward investment behaviour (Fleury & Fleury, 2007; Suliman & Badawi, n.d.). . Conclusion From the above analysis and discussion, it has been quite apparent that the OLI paradigm developed by John H. Dunning is applicable to the outward investment and international expansion of the MNEs operating in Mainland China. By taking into concern the facts mentioned in the discussion, it can be ascertained that the companies operating in this present day challenging business environment intend to conduct their respective business operations in accordance with the needs and demands of the customers in global domain. Contextually, they adopt various strategies in order to sustain and ensure gaining higher competitive advantage within the marketplace. However, amongst the various strategies that the companies adopt to attain greater level of competitiveness and business growth, the aspect concerning internationalisation of business is deemed to be crucial. Internationalisation includes expanding the business operations within the global market, which ensures rapid growth in the form of improvising the scale of operations. With this particular approach, companies seek to gain control over unexplored business markets and increase their market share to a considerable extent. Expanding business into international markets involves various strategies that companies need to take into concern for gaining success in long term. In this regard, the paradigms mentioned within the framework developed by Dunning would be vital for consideration. Notably, the framework has three vital paradigms that are intended towards enabling companies to develop better strategies in expanding their respective businesses as per the desired levels. These paradigms generally included ownership, location and internalisation that specially associate with the business decision making of the companies. Analyses suggested that the paradigm of ownership reflects the abilities of the business units in terms of brand image, competitiveness and past performances that help them to flourish in a new marketplace. On the other hand, the paradigm of location facilitates the companies to learn about the concept or the importance of selecting appropriate location while expanding operations in any foreign market. Companies need to align their goals, objectives and competencies with the structure and trend of the selected location in order to strategise their expansion move accordingly. Finally, the third paradigm includes the aspect of internalisation, which resembles with the mode of entry strategies that the companies adopt to enter into a particular marketplace. In this regard, it can be stated that in order to ensure successful entrance into a particular marketplace, utmost focus must be levied upon understanding the aforementioned paradigms and likewise develop business strategies in an effective manner. More importantly, the internalisation operations of the businesses of Lenovo and CNPC have been taken into concern for understanding the applicability of the diverse OLI paradigms to their international expansion as well as outward investment behaviours. Both the companies are deemed to have adhered to the norms of the paradigms of Dunning while making decisions related to internationalisation and investment in global business. This aspect clearly shows that the OLI framework is indeed fruitful for the companies to gain successful entry into the global market especially including the MNEs. Consequently, it can be concluded that the OLI framework is indeed applicable to the outward investment and international expansion of the MNEs operating in Mainland China in a collective manner. References Alon, I. & et. al., 2011. Chinese International Investments. Palgrave Macmillan. Dunning, J. H. & Lundan, S. M., 2008. Multinational Enterprises and the Global Economy. Edward Elgar Publishing. Dunning, J. H., 2000. The Eclectic Paradigm as an Envelope for Economic and Business Theories of MNE. International Business Review, Vol. 9, pp. 163-190. Fleury, M. T. L. & Fleury, A. A. A., 2007. Assessing Analytical Frameworks for the Study of MNEs Form Emerging Economies. Home. [Online] Available at: http://www.anpad.org.br/diversos/trabalhos/3Es/3es_2007/2007_3ES128.pdf [Accessed January 03, 2014]. Gugler, P. & Boie, B., 2008. The Emergence of Chinese FDI: Determinants and Strategies of Chinese MNEs. Copenhagen Business School. 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