German FDI in China - Report Example

Motives and Prospects within OLI framework: Case study of German FDI in China By: German FDI in China has been growing steadily over the last decade, particularly due to the expansive Chinese market and a favorable environment within which the German firms operate. Whereas the enhanced trade within the two nations has proved beneficial to a substantial percentage of the stakeholders involved, concerns have been raised, as the German corporations have not yet registered the profits they expected to materialize. This project therefore aims to evaluate the motives and prospects of German FDI in China. At the same time, it assesses the extent to which the motives of German FDI in China fall within the OLI paradigm. Introduction According to economic surveys released in the year 2004, China was ranked as the third largest recipient of FDI in the year 2003, and registered the highest growth in terms of FDI inflows. One of the nations that have shown great regard for the Chinese market is Germany, as FDI outflows from Germany to China increased by tenfold from 800 million Euros in 1995 to 7.9 billion Euros in the year 2003. According to input from Deutsche Bank, which plays a significant role in overseeing investments between the two nations, the upsurge in German FDI to China can partly be attributed to the trade relations between the two countries that have been improving steadily. Since it overtook Japan as Germany’s most important trading partner in Asia in early 2000, the volume of trade between the two countries has significantly increased, with well over 1500 German companies operating within the Chinese market in 2003, a figure that has undeniably increased with time. Trade between the two countries has undoubtedly increased since the year 2003, with most of the German firms operating China registering continuous profits and growth amidst the prevailing economic times. As highlighted in the case study, the decision by the German investors to participate in Chinese market has been promoted by several issues. At the same time, a myriad of setbacks continue to hamper the commerce between Germany and China. This research paper aims to provide more insight on the motives of German FDI in China, and the prospects for the future. Similarly, the research aims to analyze data from various reports and put into context the question of whether the German FDI motives fall within the OLI paradigm. The OLI paradigm is a three-tiered structure that organizations routinely base their analysis when determining whether specific direct foreign investments are a worthy course. The paradigm is grounded on the supposition that corporations are likely to avoid dealings in the foreign market, whenever internal transactions come at lower costs. For given foreign investments to fall within the OLI paradigm, the organization in question; particularly the product or service they inject into the market should have a competitive advantage over those of other players within the specific market. At the same time, the firm should seek to establish whether it derives greater benefit through foreign investments compared to its participation within the local market. For the OLI paradigm to be accomplished the aspect of market internalization should be apparent; in that, the company in question should be certain that exploiting the foreign market by itself, would provide it with an upper hand, as compared to partnering with a local entity. Literature Review According to Trading Economics, the accession of China to the World Trade Organization is undeniably the turning point of commerce within the Chinese market. This is essentially because it dismantled the trade barriers that existed within the market and improved access to the Chinese market. The 1.4 billion clientele has since then lured a substantial number of entities to participate in commerce within the market, and in as much as most of them are from Germany; global investors also play a substantial role within the market. The United Nations Conference on Trade and Development reports that Germany is China’s most important trading partner within the Eurozone. In the year 2003 for example, German stakeholders were the seventh largest investors in China. With most of them dealing in automotive, as well as electrical, chemical and mechanical engineering (UNTD). Even with German FDI in China increasing by tenfold, it is interesting to note that the Chinese investments make up only 1.2% of German total FDI. It is imperative to note that in as much most of the German corporations that take part in China in the past were majorly manufacturers, such as Siemens, overtime various service providers have come on board. Examples of such players include Allianz in the insurance sector, Deutsche Post in the communication sector and Metro in the transportation. According to Peng (2010, pg. 87), China’s market potential played a significant role in attracting German investors to the market. In the year 2002 for example, China had approximately 76 million prosperous consumers who did not have to worry about spending. Additionally, the extensive Chinese population made the market quite attractive. The fact that the prosperous consumers alone exceeded the German population prompted the German investors to channel most of their resources to China. Jiang (2003, pg. 112) asserts that organizations normally analyze the cost of production in the potential market before venturing into it. According to Jiang, German investors have high regard for the Chinese market particularly because the cost of production in China is considerably low when compared to the rate across other nations. Jiang consequently argues that it is imperative for various nations to enact favorable policies that make it easy for investors to venture into their markets. According to Festel (2005, pg. 327), China’s membership to the World Trade Organization played a significant role in opening up the market to German investors. The membership similarly acted as a major driver of German FDI in China because it made access to the Chinese market quite easy. Liegsalz et al (2010, pg. 126) argues that the Asian region has had to cope with unforeseen challenges and tough economic times within the past years. Nonetheless, China has managed to appeal to global investors; particularly Germany because of its rapid economic growth. In like manner, the authors argue that 2008 Olympic Games that took place in Beijing have in a way complemented direct foreign investment in China. This is predominantly because a substantial percentage of German and other foreign investors took part in laying down the infrastructure that hosted the Beijing event. Dettke (2009, pg. 52) introduces a different perspective to German FDI in China, though one which is shared by the coursework. He argues that in as much as commerce between the two nations has been quite productive over the past few years, several challenges still avert the entities who take part in the trade from realizing maximum profits. One such factor, which is similarly reaffirmed within the coursework, is the persistent legal uncertainties that exist in China. Dettke argues that the failure by the Chinese administrations to put in place mechanisms that govern the right of properties has left several investors exposed to complications. The legal difficulties majorly arise from the fact that the operating environments keep on changing, and that the regulations that are in place act as obstacles, a fact that somewhat influences investor confidence negatively. Nolan (2015, pg. 119) similarly shares the ideology arguing that while the relations between Germany and China have been ideal, the limited transparency within the Chinese market has been a point of concern over the recent years. This is essentially because most of the German investors have on several occasions been unable to get sufficient data on consumers for analysis purposes. At the same time, most of the German investors have found it difficult to establish ideal distribution networks due to the failure to identify the potential supplier networks. Nolan similarly argues that the sheer size of the Chinese market often makes it challenging for the German investors to penetrate, given that China is a diverse country, and it is extremely difficult to find, and concentrate on a small and homogenous market. Whereas the entire cost of production in China is a bit cheap, German investors have over the past few years been raising anxieties regarding high input prices, particularly in the purchasing of power and raw materials. The increase in cost of raw materials and electricity has somewhat made it difficult for the German firms to register the profits that they earlier expected. Nolan (2015) however says that such an event should not be taken to hypothesize that China is presently growing into a non-profitable venture for German investors; as international trade has made it easy for most of them to establish perfect market positions, and effectively compete with the dominant players in the various sectors. According to input from Trading Economics, German FDI to China is still on the high particularly because most of the German companies operating in China have still managed to accomplish their business objectives amidst the challenging duration. Trading Economics reports for example that German FDI to China increased in April to $330 million from approximately $224 million, which was the value of trade in March. The Economist similarly reports that German FDI in China is likely to meet the expected levels of the first quarter in 2015. According to Tang et al (2012, pg. 83) the Chinese market has managed to attract direct foreign investment since 1970’s when the world embraced international trade. This ability portrayed the Chinese market as an ideal destination for global products and services with goods trickling in in the 1980’s, 1990’s and 2000’s. In as much as global FDI to China reduced within the first quarter of 2012 from $60.9 billion to $59.1 billion, input from the German-China Bureau of Economic Research continually indicate that German investors carry on investing in China extensively. Whereas only 1500 German companies operated in China in 2003, the number has increased by over 3500 firms, as presently about 5000 German companies are functioning in China. Additionally, whereas only there is only 3.1 billion Euros worth of Chinese investments in Germany, the latter’s investment in China is valued at around 39 billion Euros, according to input from the German-China Bureau of Economic Research. The Bureau continues to report that the fact that the number of German organizations has repeatedly increased in China is a clear demonstration that the OLI paradigm is met. This is particularly because most German organizations, as is always the case when analyzing foreign investments always base their analysis on the OLI paradigm. Analysis Process For the OLI paradigm to be met, multinational corporations generally have to prefer direct investments as compared to licensing, or allowing local entities to use their name. The German-China Bureau of Economic Research that closely monitors commercial activities between the two nations has continually reported that most of the German organizations that are operating in China always prefer real investments compared to partnerships, which come in the name of licensing. This is particularly because the German firms often acquire assets that they often control and use for production and purposes of providing their services. At the same time, some German corporations often prefer building their own production facilities within China. German FDI in China falls within the OLI paradigm essentially because most of the German corporations prefer direct investments to licensing. The location aspect is similarly adhered to, for in as much as the functioning of German investors in China can be considered expensive because of operational logistics, the Chinese market compensates the German entities in terms of net profit, which comes about when they sell their products and offer their services. The German-China Bureau of Economic Research has in like manner repeatedly reported that all the operations fall within the OLI paradigm due to internalization. This implies that whereas it would be profitable for German firms to license local Chinese organizations to produce and offer their services, it would be a rather risky affair. Having the German corporations come on board implies that internalization is indeed observed. Results and Discussions From the discussions in the section above, it is apparent that German FDI in China fall within the OLI paradigm. Nonetheless, it is imperative to take into consideration the fact that the Chinese and global economic landscape has extensively changed over the last few years. Consequently, it would be important to analyze what the future holds in terms of commercial operations between the two nations, as this has in some instances been the subject of debate over the last few years. A section of economic experts has overtime stated that China is no longer attractive to German and global investors at large because of the high cost of production it currently takes to produce goods within the Chinese market. Nonetheless, the German-China and Bureau of Economic Research differs with such perspective given that not every location within China is as expensive as thought. This is particularly because interior provinces such as Sichuan in Western China and Fujian in the Coast of China are significantly cheaper and are highly accessible due to the improved infrastructure within the region. Regarding the concern that the cost of producing goods in China is expensive compared to that in various South Asian nations, the bureau reports that China is preferred for its production of high-end products that are appealing to consumers both locally and internationally. In like manner, German FDI in China is prospective to continue being on the rise because the latter is known for high tech designs and highly skilled labor. The level of infrastructure within China similarly makes it easier for the German investors to continue participating in the Chinese market. This is because most of the interior provinces are accessible in China, a situation that is not the case in other Asian countries because of poor infrastructure. Conclusion International trade is important to both the consumers and producers, as the latter are provided with a platform to expand its operations and develop into global brands, with the former at liberty to choose from the extensive high quality products and services available at their disposal. In going international, producers have two options; to either go for direct and real investments or collaborate with local entities. German investors in China have nonetheless, opted for direct foreign investments. The Chinese market majorly appeals to German investors because of the ever-available market and accessibility reasons, which were laid bare after China joined the World Trade Organization. Nonetheless, a few challenges have overtime prevented the German entities from realizing the expected profits; one of them the uncertainty exhibited by the Chinese market. Concerns have similarly been raised regarding the changing economic landscape, especially concerning the fact that the China may no longer appeal to investors. The discussion above has nonetheless established that German FDI in China falls within the OLI paradigm, and that the market still has an edge over other probable investment destinations. Reports indicate that German FDI will still continue to be on the high over the next few years, consequently, it would be imperative for the Chinese administration to put up mechanism that make its more accessible and transparent, as that would ensure that trade relations between the two countries continue becoming stronger. References Dettke, D. (2009). Germany says "no": The Iraq War and the future of German foreign and security policy. Washington, D.C: Woodrow Wilson Center Press. Festel, G. (2005). The chemical and pharmaceutical industry in China: Opportunities and threats for foreign companies. (Springer e-books.) Berlin: Springer. Germany-China Bureau of Economic Research; Accessible at: http://www.gcber.org/library/experience-china-attracting-fdi Hoeck, M. (2008). Cooperation and technological endowment in international joint ventures: German industrial firms in China. Köln: Kölner Wissenschaftsverl. Jiang, X. (2003). FDI in China: Contributions to growth, restructuring, and competitiveness. New York: Nova Science. Kaufmann, L., & Wissenschaftliche Hochschule für Unternehmensführung . (2005). China champions: How German companies can successfully integrate China into their global strategies. Frankfurt a.M: Europ. Management Publ. Liegsalz, J., & Harhoff, D. (2010). The economics of intellectual property rights in China: Patents, trade, and foreign direct investment. Wiesbaden: Gabler. Mukherjee, A., Patel, N., India., & Indian Council for Research on International Economic Relations. (2005). FDI in retail sector, India. New Delhi: Academic Foundation. Nolan, P. (2015). Re-balancing china. 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