Greenfield Foreign Direct Investment - Coursework Example

Running Head: Greenfield Foreign Direct Investments Greenfield Foreign Direct Investment [Institute’s Overview: The Greenfield Foreign Direct Investments (FDI) is an overseas investment by enterprises or solo ownerships to penetrate into developing economies, such as China for sustainable growth and massive exchange of technology and economic conditions. The developing economies facilitates the arrival of foreign investments to boost their economic condition and transfer of knowledge and human capital in the country by providing financing facilities and tax free incentives to the FDI’s ( Economist, 2011). The manufacturing industry is the keen recipient of FDI’s in emerging and developed economies due to operational facilities and value chain centres in the domestic market. The following analysis will determine the best possible site for solo ownership through FDI’s in the local market. Emerging Economies: China is the largest home for beneficiary of FDI’s in the global market. Despite the economic turmoil of 2008, China remains the home for foreign investors for several years due to its competitive advantage in terms of low cost pressure, neutral policies for joint venture and solo ownerships that encourage investors to open subsidiaries and manufacturing facilities in the overseas market. The increase in flow of exports and FDI’s has revolted for intense competition in the market since 2001, and high demand for natural resources such as oil has made China an attractive market for investments (Linton, n.d, pp. 34-45). Particularly, the resource rich countries specifically South Africa and Middle East and will continue to grow a significant foreign trade base for Europe, Latin America and Central Asia (Economist, 2011). Developed Economies: Japan is the world’s second most developed economical country and is tend to be a closed investment market for FDI’s by OECD (Organization for Economic Co-Operation and Development). The reluctance of foreign investments and hostility for voluntary policies of FDI’s was a barrier to enter the domestic market. The foreign investments are partially encourage to double the FDI’s in next five years and narrow the gap of inwards and outwards of FDI (Wharton, 2009). 2. PESTEL Analysis – Emerging & Developed Economies: 1. Political: China is among the leading emerging economies, which introduced several voluntary and neutral policies to encourage multinationals for green field foreign investments (FDI) .It has encouraged significant amount of FDI flow since 1993 and the Chinese government has played an important role in bridging the trade development, institutional reforms with set of guidelines in FDI policies. It has encouraged investments with tax incentive investments and adoption of latest technologies by the foreign investors. The autonomy for trade incentives was enjoyed by the join investments, which was then relieved since 2001 to the foreign solo enterprises to enhance their export volume with the latest technology and resulted in popular increase of FDI’s in the market. The developed economies such as USA , Japan and Europe has also contributed to large scale capital and technological extensive projects which are noted due to presence of solo ownership FDI’s such as IBM, Sony, GM, Samsung, etc. that highlight the opportunity of further future direct investments. According to the statistics (Long, 2003), 80% of the FDI are green field out of which 70% are from manufacturing industry. The massive increase of FDI’s in manufacturing industry is due to its competitive advantage in low cost of production and ability to produce supplement parts in the supply chain. On the contrary, it has intentionally induced to control the FDI’s in service market to promote investments in manufacturing industry. In longer run, through the government has opaque policies for foreign. It might create hurdles for FDI’s with over capacity and strong competition from the domestic companies (Long, 2003). The Japanese ministry has strict rules governing FDI’s policies for specific industries and investors are require filing investment targets prior to any decision making, which can be subject to either approval, recommendation or even halting the acquisition for FDI’s (Wharton, 2009). 2. Economical: China demonstrates strong financial and capita income growth with vast foreign market capitalisation due to its high skilled low cost waged employment and lower production cost in the international market making it step ahead to the economic powerhouse for FDI’s. To strengthen the economic power of the country, China has strengthen its trade connections with its emerging partners, such as Russia and UAE and produce bi lateral trades that has not only threaten the local economy but has given tough competition in cheap and non-unionised labour resulting in bringing the exports to China. The local banks have acquired incentives and stakes in natural resource rich countries such as South Africa and UAE due to high demand of oil as a source of mutual investment in China. The economic policies are neutral and voluntary regarding the maintenance of balance of exchange for imports and exports of the products when they reach certain benchmark of their total production. There is a refund policy for VAT on all the exports and tax incentive bases for introduction of advance technology in the businesses (Long, 2003). Japanese economy is stable and ideal for foreign investment but is controlled strictly but Foreign Exchange and Foreign Trade law that emphasis on smaller margin of acquisitions in several industries for national security and prevention of major stakes in the Japanese companies either by joint ventures or solo enterprises (Bayoumi et al, 1997). The recent depreciation of Yen has surpassed the FDI’s resulting in necessary effect over the economic growth. The fluctuation in exchange rates can influence the domestic investments driven by FDI’s resulting in mergers and acquisition as the only factor to enter in Japanese market (Powers, 2001). 3. Social & Cultural: The social aspect of China is holistic for cultural legacies and is interested in green field investments that give hope for innovative companies to compete in the market. The scarcity of resources are shrinking gradually and once finished eventually will result in more saturated market for innovative companies, such as selling green electricity, which could be an entrance key to the market. The improved economic condition has also changed the global trend of business environment in China. The FDI’s seek competitive high skilled work and lower prices through acquisition or degree of trans-nationalization i.e. at least 25% of gross profit outside their local market (United Nations, 2006, pp. 35-59). The Japanese market is an attractive but remains a high cost entry for FDI. It has deficiency for raw material but is a high-income country in terms of GDP and location making it an attractive investment base (Powers, 2001). The social environment and business environment usually conflict due to lack of understanding of business culture in the Japanese market. The important factor in the market survey is to study the Japanese culture for language barrier and business practices as to be successful in longer run it is essential to build up alliance in the industry (Bayoumi et al, 1997). 4. Technological: The most important factor and increase in FDI’s in China in last decades is due to inducement of advance technology policies and build research and development centers in the country. It has contributed significance to advancement in technology by intra transfer of new techniques, machineries, and strategies. The market barrier entering in China is not limited but it has enforced ‘technology swapping’ that facilitates the prospective investors to transform advanced technology to enter the local market (Chen, 2012, pp. 51-62). This is further controlled by the Chinese government to prohibit other enterprises entering the domestic market by imposing high traffic charges to protect and prohibit competition to the domestic businesses. The technology has advanced the Chinese local companies such as ZTE, TCL as leading technology companies and attraction for Chinese students who have studied abroad but returned back home to excel and establish their own business in the domestic market (Long, 2003). The technological infrastructure is vital for Japanese government and another factor for FDI’s outward boost due to its competitiveness in the market. The government has spent heavily in technological area to strengthen the economic growth of the country (Powers, 2001). 5. Legal: The regulatory environment controls the impede FDI’s under voluntary and compulsory policies to enter the local market. The crucial factor is high startup cost, cost of manufacturing facility and strict compliance to the legal procedure of the country is mandatory (Chen, 2012, pp. 69-97). It invites solo enterprisers but emphasis on joint ventures, as foreign investments are required to partnership with the Chinese company, government, or agency to operate in the domestic market. The voluntary policies are strict to protect the Chinese local business in the market and are a possible risk factor for overseas investors in case of non-compliance with the FDI’s policies (Long, 2003). The best attraction for investors is the neutral regulation of government in provision of tax grants, low cost government bonds, loans and sponsorships inducements for FDI’s. The financial sponsorship is the attractive factor for the foreign investment as it accelerates the business profits in a shorter span of time (Economist, 2011). The legal policies for Japanese FDI’s are stricter for foreign investors as they protect their domestic market by substantial amount of legal rules and policies for FDI’s operation in the manufacturing industry (Powers, 2001). The merger policies is different for FDI’s as they are restricted to finance their business through equity and triangular mergers as it is essential for the enterprise to be listed on stock exchange. The stakes are higher and merging with Japanese company is required to finance through equity and higher profit margins (Paprzyck, 2007). Recommendation: The advantages and disadvantages of doing business in Japan as FDI are: 1. Barrier of entry due to high cost of raw material 2. Social and cultural difference make is difficult in understanding the business environment especially the language barrier 3. The management style is subject to awareness of social culture of Japan business norms due to cultural sensitivity 4. Consumers are price sensitive and quality essential 5. Stricter regulations for FDI’s investment and financing options make it difficult in various industries especially manufacturing China is the recommended option for investment base of FDI due to its competitiveness in raw material availability and low price cost of production, neutral regulatory policies and economic market makes it home for more than 80% of manufacturing bases of FDI’s in the world. References Bayoumi, T & Lipworth, G. 1997. ‘Japanese Foreign Direct Investment and Regional Trade’. International Monetary Fund. Retrieved on January 25, 2012: http://www.imf.org/external/pubs/ft/fandd/1997/09/pdf/bayoumi.pdf Chen, Chunlai. 2012. Foreign Direct Investment in China. Edward Elgar Publishing. Economist, 2011. ‘World Investment Prospects to 2011: Foreign direct investment and challenge of political risk’. Economist. Retrieved on January 21, 2012: http://graphics.eiu.com/upload/WIP_2007_WEB.pdf Linton, Katherine. n.d. China. DIANE Publishing. Long, Quoqiang. 2003. ‘China’s Policies on FDI: Review and Evaluation.’ The Peterson Institute for International Economics. Retrieved on January 22, 2012: http://www.piie.com/publications/chapters_preview/3810/12iie3810.pdf Paprzyck, Ralph. 2007. ‘The Determinants of and Prospects for Foreign Direct Investment in Japan’. Hermes-IR. Retrieved on January 25, 2012: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/13604/1/D07-211.pdf Powers, David. 2001. ‘British Direct Investment in Japan’. Japan Interface. Retrieved on January 25, 2012: http://japan-interface.co.uk/articles/mbaproject.pdf United Nations. 2006. Foreign Direct Investment from Developing and Transition Economies. United Nations Publications. Wharton School, 2009. ‘How the Environment for Foreign Direct Investment in Japan is changing – for better’. Knowledge@Wharton. Retrieved on January 25, 2012: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2212 Read More