German Foreign Direct Investments in China - Coursework Example

German Foreign Direct Investments in China ABSTRACT The paper talks of the FDI growth in China and the potential achievements that the stakeholders have in the business. The approach of the case study is to analyses the German FDI investment in china using the framework of OLI thus theoretical aspects have been used to explore the Chinese market and the reasons why china is becoming a good ground for German operations. INTRODUCTION Foreign direct investment (FDI) is termed as a country’s legal right of a firm in its home country’s territory in order for it to be able to have control, in a country acting as the host, on its subsidiary operations through equity investments. The world has not only become global, but also it has managed to record an improved standard of living due to the FDI operations. Several studies have been conducted on the direct effects as a result of FDI to both home as well as the country serving as host. Majority of the studies have revealed that there is more benefit coming from FDI to both the host and the home country compared to the risks generated. It is noted that in FDI, a rational firm commits itself to investment in another firm or a different locality if only it is anticipating a viable profit that is to come from the operation (Dunning 1980, p. 9-31). From the various sources, clear indications have been shown to support that there is an increase in foreign direct investment (FDI) in China. This is not surprising at all in regard to the huge market size and the opportunities for exploitation of resources in existence. In addition, the policies of open market China has been pursuing over the last twenty years and the efforts that have been converted to attract FDI, has acted as a springboard to the growth of FDI, and the ultimate interest in the scientific analysis. The continuous development of the China’s economic development largely does depend on the extent of policy-making and FDI that will help in facilitating inward investment. Moreover, foreign development and investment f specific industrial sector is seen as an essential way to establish the superstructure and the infrastructure of today’s economy of the market (Chang & Rosenzweig 2001, p. 747-776). The study aim is to explore the main reason there are German foreign direct investments in China, and what this means in the future outlook for the German operations. LITERATURE REVIEW For several years, the model of OLI has been a significant framework min analyzing the multinational enterprises activities as well as the economic rationale that takes place in the international operations. This model is also known as the eclectic model, and it was first postulated in the year 1976 after having been proposed by J. H. Dunning. The model tries to elaborate the growth drivers and decision, which helps firms in operating international production. This paradigm has been intensively applied in the past in the bid to explain decisions entry modes. Several other empirical studies have also given it support though it is not wholly accepted, and rather described as being limited to its level of accuracy in extrapolating methods that are definite in the international operations. It is believed that operations of FDI are also being determined by several other factors seem to be beyond the OLI framework economic advantages. The model of gravity is one of the leading models that try to modify the eclectic model limitations. This model tries to explain the international production process and trade, including the variables of OLI. Some of the concerns about the framework of OLI identified by many economists include “the OLI framework seems to lack a clear distinction between its vertical and horizontal motives for trying to locate the facility for production in a foreign country. In addition, the model too does not address the important distinction for the modes of Greenfield and mergers and acquisitions for one to engage in FDI.” It is paramount to note that, the facts underlying the production motives do vary depending on regions and, this is not considered in the framework of OLI. To illustrate this using a typical case, factors that tend to have an influence on foreign investment in iron or coal ore regions in African countries is likely different from those affecting investment by an Asian car manufacturing industry (Cushman 1987, p. 174-185). However, the framework of OLI has proved to be helpful in trying to determine the basic motives in guiding the MNEs (multinational enterprises) international operations. It has also set a groundwork that is well informed by the international business studies, economics, and management. The framework of OLI is helpful when it comes to classifying a number of FDI researches done recently. Changes in the OLI model were done to make improvements to the model. It was reasoned that failure of the market, competitive advantages, environmental variables, and association are also to be put in the model to help in guiding decisions about international production (Dunning 1988a, p. 1-31). Business Forum China (2008) adopted the framework of OLI to try to explain the entry mode decisions of multinational enterprises when facing an economic transition. Despite having improved measures, (Brouthers, Brouthers and Werner 2008, p. 831-844), states that the model of OLI is inert, though aiming to cover other factors having influence on the decisions of the entry mode. In an actual fact, “the framework of OLI fails to do so because of the strategic factors ignorance, the characteristics, and the situational contingency surrounding the key decision maker and the competition”. In this study, three important questions were used in the analysis of the motives and the prospects of the operations of the Germans in china, therefore forming the body of the study. The questions include, what are the factors that seem to be motivating the investments of German companies in China? To what extent can these motives be classified within the framework of OLI? What obstacles are facing German investments in China? In summary, the framework of OLI has always been used in evaluating the reasons for German’s FDI in china, and the evaluation made it possible to draw a future perspective. ANALYSIS AND DISCUSSION Background of the countries China For the sake of its innovation, technological improvement, development in industrial expansion and the overall growth in the economy, China have adopted the inflow of FDI concepts. This has made China a key host nation concerning FDI in the world since the middle of 1990s. Germany According to the available statistics, Germany has been ranked as the leading investor country in the globe, and its economy in Europe exists as one of the largest. Its major export specialization is the mechanical and the automotive engineering industries in line with the China’s comparative advantage. GERMAN FOREIGN DIRECT INVESTMENTS IN CHINA Since China created policies of an open door to foreign investors, Germany records increasing direct investments in the country. According to (Chen 1996, p. 18-30), the framework of OLI advantages of a firm helps in determining largely the mode of entry it adopts. Using descriptive analysis, there is a transcribed interview record that was provided by different German firms. These firms were different in terms of sizes and industries. In addition, they also exist at different stages of development in china. Therefore, German foreign operations are directly investing in China. Its mode of entry operates as a quadruple dependent variable. MOTIVES FOR GERMAN FDI IN CHINA Today, China is being considered as the leading supplier and export market for Germany especially in the industry of information and communication technology. This is because Germany has been taking advantage of the rapidly growing rate of its domestic market inside China. This has positively resulted in the strong growth of economic relationship between the two countries. Germany, regarded as a big country in terms of foreign investments, has greatly contributed to china’s incorporation into the world’s economy compared to any other nation in Europe. With the China acting as a market for production of German businesses, several researchers show that in the coming years, Germany will have as its largest partner in trade coming just behind France. Several number of FDI studies are usually based on the framework of OLI proposed by Dunning. Dunning’s states that the operations of the international firms are usually determined by a blend made up of three theories, the Ownership- Location- Internalization (OLI) theory( Dees 1998, p. 175-194). Ownership advantages Ownership advantages tends to offer an increase in revenues collected or lowers the cost of operations in the host nation because FDI tend to require extra costs paralleled to its competitors based in the home country. The ownership advantages are termed as resources that are “intangible”, and they can be moved readily between the subsidiaries and the parent countries. Over the years, the operations of German FDI in china have been very successful since the operation costs at its host country have been relatively low. China has been made a cost-effective nation for the German FDI manufacturing site due to its cheap cost of labour and the low cost of the resources needed for the manufacturing process. This has led to the increase in German revenue as compared to the locally based firms. Compared to China, Germany is known to have managerial skills and technological knowledge at high-level. These competencies that Germany tends to monopolize gives it access to both output and input markets, as well as economic scales of large size in china (Chung 2001, p. 185-211). Location advantages Germany takes advantage of some of the factors available in China that are in line with its core competencies in order to gain grounds in China that are profitable. Three main central places of China accommodate approximately eighty to ninety percent of the German investments. The Shanghai metropolis’ attractiveness to the German firms is due to its great infrastructure and its proximity to the customers. The industrial Northeast offers natural resources in abundance including coal, oil, and ore. It serves as a key supplier to both the manufacturers locally and shares a close border with both South Korea and Japan thus creating easy accessibility for the German FDI. Finally, the Pearl River Delta has a high population of SMEs, which makes China the best location for most of the German FDIs. Internalization advantages Germany does have various entry modes into China. Fifteen percent of German operations start up through exports; twenty-five percent operates as subsidiary offices in China whereas sixty percent of the German firms do invest in China as a JV. Germans core ability is strengthened by its high level of professionalism and technological expertise, and this is what gives Germany its competitive advantage hence its appreciable leases of economy in China (China Statistics 2000). OBSTACLES TO GERMAN FDI The Chinese market has undoubtedly offered advantages that have given access to a huge number of German operations within a small period. However, couples of challenges in the china’s business environment face the German operations. In the year 2007, the German chamber of commerce described the market as a double edge sword, with the business being faced by equal challenges in form of obstacles as well as opportunities. Thus, the hope of china becoming among the leading competitors in the global world would be achieved if only effective measures are taken into consideration in order to make improvements in its environment of business (Coughlan 1985, p. 110-129). The obstacles being faced by German FDI in china include:- Poor accessibility of information and lack of clear regulations Investors from Germany do encounter difficulties in collecting useful information about the market and the potential supplier of information. There is porosity in the legal laws of China making it hard for investors to gather the needed information. The differentiation in china’s huge size of the market makes it inaccessible to the providers of services. Thus, a strategy of investment must be developed to reach out to its diverse regions. Deficiency in intellectual property rights protection The violation of property rights including the brands and trademarks are the main challenges facing German operations in China. This has resulted in the loss of competitive advantage as low-cost producers in China colonize the high and expensive knowledge and technological expertise acquired by the German producers. Shortage of skilled human resources There is an increased shortage in the number of engineers and specialists who can manage the increased German manufacturing industries in China. This deficiency of skilled personnel is becoming a huge hindrance to the upgrading and threat to market competition. High input prices Due to the issues of bureaucracy, there is an increased price of electricity and other relevant material production. Consequently, this has led to a strain on the margins of profit and has initiated some regular hours of working. The demand from China has resulted in a considerable increase in the global market prices (Davidson 1982). Increase in the rate of competition Several competitors in China are facing the German firms. Competition comes from Australia, America, and other Asian countries. Several other foreign companies are today infiltrating the market, and this leads to a decrease in the margins of profit of FDI. The first technological advancement in China by the locals might lead to the saturation of the market thus making market competition fiercer and plummeting growth of opportunities. Effects of corruption Corruption has played a great role in affecting large number of German operations in China especially the construction and production companies. PROSPECTS FOR GERMAN FDI IN CHINA In spite of the challenges prevailing in the operations of businesses in China, firms in Germany are becoming more optimistic than being pessimistic. Majority of the German operations are expecting favorable growth in the size of market sales. This was anticipated since the customers from China are becoming aware of quality within certain markets, thus helps in creating new opportunities for products from Germany in the coming years. China will be vital in serving as a base for exporting things to other Asian markets neighbors, and basing on current evaluation of sourcing potential; future developments can be seen in offing (Cheng & Kwan 2000, p. 379-400). The sales market of china will continue to remain as the chief attraction for the operations of Germany. The downside of this operation is that the environment of business is bound to face an increased competition, which is a rational consequence of an increased attractiveness of the market. Therefore, it puts a demand on the operations of Germany to sharpen its competitive advantage and try to lengthen its reach of investment, in and beyond the borders of china to other countries of Asia (De Gregorio 1992, p. 58-84). Different operations of Germany believe that there is likelihood of improving the quality of supply, the current levels of quality contributing to the positive expectations for the coming years. However, the costs from skilled human resources are projected to increase, thus resulting in a direct increase in the cost of operations and production in china. This may be solved if the industries that have less number of skilled manpower, especially the engineering and manufacturing industries would try to put more effort in training the local populations and bear the extra costs coming with the training so that the problem of having less skilled human resource can be solved (Davidson & McFeteridge 1985, p. 5-22). CONCLUSION This essay has sorted to explain and demonstrate the reasons that have helped in guiding the operations of Germany in china using the framework of OLI. Several years after the inception of the OLI framework, the model has remained pivotal in assessing the economic rationale of the international production by the multinational enterprises. Therefore, this will serve as a stepping-stone where there can be incorporation of academics. From the study, the potential for markets and the attractiveness in china has outweighed any obstacle apparent to the German investors. However, great attention needs to be given to the obstacles facing the foreign investments in china. By so doing, there will be a creation of a good environment for doing business. This will inevitably benefit the country hosting as well as the home country in terms of profits in the coming years. References Brouthers, L.E., Brouthers, K.D. and Werner, S. (2008). Is Dunning's EclecticFramework Descriptive or Normative? Journal of International Business Studies. Vol.30, No. 4, p. 831-844.2.  Business Forum China. (2008). German Business Expansion in China: 2008- 2010. 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