The Increase in Outward Foreign Direct Investment from Developing Economies

One of the important topics used for media interests and academic research which is quite famous all throughout the world is the globalization of the business firms from the developing economies. The increase in the flow of outward foreign direct investment (OFDI) from developing nations like Singapore and Hong Kong and transition economies consisting of Russia and China is not very surprising (Rugman, Nguyen and Wei 2016). Over the past thirty years, the mainland China have witnessed a huge economic development along with transformation which in turn allows many firms from the mainland China to accumulate enough location specific and firm specific advantages before they go for venturing abroad. In the recent years, China has joined the newly industrialized economies (NIEs) of Latin America and Asia in order to produce many competitive transnational corporations (Cherry 2015). The high-profile international acquisitions of the modern age along with the takeover bids by the Chinese companies have dramatically shifted the attention of media from stating China as a “giant seeking vacuum cleaner” in the case of global inward foreign direct investment (FDI) to making the country as a cash-rich predator on a global buying binge. The firms of China which have listed in Fortune 500 have been the main players in the cross- border mergers and acquisitions (M & As) of China which has been carried out since the year 2002 (Fan, Cui and Zhu 2016). Some of the examples include the takeover of the Addax petroleum, which is a Swiss-Canadian Company, and the partial acquisitions of Repsol YPF Brazil. Other examples include Sync rude Canada by Sinopee, acquisitions of twenty percent stake of the South African Standard Bank by The Industrial and Commercial Bank of China (ICBC) (Wang, Wang and Liang 2016). The takeover of Petro Kazakhstan by the China National Petroleum Corporation (CNPC) is some of the important examples. Under this scenario, the report ids aimed to analyse the motive, impact and factors that influenced the cross-border multinational transformation of the firms.

The term foreign direct investment refers to those capital invested in a particular country which provides manufacturing for both consumers and world market. The multinational companies, which are based in post-communist transition economies, emerged during the year of 1990. There was a boom in the outward foreign direct investment dramatically around the year 2000 to 2007 (Kawai and Strange 2014). The economy of china has made a quite remarkable profit over the past few decades. The outward foreign direct investment is regarded as an important factor for the development of the nation’s industry, which us also used as a measure of competitiveness. As there was a bursting in the bubble economy of Japan in 1990, the multinational companies in Japan have been facing new competitive challenges (Walsh 2016). The engagement of the Japanese in the international economy has went under a number of phases. After the Second World War, there had been an economic miracle in Japan. A lot of transformation which had taken place in the government policies in many developed countries such as the United States and Western Europe have forced the manufacturers of Japan to convert themselves into the multinational corporations and also to transfer their capabilities which are home grown to overseas subsidiaries (Cherry 2015).Majority of the scholars agree that the main motivation of the Chinese multinational enterprises is to invest abroad. The innovations that are mostly market seeking are one of the logical consequences of the export-oriented policies over the last few years. Mainly the strategic asset seeking motivations play an important role for the Chinese investors abroad.

China’s Economic Development and Transformation

Cooperation in the creation of knowledge process in China has become quite diverse. Therefore, Transnational Corporations play an important role for the innovation of any kind of new ideas. One of the important changes in the world economy is shifting within a group of leading enterprises, which is also termed as transnational corporations (Kawai and Strange2014). The transition of market in China first took place between the years 1978-1983 where both the industry and the industrial enterprises formed the major reforms (Wang and Wang 2015). China also started moving away towards market-oriented system in the year 1978 from an economy, which was centrally planned. The strong leadership skills of the government had also been one of the important factors for the economic development (Rasiah 2017).  The next stage of transformation took in the year 1984 where enterprises were forced to buy more raw materials. The expansion of FDI was taken up by domestic enterprises so that there is an increase in revenues and profits. The proper outflow of FDI in China took place mainly in the third stage after the year 1993 (Cai, Lu, Wu and Yu 2016). In this stage the government of China appointed the state-owned enterprises which helped in investment expansion and also are capable of pursuing international management successfully. The policies, which encouraged outflow of FDI by the Chinese Firms, were coordinated by the highest levels of the government bodies. The third stage of economic reforms also saw the Chinese government activating policies related to technologies such as significant rise of research and development activities and also implementing different kinds of new technologies in the economy with the help of both private and public expenditures (Lee 2016). Chinese TNCs started growing after the emergence of Western transnationals. The FDI outflow from China reached five other continents by the mid-2000s. The foreign expansions of the Chinese TNCs have both external and internal effects. The flows of the foreign direct investment followed trade expansion of China in countries like Africa and Latin America (Li, Strange, Ning and Sutherland 2016). The outflows were also used for acquisitions of innovative companies in Europe and America.

Multinational cooperation has a lot of advantages in developing countries. When the MNCs tries to invest in the host countries, there should be significant scale of investment. There are lot of advantages when the multinational companies invest which includes providing a huge scale of employment. FDI will provide employment benefits for the countries where employees will be locally available.  A multinational organization aims to produce goods and services in order to sell in different countries. It has been observed by many scholars that firms try to become multinationals when they try to exploit the three sets of advantages (Bebenroth and Hemmert 2015).One of them is the ownership advantages, which states that firms, which are multinationals usually, develops their own brands and owns proprietary technology, which the other competitors will not be able to use. They are often the technology leaders in the market. Next comes the localization advantage, which states that when the products are sold near the locations of the consumers it helps to reduce the transportation costs and also helps the company to fit the local taste and preference. Firms also tries for “multinational-sizing” so that they can internalize the benefits with owning a particular technology, patents or expertise.

Factors Influencing Cross-border Multinational Transformation of the Firms

Firms which tries to enter the foreign market might face several problems might face increased cost of the different environment of business and the different ways in which the companies can operate. Small and medium size enterprises may sell the products, technologies and different kinds of services in China have faced many problems while multinational-sizing. One of the most important barriers is the red tape which states that in China opening a bank account or registering a company can take a lot of time ( Lee 2016). The time required to complete all the process can be exceptionally lengthy. There is also a presence of cultural misunderstandings which arises due to misunderstandings are one of the biggest challenges which the firms face. The western companies also face many problems while working with China. China has also rated human resources as one of the biggest challenges while doing business.

A multinational corporation is a type of organization that owns the production of services and goods in one or more countries other than the home country (Boyd et al. 2014). On the other hand, transnational corporation is a type of commercial enterprise that operates substantial facilities and it also does business in many countries without considering any particular country as its national home. All MNCs are not transnational companies whereas the transnational corporations are the multinational corporations. Most of the multinational enterprises usually originated from the developed countries ( Bebenroth. and Hemmert.2015). During the last decade there had been a dramatic growth in FDI in China. There are however a large number of advantages and disadvantages in the ownership-Location-Internalization model (OLI) and in Linkage-Leverage-Learning model (LLL). However, the OLI model is very important for understanding the FDI pattern from China to the other developing nations. However, the LLL model is a powerful tool for examining the FDI in the developed economies. The OLI model that is much modified can help in explaining why the different companies from the developing economies carries out the different cross border business and is also a very important framework for comparing different MNEs. There are different types of knowledge acquisition of firms according to the LLL model. There is a presence of lot differences between the LLL and OLI model. China has always been a very active in both inward and outward FDI.

There has always been a strong relationship between the foreign direct investment and the economic growth. A huge amount of foreign investments is needed for the country in order to achieve an economic growth. Foreign direct investments are also considered to be a powerful instrument which is needed for the economic growth (Luo and Jiang 2014). Studies have also revealed that FDI also help to generate domestic investment, which facilitates transfer of technological knowledge.FDI, is also important for developing and for countries that are emerging. It benefits the global economy as well as investors (Kawai and Strange2014). Another advantage of foreign direct investment is that it also offsets the volatility, which is also created by hot money. FDI by MNCs in the developing countries plays a crucial role in the entry of advanced technologies. Another benefit of the foreign direct investment is capital accumulation (Sutherland and Anderson 2015). Multinational companies also contribute to economic growth by exporting services and goods, which maximises the rate of savings and economies of scope. MNCs can also provide different types of different worthwhile asset by different types of transactions related to FDI like modern technology, capital and production. Multinational companies also cut their costs by making use of cheap labour from different developing countries (Rasiah 2017). The process of globalization has allowed multinationals to optimize competitive variable in the market. FDI also removes the problem of unemployment and scarcity of technology can also be solved at some extent. Outward foreign direct investment in the recent years has support economic development in the developing countries. Selecting a different mode for expanding in a foreign market is one of the crucial stages for the international firm.

Cooperation in Creation of Knowledge and Innovation Process in China

The host country government policies play a very important role in order to attract foreign direct investment and also influence the behaviour of the Transnational Corporations. They also try to focus on the inequality of income along with the effects of the human capital formation. The policies related to the foreign direct investment made by the government also affects formation of the human capital (Boydet al. 2014). The policies therefore introduce a simple framework of demand and supply which also analyses the effects of the Transnational Corporations on the income inequality and human capital (Rudy, Miller and Wang 2016). One of the major challenges that the developing countries face is making globalisation work for the purpose of development and for the poor. The government always wants to attract the FDI since the characteristics that are associated with FDI fit the development objectives of the government which includes growth and poverty reduction. International agreements with different countries can both facilitate or constrain the attraction of FDI (Thite et al. 2016). Agreements related to TRIPs and TRIMs somehow gives more protection to the foreign investors. In order to build FDI policies effectively, the governments of the developing countries need to address the different kinds of market failures which are related to FDI and development. The Japanese government had also set up Invest Japan Business support Centres in order to promote FDI in Japan (Fitzgerald and Rowley 2015). However, Japan in the recent years no longer ranks among the top countries receiving the highest FDI. As Japan has always been a leader of research, development and high-end technologies, it has a steadily growing economy along with the rock-solid stability (Long, Yang and Zhang 2015). The Chinese government had also taken new policies in order to attract foreign manufacturers in the country. Since the year 2008, China has been one of the tops their destinations in case of foreign investment. The government of China forms policies in order to support foreign projects that will facilitate economic development and employment.

Conclusion:

The appearance of several multinational ventures of China in the world economy can be considered as one of the very important steps towards Chinese development. Over the last few years, the emergence of the multinational enterprises in China has become quite apparent because of the implementation of Go Global Strategy where the Government of the mainland China has encouraged the Chinese firms for investing abroad. The outward foreign direct investment is also enlarging at an increasing rate. Unlike the Multinational Enterprises in the industrialized countries, the firms of China have a quite weak ownership advantage. Firms usually invests in other countries when they can purchase the ownership advantages with the exploitation of  proprietary assets and capabilities along with using the  advantages related to location specific that the host countries provide by internalizing cross border activities. However, most of the Chinese MNEs have a very limited knowledge on the foreign market and on the international investment experience.

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