EXECUTIVE SUMMARY
This essay utilized Palm, Inc. as the model multinational corporation to review its present foreign direct investment (FDI) activities in China and how they dealt with critical situations. From the analysis, key trends in the FDI activities were then identified, how it worked and its effectiveness in dealing with critical situations was ascertained. The paper then moved on to assess the impacts of FDI on China with regard to its suitability to critical situations, during which the importance of FDI in relation to the strategy being followed by China was determined also. An overall analysis of the performance and effectiveness of China’s FDI policies was also conducted to assess and compare the capabilities of these policies with those of others. Gaps in the FDI policies of China were then identified.
Finally, several choices of strategies to improve the FDI policies of China as effective means in critical situations were recommended and evaluated in terms of appropriateness to the issues reviewed, feasibility in carrying out the options and acceptability within the key stakeholders and decision makers. Several key implementation issues related to managing strategic change were also addressed as well.
INTRODUCTION
As a person with knowledge of Foreign Direct Investment (FDI) in China, the author has always brought up to his superiors the viability of strategy formation regarding the analysis of this topic and at times fails to understand the reasons or logic behind certain strategic implementations imposed on it.
By delving into this project paper, the author intends to have better insights into how Foreign Direct Investment (FDI) in China is thought up, formulated and then imparted down. The author hopes to have an in-depth understanding as to how the Foreign Direct Investment (FDI) enables China to compete effectively and profitably in this era of internationalization where competition is extremely intense.
In order to reinforce the learning objectives, two key focal issues were focused upon, i.e. innovation and diversity. Innovation was discussed with regard to Foreign Direct Investment (FDI) in China where it was renowned for its developmental capabilities to constantly innovate. Diversity came under strategic thinking and formation as the author considered the diverse culture, political climate, economic surroundings, social environment, technological settings, government policies and legal systems in order to better understand the issues being discussed.
FDI defined
Foreign direct investment (FDI) occurs when a parent enterprise instigates a long term investment with a foreign direct investor. This leads to the efficient and effective implementation of the policies and tasks necessary to satisfy a customers, employees, and management of the transnational corporation. Foreign direct investment (FDI) focuses on the careful management of the processes involved in the establishment of acceptable investments and services (2001).
More often than not, small companies don't really have the capabilities to implement foreign direct investment. Instead, these companies engage in activities that various schools of economics typically associate with foreign direct investment. These activities include the trading of products, product development, production and distribution.
However, foreign direct investment deals with all operations done within multinational companies and organizations. Activities such as the management of purchases, the control of inventories, logistics and evaluations are often related with foreign direct investment. A great deal of emphasis lies on the efficiency and effectiveness of processes. Therefore, foreign direct investment includes the analysis and management of internal processes.
Palm, Inc. will be the model multinational corporation (MNC) that will be used in this research based on their history in foreign direct investment.
The Impact of FDI in China
Despite the adverse economic trends in the first half of the year because of certain restrictions in the FDI policies of China, the country as a whole still experienced a relatively robust economic growth. It is estimated that China, taken together, posted a better-than-expected GDP growth of 4.5% last year, slightly higher than the 4.1% growth that they achieved in 2002 (2004).
Table 1. Trends in GDP Growth Rates
GDP Growth Rates
% growth, 1995 - 2005
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005*
China
6.7
5.5
3.7
1.8
5
5.4
5.3
5.5
5.2
6.0 (e)
6.4
Indonesia
8.2
7.8
4.7
-13.1
0.8
4.8
3.3
3.7
4.5
5.1
5.4
Laos
7
6.9
6.9
4
5.2
5.9
5.5
5.9
5.3
6.5 (e)
7.0
Malaysia
9.8
10
7.3
-7.4
5.8
8.3
0.4
4.2
5.3
7.1
6.0
Myanmar
6.9
6.4
5.7
5.8
10.9
6.2
-
-
-
-
-
Philippines
4.7
5.8
5.2
-0.6
3.3
4.0
3.4
4.4
4.7
6.1
4.5
Singapore
8
7.5
8.5
0.1
5.9
10.3
-2.0
2.2
1.1
8.4
4.5
Thailand
9.3
5.9
-1.4
-10.8
4.2
4.6
1.8
5.2
6.8
6.1
5.8
Vietnam
9.5
9.3
8.2
4.4
4.7
6.1
5.8
7.0
7.2
7.5
7.5
ASEAN
8.4
7.4
3.5
-9
3.1
5.9
1.9
4.8
5.3
5.8
5.5
Source: Asian Development Bank, World Bank and other sources
It is a common knowledge that the FDI policies of China are still relatively new and is still in its early stages of development. However, it has shown signs of rapid growth and it is being estimated that there will be more entrepreneurs and multinational corporations that will invest in the country within the year. And it is further being expected that within the next years the tremendous growth and technological advancements will continue in China. E-commerce and multimedia terminals are just some of the technological advancements already being expected. Therefore, the continued growth and development will also make it imperative for localization to occur in China in the years to come.
The Importance of FDI in China
A. Political Situation
China has experienced electoral and political transitions and crises in the last 12 months following the implementation of FDI policies. There have been at least four political trends that have emanated from these events. These are: (a) the cry for democracy and reforms in the FDI policies; (b) increased popular and local-level assertiveness; (c) greater public accountability; (d) re-definition of the concepts of power and politics. Also, the forms of political economies have slowly shifted from a bipolar (big government-big business) to a tri-polar structure (authorities - private sector – civil society).
Table 2. Foreign Direct Investments (FDI) in China
Type of FDI
SHARE
Mergers and Acquisitions
80%
Greenfield Investments
16%
Horizontal / Vertical Direct Investments
4%
Table 3. Foreign Direct Investors in China
COMPANY
MARKET SHARES
Palm, Inc.
60%
Handspring
14%
Compaq
10%
H-P
9%
Sony Corporation
7%
B. Taxation System
The implementation of the Free Trade Area, or FTA, which laid out a comprehensive program of regional tariff reduction in the Chinese market, will be continuously implemented in phases through the year 2008 (2003). Over the course of the next several years, the programs in tariff reductions were made broader. Efforts to eliminate non-tariff barriers and develop common real estate market standards were initiated. In addition, China also was able to formulate framework agreements for the intra-regional liberalization of FDI. Industrial complementation schemes meant to encourage intra-regional investment were also approved.
C. Internal Market
China bases its pricing strategies on several key trends that continuously shape the global marketplace. One particular trend is labeled as “premium-tization”. This phenomenon causes the polarization of different markets. This would then trigger the consumers to demand and pay much higher prices for perceived quality. However, discounting in prices is also simultaneously taking place, therefore squeezing out the middle range. More often than not, Chinese industries undergo internationalization which leads to a tighter squeeze for shelf space. This will in turn leave China as a winner. It is for this reason why China values the “premise sector” so much because this would allow consumers can to try their products and services at low risk and price.
Case Study
Palm, Inc. is a business entity specializing in mobile computing. Its products enable its customers to put the power of computing in their hands, along the process accessing the information they need. Palm, Inc. was established in 1992 by and , which later co-invented the Palm Pilot.
Palm, Inc. aims for sustainable growth as a broad market leader in mobile computing as well as for segment leadership, hence the rationale for its foreign direct investment activities in China. In both cases, the Palm, Inc. brands will play a crucial part. Palm, Inc. is able to establish its broad leadership in China usually by acquiring other strong mobile computing companies and their products, which are then combined into a new, larger company. Offering training to its employees, improving the company operations, and the introduction of new technologies then reinforces the positions of the various Palm products. This practically results in economies of scale that is able to create a distribution network for both the local and international Palm products. If a market is already in the control of other mobile computing companies, Palm, Inc. devotes its attention towards the development of a premium segment with its various Palm products.
The mission of Palm, Inc.’s foreign direct investment activities in China is to secure the growth of its business in a sustainable manner within the country, while at the same time constantly improving the company’s profitability. The strategy to achieve this involves four elements:
TARGET MARKET / SEGMENTATION
Segmentation is a key factor especially in markets where a broad leadership position has yet to be fully developed. In these markets Palm, Inc. strives for strong positions especially in the premium/import and specialty segments.
Good examples here include Palm, Inc.’s leading position in the import segment in the United States as well as the recently established market in China. In both examples, Palm, Inc. shows its desire to establish autonomous growth through the selling of more and more brands and expansion through the distribution networks as well as growth through acquisitions.
Risks, Barriers, Crisis
A. Cultural Issues
There have been social and cultural trends that have been evident over the last 12 months after the restrictions in the FDI policies in China. These include: (a) the irreversible rise of civil society against the restrictions; (b) the rise of civil society blends perfectly with a tri-polar structure of political economy; (c) the increase in the roles of intellectuals; and (d) the beginning of a period of introspection (2004).
B. Intellectual Property Issues
The creation of restrictive FDI policies, commercialization, and protection has been a significant source of comparative advantage of multinational corporations and economies and a major driver of their competitive strategies. Indeed, China is fully aware of the pressing need for a long-term policy commitment to collectively transform its FDI policies into one which is largely based on knowledge, driven by innovation and sustained by the active participation of all major sectors.
China has pledged to work together to help accelerate the pace and scope of policy formulation, commercialization and protection; to improve the regional framework of FDI policies and institutions, including the development and harmonization of enabling monitoring and evaluation systems; to promote cooperation and dialogues within China as well with the country’s organizations; to strengthen FDI related human and institutional capabilities in the country, including fostering greater public awareness of issues and implications relating to its FDI.
C. Education Issues
The recent flow of information would definitely make learning easy for every Chinese who desires to do so. In addition, it sustains the need for systems capable of storing and handling this information. Recent research into the educational demands of Chinese adults verified that the ever progressing technological innovations remain as the primary trend that will push these demands in future.
The growing impact of information and communications technology (ICT) fits in with the larger transformation towards a knowledge-based society. Most professional environments are already being adapted to ICT. Being able to handle e-mail and databases is necessary in the professional world. Nowadays, technicians are more and more using artificial intelligence systems in order to determine and solve problems.
Learning processes among Chinese schools are being influenced by the interaction of two major factors. On the one hand, the instructional factors: the educational philosophy and its conversion into didactical ideas. On the other hand, organizational factors: the staff, infrastructure and school policies related in this area. It is obvious that Chinese schools must possess a sound vision of staff policy and the efficient use of the operating budget in order to effectively perform its role in society. Expansion of parent participation as well as ICT-integration must be among the general aspects of Chinese school policies.
Overcoming Barriers and Improvement
There is definitely a need to reconcile both the inside-out and outside-in capabilities. While China’s FDI policies involve focusing on its core competencies with market position following its resource base, the country will be put into a disadvantageous position should it choose to neglect both the macro as well as the macro environment. Therefore, China has to be aware of the latest FDI changes, as well as changes in political, economic, legal and even demographic trends in order to develop the outside-in capabilities, such as market sensing, customer linking, channel bonding and technology monitoring.
The advantages enjoyed by Palm, Inc. may come in the form of increased revenues. Knowing what the Chinese market demands and the latest trends could help the company fully exploit its research and development capabilities to come out with products which are not only cost-effective but also high in quality. The strategic option can even be used as marketing tool where the focus is on staying close to their customers and listening to their feedbacks. On the flip side of the coin, there will be huge mobilization of resources involved, and the associated risks bestowed on Palm, Inc.
Nevertheless, the mentioned strategic option seems the most practical in the wake of globalization, since there is a sudden shift towards a more integrated and independent world economy. The key stakeholders too should not have any objections so long as Palm, Inc.’s core business is not threatened. By virtue of China’s centralized control of its FDI policies, it is being expected that major barriers should not exist in carrying out such an option except additional time may be required given the scope and span of operations.
CONCLUSION
The results of the analysis carried out on the FDI policies of China indicated very significant effects, even amidst the threats of unrest. Therefore, we could conclude that the China and its FDI policies could still be expected to improve faster than average.
The review of the impacts of FDI on China’s capabilities and resources revealed very little inconsistencies regarding its FDI policies. This is coherent with their traditional inside-out approach. However, the need to reconcile both the inside-out and outside-in approaches becomes imperative now.
The analysis among the environment as well as the restrictions on China’s FDI policies revealed certain gaps, most of which are biased towards the environment. However, these gaps paved the way towards determining a number of recommended strategic options to secure the competitiveness of China’s FDI policies.
Also, the Chinese government has to find a balance between adherence to internal forces within the management and to the changing forces of the environment in order to implement such strategic options.
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