Dynamics of Multinational Enterprises - Report Example

Executive Summary The report analyzes the market entry strategies into China. This report acts as an advisory study to the various companies in UK, US and Japan who intend to enter China as a part of their expansion plan. As for over a decade, China has been an attractive economy for expanding various companies businesses and product lines, this report tries to analyze different issues relating to FDI investment in the economy. The report in its short analysis tries to answer two questions, firstly why China has tried to favored inbound Foreign Direct Investment through Joint Ventures and secondly, Cost and Benefits of FISE approach. China tends to favor FDI through JV route because this gives them the opportunity to boost domestic industries, post high GDP numbers and maintain a perfect competition in the economy. Table of Contents Executive Summary 1 Introduction 3 Analysis 3 Part A: FDI thorough Joint Ventures in China 3 Part B: Cost Benefit analysis of FISC approach to market entry for MNE and Chinese Economy 5 References: 8 Introduction China as an economy has always welcomed Foreign Investments but through Joint Ventures. The report will discuss the rationale behind such policy of China and how the country has benefited with this policy along with providing market advantage to incoming companies. In the recent past FISC approach have been prevent in entering new markets and company like Kotak has used this to a full effect. The report will also analyze benefits of using the FISC approach to market entry for China and Overseas. Analysis Part A: FDI thorough Joint Ventures in China China has favoured FDI through joint venture route because they wanted all the industries and strategies to be tightly regulated under government supervision. This can only be done if strategies are local in nature and are made by local people. These local companies have been strongly ruled and regulated by Chinese Government. The republic of China Government doesn’t want to lose this control and want it to be tightly regulated (Berger & Udell, 2002). This analysis suggests that exports level from China towards America have risen again. This is resulting in huge balance of trade payment situation towards China. With this balance of payment situation the Chinese reminibi should appreciate against US dollars. But china follow a fixed currency regime, this is done to keep Chinese export competitive. With revaluation of Chinese currency the trade deficit will not narrow US trade deficit against China. The levels would be similar but it would make Chinese exports less competitive and hence will have an indirect impact on US trade deficit (Berger & Udell, 2002). The exports that Chinese make towards are funded indirectly by Chinese government. This is done by investing in Government of USA Securities by Chinese Govt. Hence indirectly Chinese government is providing American economy enough fund so that they can boost Chinese exports. This has created huge balance of trade hung up situation in America. As a result of this, Chinese Government needs to set their currency free because that can only show the correct situation of the market (Batini & Nelson, 2005). For well over a decade China has presented itself as an attractive venue for market entry, with over 2.6 billion consumers in a progressively deregulated marketplace experiencing high rates of economic growth. The accession of China into the WTO provided a still further stimulus to firms seeking market entry, as has the rapid diffusion of internet-related technologies (Economy of China, 2010). In fact, most Western companies have sought to enter China via the joint-venture route, sharing day-to-day control of the business with a local partner. Having a local partner in a joint venture does provide certain advantages as in securing contacts that often depend on political linkages and being better able to use guanxi-type relationships (Batini & Nelson, 2005). However sharing operational control with the local partner can paralyze decision-making. Lucent, for example, saw its share of the market for optical-fiber equipment in China fall from 70% to 30%, largely because, in the view of analysts, it has had to negotiate each technological change in its product base with the local partner. Such time delays in rapidly evolving high-technology markets can be extremely adverse. Nevertheless, the experience of companies seeking to enter China in recent years has been less than encouraging. However, these disappointments may have had much to do with Western companies using inappropriate methods in their attempts to internationalize their operations into the Chinese market (Economy of China, 2010). The economy began to show more signs of weakness at the end of the second quarter. Tightening policies are producing results in the property market, investment growth, and industrial activity. The decline in commodity prices is affecting domestic inflation measures. The mix suggests that policy could turn to a more neutral stance, while outright easing may still need to wait for a deeper downturn to materialise (Batini & Nelson, 2005). Despite the headline of 10.5%, seasonally adjusted real Gross Domestic Product in China has grown at a rate of around 8% only in the first quarter which is less than compared to 10.8% of the first quarter. Industrial production in the country has slumped its growth which has led to a big fall within the heavy industries. Investment in property had just begun to slow in June, while SOE outlays remained subdued (Barron, 2010). The inflation numbers in the country have cooled down a bit, though the prices of food are still presenting upside risks. The PPI has finally followed the global commodity prices in July. The trend in CPI still looks positive in the second half, but is less threatening than previously thought. Part B: Cost Benefit analysis of FISC approach to market entry for MNE and Chinese Economy (Berger & Udell, 2002) has suggested that a more appropriate vehicle for Chinese market entry than either joint venture or WOFE is the foreign investor shareholding corporation (FISC). In fact, this has many of the characteristics of the Western joint-stock company and Eastman Kodak successfully pioneered a FISC in China. The FISC grants local partners in different geographic regions or product groups, minority stakes in return for their business assets, such as factories, offices and vehicles (Capital Flight, 2010). Since local partners have lost direct ownership of these assets, they can be removed from day-to-day decisions involving their use. Nevertheless, as part-owners of the corporation they have a vested interest in its overall success. The Chinese authorities have welcomed these initiatives – the China State Development Planning Commission released a report supporting the Kodak model – and FISCs are quoted on the Shanghai and Shenzhen stock exchange making it easier for them to raise capital (Capital Flight, 2010). This was an especially important development since many of China’s previously highly protected domestic industries had problems of inefficiency and were in urgent need of investment and modernization by Western companies willing to transfer technology. For example, in the pharmaceuticals industry alone there are some 1,800 domestic manufacturers, 80% of which have sales of less than $1 million, with the result that they are internationally inefficient, being unable to exploit the large economies of scale and scope typically available in the pharmaceutical industry (Economy of China, 2010). Nevertheless, as part-owners of the corporation they have a vested interest in its overall success. They are therefore motivated to help the FISC secure contracts and make best use of local networks and relationships to further its business interest. The FISC can now coordinate activities across many such local partners to exploit any available economies of scale and scope in ways precluded to the joint venture (Berger & Udell, 2002). A further advantage of the FISC is that it allowed Chinese political authorities to encourage industrial reform through the back door with no ‘loss of face’. Kodak created the FISC ‘Kodak (China)’ in which it held an 80% share. ‘Kodak (China)’ purchased the assets of two domestic photo film manufacturers IXiamenFinda and Shantoub Era), giving to each of these a 10% shareholding stake and the right to one board member, with Kodak naming the remaining eight board members. The economy began to show more signs of weakness at the end of the second quarter. Tightening policies are producing results in the property market, investment growth, and industrial activity. The decline in commodity prices is affecting domestic inflation measures. The mix suggests that policy could turn to a more neutral stance, while outright easing may still need to wait for a deeper downturn to materialise (Economy of China, 2010). References: Economy of China [Online] (Updated 26 September 2010) Available at: www.acnielsen.com [Accessed 23 November 2010] An argentina like economic crisis [Online] Available at: http://www.americanthinker.com/2010/08/an_argentinalike_economic_cris.html [Accessed 23 November 2010] Capital Flight [Online] (Updated 12 Februry 2010) Available at: http://www.ajr.org/Article.asp?id=4877 [Accessed 23 November 2010] China B2B Market [Online] Available at: http://www.tradett.com [Accessed 23 November 2010] Global Economy outook [Online] Available at: www.creditsuisse.com [Accessed 23 November 2010] Currency Exchange [Online] (Updated October 2010) Avaliable at: http://www.investopedia.com/articles/03/020603.asp [Accessed 23 November 2010] Barron, P., (Mar, 2010), “The Velocity Of Money And The Business Cycle” The Bulletin, Usinghttp://thebulletin.us/articles/2010/03/05/commentary/op-eds/doc4b916fc91ff13539358325.txt Accessed on 23-Nov-2010 Batini, N., Nelson, E., (Mar 2005), “The U.K.’s Rocky Road to Stability”, The Federal Reserve Bank of St. Louis, Research Division, Federal Reserve Board, Working Paper No. 2005-020A, pp 8-12 [Online Available] http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID762565_code437190.pdf?abstractid=762565&mirid=1 Accessed on 23-Nov-2010 Berger, A. N., Udell, G. F., (Feb, 2002), “Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure”, The Economic Journal, Vol. 112, No. 477, pp F32, F48-F49 [Online Available] http://www.jstor.org/stable/pdfplus/798490.pdf Accessed on 23-Nov-10 Read More