Market Entry into China of Foreign Investment Shareholding Corporation - Case Study Example

 MARKET ENTRY INTO CHINA Executive Summary This report is an advice to the US organizations that plan to enter the Chinese markets should opt for the Foreign Investment Shareholding Corporation entry mode strategy. This strategy will be advantageous for the organizations as they allow the firm to remain in control of their operations of the business without the interference of the local Chinese partners. The advantages of and disadvantages of foreign direct investment are also discussed in the report. China had a lot of focus on the foreign direct investment entry mode and they built a stable and strengthened export market in China. Contents Executive Summary 1 Contents 2 1.Introduction 3 2.Reason for China favoring the FDI entry mode 4 2.1 Advantages of Foreign Direct Investment 4 2.2 Disadvantages of Foreign Direct Investment 5 2.3 Foreign Direct Investment in China 5 3.1 Impact on Multinational Enterprise 6 3.2 Impact on Chinese economy 7 4.Recommendation 8 5.References 10 6.Bibliography 11 1. Introduction This report is discussing upon giving the advice to the United States technology organization for them to enter the Chinese market with the most appropriate entry mode. Change is a continuous process which is being observed by the business environment all around. In the midst of the changing environments of business, the entry into the international markets cannot be ignored under any circumstances. The globalization phenomenon is at its peak and all organizations around the world are striving towards having a global presence to attain success (Peng, 2000). Globalization has become an important aspect because of the need and demand of product and services of different companies in different regions. This has caused all organizations to approach towards making a global presence of their firms. Organizations around the world are looking for such opportunities and since China has been associated with the World Trade Organization; and therefore major organizations seek market entry into China. China has plans to make their economy a market based economy and therefore opened the gates for new market entries into China (Williamson and Zeng, 2004). China has a developing economy that is growing on a very fast pace and attracting a lot international organizations in their country. Market entry modes have been changing and developing constantly. At every era there seems to be a successful market strategy of entering new markets and as discussed in the case below that Foreign Investment Shareholder Corporation is a more reasonable option for the US organization to enter into China. 2. Reason for China favoring the FDI entry mode Foreign Direct Investments (FDI) can be defined as the direct investments that an organization makes on the productive assets in any foreign country. A foreign direct investment is an extremely important aspect of the economic system present on the global basis (Huang, 2003). 2.1 Advantages of Foreign Direct Investment The advantages of foreign direct investment are as follows (Huang, 2003): Cost of transportation is low and this is advantageous to the firms as a heavy cost is involved in the transportation of raw materials. Trade Restrictions barriers are avoided which allows the firms to conduct their trade and develop their trade policies. Tax incentives advantages allow low taxes to be given. The uncertain cost structure by the foreign exchange is avoided Restrictions imposed by consumers are avoided as consumers are already aware of the local partner Chinese firms in China. Raw materials that are present locally can be used in the business and also the market testing can be conducted The organization’s know-how level is protected by foreign direct investments as the local organization knows how the business activities are conducted in China. 2.2 Disadvantages of Foreign Direct Investment The disadvantages of foreign direct investment are as follows (Huang, 2003): The FDI has been categorized more expensive than the other market entry strategies such as the exporting strategy and the licensing strategy. It may be expensive but for becoming stable in the new market and new regions it may be a feasible option. The FDI has a high level of risk involved in its implication than the other market entry strategies such as the exporting strategy and the licensing strategy 2.3 Foreign Direct Investment in China In the year 2000 and onwards, China has been an important destination in attracting the foreign direct investment (FDI) into their country. The foreign direct investment has allowed china to develop a strong place in the sector of industrialization and also the modernization of industries for China. Foreign Direct Investment had become the most attractive entry mode for China. Majority of the foreign direct investments went towards the production and development of technology related products of China. The regional exporting of China was strengthening at a gradual pace with the foreign direct investment and also the employment level of the domestic economy was also improving especially in the eastern regions of China and the southern regions of China. These regions were highly successfully in attracting the foreign direct investments in China. The trade sector of China also went on improving with the foreign direct investments coming in to China. China had exports of about $693.3 billion and due to this China had become the 3rd largest exporter country in the year 2004 (World Trade Organization, 2005). The FDI mode of entry into the Chinese markets has allowed China to strengthen their export segment. China’s trade has been on a high scale in the Asian high performing economies list and it has incepted new paths for the labor employment in their country. With the foreign direct investment entry into China, it has helped China to become a major destination of export for the regional economies. 3. Foreign Investment Shareholding Corporation The Foreign Investment Shareholding Corporation has been developed by the Chinese State Development Planning Commission. They have made this new option of market entry strategy into China. This type of entry mode is helpful for the foreign organizations in having a stable control in the new market (Vanhonacker, 2000). 3.1 Impact on Multinational Enterprise The multinational enterprises that are planning to enter the China market can form the joint stock companies with the market entry mode of Foreign Investment Shareholding Corporation. The foreign United States organization may allow the Chinese firms to have some share of the stakes that they have invested in return for the assets that the Chinese firms have provided them with for conducting their business. The business assets can be the factory land, the trucks and other such assets. The Foreign Investment Shareholding Corporation allows the organization to be listed on the Shenzhen and Shanghai stock exchanges at a fast rate and this is one of the major advantages of Foreign Investment Shareholding Corporation as this makes it easier for the foreign organizations to increase the new capital which is constantly needed for running the business at a successful rate. 3.2 Impact on Chinese economy The local partners for the foreign investment shareholder corporation do not have the rights to participate at the management level of the firm; they cannot make the decisions for the firm but can only allow the multinational enterprises to access the Chinese markets. With the path of accessing the Chinese markets, the number of investments in the Chinese market will increase and therefore the chances of making the economy much stronger and stable also increases. The regulatory frameworks that are present in China allow the foreign organizations to have the opportunity of converting into the foreign investor shareholding corporation from the joint venture firms and the wholly-owned foreign subsidiaries. The main condition for possessing the status of FISC is that the organization should be having a profitability level of a time period of three years (Vanhonacker, 2000). The Chinese economy will be highly benefitted by the FISC approach as this type of market entry will tend to promote more investments in the economy along with part of the share of profits of the foreign organization that is operating its business in China. Receiving a part of the organization’s profits is a high benefit and they can have that profit invested in developing their own technology. 4. Recommendation The regulatory policies for trade at an international level that have been developed by China are changing at a rapid rate and majority of the organizations are looking over to exploit the opportunities of conducting business in China. The policies that are changing are becoming flexible for the new market entrants. The demand for Telecommunication and IT products and services continues to sore unlike in any other market around the world where the industry has taken a downturn. The opportunities in China are changing as well, but the changes are associated with a rapid growth and in an environment that is in the process of making changes.  Some of the changes include industry restructuring to meet the demand and a delay in issuance of licenses until order is established. According to the analysis above, it is strongly recommended by the advisor that the Foreign Investment Shareholding Corporation is a suitable option for the US organization to refer to while entering the Chinese market. The Chinese local partner with the US organization will be providing the necessary resources that are needed for running the business. Also, by entering the market with this approach can allow a wide variety of shareholders to invest in the business as the organization will become publicly listed on the Chinese stock market. The Chinese partners will also bring the contracts for the new organization which has entered into the market through Foreign Investment Shareholding Corporation entry mode and therefore this method has many advantages for the firm rather than the disadvantages. Kodak which had adopted this market entry approach of Foreign Investment Shareholding Corporation has attained a high level of control of the organization’s operations in China. The tradeoff factor has been eliminated between the management and the market by providing the local Chinese partners with stakes of Kodak. Therefore it is advisable that the U.S organizations also follow Foreign Investment Shareholding Corporation entry mode into China. 5. References Huang, Y. (2003). Selling China: Foreign direct investment during the reform era. Cambridge: Cambridge University Press. Peng, M. W. (2000). Business strategies in transition economies. Thousand Oaks, CA: Sage. Vanhonacker, Wilfried R. (2000). ―A Better Way to Crack China. Harvard Business Review July. Williamson, Peter and Zeng, Ming (2004). ―Strategies for Competing in a Changed China.‖ MIT Sloan Management Review Summer. World Trade Organization (WTO). (2005) International Trade Statistics 2005, Geneva: WTO. 6. Bibliography Buckley, P.J., & Ghauri, P.N. (1999). The internationalization of the firm (Eds.). London: Thomson. Business Press. Business Week. (2004). China goes shopping. December 20, 30–32. Child, J. & Yan, Y. (2001). National and transnational effects in international business: Indications from Sino-foreign joint ventures. Management International Review, 41, 53–75. Guthrie, D. (2005). Organizational learning and productivity: State structure and foreign investment in the rise of the Chinese corporation. Management and Organization Review, 1, 165–95. Read More