Custom essays on INVESTMENT DECISIONS FOR GERMAN NON-PUBLIC MULTINATIONALS IN CHINA

2.2.1 Foreign Direct Investments (FDI)

It is obvious that foreign direct investment (or FDI) is a special and growing event in the area of global business. Graham has found that it can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to economic development (2005, pg 1). Traditionally, foreign direct investment is seemed to be defining as a physical investment in one country in order to build there a factory or mill from the other country.  However, the direct investment in any kinds of buildings, technical equipment or even work machines, by contrast, differs from making a portfolio investment that is much more likely to be defined as an indirect investment. Recently, the usual definition of foreign direct investment has been transformed and added with the lasting management interest’s acquisition in the organization. Such changes happened because of global investment area rapid growth. Further still, such investment can take various forms, which are a facility construction, a direct foreign company’s acquisition, or even an investment into a joint venture or it can be also a kind of a strategic alliance, including any local company that has an attendant technology input. FDI became an event that plays a major role among the sphere of the business internationalization. Such changes happened in the period of past few decades.

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IT is obvious that FDI’s methods, techniques, size and scope were influenced by some changes in profound of capital markets, in the process of liberalization growth of “the national regulatory framework governing investment in enterprises” (Graham, Spaulding, 2005, pg 1) and in technology. Modern systems of the information technology and a slump or recession in the area of international communication costs are seemed to make a foreign investments management much easier and improved in contras with the past situation. Further still, the sea change that took place through the both spheres investment policies and trade, which was in a decade ago, has seemed to be a one of the most prominent and successful attempts to catalyze FDI’s widespread role. This theme can be talked about during long time but I am sure it will be better to concentrate on main points and stay on that level of gaining information that is enough to understand the topic but is not too detail.

2.2.1.0 The Eclectic (OLI) Paradigm

It will be appropriately to fully describe the OLI Paradigm, which can be also called The Eclectic Theory (evolved by John Dunning). It is a unit of three different theories of FDI, which I am going to explain. The main formula is such:

What does this formula mean? “O” means advantages or benefits of an ownership (it can be also called FSA – Firm Specific Advantages). Dunning has found that the FSA is usually intangible and can be transferred within the multinational enterprise at low cost. The advantage either gives rise to higher revenues and/or lower costs that can offset the costs of operating at a distance in an abroad location (2001, pg 173-190). It should be mentioned that there are three main forms of FSA for an international enterprise, which it may definitely posses. It is obvious that they are such:

1.  Large – sized economics;

2.  Knowledge and skills, technology, its innovation;

3.  Advantages and benefits of monopolistic activity;

Next is “L”, which can be defined as Location Advantages or benefits (or it is also known as CSA – Country Specific Advantages). The CSA can be divided into three categories, which are depicted below:

• E (or economic benefits or advantages) – it includes both quantities and qualities of production factors, costs of transport and also telecommunications, market size and scope and other;
• P (or political benefits or advantages) – it consists of the same and special policies of government, which affect inward FDI flows and also international goods making;
• S (or social or cultural benefits or advantages) – it contains a distance between two countries: the host and home, between language and differences in culture and others.

The last, “I” means internalization advantages/benefits (or it can be also called as IA). However, the Multinational enterprises are seemed to have certain ways of choosing entry modes, between the market and the hierarchy. It is obvious that economic rates and rents for any organization are seemed to be raised because of ability of employees to improve their work and knowledge and gain the know-how ability.

2.2.1.1 Foreign Direct Investments in China

First of all, the table 1 that depicts FDI inflows in China from 1985 to 2000 years and table 2, which illustrates its flows in recent years (2008 and 2009 years):