International Business Environment - Report Example

Assess the major reasons why a firm may wish to engage in foreign direct investment. Distinguish between firms based in developed countries from those in developing countries. Investment made on the Chinese industry by a German firm operating in the electrical sector. Table of Contents Summary 3 1. Introduction 4 2. Body of the report 2.1 Chinese market – general overview 6 Prospects for foreign investments made on the Chinese market 8 2.2 German market – general overview 9 2.3 GermanElectrics – general overview 11 Prospects for the firm within the Chinese market 11 Issues for consideration 12 3. Conclusion 13 References 18 Appendix 22 Summary The foreign direct investment around the world presents a trend for continuous increase (see also Figure 1 in Appendix section). In the case of China foreign direct investment is considered to be one of the most significant sources of funding for the various governmental and non-governmental activities. Indeed, because in the country there is still no clear distinction between the public and the private sector (at least referring to the commercial activities) and the former constantly involves in the initiatives of the latter, the provision of funds for the development of a strong commercial sector is considered to be of crucial importance for the improvement of the position (mostly from a financial and administrative aspect) of private enterprises across the country. Today the foreign direct investment in China is appropriately supported by the Government that has alternated the country’s existed commercial and financial framework in order to attract foreign investors, an initiative that has been strongly appreciated by foreign entrepreneurs (see also Figure 2, Appendix section). Under these terms, the chances for growth offered to foreign enterprises that enter the Chinese market are many. In the case of the GermanElectrics (the firm, the potential growth of which in the Chinese market is examined in current paper) the entrance in China could be possibly related with the improvement of the firm’s profitability. However, it would be necessary that the firm’s existed strategies are thoroughly reviewed in accordance with the demands of the international marketplace. 1. Introduction The operation of firms within the international market has been extensively examined in the literature and the empirical research. The increase of competition and the radical development of technology are two issues of significant importance for firms worldwide. Towards this direction, it is supported by Douglas et al. (1989, 437) that ‘recent years have witnessed a growing intensity of competition in virtually all areas of business, whether at home or abroad, in markets upstream for raw materials, components, supplies, capital and technology as well as in markets downstream for consumer goods and services’. From a different point of view, Ulijn et al. (2000, 293) suggest that ‘a global economy requires business organizations to cultivate their international holdings by respecting the national differences of their host countries and coordinating efforts for rapid innovation’. Indeed, the expansion of firms across borders is a common phenomenon within the modern commercial market. However, the lack of appropriate preparation for such an initiative can lead global firms to severe financial losses especially in the long term. Moreover, in accordance in a report published by the World Economic Outlook (2002, 82) it is suggested that ‘trends and cross-county differences in corporate indicators reflect a variety of country-specific institutional and macroeconomic factors, as well as industrial specialization and firm size, with the following key policy implications’. In other words, firms operating within the global market have to secure their position in their market; at a next level they should ensure the appropriateness of their investment in foreign markets especially to developing countries around the world. Examining the terms and the consequences of entrance within a foreign commercial market French 91997, 10) came to the conclusion that ‘a traditional route for private capital moving into the developing world is as "foreign direct investment" (FDI) of corporations setting up local plants; however today FDI has expanded rapidly, as multinational corporations build a stronger presence all over the developing world, often through joint ventures with local companies’. In fact, the level of FDI made in developing countries can be strongly influenced by the performance of their markets regarding the various corporate activities. Other factors could also influence the level of FDI within a foreign market (like for example the prospects of this market for future growth as these prospects can be derived from the market trends and the reports of analysts through a specific period of time). It is made clear from the above that the entrance in foreign markets is a need for all firms around the world. In fact, the expansion of corporate activities worldwide is a good strategy for the growth of the firm and its survival in its industry (only if the relevant initiative is appropriately designed). Regarding this issue it is supported by Nakra (2000, 36) who that ‘the globalization of markets makes the product offerings and demands increasingly homogeneous and encourages organizations to restructure in response to global competitive opportunities’. Current report refers to the potential prospects for growth offered to GermanElectrics (a firm focuses on the manufacturing of electrical appliances). The firm is based in Germany. However, there are many chances for its activities to be expanded to China. For this reason, all aspects of firm’s potential growth within the specific market are being examined suggesting the chances for effective and profitable foreign investment in China. 2. Body of the report 2.1 Chinese market – general overview Generally, it is stated by Keren et al. (2002, 17) that ‘the comparative disadvantage of transition economies (TEs) in the provision of business services is, by definition, a comparative advantage and a profit generating opportunity for foreign firms to step in’. On the other hand when examining the Chinese market Ahlstrom et al. (2003, 15) came to the conclusion that ‘Chinas economic reforms and recent accession to the World Trade Organization (WTO) have provided significant opportunities for foreign firms to establish marketing and manufacturing operations there’. It seems therefore that the prospects for foreign firms that are interested in entering the Chinese market are extremely positive. However, it could be stated that in the long term the development of corporate activities in the Chinese market should be based on specific rules in order to avoid possible financial losses. Regarding this issue and referring specifically to the commercial activities of small firms in China Busenitz et al. (2001, 12) came to the conclusion that ‘younger business owners with a higher need for achievement, greater commitment, and perceived limitations in physical facilities were more likely to expand’. In accordance with the above, it should be noticed that leaders of firms operating in the international market should take into consideration the fact that ‘the Peoples Republic of China has agreed to participate in the meetings of the IASC for the first time while China recently organized the Chinese Institute of Certified Public Accountants, which has a nationwide licensing exam and is in the process of creating a Chinese Accounting Standards Committee’ (Radig et al., 1998, 22). The above developments are encouraging regarding the prospects of foreign firms in the Chinese market. However, in the long term the ability of foreign firms to survive within the specific market should be thoroughly examined. Regarding this issue, the study of Ahlstrom et al. (2003, 4) led to the conclusion that ‘the tendency for various localities and jurisdictions, which is a common practice in China, to compete with one another while controlling (and sometimes protecting) organizations within their borders is an obstruction of interprovicial and interlocality commerce’. However, because of the rapid development of Chinese market, the investment made on the particular market should be considered to have many chances for being profitable; even if primarily this investment seems to be a risky initiative. Towards this direction, it is suggested by Mcdonnell (2004, 953) that ‘China has been one of the great successes in the developing world over the last two decades’. Moreover, ‘a crucial part of the growth of industry in China has been the rapid growth of township-village enterprises (TVEs)’. In fact corporate activities in China have many chances to be developed rapidly. The rates of growth achieved by the firms already operating within this market is an extremely positive indicator regarding the prospects for the growth of these firms (referring especially to the foreign-owned firms) in the future. Prospects for foreign investments made on the Chinese market In accordance with the above, foreign investments made in China have many chances to achieve a high level of profit. However, it is necessary that the strategy of foreign firms entering the country is aligned with the cultural and social characteristics of the Chinese market. Regarding this issue Douglas et al. (1989, 440) noticed that ‘differences in environmental conditions in different country markets, in terms, for example, of market size and growth, rate of technological change, or barriers to entry, may also lead to differences in strategy’. In any case, firms that are interested to enter the Chinese market should take into consideration that in China the state constantly intervenes in all corporate activities. Indeed, the study of Chen 92002, 72) led to the conclusion that ‘the role of the state (represented by state-owned enterprises) has declined measured by the share of the gross value of industrial output and by both the size and the share of urban employment, the state has maintained its dominance in many industries where products and services have been considered vital to national interests and has even experienced expansion in employment size in several service industries’. Because of the above issues the strategies of all foreign firms that are interested in expanding their activities in China should be appropriately modified trying to understand the needs of consumers and the ethics of the specific market in all its aspects. 2.2 German market – general overview Generally, it could be stated that corporate activity in Germany is on a constant development. Towards this direction, in a research published by the Dow Jones News Service (2005) it is suggested that ‘German companies should expect production and export growth next year that should lead to German real gross domestic product growth of up to 1.5%’. On the other hand, Rogers et al. (2005) noticed that ‘Germanys economy expanded by a stronger-than-expected 0.6 percent in the third quarter, helped by a surge in exports and strengthening corporate investment, according to preliminary data; however weak household spending caused an unexpected decline in a separate gauge of investor confidence published by the Mannheim-based ZEW institute, underscoring Germanys continued reliance on exports to power economic growth’. It seems that German economy is not yet stabilized despite the significant growth achieved during the last decades. Under these terms, the expansion of corporate activities of German firms should be regarded as a potential chance of growth for the German economy. Towards this direction, it is suggested that ‘as many as one fourth of all German medium-sized companies plan to relocate parts of their production abroad due to the unfavourable general conditions in the country; the planned relocation of activities to other countries is mostly seen as a strategy of success’ (German News Digest, 2005). It is not made clear though whether the growth required (as a result of the expansion of corporate activities worldwide) can be logically achieved within a short period of time or whether such a target could be reached only in the long term. On the other hand, it is noticed that ‘‘many Mittelstand companies - medium-sized family-owned concerns that make up the backbone of the economy - are calling for urgent reforms to give them more flexibility; they say they are strangled by red tape, much of it emanating from the European Union and added to by their government’ (The Daily Mail, 16/3/2005). The above article refers to the performance of the German firms and the changes required in order for these firms to successfully face their competitors within the international market. The above issues have been also examined through a research made across small and medium size German firms. In accordance with the results of the above research (mentioned by Dichtl et al., 1990, 29) reveal that ‘small- and medium-sized firms are unable to participate in fairs or trade shows overseas, partly due to financial and partly due to other factors summarized under the heading of "lack of know-how"’. In other words, German firms of all sizes should expand their activities within the international market in order to survive in the long term. The above initiative should be however appropriately designed and executed in order to avoid any severe consequences to the firms involved. The social and cultural characteristics of the foreign markets should be always taken into consideration by the German firms that are interested in operating abroad (this is an issue for all firms operating globally in modern commercial market). 2.3 GermanElectrics – general overview GermanElectrics has all the chances for a future growth in case that the entrance within the Chinese market should be decided by the firm’s leaders. In fact, it should be mentioned that the firm has the appropriate structure and financial strength in order to respond to the needs of this initiative. In the long term, this decision would be proved to be particularly profitable for the firm. An issue that should be mentioned is the fact that the cost related with this initiative would be limited because of the existent infrastructure and the skills/ competencies of the firm’s employees. The prospects for the firm if entering the Chinese market are analytically developed below. Prospects for the firm within the Chinese market The entrance of the firm in the Chinese market would have the following consequences for the firm (either in the short and the long term): a) reduction of costs related with wages, salaries and rewards given to employees; b) reduction of all operational costs (primarily of the firm’s branch operating in China and indirectly of the costs related with corporate activity in general); c) chances for growth of existing customer base; d) chances to enter new markets (apart from the Chinese, the other markets of the greater south East Asian region would be possibly targets of corporate activity). In the long terms the firm could also have the chance to further expand its activities (by the limitation of the costs related with its operation, funds will be available for expansion in other markets also). Issues for consideration Apart from the issues already developed above there are a few considerations related with the potential expansion of corporate activities in China. Towards this direction, it should be mentioned that it would be ‘vital for international business representatives to understand the host culture; they must be aware of traditions, rituals, myths, attitudes, and beliefs held about a variety of issues and behaviours in order to respond in an acceptable and culturally sensitive manner’ (Hugenberg et al., 1996, 215). On the other hand, it should be taken into account the fact that Chinese market is a market focusing on the ‘commodity products’. Under these terms, it is suggested that ‘‘any differentiation strategy, like branding (and consequentially charging a premium for the branded product), may be very difficult for Chinese exporters to successfully implement because it operates against their stereotype’ (Brouthers et al., 2002, 667). At a next level, the potential ‘absorption’ of firm’s products by the local market should be taken into account when designing the firm’s strategy regarding the Chinese market. In fact, the study of Reid et al. (2004, 245) led to the conclusion that ‘significant overestimation of demand for their products is a major problem that most multinational corporations faced in China; this overestimation of demand led to significant overestimation of investment in production capacity, which in turn led to over-capacity and a diminution of profits’. In order for the firm to avoid any risk related with overestimation of local market’s chances for growth, it is necessary that an extensive research is made in advance in relation with the performance of other competitors in the particular industrial sector and the prospects for the future as they can be revealed through the current market trends and the performance of the market for a significant period of time (par example for the last decade). 3. Conclusion From a general point of view it could be stated that the expansion of firm’s activities in China would be extremely positive for the specific firm – in terms of the profits expected by such an initiative. However, it should be noticed that appropriate alterations should be made in existing company’s strategies. Towards this direction, it is highlighted by Luo (1999, 270) that ‘host country-specific knowledge is a driving force behind international expansion performance because such knowledge cannot be easily acquired’. On the other hand, it is suggested by Wooldridge et al. (2001, 17) that ‘the main challenge for companies in a global economy is to situate themselves in various centers of excellence and weave together different centers of excellence into a global production network’. In other words, the expansion within the international marketplace should be the target of any firm around the world (under the terms that the appropriate measures are taken in order for the performance of the firm to be secured in the long term). In the case of Germany, the choice of specific German firms to enter the Chinese market (or other developing markets internationally) should be characterized as justified. However, it should be noticed that in accordance with the research made regarding the performance of firms in Germany, there would be no particular need for German firms to transfer their operational centres abroad mostly because their performance presents a continuous growth. In fact, in accordance with a report published in the website of the Germany’s Embassy (2007) ‘Germany owes its rise from the devastation of the Second World War to its present position among the world’s leading industrial nations not to its natural resources or financial reserves but to its skilled manpower’. In other words, German firms have all necessary requirements to achieve within the international marketplace without having to move abroad. In the long term, this aspect could be reviewed if financial indicators in Germany would change negatively. On the other hand, it should be noticed that relocation in Germany would resulted for a particular firm a series of changes (either in the short or the long term). This target is not easy to be achieved unless existed managerial practices in Germany are alternated. More specifically, it has been found by Bloch et al. (1998, 312) that ‘from its economic miracle days, Germany has clearly revealed itself as an industrial nation whose managers have failed to adapt to changing times and who have lost the affinity to the global market which they dominated for so long; the country remains in the first league, but its hold is tenuous’. In accordance with the above, if a particular German firm would be interested in operating globally, appropriate changes in existed managerial practices would be required; the review of principles and rules related with culture and diversity would be among the prior issues to be examined in this particular case. From another point of view, it is noticed by Luo (1999, 270) that ‘a long-established presence in a transition economy such as China often results in a favourable image perceived by local customers, suppliers, competitors, and governments, well-established marketing and distribution network, familiarity with culture-specific business practices, and greater ability to reduce operational uncertainties and financial risks’. In other words, the operation of firm within the Chinese market could be proved to be extremely positive for the firm’s profitability in the long term. However, it should be taken into account that in accordance with an article published by the ‘Mail’ (28/4/1996) ‘we still remain pretty ignorant about what makes China tick, and that knowledge vacuum naturally breeds endless speculation - about which group has the upper hand in Beijing, about the armys role, about the balance between economic progressives and political conservatives, about the power of the centre over the provinces’. The above problems are just indicative in relation with China’s political, commercial and social framework. The establishment of corporate operational or production centred in China is a growing trend with the modern market. The extremely friendly taxation and regulation of most corporate activities in this country should be considered to be the main reason for this outcome. Low operational costs also have a significant role in the decision of firms to expand their activities in the market of the particular country. Generally, it could be stated that commercial activities in China can also hide significant risks. However, it depends on the leaders’ ability to make the appropriate provisions in order for the expected risks to be successfully faced (as possible). Moreover, it is noticed that ‘international markets have become enticing prospects in companies efforts to increase market share and diversify offerings; some cultures are more resistant to cultural invasion and integration than others whereas others, upon discerning an unhealthy level of cultural contamination, react with cultural backlash and attempt to eliminate such influences’ (Ulijn et al., 2000, 303). In accordance with the above, corporate activity in China should be appropriately designed and constantly monitored in order to avoid any potential turbulence. The role of the firms’ leaders is considered to be crucial towards this direction (as already stated above). In fact, it is noticed that ‘the actual ability of foreign investors to step in and make money depends also on the business conditions in the target countries, including objective hurdles and policy-driven barriers to entry and/or to free operation’ (Keren et al., 2002, 17). The above assumption is also supported by Reid et al. (2004, 237) who mentioned that strategic management ‘can play a significant role in the long term success, or failure, of business corporations in the sense of understanding the future’. Moreover, MacMurray (1994, 68) noticed that ‘as Chinas enterprise reform movement accelerates, MNCs will need to closely monitor the evolution of the industries in which they participate and seek a deeper understanding of the emerging competitors and acquisition candidates in each’. As for German companies that has expanded their activities in China, the particular decision has been proved to be of significant importance for their growth. It is for this reason that in accordance with a survey published by the Industry Updates (2005) ‘more than 60 per cent of German companies believed that the business climate in China has improved significantly’. Because of the issues developed above the entrance of GeneralElectrics in the Chinese market is expected to be of significant importance for the improvement of the firm’s profitability either in the short and the long term. References Ahlstrom, D., Nair, A., Young, M.N. (2003). Navigating Chinas Feudal Governance Structures: Some Guidelines for Foreign Enterprises. SAM Advanced Management Journal, 68(1), 4-15 Bloch, B., Groth, K.J. (1998) Globalisation German managerial failure: the other side of the globalisation dilemma. European Business Review, 98(6):311-321. ISSN: 0955-534X Brouthers, L.E., Xu, K. (2002). Product stereotypes, strategy and performance satisfaction: the case of Chinese exporters. 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Economic Prospects and Policy Issues, 2002, 1-66 Appendix Figure 1 – Foreign Direct Investment around the world (1990-2004), (source: Global Policy Forum, 2006, [online], http://www.globalpolicy.org/socecon/ffd/fdi/tables/developingregions.htm) Figure 2- Foreign Direct Investment in China, 1995-2004 (source: Asian Development Bank in Swivel preview, [online], http://www.swivel.com/graphs/show/9640950) Read More