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Motives for Chinese and Indian Foreign Direct Investment into Developed Countries within the Automotive Industry

Bachelor Thesis 2014 65 Pages

Business economics - Investment and Finance

Excerpt

List of Contents

List of Figures

List of Tables

List of AbbreviationsΙ

1. Defining the Problem
1.1 Contemporary Significance of the Subject
1.2 Objectives of the Research
1.3 Organisation of the Research
1.4 Limitations of the Research

2. Theoretical Framework
2.1 Foreign Direct Investment
2.1.1 Demarcation and Definition
2.1.2 Methods and Types
2.2 Internationalisation
2.2.1 Underlying Drivers
2.2.2 Motives

3. China
3.1 China’s Economy
3.2 China’s Outward Foreign Direct Investment
3.3 China’s Automotive Industry
3.4 Case Study China
3.4.1 Geely Company Overview
3.4.2 Motives for Geely’s Acquisition of Volvo
3.5 Evidence for Further Motives in China

4. India
4.1 India’s Economy
4.2 India’s Outward Foreign Direct Investment
4.3 India’s Automotive Industry
4.4 Case Study India
4.4.1 Tata Motors Company Overview
4.4.2 Motives for Tata Motors’ Acquisition of Jaguar Land Rover
4.5 Evidence for Further Motives in India

5. Cross-Case Analysis

6. Conclusion

List of References

Appendix

List of Figures

Figure 1: Share of OFDI by Group of Economies (Per Cent)

Figure 2: Most Promising Investor Home Economies for FDI

Figure 3: Push Factors for Internationalisation/OFDI

Figure 4: OFDI flows from China

Figure 5: The Development of India’s OFDI Flows

Figure 6: Overview over the Tata Group’s Company Portfolio

List of Tables

Table 1: Global Sectoral Distribution of FDI projects

Table 2: Standardised Characteristics of Developed Countries

Table 3: Foreign Operation Modes

Table 4: Characteristics of the two overall FDI types

Table 5: Major Companies in the Chinese Passenger Car Market

Table 6: Financial Structure of Geely’s Acquisition of Volvo

List of Abbreviations

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1. Defining the Problem

1.1 Contemporary Significance of the Subject

Fuelled by integration, trade liberalisation and deregulation the global economy is trans- forming into an interdependent system. Within this development the internationalisation of companies from developed countries only marked a first stage. The second and current stage sees the rise of emerging market firms investing not only into neighbouring but also into highly developed markets (Baskaran & Chaarlas, 2012; Gaur & Kumar, 2010; Goldstein, 2007a; Karl P Sauvant, Maschek, & McAllister, 2009; Williamson, Ramamurti, Fleury, & Leme Fleury, 2013). This trend challenges established internationalisation theo- ries claiming that emerging market firms initially only invest into economies less devel- oped than their own. Therefore it serves as a present, important and moreover heavily discussed area of research (Mathews, 2006; C. Wang, Boateng, & Hong, 2011; C. Wang, Hong, Kafouros, & Boateng, 2012).

Foreign Direct Investment (FDI) is an internationalisation mode where one firm in a home country obtains a lasting interest with a firm in a host country. It can be divided into a strategic alliance, the establishment of a wholly owned subsidiary, mergers, acquisitions or the participation in an equity joint venture (JV). “Direct” thereby implies an investor’s ownership of at least 10% of the shares or voting rights, which is enough to exercise some degree of control over the recipient’s decisions (Bhattacharyya, 2012; Dunning & Lundan, 2008; Eurostat, 2014). FDI’s importance in the context of internationalisation is highlight- ed by its long term prospects on the basis of capital commitment and direct control, allow- ing not only transfers of goods but furthermore of technology, skills, innovation capacity and managerial expertise (Mallampally & Sauvant, 1999). Research has also shown that FDI contributes more to economic growth for both home and host country than domestic investment (Borensztein, De Gregorio, & Lee, 1998; X. Li & Liu, 2005; OECD, 2009). The importance of FDI flows is further highlighted by its worldwide growth from 1970 (USD13.34bn) to 2013 (USD1.45tn) of more than 1,080% which outpaces simultaneous world trade or output growth and is projected to reach USD1.8tn in 2016 (Mallampally & Sauvant, 1999; UNCTAD, 2014a). After a slight decline in 2012, this development contin- ued in 2013 with a 9% increase in global FDI flows (UNCTAD, 2014b, p. iii).

A major trend is the growing importance of FDI from developing Markets. While FDI from developed countries is stagnating and is 55% off its 2007 peak, developing countries are taking over in terms of outward foreign direct investment (OFDI) growth, reaching a new high of 39% of total world OFDI in 2013 compared to only 7% in 1999 as highlighted in the following figure (UNCTAD, 2014b, pp. xiv, 5).

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Figure 1: Share of OFDI by Group of Economies (Per Cent) (UNCTAD, 2014b, p. 6)

The faces of this development are Emerging Market Multinational Companies (EMNCs), nicknamed “New Kids on the Block” by Ramamurti (2012, p. 1) for “challenging the established order of industrial hegemony” (Athreye & Kapur, 2009, p. 6). Popular exam- ples can be found in almost every economic sector. From energy giants like Brazilian Petrobras or Russian Gazprom, to banking groups like Industrial and Commercial Bank of China, telecommunication enterprises like China Mobile or Indian Bharti Airtel, to High- Tech companies like Chinese Lenovo or construction conglomerates like Brazilian Con- strutora Norberto Odebrecht (Fortune, 2014). Additionally EMNCs control almost one third of the world’s oil and gas production. This signals a radical change. Emerging Econ- omies are now creating multinational conglomerates of their own (Accenture, 2008).

Within emerging economies particular attention has been paid to a group of countries popularised as “BRICS”, for Brazil-Russia-India-China-South Africa, which are predicted to surpass the G8 states by 2050 in terms of gross domestic product (GDP) (Besada, Tok, & Winters, 2013; BRICS5, 2013). Moreover O’Neill (2002) states that while Brazil and Russia will become the world’s dominant suppliers of raw materials, China and India will dominate the worldwide manufacturing of goods. But with Brazil and Russia currently struggling to maintain their high GDP growth rates, the focus is set on China and India (Sharma, 2013). Not only are China and India home to the majority of the largest EMNCs featured on the Fortune’s Global 500 List (2014), but also considered the most promising developing market investor home economies for FDI in 2014-2016, as can be observed in the following graphic (Dunne, Kratzert, Rothenbuecher, & von Hoyningen-Huene, 2012).

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Figure 2: Most Promising Investor Home Economies for FDI (UNCTAD, 2014b, p. 28)

A further reason for China’s and India’s popularity is the media attention they are receiv- ing accusing them of using OFDI to “buy up the world” (Liu, 2014; Nolan, 2013). Indeed Chinese and Indian firms engaged in a number of large investments like Tata Steel’s (In- dia) takeover of UK’s Corus Group or China Investment Corp.’s acquisition of a 9.9% stake in Morgan Stanley, one of the world’s biggest banks (Goldstein, 2008; Rediff, 2013).

These FDI initiatives also highlight a further trend. The growing FDI from China and India towards developed markets, called South-North FDI (Mathews, 2006; OECD, 2014b). This is an upcoming trend, because prior to 2000 China’s and India’s OFDI was typically targeted towards other emerging economies in the same geographical or cultural region (Karl P Sauvant et al., 2009). It is a turnaround that can be shown by the 23% growth of OFDI into North America from 2012-2013 driven by the mega acquisition of U.S. pork producer Smithfield by the Chinese company Shuanghui, the largest Chinese acquisition of a U.S. company to date (OECD, 2014b; Vollmer, 2014).

The global FDI’s sectoral distribution reveals a further trend, which is the growth in manu- facturing FDI mainly driven by the automotive industry as shown in the illustration below.

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Table 1: Global Sectoral Distribution of FDI projects (Milelli & Sindzingre, 2013, p. 11)

The automotive industry is not only a driver of global manufacturing FDI but more im- portantly the key driver of any growing economy, as it is deeply connected with a variety of economic sectors, in a forward and backward manner. This again results in a strong positive multiplier effect, with the potential to accelerate any nation’s economic develop- ment (Holtbrügge & Kreppel, 2012). The rise in automotive FDI is thereby primarily driven by investments from developing countries, particularly from the world’s largest automotive market in terms of vehicle sales, China (Salidjanova, 2011). Even more signifi- cant is that among the world’s main car producing countries, India and China show the largest growth and potential. The reason for this can be found in their low car ownership rate and governments’ strong focus on mobilisation (Fetscherin, 2011; RBSA, 2013).

1.2 Objectives of the Research

The previous part sheds light on trends that are currently evolving. These can be concentrated into one research question, which then can be subdivided into several sub-questions that address the different trends. The overall objective of the research is to find out:

What are the Motives for Chinese and Indian FDI into Developed Countries within the Automotive Industry?

This research question entails the sub-questions:

What are the Motives for internationalisation?

What are the Motives for Targeting Developed Markets? What are the Motives for FDI as the Entry Mode?

“What-Questions” portray the absolute research objective, which again can only be

achieved if one also addresses the underlying drivers of the motives, resulting in a further question to be answered:

What are the motives?

Why these Motives?/What are the Underlying Drivers of the Motives?

A further research objective is to estimate the motives’ impact on the automobile sector, on China and India as the FDI home countries and on developed countries as the FDI host countries. The framework in which research will be conducted is the automotive industry.

1.3 Organisation of the Research

The research was compiled with the intention to provide the reader with a step-by-step approach to understanding the research information and its implications. Therefore the thesis begins with a theoretical introduction into FDI and internationalisation theories. With the theoretical foundation, the research will firstly concentrate on China and secondly on India. To get a holistic overview of the underlying drivers for their FDI we will look at country-level (economic situation and OFDI), industry-level (automotive industry) and institutional-level factors (dispersed across the chapters). This is followed by a firm-level view in the form of a case study for China and India to find out the motives for FDI into developed countries. Because the case studies only deal with unique and firm specific situations we will also have a look at evidence for further motives considering other vali- dated automotive industry examples. A cross-case analysis combines the results of the analyses on China and India and determines similarities, differences, patterns and the impact on the automotive sector, markets and institutions of China and India and FDI host countries. Here it has to be mentioned that with the topic still under intense academic discussion, the described approach does not follow an established theoretical framework but is a personal and pragmatic way of understanding the underlying drivers and motives for Chinese and Indian FDI into developed markets within the automotive industry. It is mainly based on knowledge derived from research reports.

In determining the underlying drivers, the research will put a focus on institutional factors as firms’ need to consider and operate under social and state regulations, being particularly true for emerging markets in which governments usually exert a strong influence (Freeman, 2013). Furthermore China and India are analysed separately because they have different political and economical models. China is a closed communist and India an open democratic society leading to heterogeneous underlying drivers. This research is not sup- posed to be a comparison, and a generalisation of country specifics would dilute the find- ings (Contessi & El-Ghazaly, 2010; Farrell, Khanna, Sinha, & Woetzel, 2014). The meth- od of research is Case Study, as “it tries to illuminate a decision” according to Yin (2003, p. 17) and is the preferred method when a why-question is posed (Yin, 2003). The case study approach used is an analytical one that tries to understand what has happened and why with the unit of analysis being a company’s specific FDI (Monash University, 2007). The rational for merging the findings into a cross-case analysis is that while separate cases allow one to understand individual aspects and motives, the research also intends to deter- mine the broader impact of the findings. The utilisation of sources thereby follows the 3 principles of valid data collection by using multiple sources of evidence, creating a case study database and maintaining a chain of evidence throughout the research (Yin, 2003). The majority of the sources are research papers, followed by books, official reports by international or government institutions and reliable statistical databases.

1.4 Limitations of the Research

Because the topic of South-North FDI is comprehensive, widely ramified and hampered by data constraints, definitions and limitations are required. Firstly developed and developing countries have to be differentiated. Despite a lack of clear definitions on these two forms, it can be said that developed countries are mainly characterised by a high per capita income, a market economy and a democratic government. Examples are the OECD nations includ- ing Germany and the U.S.A. among others (OECD, 2014a). Secondly a target-oriented research has to be ensured by focusing on the drivers originating from China and India only. This means that drivers of FDI host countries like a “reduction of barriers for FDI into Germany” will not be discussed. The reason behind this is the homogeneity of devel- oped countries and their unique relations to India and China. Instead, the research will be conducted on the basis of assumptions regarding developed markets concerning not only general economic indicators like growth, development, politics, entry barriers and market size but especially the competitive advantages developing market firms have internationally. Namely their strong brand images (e.g. Coca-Cola) and their Know-How (e.g. German small and medium sized engineering companies) (Forbes, 2014; Simon, n.d.). These standardised characteristics for developed countries facilitate the research concentration on China and India and are summarised in the following table.

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Table 2: Standardised Characteristics of Developed Countries

(Athreye & Kapur, 2009; Liu, 2014; OECD, 2014a; UNCTAD, 2014b; UNESCO, 1984)

Thirdly only the motives and underlying drivers of Chinese and Indian FDI will be the target of research. This excludes processes, competitive advantages, cultural aspects and further information on FDI. Fourthly the companies being analysed will be automotive original equipment manufacturers (OEMs), because of a lack of reliable and comprehen- sive resources on automotive component firms. Fifthly constraints have been encountered in the search for data. According to Wang (2011, p. 2) developing country OFDI statistics are often biased because “true motives of foreign investors may not be disclosed for rea- sons of good public relations”. Furthermore they can be biased as a result of intentional double counting of FDI flows known as “round-tripping”, which is conducted mostly in investment between China and Hong Kong to “exploit FDI incentives granted only to foreign investors” (Contessi & El-Ghazaly, 2010; Dunning & Lundan, 2008, p. 74). Data by the Chinese Ministries is particularly unreliable (Milelli & Sindzingre, 2013). The sixth and final constraint concerns the use of the case study research method. Despite its ad- vantages it is neither generalizable nor based on surveys (Neale, Thapa, & Boyce, 2006).

2. Theoretical Framework

2.1 Foreign Direct Investment

2.1.1 Demarcation and Definition

This section on FDI will firstly demarcate it from other forms of internationalisation, de- fine the term in detail and explain its importance. In a second step the FDI methods and their characteristics will be explained. Incentives and Barriers for FDI are similar to drivers for internationalisation and will therefore be explained in the Internationalisation Chapter.

Any company with the desire to internationalise, no matter if from developed or develop- ing countries, with or without cross-border experience, has to select a suitable mode for entering new market(s), called Foreign Operation Mode. The selection of the right foreign operation mode is important because it determines the degree of control and commitment of resources, of flexibility and of the potential risk. These forms can be differentiated by a number of factors, with the most common being “location of value-added”. Moreover FDI is the foreign operation mode with the largest resource commitment and degree of control as can be observed in the following graphic, which demarcates FDI from other internation- alisation modes (McDonald & Burton, 2002; Morschett, Schramm-Klein, & Zentes, 2010).

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Table 3: Foreign Operation Modes (Morschett et al., 2010, p. 242; Zentes, 1993, p. 67)

While the definition and characteristics of FDI were already stated in the section dealing with its contemporary significance, it has to be differentiated between cooperative ventures that are characterised by partial ownership and wholly owned subsidiaries, which imply full ownership (100%) and control over foreign firms. Furthermore the inherent term “in- vestment” induces one to confuse FDI with “International Portfolio Investments”. The difference is that FDI refers to active ownership with the intention to exert lasting control over business unites abroad. International Portfolio Investments on the other hand refer to passive ownership of foreign financial market instruments (bonds, stocks), with the sole aim to “generate financial returns”, usually on a medium or short term (Kutschker & Schmid, 2010; Morschett et al., 2010, p. 302; Stehn, 1992). Furthermore FDI can be of two directions, inward (IFDI) and outward and in the form of flows or stocks, with flows being measured over a period of time and stock at a point of time (Kutschker & Schmid, 2010). FDI is important because it is a source of private capital allowing firms to perform well and attract more FDI. Consequently it allows industries to thrive and countries to benefit in terms of per capita incomes, governmental spending and overall welfare (WHO, 2014a).

2.1.2 Methods and Types

The two overall FDI types can be characterised with the following attributes:

(Equity) Cooperation Wholly Owned Subsidiary

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Table 4: Characteristics of the two overall FDI types (Morschett et al., 2010, p. 245)

Going into detail we can furthermore define and characterise the underlying four modes. Strategic Alliances are strategic partnerships of at least two firms and in the context of FDI require the acquisition of an equity stake in a company of at least 10%. The participants stay independent and are able to jointly pursue common business goals (Mowery, Oxley, & Silverman, 1996). Advantages that derive out of strategic alliances include economies of lscale and scope, risk sharing, access to new markets, flexibility, knowledge generation and an increase in the participants companies’ market value. Disadvantages include a high need for coordination, potential knowledge dissemination, balance between cooperation and competition, different managerial skills, trust and commitment (Kutschker & Schmid, 2010). An automotive example is Chinese Dongfeng Motor’s acquisition of a 14% equity stake in the struggling French OEM PSA Peugeot Citroen (Handelsblatt, 2014).

Joint Ventures on the other hand are newly born cooperative ventures by at least two coop- eration partners on the basis of equity-cooperation. As a result the cooperation partners share control, profits and assets in both specified areas or across the whole group. Ad- vantages of JVs are accelerated market entrance, market knowledge of the local partner, economies of scale and scope, reduced resource commitment, risk sharing and learning effects. Often occurring challenges are regulatory issues, loss of control, conflicts of inter- est, increased coordination needs, danger of instability, profit sharing and knowledge dissemination (Büter, 2010; Kutschker & Schmid, 2010). Popular examples are the joint- ventures German automotive OEMs had to engage in to enter the Chinese market in the 1980s and 1990s, also known as “public-private-partnerships”, because the Chinese JV partners were mostly government-owned or -backed (Posth, 2008).

The creation of a new company, also called greenfield-investment, implies building new facilities in a foreign country and thereby growing “organically”. Advantages are easier cultural adaptation, strategic independence from the mother company, application of state of the art technology and regulatory support through the creation of local jobs. Problems that could occur include time intensiveness, lack of short-term economies of scale, potential insufficient local resources and an increase in rivalry through the entrance of a new competitor (Holtbrügge & Welge, 2010; Kutschker & Schmid, 2010; Morschett et al., 2010). An example provides the establishment of a plant in North America by South Korean automotive OEM Hyundai in 2010 (OFII, 2011).

Acquisitions, also called brownfield-investments, refer to the purchase of at least 50% of an existing firm in the host country. The acquired firm becomes an entity of the acquirer, who hopes to obtain one or several of the following potential benefits: accelerated market entrance and penetration, economies of scale, scope and speed, quick repayment of in- vestments, existing human capital, skills and know-how, sometimes only possibility to enter a market, image/brand improvement, avoid being acquired themselves or prestige. Disadvantages are high resource commitment, negative public and governmental reaction, uncertainty, employees’ aversion, issues within the integration of the acquired firm and frequent failures in global acquisitions. A further method close to acquisitions is a merger, where firms form a new enterprise to combine and share their assets (Kutschker & Schmid, 2010; Morschett et al., 2010). The shareholders usually stay as cooperative owners. Partic- ular attention has been paid to mega-acquisitions, like the one of Swedish carmaker Volvo by Chinese Geely Automobiles or the one of Jaguar Land Rover by Indian Tata Motors (Balcet, Wang, & Richet, 2012).

A further distinction can be made within the type of FDI, namely horizontal, vertical or conglomerate integration. Horizontal FDI refers to FDI into companies in the same sector and value chain stage, thereby duplicating home country activities. Vertical FDI concerns FDI between companies in the same sector but in consecutive value chain stages. Vertical FDI can be differentiated into forward integration, thereby focusing on sales markets and sales companies, and backward integration, thereby focusing on procurement markets and suppliers. The third and final type of FDI is Conglomerate Integration, which occurs when previously there is neither a sectoral nor value chain connection between the home and host company (Büter, 2010).

2.2 Internationalisation

2.2.1 Underlying Drivers

The section “Internationalisation” will firstly focus on underlying drivers for internationalisation by explaining the theoretical approaches for internationalisation and deriving the most common underlying drivers to form a framework for further research. In a second step it will outline the five established motives for internationalisation and explain possible advantages and disadvantages arising out of selecting them.

In general terms underlying drivers, also called determinants or incentives-and-barriers for internationalisation, are “factors that affect a decision” (WHO, 2014b). In this case the decision for FDI into developed countries. While there are countless of these, they can be divided into „push-“ and „pull-factors“. Pull-Factors refer to drivers in FDI home countries, in our case developed countries, and are therefore not of interest as explained in the paragraph on limitations. Push factors on the other hand refer to factors promoting OFDI from the home countries, like China and India, and therefore are of particular interest. These push factors consequently form the major part of the underlying drivers and are key basic information in determining the final motives for Chinese and Indian FDI into developed markets within the automotive industry (Kaburagi, 2006).

In academic research, little attempt has been made to unify all underlying drivers for inter- nationalisation in one framework. The reason is that firm resources and the environment are complex and constantly changing, making a single approach inadequate (Contessi & El-Ghazaly, 2010; Lu, Liu, & Wang, 2011). Despite this limitation, two internationalisa- tion theories have been discussed most intensively, the OLI-Framework and the LLL- Framework. The OLI-Framework (Ownership-Location-Internationalisation) by Dunning aims to explain firms’ internationalisation as an attempt to “exploit local and already exist- ing firm specific advantages”, like low labour cost (Athreye & Kapur, 2009, p. 213; Dunning, 2000, 2008). This approach is limited in its capacity to explain the internationali- sation of EMNCs, as these companies’ technology or ownership advantages normally are very low (Athreye & Kapur, 2009; Mathews, 2006; Karl P Sauvant et al., 2009). Mathews’ Linkage-Leverage-Learning (LLL) framework on the other sides adds to the OLI frame- work as it captures the idea that EMNCs internationalise to build advantages (Mathews, 2006). In order to establish a theoretical framework for further research we will take Mathews’ basic idea and combine it with the most recent research findings on underlying drivers for EMNCs OFDI into developed countries. The findings are similar in their ap- proach of assigning a wide range of push drivers from country, industry and institution to firm specific factors that have a combined impact on the motives (Holtbrügge & Kreppel, 2012; Lu et al., 2011; Milelli & Sindzingre, 2013; Yamakawa, Peng, & Deeds, 2008). In order to fully determine the underlying push drivers we will therefore consider all of them. The following figure shows a number of the potential underlying push-drivers for OFDI from developing markets into developed markets. The connecting arrows indicate the order in how the research will be conducted, from a macro view on the country level to a situa- tion-specific view at the firm level, resulting in the finding of the motives.

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Figure 3: Push Factors for Internationalisation/OFDI (Büter, 2010; Holtbrügge & Welge, 2010; Kutschker & Schmid, 2010; Milelli & Sindzingre, 2013; Morschett et al., 2010; WHO, 2014a), modelled after: (Child & Rodrigues, 2005; Holtbrügge & Kreppel, 2012; Lu et al., 2011; Milelli & Sindzingre, 2013; Yamakawa et al., 2008).

2.2.2 Motives

Stevenson defines a motive as “a reason for doing something” (2010) and concerning private businesses the primary motive is to compensate stakeholders through the maximi- sation of long-term returns on investment (Grant & Nippa, 2006). This goal can be achieved in several ways including internationalisation. The motives for internationalisa- tion on the other hand are very heterogeneous, like MNCs themselves, with the five major ones being Market Seeking, Resource Seeking, Efficiency Seeking, Strategic Asset Seek- ing and Following-the-Leader (Dunning & Lundan, 2008; Floyd & Summan, 2008; Holtbrügge & Welge, 2010; Kutschker & Schmid, 2010; Morschett et al., 2010).

Market Seeking refers to starting business activities in a foreign country to get access to a market and its sales potential. This can mean venturing into new markets or strengthening the presence in an existing market but always refers to exploiting already existent ad- vantages. Further reasons can be to follow the customer, known as “piggybacking”, for protecting or strengthening existing sales and to establish a “bridgehead” for entering nearby countries at a later point of time (Morschett et al., 2010). With a focus on FDI, one can differentiate three further reasons for engaging in market seeking. Firstly to locally adopt products for competitiveness reasons, secondly because costs for FDI are less than for other foreign operation modes and lastly to be physically present in the leading markets (Dunning & Lundan, 2008; Dunning, 2000).

Resource Seeking firms aim at getting access to resources and securing this access. Re- sources mostly refer to natural/physical resources but according to Dunning and Lundan (2008) also entail suitable supply of labour, expertise (technological, management, market- ing) or organisational skills (Morschett et al., 2010). In this research we will use the term resource seeking only in connection with natural resources like minerals, natural gas, oil or coal. Expertise and organisational skills on the other hand will be a part of the strategic asset seeking motive.

Efficiency Seeking is a firm’s search for an improved cost efficiency and implies that the foreign subsidiary belongs to a wider international network of coordinated production sites concentrated in specific locations to supply several markets. Benefits obtained are econo- mies of scale, economies of scope and risk diversification. Hereby subsidiaries are either simple “miniature replicas” of the parent company with low autonomy or have a “product mandate”, through which they can control activities along the whole value chain. Further- more efficiency seeking can be of two kinds. Firstly it can take advantage of differences in skills and costs across different countries and secondly of similar economic structures in different countries (Dunning & Lundan, 2008; Lu et al., 2011; Morschett et al., 2010).

Strategic Asset Seeking is the fourth group and refers to companies trying to improve their global competitiveness by gaining access to knowledge, capabilities, technology and inno- vation. Compared to market seeking here the focus is on augmenting a company’s capa- bilities through acquiring new ones of which the whole group can benefit from. The reason for seeking new capabilities abroad indicates market imperfections in the FDI home coun-

try. To augment its advantages a firm may collaborate with a competitor, form a JV with a foreign rival, pressure a market by acquiring a number of important suppliers for natural resources, get control over distribution centres to better push its products into markets, diversify its product portfolio by acquiring a producer of complementary products or merge with an incumbent company to promote relations with the local government (Deng, 2007; Dunning & Lundan, 2008; Luo & Tung, 2007; Mowery et al., 1996).

Follow-the-Leader is an “oligopolistic reaction to a competitor’s move to a foreign coun- try” with the goal of maintaining the present competitive situation (Morschett et al., 2010, p. 81). In current times of accelerated internationalisation following the leader can also imply an exchange of threats. A competitor that has been attacked in the German market might pay back its competitor by attacking him in the Canadian market, thus following the leader’s strategic moves (Morschett et al., 2010; Nayyar, 2008).

Furthermore, but less commonly, motives include escape investments as a result of a home countries’ institutional constraints like high taxes or regulation. Support investments are another motive and refer to investments into affiliate companies that support the activities of the group. Examples are trade subsidiaries that facilitate the export of goods and assist the parent company in purchasing goods from the host country (Dunning & Lundan, 2008). The different motives named are partly concurrent and partly complementary, but mostly occur in bundles that create trade-offs and force the internationalising firm to tailor FDI to its special needs. A company that is seeking a new market for enhancing sales might fur- thermore be forced to engage in efficiency seeking to offer its products at a competitive price. Motives become multifaceted, hard to define and nested (Morschett et al., 2010).

3. China

3.1 China’s Economy

The People’s Republic of China is the world’s most populous and second largest country in terms of GDP with nominal GDP growth averaging remarkable 9.1% since 1989 (IMF, 2014; Zhu, 2012). Real GDP growth is currently slightly declining and in 2013 was at its lowest since 1999. But considering its size China is still the world’s fastest growing econ- omy (Morrison, 2014, p. 4). Furthermore China is a communist, one-party state that exerts tight control over its economy, intervening and adjusting according to national political interests (CIA, 2014). Despite its political system it is internationally recognised and holds a number of supranational trade agreements being a member of the World Trade Organisa- tion and the G-20 Nations among others (G20, 2014; WTO, 2014). Growth is the main goal of the ruling communist party. To achieve growth it pushes for the transformation of its former central planning system towards a free but tightly monitored market system. From an economy driven by inward investments into manufacturing or infrastructure and exports, to a focus on domestic consumption and imports (Milelli & Sindzingre, 2013; C. Wang et al., 2011). The government’s representatives in the market are so called State- Owned-Enterprises (SOEs) that receive favourable treatment as well as incentives. SOEs do not outnumber private firms but are usually larger and industry leaders. Key economic institutions like banks, energy, transportation or arms companies are mostly government backed with the economic transformation promoting an increase in private firms and thus in overall competitiveness and efficiency (Morrison, 2014; Zhu, 2012).

There are several factors that currently have a great impact on the transformation of Chi- na’s economy. One of these is the rise in labour cost particularly in labour intensive sec- tors. While there is still a significant gap to western wages, low cost labour seekers already move on to neighbouring countries (Milelli & Sindzingre, 2013; Sirkin, Zinser, & Rose, 2014). On top of this income and private savings are rising while consumption is declining, hampering national economic growth. Environmental pollution is also becoming a big concern (Stanley & Xu, 2011; X. Wang & Zhou, 2014).

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Pages
65
Year
2014
ISBN (eBook)
9783668007574
ISBN (Book)
9783668007581
File size
903 KB
Language
English
Catalog Number
v301891
Institution / College
University of Applied Sciences Dortmund
Grade
1,0
Tags
International Management Internationalisierung China Indien India Foreign Direct Investment Auslandsdirektinvestitionen Investitionen Developing Countries Entwicklungsländer entwickelte Länder Developed Countries Automobilindustrie Automotive Industry Tata Geely Volvo Jaguar-Land Rover Investments Internationalisation Subsidiary Tochterfirma

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Title: Motives for Chinese and Indian Foreign Direct Investment into Developed Countries within the Automotive Industry