Study on China's outward foreign
direct investment：a typical
sample of
newly developed economy
Dr Chen yan
[email protected]
Objectives of the lecture
The objective of this lecture is to understand
the motivations for firms to internationalise
(why) and the internationalization process
(how)
Position
图1：中国经济指标占全球指标的比例（%）
28.0%
量
外
国
证
券
投
资
流
量
资
对
外
证
券
投
资
投
直
接
0.6%
0.1%
流
量
3.5%
流
量
流
资
外
国
直
接
投
备
汇
储
外
对
外
口
务
与
服
货
物
6.7%
积
累
额
7.4%
进
口
出
与
服
务
产
货
物
内
生
国
8.4%
额
8.5%
总
值
数
游
人
旅
人
口
30.0%
25.0% 20.7%
20.0%
15.0%
10.0%
4.5%
5.0%
0.0%
The motives for engaging in
international business
• The main motives for engaging in
international business are:
• resource seeking
• market seeking
• efficiency seeking
• strategic asset or capability seeking
Resource Seeking
Aim: To acquire resources at a lower real cost than
could be obtained in their home country.
Three types of resource seeking activities:
1. seeking physical resources (e.g. oil), raw materials
and agricultural products
2. seeking supplies of cheap unskilled or semi-skilled
labour. It is usually undertaken by firms from
countries with high labour costs.
3. seeking technological capability as well as
management and marketing expertise.
Market Seeking
Aim: undertaken to sustain or protect existing
markets, or to exploit and promote new markets.
Difference between market seeking and resources
seeking
resource seeking: the products are manufactured in one
country and sold in a different country
market seeking: the products are manufactured in one
country and also sold in that country
Market Seeking
Reasons for market seeking investment:
1)
follow their customers: when main customers set up foreign producing facilities,
firms need to follow them in order to retain their business, e.g. Japanese car parts
2)
product adaptation: to compete with local producers, firms need to adapt their
products and marketing behaviour to the needs of the host country (local tastes,
language, legal requirements)
3) lower production, transaction and transportation costs: The production of goods that are
relatively costly to transport is more likely to be located near the main centres of
consumption, (Example: washing machines are more likely to be produced in the
target market than computers
4) strategic market investments; Such investments might be undertaken either for defensive
or aggressive reasons. Defensive investment means following the investment of the
competitors of a firm by making its own investment in the same markets. Aggressive
investments are those designed to advance the global interests of a firm by investing
in an expanding market (Example: Pepsi cola in Russia).
5) host government policy;
•
In the 1960s and 1970s, host governments imposed heavy tariff barriers on import. A
way of overcoming such barriers was market seeking investment.
•
Since the1980s, many foreign governments have chosen to attract inward investment
by offering investment incentives (e.g. tax concessions). As a result, foreign
investment flourished, and global economic integration has been upgraded
dramatically.
Efficiency Seeking
Aim: undertaken to gain benefits from the common
governance of geographically dispersed business activities
in different countries. Such benefits are those of the
economies of scale and scope, and of risk diversification.
MNEs with this motive generally aim to take advantage of
different factor endowments, cultures, economic systems
and policies, and market structures by concentrating their
production in a limited number of locations to serve
multiple markets.
Two Types of Efficiency Seeking
Investment
1) The first takes advantage of the differences in the availability and cost of a
variety of factors in different countries. This explains why capital, technology
and information intensive activities are concentrated in developed countries,
while labour and natural resource intensive activities are concentrated in
developing countries. (Example: the designing of computers in Silicon Valley;
the production in East Asia; the products are sold all over the world .
2) The second kind of efficiency seeking investment takes place in countries with
broadly similar economic structures. It is designed to take advantage of the
economies of scales and scope, and of differences in consumer needs.
(Example: car industry in Europe; a product can be produced for the whole
market, but with different taste and requirement (modification of driving seat
and air conditioning)).
Two Types of Efficiency Seeking
Investment
Distinction between efficiency seeking
investment and resources seeking:
efficiency seeking: the manufacturing process is divided
into several sections in different countries, seeking the best
mix of production factors
resources seeking: the production is mainly concentrated
in one country, and the reason behind this investment is to
utilise the cheap labour available in the host country,
e.g. Nike
Strategic Asset Seeking Investment
Aim: to attempt to acquire the assets of foreign firms so as to
promote their long-term strategic objectives, especially
advancing their international competitiveness.
MNEs with this intention often establish global strategic
alliances or acquire local firms.
Example: Lenovo’s purchase of IBM’s PC business
Other Motives for Engaging in IB
1) Escape Investments
International investments are frequently made to
escape restrictive legislation or macroorganisational policies by home governments.
So escape investments are obviously most likely
to originate from countries whose governments
pursue strongly interventionist macroorganisational policies; and they tend to be
concentrated in those sectors which are most
regulated.
Other Motives for Engaging in IB
Examples of escape investments:
• Japanese banks that operate in Europe engage in a wider range of
services for their customers than they are allowed to undertake in
Japan
• the shifting of its ‘cancer and immune system’ research of BASF,
from Germany to the US; a way to deal with the legal and political
challenges from the local ‘green’ movement
• the investment by Israeli firms in EC before 1992 to by-pass the
Arab boycott on products exported from Israel
• MNEs’ investment in China – polluting heaven hypothesis
Other Motives for Engaging in IB
Round tripping: another example of escape
investment
Many Chinese firms moved a large volume of
capital from China. They then returned back as
foreign investors, to be treated as ‘foreign’ in order
to take advantage of the policy incentives given to
foreign investment.
This is called ‘round tripping’.
Other Motives for Engaging in IB
2) Support Investments
• The purpose of these investments is to support the
activities of the rest of the enterprise. These activities
may incur costs but the rest of the same MNC can
benefit enormously.
• Usually, they are designed to promote exports, and to
assist in the purchasing of foreign goods and services.
• Most of such investment are trade-related, e.g.
representative offices and trading branches.
The internationalization process
•
•
A firm’s international expansion occurs as a
result of incremental decisions
Johanson and Wiedersheim-Paul (1975)
identified four successive stages in the firm’s
international expansion:
(1)
(2)
(3)
(4)
No regular export activities;
Export activities via independent representatives or agents
The establishment of an overseas subsidiary
Overseas production and manufacturing units
The Uppsala Model
• Johanson and Vahlne (1977) formulated a
‘dynamic’ Uppsala Model
• The Oppsala Model posits that firms proceed
along the internationalization path in the form of
logical steps, based on their gradual acquisition
and use of information gathered from foreign
markets and operations, which determines
successive greater levels of market commitment to
more international business activities.
The Uppsala Model
Market knowledge
Leads to
Market commitment
Leads to more
Market knowledge
leads to more
Market commitment
and so on
1. risk
FDI-related
2.return
WOS
EJV
CJV
Transfer-related
BOT
Franchising
Licensing
Trade-related
subcontracting
export
Source: Shenkar and Luo (2004)
1. Organizational control
2. Resource commitment
Limitations of the Uppsala Model
(1) The model does not explain what triggers
the first internationalization step
(2) It does not explain the mechanism by
which experiential knowledge of a foreign
market affects commitment of resources to
that market (Anderson and Gatignon,
1986)
Limitations of the Uppsala Model
(3) The basic assumption of the model is that lack of
knowledge about foreign markets is a major obstacle to
international operations – but what if the firm acquired
knowledge through external recruitment rather than firm
experiential knowledge?
(4) The argument that MNEs enter countries that are
culturally and geographically close to theirs before
entering culturally and geographically distant countries
does not always hold (example: Starbucks: its first
international venture was in the Japanese market in 1995)
(5) There are firms which do not follow the traditional
internationalization process, but which are MNEs from the
very start. These firms are called Born Global Firms.
The Born Global firm
• Born global firm is an business organization that
from inception, seeks to derive significant
competitive advantage from the use of resources
and the sale of outputs in multiple countries.
• These firms view the world as their marketplace
from the outset and see the domestic market as a
support for their international business.
Characteristics of Born global firms
• Born Global firms are generally small and medium hightech firms using well-known technology
• Firms originating from small countries such as Nordic
countries are more likely to adopt a Born Global strategy
than firms from large countries such the US
• A major characteristic of Born Global firms is the
commitment of the manager or founder to
internationalization. Born Global firms are managed or
founded by people who have greater international exposure
than managers of gradually internationalizing firms.
Activity
Discussion questions: what are the motivations of the following FDI
activities?
•
Taiwan Acer’s investment in the Silicon Valley, California (Acer is a
giant computer manufacturer)
•
P & G has shifted some of its back-office accounting functions to
the Philipines
•
Nanjing (China) Automobile Manufacturing Corporation’s
acquisition of MG Rover
•
Chinese oil firms’ investment in Sudan and Nigeria
•
Hong Kong firms’ investment in the clothing industry of mainland
China
•
Volkswagen’s investment in Shanghai, China
1.
Japanese firms’ investment in British Pharmaceutical industry
FDI flow in
FDI flow out
图1.1 中国对外直接投资流量与存量（2000-2010）
350000
300000
Mil.$
250000
200000
存量
流量
150000
100000
50000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
年
Speed
OFDI Direction(2010)
New FDI or M&S
图2.1 中国在美绿地建与并购投资（2003-2010）
6000
40
35
5000
30
4000
25
3000
20
并购投资额 单位：百万美元
（左轴）
绿地（新建）投资额 单位：
百万美元（左轴）
并购交易项目数（右轴）
15
2000
10
1000
5
0
0
2003 2004 2005 2006 2007 2008 2009 2010
绿地（新建）投资交易项目
数（右轴）
Returns
图3.1 中国在美国投资的收入（1999-2009）
70
60
50
40
30
20
10
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
0
中国在美其他投资的投资
投入
中国在美直接投资的投资
收入
Question
1.Does China’s FDI in US follow the
Uppsala model?
2.Your comments on entry mode of
China’s FDI to US ?
2. Opportunity and Challenge?
Reading
Axinn, N. C. and Matthyssens, P. (2002) “Limits of Internationalization Theories
in an Unlimited World,” International Marketing Review, 19(5): 436-449.
Cazurra, C. A., Maloney, M. and Manrakhan, S. (2007) “Causes of the Difficulties
in Internationalization,” Journal of International Business Studies, 38: 709725.
Child, John and David Faulkner (1998) Strategies of Cooperation, Oxford
University Press.
Dunning J. (1992) Multinational Enterprises and the Global Economy, Addison Wesley.
Ch3 ‘the motives for foreign production’ .
Li, L., Li, D. and Dalgic, T. (2004) “Internationalization Process of Small and
Medium-sized Enterprises: Towards a Hybrid Model of Experiential Learning
and Planning,” Management International Review, 44(1): 93-116.
Lu J.W., Beamish P.W. (2004) “International Diversification and Firm.
Performance: The S-Curve Hypothesis,” Academy of Management Journal,
47(4), 598-609.
McDougall, P., Shane, S., and Oviatt, B. M. (1994) Explaining the Format of
International New Ventures: the Limits of Theories from International
Business Research, Journal of Business Venturing, 9(6): 469-87.