Introduction
Description of the study
In this paper the author considers the incentives for attraction of foreign direct investment and their role in the development of the companies having the residency in China.
Purpose of the Assignment
Furthermore, the purpose of this paper is to evaluate the motivations for attraction the foreign direct investment to the MNCs and the consequences of their involvement.
Questions rising in the assignment
Methodology
For the completion of the order, the author has applied structural analysis of the reports provided on annual basis by the major MNCs and the data collected by the IMF and stte authorities of China.
Structure of the paper
The paper includes introduction, main section as the literature review with the description of the notion of FDI, its main features, the approaches to the management of exchange risk, country risk analysys of China as venue for FDI. Simultaneously, the paper includes the case study about Lenovo company and the conclusion section.
Literature review
Motivations of FDI
Since XX century the world has faced the globalization process which introduce new instruments for strengthening of the economy of the state. Among these instruments the countries got acknowledged with attraction of foreign direct investment. Till 1980 China was one of the closest economies for the foreign investors and only in 1979 the National People’s Congress in China adopted the Equity Joint Venture Law which opens the Chinese economy to the rest of the world. To process with the motivated factors which attract the FDI to China, one should be aware that according to International Monetary Fund, the foreign direct investment implies the kind of international investment that represents the aim of foreign business entity in one economy as the direct investor to receive the long-lasting interest in the entity having the residency in another state as the direct investment company (Sarbu, 2014). Besides the FDI has the following elements:
Direct participation in capital;
Reinvested earnings;
Intra-company loan.
In order to decide to invest in certain economy, the investor evaluates several factors that could play the significant role in FDI motivations. In particular, economic theories state that such factors as the location of the country, production level, market shares, amount of natural resources, political stability and legislation restrictions, have the value in the analysis of the perspective FDI. Besides, the factors could vary due to the difference of the nature of the business unit. For example, individual companies prefer to invest in the economies where the entrance to the market is quite easy so that the companies have the opportunity to become the participants of intensive competition. Meanwhile, the multinational corporations in majority cases investigate whether the country proposes the opportunities for the technological innovations and their creation within the territory of the state (Sarbu, 2014).
In accordance to the economic theories, multinational companies are guided by the following motivations suggested by the country resident:
Resource seeking where the investments are expected to provide the hosts with the resources of high quality with the lower cost available in the country residency.
Market seeking as the motivation for MNCs implies that investors are seeking for new markets which will eliminate the barriers between the countries of both residencies. Therefore, the investors consider the state of competition in the state, perspectives of the market growth and the respected market size where the company will exercise the performance.
Efficiency seeking is usually used by the companies operating within state parties to NAFTA and members of European Union, as the investors expect the return after long-lasting period.
Strategic assets seeking is the way for introduce the investment into the economy of the state in case of existence of long-term strategy addressing the regional integration (Franco, Rentocchini and Vittucci Marzetti, 2008).
Talking about China as the venue for attraction of FDI by the multinational companies, throughout 2011-2013 it was regarded by the UNCTAD and the World Investment Prospect as the top residency for the companies. The MNCs in these years chose China due to the high fiscal stimulus ans the related economic growth, while nowadays this tendency is seemed to slow down. Despite this fact, the MNCs consider that new perspectives should be looked for in addition to the fact that strengthening of the positions in China should be provided. For example, the head of FedEx office in China is loyal to the position that China will continue to support its place in the world as the growing dynamic market. Despite the fact the some MNCs are worried with some problems existing in the state with respect to the development of efficient infrastructure, the other define that China is perspective for FDI return. This position is supported with the argument that country provides the great opportunities for the companies in terms of being engaged in the e-commerce.
Although, it is necessary to draw attention to the fact that MNCs attracted FDI only within the last twenty years. This activity burst the development of the manufacture industry in the state. IN the beginning of XXI century, China became the main venue overcoming the position of the United States of America as the destination offering the policy preferences to the MNCs, cheap labor, friendly and competetive environment, etc. Nowadays China is the top recipient of FDI what allows the country to promote trade, increase tax revenue, etc. In addition, the large group of MNCs exercise their functions in China as the country supports the free-market strategy. Before proceeding with description of the companies having the headquarters in China, such international brands as Apple, KFC, Taco Bell expand rapidly in China (Determinants of China’s Regional FDI Inflows, 2013). These companies report on the increased revenues and loyal policy provided to them by Chinese government. Besides, such Chinese MNCs as Lenovo, Haier, Datang Telecom serve as good examples of operating companies within FDI dimension. These companies confirm the vision that Chinese MNCs are healthy and have the valuable meaning for Chinese economy in general.
Management of exchange rate risk
In terms of country risk assessment, it should be said that China has the restrictive foreign investment regime in contrast to its trading partners such as USA, European Union. Despite the fact that in 2014, China became the top destination in the world for foreign direct investment, some industries are still closed and restrictive in access for the majority of foreign investors. According to the survey conducted by the American Chamber of Commerce in China in 2014, the state becomes less favored to the foreign business units. Moreover, some companies report on the fact that the costs of production require higher budget expenses, while human resources nowadays are much more restrictive. In addition, the situation appears much more complicated due to the fact that procedure of implementation of several legislative acts is unclear to the foreign investors so that they are cautious about further activity in the state. The abovementioned factors put the future of China as the top venue for FDI under the risk so that the leadership of the state should take immediate measures in order to manage this country risk and return the preference of foreign investors to China (Doukas and Lang, 2003).
Talking about the legal framework existing in for foreign direct investment and related regime, in 2014 the Ministry of Comemrce produced the draft of new Foreign Investment Law that should overcome the current legislative base for FDI. This legal act include several provisions from the Bilateral Investment Treaty to be concluded between China and the United States of America. Furthermore, China established new free trade zones which will foster the openness of foreign investment regime. These zones are Tianjin, Guandong, Fujian. Besides, the USA plays the significant role in the simplification of the environment for FDI due to the interest of vast amount of American MNCs in China FDI. This influence is exercised with help of such instruments as the U.S. - China Joint Commission on Commerce and Trade, the U.S. - China Strategic and Economic Dialogue. Within these platforms the US leadership states on the necessity before China to open new markets for foreign investors and the forthcoming obligation of the country to improve the existing legislative base in order to provide better protection for foreign investors coming into the country (Barclay, 2000).
Country risk analysis
However, this approach represent the perspective way for changing business while there is no destination in the world which may substitute China as the top place for attraction of FDI due to its volume of export to the rest of the world. Besides, it should be said that China recognizes the threat of been substituted and is looking for new instruments that may assist in strengthening its position. For example, the manufacturers located in China are considering about the additional investment in capital equipment and investigate new production techniques that will allow to minimize the costs of production. Nevertheless the huge support is needed from the Chinese government in improvement of the situation. In particular, the leadership should encourage the companies abroad to share the best practices which may be at hand for the manufacturers in relation to innovation and other sphere for reducing the costs (Zhang and Roelfsema, 2013).
Although, China have a lot of instruments to prevent the further slowing down of the economy and to return the attention of the major enterprises to its investment environment. Furthermore, the Chinese based companies as MNCs nowadays are spreading all over the world. Their main task is to investigate the strategic transformation by inland and outward investments in order to study the technologies used by the West. In addition, the companies are seeking for the best practices in the management of the risks and consolidation of wide supply chains which may allow to keep resources stable.
For the completion of this section, the author has decided to chose for the description Lenovo company as the most popular multinational corporation having the headquarter in China.
Background of the company
The company was created in 1984, while it became famous anad valuable only in 2004. Nowadays, Lenovo is the largest producer of PC within China due to the fact that general revenue of the corporation amount to $34 billion. The company appreciated the vertical integration as the efficient business model and the strong management of the development of the sypply chain in addition to the surveillance of the operation exercised within the whole market where subsidiaries are located.
Summary of the country
The world has accustomed to the fact that China is the destination of FDI, while since 2002 the country started to increase outward FDI. Nowadays the country is raised as one of the biggest investor in theninternational level. Given the fact that China represent the platform of low-cost production, the main factors motivating the investment into foreign economies are resource seeking, market diversification and strategic asset seeking.
China establishes the subsidiaries in other jurisdictions in order to facilitate export as the MNCs having the headquarters in China face certain restrictions over the volume for production of the goods. Some companies consider that FDI in foreign economy will add value to the competitive advantage of the business unit upon acquisition of strategic assets located in other jusirsdiction. In its strategy, the companies prefer to invest in the developed economies dealing with international trademarks. Lenovo in this case may serve the example of purchasing the IBM's PC sector. Besides, the government of China supports the increase of outward FDI since 1979. This approach creates additional benefits for the country in form of strengthening international competitiveness of the business units, their involvement in the competition at the international markets, formation of the reputation of the state, etc.
FDI strategy of the company
Therefore, the example of Lenovo evidences that the multinational companies as Lenovo, based in China, could achieve the successful performance in the international level due to the vast support from the Chinese government. In addition, the deliberate FDI strategy relied on one acquisition in form of IBM purchase has led the company to the success among such rivals as Apple, Microsoft, Dell, etc.
Talking about the exact examples of Chinese MNCs, the person may face some difficulty due to the fact that majority of these companies are not so famous as American or European. However, in 2001 twelve Chinese MNCs were included into the Fortune's Global 500 list while in 2011 this amount comprises of 60 enterprises. The most famous Chinese MNCs are Huawei and Lenovo. The awareness of these companies depend on the competition existing in every state in this sphere. In contrast, Lenovo usually purchases the competitors in this industry so that to increase personal market share. Given the fact that Lenovo's strategy implies the production of the technologies on the big scale, the rivals find the proposals to be purchased by Lenovo preferential and beneficial. However, some customers are afraid to give preference to the companies having the headquarter in China as there is a perception that quality of these products is not high. The same situation was when Lenovo purchased IBM PC's as the audience expected the delivery of the production of low quality. When this expectation was not reached the clients returned to the company.
Meanwhile, the other industry what China finds attractive for FDI and introduction of MNCs is automotive dimension. Chinese companies in this sphere have been fighting for years for becoming the strong competitor. Although in 2013 Chinese company Qoros was recognized by the world as the reliable manufacturer of the cars. This MNCs starting its foreign investment strategy from entering the automotive market in Slovakia and then turn to the rest of Europe (Chow, n.d.).
Nevertheless it is quite difficult to name the Chinese MNCs which are popular on the global level in every sphere of industry. There are some reasons preceding the impediments which these MNCs face with regard to the establishment of the subsidiaries in several jurisdictions. In particular, these corporations show the inability to avoid the national corporate culture and business practices in order to adjust to the environment existing in every jurisdiction. Chinese style is featured with short-term goals and strategies, while personal relations within the corporation prevails over the industrial. In addition, the lack of transparency in the actions is noticed in the activity of the companies. Moreover, in achievement of the global presence, Chinese companies chose to enter into merger and acquisitions agreements, which are not favorable for the business units. In case of such agreements, the strategies of the two companies and other factors should be as close as possible in order to conduct the efficient activity.
Conclusion
Major findings
Development of the reliable framework for the foreign direct investment is the key priority of every economy. The attraction of FDI provides the state with an opportunity to have the access to certain resources which were not available before. In addition, FDI usage leads the country for elaboration of the platforms for the development of technologies and innovations used by other states. The process of flow of FDI fosters the spillover of the sources and knowledge to the country - recipient of the investments. Besides, the entrance of new market players into the industry and market accordingly fosters the development of the competition and turn it into firce one.
Talking about China and the multinational companies operating in the country, one should state on the fact that China is passing through critical points as the destination for the FDI due to its legislative base, policy of the leadership of the country and inability to maintain the low cost production. However, the tendency shows the evidence that country is seeking for the ways and resolutions which may assist in overcoming the abovementioned facts and retain the foreign companies in China. Furthermore, despite the fact that China is the top place for attraction of FDI, it is also one of the major investor in the world. The country continues to gather the innovation and technological experience which may become useful for the development of national market and industries.
References
Barclay, L. (2000). Foreign direct investment in emerging economies. London: Routledge.
Chow, D. (n.d.). How China Promotes its State-Owned Enterprises at the Expense of Multinational Companies Doing Business in China and in Other Countries. SSRN Electronic Journal.
Determinants of China’s Regional FDI Inflows. (2013). China-USA Business Review, 12(06).
Doukas, J. and Lang, L. (2003). Foreign direct investment, diversification and firm performance. Journal of International Business Studies, 34(2), pp.153-172.
Franco, C., Rentocchini, F. and Vittucci Marzetti, G. (2008). Why Do Firms Invest Abroad? An Analysis of the Motives Underlying Foreign Direct Investments. SSRN Electronic Journal, pp.1-20.
Giroud, A. and Mirza, H. (2015). Refining of FDI motivations by integrating global value chains’ considerations. Multinational Business Review, 23(1), pp.67-76.
Sarbu, M. (2014). Forms And Motivations Of Foreign Direct Investment. SEA - Practical Application of Science, II(1 (3), pp.532-550.
Zhang, Y. and Roelfsema, H. (2013). Unravelling the complex motivations behind China's outward FDI. Journal of the Asia Pacific Economy, 19(1), pp.89-100.
