This week´s reading: Foreign Direct Investment and Collaborative Ventures ("FDI"), ch. 14, Cavusgil 2020.

FDI types in detail. Reasons and motives for FDI and collaborative ventures. FDI as a risky entry strategy.
FDI vs. International Portfolio Investment. Major factors relevant to selecting FDI locations. Case on China´s
FDI strategy: Closing case on China´s "Going Out" Strategy.
 Learning Objectives:

14.1  Understand international investment and collaboration.

14.2  Describe the characteristics of foreign direct investment.
14.3  Explain the motives for F D I and collaborative ventures.
14.4  Identify the types of foreign direct investment.
14.5  Understand international collaborative ventures.
14.6  Discuss the experience of retailers in foreign markets.

Consider the following example from the beer industry. Former company South African Breweries SABMiller. As
of today: https://www.ab-inbev.com/ The company established a major presence in the U.S. beer market by buying
Miller Brewing. After changing its name to SABMiller plc., the firm next acquired 97 percent of Bavaria S.A.,
South America's second-largest brewer. In 2006, SABMiller acquired Foster's India for $120 million, gaining
control of nearly 50 percent of the Indian beer market. In 2011, the firm acquired Foster's, Australia's largest
brewer.  In China, SABMiller entered a joint venture with CR Snow Breweries, helping make SABMiller the largest
brewer in China.

- A joint venture is a form of collaboration between two or more firms, which together create a new, jointly
owned enterprise. Both partners typically invest money to create a new enterprise, which then might last for
many years. This is also the differential factor from collaborative arrangements, where no new entity is being
created. The extend of ownership in a joint venture may be range between minor, equal or major ownership.
- Through numerous FDI and collaborative ventures in the 2000s, SABMiller has become the world's third-
largest brewer, with operations in more than sixty countries.  Both FDI and international collaborative ventures
are fundamental strategies that focal firms use to expand abroad.  Today Anheuser-Busch InBev is the world's
largest brewer based on FDI activities in the past.

FDI and Collaborative Ventures:

 
- Foreign direct investment (F D I): Strategy in which the firm establishes a physical presence abroad by
acquiring productive assets such as capital, technology, labor, land, plant, and equipment.
- International collaborative venture: A cross-border business alliance in which partnering firms pool their
resources and share costs and risks of a venture.
- Joint venture (J V): A form of collaboration between two or more firms to create a jointly-owned enterprise.
 
1. Explain why FDI is a particularly risky foreign entry strategy. How is FDI different from international
portfolio investment?
 
Answer:  Foreign direct investment (FDI) is an internationalization strategy where the firm
establishes a physical presence abroad through direct ownership of productive assets such as capital,
technology, labor, land, plant, and equipment.

FDI is the most advanced and complex foreign market entry strategy. It entails establishing
manufacturing plants, marketing subsidiaries, or other facilities in target countries. Because this
involves investing substantial resources to establish a physical presence abroad, FDI is riskier than
other entry strategies.
 
International portfolio investment refers to passive ownership of foreign securities, such as stocks and bonds, for
the purpose of generating financial returns. International portfolio investment is a form of international investment,
but it is not FDI, which seeks ownership control of a business abroad and represents a long-term commitment. The
United Nations uses the benchmark of at least 10 percent ownership in the enterprise to differentiate FDI from
portfolio investment. However, this percentage may be misleading, because control is not usually achieved unless
the investor owns at least 50 percent of a foreign venture.
 
For more details see:  14-1: Understand international investment and collaboration
 
Factors Relevant to Selecting Locations for F D I:

 
 
Consider the attractiveness of Eastern European nations as FDI destinations. Several of the selection criteria noted in
the Exhibit have attracted foreign firms to these countries. In the Czech Republic, giant Chinese electronics
manufacturer Sichuan Changhong (www.changhong.com) built a $30 million factory that produces up to one
million flat-screen televisions per year. Numerous automakers, from Ford to Nissan, have built factories in the
region. Firms find the region attractive for various reasons. First, wages in Eastern Europe are relatively low;
engineers in Slovakia earn half of what Western engineers make, and assembly line workers one-third to one-fifth.
Second, East European governments offer incentives, from financing to low taxes, as in Slovakia where all taxes are
a simple 19 percent. By comparison, personal income tax rates often exceed 30 percent in Germany. Third, local
manufacturing allows firms to avoid trade barriers. Sichuan Changhong's presence in the Czech Republic helps it
avoid tariffs the European Union imposes on imports from China. Fourth, companies prefer Eastern Europe
because of its physical proximity to the huge EU market. Many Eastern European countries are EU members
themselves. Just as Eastern Europe has become a popular FDI destination, production of cars and other products is
falling in much of Western Europe due to higher manufacturing costs, taxes, and strict labor rules.26 As these
examples imply, managers examine a combination of criteria when making decisions about where in the world to
establish operations via FDI.
 
Have a focus on the three major motives for FDI, see pp. 436-439 and the major types of FDI, pp. 439 - 447.
When you do these readings make sure to increase your understand on greenfield operations versus Mergers and
Acquisitions and how the process of International Business Partnering can be improved (!!!!!).

Major motives for FDI

When international companies seek to enter the foreign market, their aim is to enhance the competitive advantage of
their establishment in the global marketplace. In order to facilitate the main motives for such a business endeavor,
three principal categories can be distinguished. These categories characterize the motives to be market-seeking,
resource- or asset seeking and efficiency seeking.
Now, market seeking motives imply the unsatisfactory and unfavorable developments in the home market, which as
a consequence motivates companies to seek new market opportunities. This way, companies gain access to the new
arising opportunities which facilitate the production of their offers at or near the location of their customer base.
This leads to another motivation lying in following key customer segments into abroad located markets, which both
helps serve them better, but also to a certain extend prevents their competitors to serve them. Lastly, in order to
compete with their key rivals, they decide to confront them directly in the competitors’ home market.
The second major motive for FDI is, as mentioned above, characterized by seeking complementary resources and
capabilities of companies which can serve as partners with based headquarters in this foreign market. This way, the
company has better access to raw materials, which are needed for certain types of industries. In addition, knowledge
is of critical importance for the success in the international environment, which is why companies tend to conduct
FDI strategies in order to deepen their understanding of their target markets and also acquire further technological
and managerial knowledge. Their physical presence abroad enables them better access to the customers, the
distribution system, having better control over their own operations, and also accessing the market knowledge at
hand. In addition, the know-how of the partner is also a very important asset, since he has additional insights which
can be of great benefit to the company.
On a last note, efficiency seeking motives imply companies achieving economies of scale. With their expansion,
their sales have potential to increase and the company’s assets can actually be distributed across a larger number of
products and also target markets. This way, the average cost of a company’s operation actually decreases, while its
profit is rising. This can be achieved since FDI reduces sourcing and the production costs can be lowered whilst
using inexpensive labor or other cheaper means of production process facilitations. Due to the closer location to the
customers, expensive distribution systems would not be needed, again having a positive impact on the decrease of
costs. Furthermore, governments often times offer governmental incentives the foreign companies can take
advantage of, and with their physical presence in the entered market, they also avoid trade barriers which they would
have otherwise faced when wanting to operate.

Major types of FDI

Foreign direct investment can be classified by their form, nature of ownership and level of integration. The
classification by its form accounts for two types, one of them being greenfield investments. As the meaning of the
world itself implies, it actually occurs when a firm invests in buying empty land and them building a production
plant, new manufacturing facility, administrative facility or marketing subsidiary form scratch. The other FDI type
by its form are mergers and acquisitions and they are different from greenfield investment in the sense of not
building a new entity, but rather acquiring an existing company or already established facility. Mergers account for
special forms of acquisitions, where two companies together form a larger firm, which consequentially leads to
benefits such as knowledge and resource sharing, cost savings, a larger product offer, etc. When talking about the
nature of ownerships possible in a foreign direct investment, they can be either constructed as joint ventures or
wholly owned direct investment. Should a focal firm decide to have the complete managerial control of an
establishment, then this accounts for the wholly owned ownership or equity ownership. This means that the person
who invested is in fact also the only one in charge and the solely owner of the foreign assets associated with the
investment. On the opposite, joint ventures are a type of partnership. In this instance, the assets are being divided
between the two or more parent firms who actually created the newly created legal entity. This partnership can vary
depending on the agreement, but ranges between a minor, major or 50-50 division of ownership between the
partners. To conclude the various types and differences of foreign direct investments which can be implemented,
there is also a distinction between the horizontal versus the vertical integration. Should a firm own or seek to own
multiple stages of the value chain for producing, selling and delivering a product and service, this accounts for the
vertical integration type. Again, this can be either a downstream integration, such as marketing and selling
operations, or an upstream integration, such as that of factories or assembly plants. The opposite is however the
horizontal integration, which characterizes an agreement in which the firm does not want to own multiple stages, but
only one single stage of its value chain.

Greenfield operations versus Mergers and Acquisitions

When these two forms are being compared, MNEs typically decide on using acquisitions, rather than investing into
greenfield. The reasoning behind it is the ownership of the already existing assets, which by purchasing an already
existing facility, is directly transferred to them. It is less risky, since it immediately leads to generating revenue and
also accelerating the return on the investment which had to be conducted. Should one look at the advantages of
greenfield investments, they on the other hand create new jobs and production capacities. It enables a better
connection to the global marketplace and the factor of know-how is rather important. Due to their benefits,
governments also often times offer incentives to encourage such investments, because it can also have positives
outcomes on the economy of the market and country in general, and not only for the investing party.

How the process of International Business Partnering can be improved

With foreign direct investments, companies also engage in partnerships in order to benefit from his know-how,
which as a consequence will reflect positively on the firm in question. This partnership with a local can also help
reduce risks, grant access to local expertise and provide support in mastering trade barriers, which helps when
entering such a foreign environment. When acquiring a international business partner, it is important to establish
which market will be targeted, because according to its characteristics, the partner shall be selected. There are eight
steps when identifying the suitable business partner to collaborate with. Primarily, it has to be decided whether the
company shall be of a collaborative nature or constructed as a wholly owned subsidiary. Afterwards, the necessary
qualifications sought in a partner need to be established, after which potential candidates can be screened in order to
identify a suitable one. When selecting the partner, the nature of this legal partnership needs to be determined, and
should the decision rest upon a contract, it has to be adjusted in the contract accordingly. Lastly, of crucial
importance is the trust built in the partner relationship and also reciprocity, in order for both parties to be satisfied
with the outcome and also the co-operation. Certainly, the conducted work will also have to be evaluated, which is
why clear criteria needs to be determined and the ongoing performance shall then be measured against it. Since
foreign direct investment mostly accounts for a long-term period, the partners also need to establish long-term goals
which they want to work towards, in order advance the company’s success even further.
The process of seeking a partner can be quite demanding and the fact of relying on someone else can be quite
intimidating. This is why this process can also be improved and strengthened if both parties are transparent about
their competences, desires and business practices they want to follow. A common goal needs to be structured,
because otherwise conflict may occur. In order to reach this goal, the partners also need to know what their purpose
in the proposed hierarchy is and how the management is actually organized. It is important to find common ground
and appreciate one another, especially since often times cultural differenced can be present. After all, they wanted to
partner up in order to benefit from this relationship and because they sought out competencies, which can be of use
to both of them. It is important to safeguard these assets which can be contributing factors to the success of their
firm.

When managers first contemplate internationalization via FDI, they usually think in terms of a wholly owned
operation. Many are accustomed to retaining the control and sole access to profits that come with 100 percent
ownership. The nature of the industry or product may also make partnering less desirable. But management should
consider collaboration an option. Typically, the firm enters a collaborative venture when it discovers a weak or
missing link in its value chain and chooses a partner that can remedy the deficiency. China is an increasingly
popular venue for collaboration in the Internet service-provider industry. Both Microsoft and Google entered this
huge market via joint ventures with local partners. But eBay and Yahoo entered China primarily via wholly owned
FDI. Each firm chose the entry strategy most appropriate for its situation.
 
2. What makes China popular for FDI? What factors contribute to the long-term popularity of FDI in
advanced economies?
 
Answer:  According to A. T. Kearney's FDI Confidence Index, China ranks among the top destinations for
foreign investment (www.atkearney.com). China is popular because of its size, rapid growth rate, and low labor
costs. It is an important platform where MNEs manufacture products for export to key markets in Asia and
elsewhere. China also holds strategic importance for its long-term potential as a target market and source of
competitive advantage.
 
Advanced economies such as Australia, Canada, Japan, Netherlands, the United Kingdom, and the United
States long have been popular destinations for FDI. These countries all share high per-capita GDP, strong GDP
growth, high density of knowledge workers, and superior business infrastructure, such as telephone systems and
energy sources destinations.
 
Objective:  14-2: Describe the characteristics of foreign direct investment
 
Make sure to understand the closing case on China´s "'Going Out" Strategy and The European Union´s
Position on Chinese Investments from a critical perspective given the current corona situation, pp. 449-450
(two pages only!).
- China entered WTO
- Increase of outwards FDI from China in all areas of the world – “China’s going-out strategy”
- In 2017 – reached an absolut high
- China is amongst the world’s three largest sources of FDI, after US and Japan – global share of 10.14%
- Not always positively perceived
- Worries about China taking the lead in controlling sensitive sectors – tentative acquisitions have been blocked
because of this
- Cinese investment continued throughout global financial crisis and sovereign debt crisis – still ongoing
- Europe is receiving almost double the amount of incoming FDI than the US in 2011-2012 – should be because
of the opportunities created by the sovereign debt crisis in the euro zone
- Investment in Europe is a recent phenomenon
- Chinese investors entered capital of companies short on cash but with a long-term guarantee of success
(infrastructure and public services)
- Target countries – UK, Italy, Netherlands, Germany
- Energy is a favorite target – since natural resources have always been one of the primary objectives of Chinese
investment abroad
- The crisis in Europe provided China the opportunity to acquire knowhow and technology in order to secure a
successful future

- EU opinion on investment – generally welcoming it

- EU lacks a coherent policy and don’t have a regulatory framework at the Commission’s level – there is a
fragmentary approach where each member state decides on its own, this is also why some countries have not
benefited from these investments
- Countries with transparent legislation also are more successful in attracting the foreign capital
- These investments started debates at a continental level – generally in the sense of attracting these Asian
investments, rather than restricting them
- Seems that the Chinese are more searching for commercial gains, which is why the strategic level is not being
compromised – the investments are mor from individual companies and not the Chinese government – logic of
profit

 
Over the last decade, Chinese investments in the EU have been welcomed. What do you think the latter´s
likely attitude toward Chinese investment in the longer term would be and think about the current corona
situation in the EU.
- Chinese FDI continues to flow into the EU, despite its improving situation – but they changed character –
mostly greenfield investments with significant capital expenditure
- They are targeting small and medium enterprises
- The importance of Chinese investment in EU is still limited
- Further efforts are needed to align investments to the level of importance of foreign trade between two partners

The COVID-19 pandemic has had some negative but rather temporary effects on Chinese
investments in Germany. Germany is expected to stay attractive to Chinese investors who seek to
gain access to advanced technologies and know-how in the future.

In early 2020, COVID-19 first caused a drastic lockdown of the Chinese economy.
Subsequently, lockdown measures and further containment policies like business closures and
mobility restrictions have been implemented worldwide to stop the spread of the coronavirus.
The pandemic has led to a massive shock to the world economy

With its accession to the World Trade Organization in 2001, China faced increasingly severe
market competition. China thus increased its emphasis on the key role of science and technology
and later also indigenous innovation and upgrading for enhancing Chinese firms’
competitiveness and for sustaining China’s economic growth in the long term.

They indicated that the COVID-19 pandemic had some but not a strong impact on such decline
in general investment enquiries.

Leading up to the outbreak of COVID-19, the European investment environment was favourable
to Chinese investors, especially when compared with the US environment. Since then, however,
although still much better than the US environment, it is not clear whether the EU investment
environment will be maintained.
In just one example, it is notable that the United States is not alone in expressing concerns about
the prevalence and use of Chinese technology. Chinese telecommunications company, Huawei,
has been banned from certain telecommunications infrastructure in Australia, Sweden, the
United Kingdom, amongst others, in addition to the United States

In June this year, 2020 the European Commission released a White Paper on ways Member
States can level the playing field with foreign entities that depend on subsidies from foreign
governments.

It concludes that foreign subsidies can in fact undermine competition and distort the European
Union’s internal market. For example, in the case of a foreign company acquiring an EU entity,
foreign government subsidies (such as preferential treatments in financing, loan guarantees, and
special tax rebates) may enable the acquirer to offer premiums for acquisition, thereby
preventing non-subsidised acquirers from accessing key technologies.

The White Paper proposes an introduction of new EU legislation to address the current lack of
rules on unregulated foreign subsidies. This would greatly reduce the certainty of transactions
and modify closing schedules for foreign transactions.

ccording to a recent report by Roland Berger, Chinese companies’ investments in European

markets have filled gaps in certain European industrial chains. For example, CATL, a Chinese
battery giant, established a battery cell manufacturing plant in Germany to enhance electric
vehicle manufacturing in the European Union. Similarly, Chinese tech companies have
established research centres throughout Europe to advance innovation throughout European
enterprises. For example, one Chinese tech giant, relying on its own cloud computing and
artificial intelligence technologies, is providing BMW with an advanced and complete technical
solution that runs through the entire research and development process of autonomous driving.

The COVID-19 pandemic has not only exposed the tensions between China and the European
Union, it has also shown the mutual dependence of the two nations. It would be in both parties’
best interests to reach a consensus that mutual cooperation outweighs splendid isolation.