International Business Report

International Business
Individual Report

Foreign direct investment is an investment in a business’ market by a firm from a different country. After the firm commence foreign direct investment, it becomes a multinational enterprise which can be known as any firm that has productive activities in at least two countries. However, there are two main forms of foreign direct investments which can be known as Greenfield investment and acquisition of or merger with a local firm. Greenfield investment is a form of foreign direct investment where a company starts its operation from the ground up. On the other hand, acquisition of or merger with a local firm comes in two different parts. Acquisition refers that a firm from a foreign country acquiring a firm in the invested country. Whereas merger refers to two companies agrees on combining both firms from different country, which can be known as joint venture. Therefore, acquisition and merger of executes a lot faster as compared to Greenfield investment.

As a CEO of a firm, it is best to form a joint-venture in the manufacturing industry as forming it will definitely give access to greater resources and also forming a joint-venture in a foreign country gives insight and knowledge of the manufacturing market in China. According to Ross (2015), the manufacturing industry in China is the biggest in terms of market size and diverse in terms of product differentiation. Also, more than fifty percent of the manufacturing company believes that the manufacturing industry in China is in an absolute advantageous position in Asia as according to Deloitte (n.d.). Absolute advantage refers to a country’s production of a product is more efficient than any other country that are producing it. One of many China’s absolute advantage can be known as their labor cost. When comparing China against the rest of the world, no other country can produce as fast, as inexpensive and as efficient as them. According to Aburaki (2013), many of it ultimately also comes down to the competitiveness in China, where competition is so intense that they have to find ways to produce as fast, as inexpensive and as efficient in order to survive the market.  

Having to invest in a foreign country as developed as China sure will lead to some risk, but there are also a lot of opportunities. I believe that the opportunities given when investing in China outweighs the risk and cost of investing in China. Since China made a decision to move their economy to one that was more market driven, for almost thirty years it resulted in steady high economic growth rates of around ten percent annually compounded. The growth has certainly attracted a lot of foreign investment as it promises a good long run return. According to Zhang (2011), the reason being is because China have a population of more than one billion people, making it the largest market in the world. Moreover, the cheap labor combined with tax incentives made it even attractive for foreign firms. Furthermore, to build guanxi in China requires a substantial amount of presence in the country. Guanxi in general means relationship or network where business, social, marital relationship as well as relationships among students are included. In China, guanxi is often used to help businesses to go the shorter route. However, the problem China faces is the lack of purchasing power because of rapid growth, the lack of well-developed transportation system or distribution system as well as the highly regulated environment. Despite all these problems, the Chinese government issued plan on investing more than $800 billion on infrastructures over the next ten years as well as giving preferential tax breaks to firms that invests in certain areas. As China pursue their macroeconomic policy which includes maintaining a steady economic growth, stable currency and low inflation, it will still continue to attract foreign direct investment. Therefore, investing in China is the perfect plan for companies that wants to go multinational.  

As a CEO of a firm that is deciding in making a $100 million foreign direct investment in China, I will firstly conduct an environmental scanning of China. Environmental scanning is a method to determine business risk as well as opportunities in a country. The push factors can include legal risk, economic risk, political risk, technological risk, socio-cultural risk and others more. It ultimately helps with decision such as when to enter a market, what form of operation to set up as well as which country to enter. However, there are two different type of international business environment when it comes to country attractiveness which are known as macro international environment and micro international environment. The macro international environment includes the push factors as mention when determining business risk in a country. On the other hand, micro environment includes supplier, competitor, customers and so on so forth.

        First of all, the international political environment refers to a set of values and beliefs that confirms with certain action and guides economic and political actions. The political, also can be known as legal factor includes sub factors for example: political stability of the target country, transparency and corruption, trade regulation, enforcing contracts and so on. As according to Mulyadi (2015), Mao Zedong, chairman of the communist party of China established political independence and autocracy so to establish strict regulation over everyday life while making sure of China’s sovereignty. During his days, political revolution was his main focus instead of economic development. After his days, his successor, Deng Xiaoping’s main focus was on a market-oriented economic development as well as social welfare. And currently at the time of writing this case study, the President of the People’s Republic of China and General Secretary of the Communist Party of China, Xi Jinping mainly focuses on pushing China investment abroad and attracting foreign investment into industries that China has not master in yet. This means that as long as Xi Jinping continues on doing what his is doing, foreign investors don’t have to be worry anytime soon. However, in China, political risk such as confiscation, contract repudiation, expropriation and so on are potential problems. When it comes to corruption, it can be regularly found in China. However, after President Xi Jinping’s rise to power, China had underwent an intensive and mass anti-corruption campaign across all sectors including the government in China. According to Georgine K (2017.), there is a special type of political risk that occurs in China and that is the constant battle between central and local governments over applicable laws, which translate to companies having a hard time understanding what the rules are. Not only that, recently it can be seen that because of the trade war between China and US, political risk have been increasing. Protectionism have also seen a greater push towards it where most of the force comes from mainly US and Europe. However, people have been stating that a trade wars between US and China would hurt the US more together with its allies. Whether firms like it or not, there is always political risk. That is why managing political risk is very important as it help measure the political risk and reducing it with ways like selecting the best mode of entry, adopting a low-tolerance policy towards corruption, increase bargaining power and so on.