Foreign Direct Investment: Nissan Company - Research Paper Example

Foreign Direct Investment Most of foreign direct investment (FDI) takes place in the form of mergers or acquisitions (M&A).It is advisable in finance to look at acquisitions as the manifestations or evidence of the market for the corporate control. After the insight, Nissan is proposed to use a model of FDI that its headquarters bid to take control of overseas assets. The model is constructed and uses its parameters in constructing benchmarks or tables that evaluate multilateral outward and inward FDI. Foreign Direct Investment Introduction From 1987 to 2012, it is estimated two-thirds of the foreign direct investment (FDI) was in the form of mergers or acquisitions (M&A), instead of new plants. For example, Renault acquired one-third shares of Nissan, but it was not contemplating on building Renault’s plant in Japan or shifting its model production in Japanese factories. Alternatively, Renault appointed a star manager, Carlos Ghosn, at CEO’s position in Nissan. Ghosn restructured the company, hence restoring Nissan to profitability (Crooks, 2010). This analysis suggests a simple model for FDI where Nissan as a heterogeneous investor bid to secure the control rights on proposed or existing overseas assets; the formulation is capable of explicitly considering more than two countries or market. The model avails a strategy utilized in bilateral FDI for analyzing bilateral trade in goods; its specification entails an inward effect showing characteristics pertaining to the destination country, an outward efficacy indicating the features of origin country, and a vector consisting pair-specific variables that reflect monitoring costs (Forum, 2010). The model is applied or estimated using five countries. In the second stage, the estimated outward and inward fixed effects related to variables that are predicted by the model. Then the formulation of the model is aggregated into yielding simple table used for each country’s share of the world Automobile FDI (Obashi, 2010). Background Many firms engage in FDI without exploiting the external markets directly via the exportation. They focus on location, internalization, and ownership advantages with internalization of intangible assets. Ownership advantage depends on the managerial and technological superiority of home country’s firm in relation to the hosting country firms. This superiority should be sufficient to deal with the extra costs incurred as a result from differences in business customs, informal and formal norms, and languages. As a result, the ownership is directly linked with control; hence control turns weaker when ownership is diluted. Firms that subcontract or outsource may retain some of their control in case of long-term relations. Relinquishing ownership has benefits if the business partner has the best technological or managerial ability in a specific product. Locational advantages and considerations entail factor endowments, wage levels, technology transferability, market-supportive institutions, physical and human infrastructure, and the political regimes. The Internalization advantage is related to the net benefits acquired by the FDI firms via more integrated and captive business activities carried by parent firms. The required or optimal degree of any internalization correlates with the balance of the costs of incomplete contracts, asymmetric information, and the ineffective disputes settlement methodologies (Crooks, 2010). Nissan Investment in the United States The automotive industry is categorized as one of the most competitive industries on the Earth. Changes in this sector have forced international corporations, such as Nissan, to reassess their production locations in line with current or future models. The United States, US, is among the net beneficiary of this genius strategic realignment. The US boost on having a large or massive domestic automotive market, it is second to China; the US has both favorable exchange rate and favorable investment climate. In fact, the above dynamics have made the US a more affordable investment location as compared to other countries, such as Central Europe and Brazil, which were historically regarded as cheaper investment place (Forum, 2010). Foreign companies’ percentage share of the U.S. market increases on regular, they have continued increasing their individual U.S. production; hence replacing the sales that would have possibly come from the imported vehicles. The US is the center of attraction for the several global carmakers since there is immense opportunity for big number of mid-income population aspiring to own at least car, and, in addition, the abundance of raw materials, iron, and low-cost labor. The FDI in the US Automobile Industry opened up for the new avenues or places for the development the important sector of US industries. The US’s liberalization of government policies about FDI in the automobile industry increased the industry’s scope. The Nissan is one of the FDI players at the Indian’s automobile industry. US have many advantages in manufacturing methods used in the automobile sector. Mostly, the big names like General Motors, Ford Motor Company, VW Group, GE Corporation, Toyota Motors, and Honda Motors have already set up several manufacturing units in US. Today, the US boasts of her quality resources which some are listed, as brilliant engineering talent, abundant capital goods, low overall cost, language strength of English, political stability, and one of the most efficient accounting framework. The FDI has already penetrated the market, and the US is considered as the second largest FDI business destination. The automobile sector in US is growing at a rate of 18 percent per year. The analysis is carried with the objective of analyzing progress of Nissan Automobile through FDI. In the pursuance or observations of the above mentioned, objectives following or relating to methodology is adopted while the present research work is built on secondary data. Sub-Sector Amount of FDI’s Inflow (US $ in Millions) Percentage FDI inflows Passenger vehicle 2,987,295 2.37 Heavy Vehicle 752,736 1.16 Transport or Others 799,532 0.49 Auto ancillaries or parts 13,376,449 0.50 Total 17,916,034 4.52 Source: Directorate of Economics US Table 1 The Subsectors of FDI’s equity inflow (2010 to 2020) Sub-Sector 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 Passenger vehicle 1,209,875 1,309,299 1,545,222 1,777,582 1,838,592 2,357,410 2,987,295 Heavy Vehicle 353,704 391,084 519,983 549,007 416,871 567,557 752,736 Two wheelers 374,454 434,422 556,125 500,659 497,019 619,193 799,532 Auto ancillaries or parts 6,529,824 7,608,695 8,466,664 8,026,679 8,419,790 10,512,901 13,376,449 Total 8,467,852 9,743,502 11,087,996 10,853,929 11,172,274 14,057,063 17,916,034 Source: Industry Statistics US Table 2 Trends in the Automobile Production Rank Country Amount of FDI Inflows (US $ Million) Percentage of FDI Inflows 1 Japan 6,239.91 23.68 2 India 3,841.18 14.62 3 The Netherlands 3,235.14 12.57 4 Italy 2,716.72 11.66 5 Mauritius 2,230.15 8.62 Total 18,263.1 70.52 Source: Directorate of Economics US Table 3 Top Five Countries FDI Inflow (2010 to 2020) Year Portfolio Investment Direct Investment Total 2007-08 55306 39673 94979 2008-09 31712 103366 135078 2009-10 109740 138275 248015 2010-11 -63617 161480 97861 2011-12 161879 188814 350693 2012-13 157354 135119 292473 Source: Directorate of Economics US Table 4 Foreign Investments inflow FDI in Automobile Investment Scenario The Cumulative FDI inflows seen in the automobile industry’s Cumulative FDI equity inflows pumped into the economy from 2006- 2012 were US$ 568,246.20 billion. From the figure, the amount of US’s FDI inflows for the Automobile industry as from 2006 to 2012 was US$ 25,972.58 billion, which represented 4.50% of the total FDI inflows. The automobiles production trend from 2006 to 2012 is presented in Table 2; total automobile production was gradually increased from 8, 467,852 in 2006 to 17,916,034 in 2012. This shows an increase by 9,448,180 in absolute terms or 111.56 per cent in relative terms during the given period. The top five countries that share the FDI in automobile industries include India, Japan, Netherlands, Mauritius, and Italy. These countries, five of them, altogether contribute to 70.54 per cent of the total FDI inflows in the US. From the table, nearly 24 per cent FDI contributions are from Japan; India contributing 14.60 per cent; 11.04 per cent from Italy, 12.57 from the Netherlands and 8.62 per cent from Mauritius. Table 4 clearly shows the total direct investments and portfolio investment inflow that the US attracted during 2007 to 2012. From Table 4, it is evident that the total investment, which is the sum of direct and portfolio investment was USD 94,980 Million at 2007 that was eventually increased to USD 292474 Million in 2012. In the year 2010 portfolio investment has a negative sign because of the crisis that affected automobile industry. References Crooks, E. (2010, November 21). Nissan Shifting Output to a Dollar Economy. Financial Times. Forum, W. E. (2010). Global Competitiveness Report 2010-2011. Geneva: World Economic Forum. Obashi, A. (2010). Stability in the Production Networks in the East Asia. World Economy, pp. 20-30. Read More