Table of Contents
Globalization and liberalization are paths to development. Some countries which followed this path have been successful in expanding their business horizons and economic development, while some have gone economic turmoil and political upheavals. Having said this, for globalization to succeed, the four 'dimensions' of international political, international economic, domestic political or institutional, and domestic economic or societal have to be considered. It's imperative that the above four conditions are favorable for business to succeed.
In almost all transitional countries, including Ukraine, the development of entrepreneurship; small, medium-sized, and large enterprises, a source for economic and social growth, was associated to active state policy. In the early stages of transition, state support was needed to encourage the growth of industry, which under socialism was non-evident. During the transition period, this trend changed and States began to encourage new entrepreneurships and facilitated their entry into the country's economic stream. But many small and medium scale industries, despite their undisputed contribution to employment and growth, were unable to develop on their own because of their inability to raise funds and find appropriate market for their products. Their inexperience in global markets and competition, and lack of track record made them risky propositions for banks and venture capital investors. Thus there was a need for encouraging FDI to boost these industries and contribute to the economic development of the country. Government role and the nation's prudent fiscal, monetary, and financial policies have to be considered before FDI players can recognize Ukraine as a viable and prospective country to invest in (Hashi, p.8, 2004).
Thanks to globalization, many organizations are now moving their operational and manufacturing units to third world countries. What this does is that it puts pressure on Banks to increase their lending to these organizations. While investing and running a unit abroad is risky, the returns are far better. Therefore, banks give in to these investors who return the loan money with higher interest. The best part of globalization is that most organizations, who do seek to invest abroad, do so in developing countries where the cost of production is very less in comparison to that in developed countries. Because of this, the investment is ideal for those organizations who seek long-term associations.
Many third world countries, especially those in Asia have encountered economic success while a country like Nigeria, succeeded only to crash due to their political instability. There is no doubt that along with natural resources and skilled labor, the political atmosphere in those countries which attract FDI is sound and stable.
When one talks of international economic structure, investors seek favorable conditions which will enhance their productivity and drive profits. For this, the country which attracts FDI should offer incentives and liberal tax rebates to these conglomerates. China and India are standing examples of countries which have all these and are today, among the fastest growing economies in the world. While globalization has increased cross-border business substantially, it has helped those companies which seek to invest there, profit from cheap labor and abundant raw materials.
While these companies enjoy local government subsidies, reduction in production costs, improved quality due to skilled and semi-skilled cheap labor, the countries benefit from inflow of valuable foreign money, infrastructural developments, and more job opportunities for their citizens.
And when it comes to domestic economic or societal dimension, one should consider the benefits the host country will from FDI.
When there is surplus production, there is the possibility of these being marketed in the local market as well; this is one of the most important initiatives foreign investors seek from the local government. Global competition can strangle profits and when these investors are allowed to market their produced product in the local market, they have the advantage of having domestic presence in the form of spares availability and service centers. Reduced prices and international standards will enhance their marketability. This is precisely why many conglomerates seek to invest in India and China. These two countries alone make up for 20% of the global population, and when they allow these finished products to be sold in the domestic market, they have every reason to smile. Thanks to globalization and free flow of FDI into their countries, today, Chinese and Indian middle-class has grown considerably and so too has their buying power.
Foreign Direct Investment (FDI) has been the key component in China's economic growth, which led to many foreign conglomerates to invest huge amount of money and technology in joint ventures and independent identities. The idea to tap the huge resources of cheap labor and raw materials, apart from encouraging government subsidies led to a massive industrial revolution. The automobile industry too has been exceptional. Never before has the Chinese seen such push to globalization as now. The city of Shanghai is among the most cosmopolitan cities on the global industrial map. The flow of FDI into the country has not only boosted its economy, but the lifestyle of the Chinese people as well.
Contractor and Lorange (1988) were among the early writers who wrote elaborately on the advantages and disadvantages of joint ventures. They held the opinion that cost benefits in joint ventures lay in the way a joint venture was managed. Koot (1987) substantiated this theory by including a few recurrent themes such as, the rationale for joint ventures, estimating ownership and control, probable solutions to autonomous ventures, identifying the correct partner, and finally, the consequences of such an arrangement through legal agreements and protection. Using a transaction cost paradigm, an entrepreneur can differentiate the possible relevance of joint ventures over wholly owned subsidiaries, according to Beamish and Banks (1987).
Ever since 1979, many established automotive companies have moved a major share of their R&D and production units into China. Mainly through joint ventures, these companies have made most of the government subsidies and cheap labor to enhance their global market share. The government came up with a plan to ensure that the other parts, rather than the main metropolitan cities of the country, benefited from such flow of foreign exchange, by encouraging investment there.
Many of the villagers had come to the cities in search of a better livelihood, and the cities were getting crowded. This initiative seemed to work, as many villagers began to return to their villages, earning handsome salaries in their comfort zone.
China is today an established production house of automobiles. Companies like Rolls Royce, Mercedes Benz, BMW, Ford, Mitsubishi and numerous others have an established presence here. It is the third largest market for automobiles after the United States and the European Union. This has also had an impact on world businesses. The industry blossomed to grow by a staggering 44.4% on ye?r-on-ye?r sales, with a turnover of over 453.132 billion Yu?n. This is exemplified in a new report called the, 'Chin? Automobile Industry: ? Sector?l Analysis (2005-2015)' which analyses the automobile market across Chin? along with statistical figures ?nd strategies for investors.
As steel prices plummeted, the Chinese auto industry began to show rapid growth and profits. Such has the influence of joint ventures been on the Chinese people and its economy, that once the first millionth car rolls out from Chin?, the industry is poised to expand their operations into the United States. As much as 3.5 billion Yu?n (US $422.9million) will be invested into such prestigious projects. This has also opened new vistas for investment, with private enterprises recognizing the possibility of high returns through equity participation in the automobile industry. While the possibility of high growth and profitability is on the cards for exports and joint ventures abroad, at home, the market for automobiles continue to show growing demands for high quality and cheaper cars.
Mergers and Joint-Ventures
The case of joint-ventures in the automotive industry is valuable for several reasons. This sector accounts for ? major share of a nation's turnover in terms of exports and revenue generated. In 2000, the United Kingdom recorded some $20 billion in automobile and automobile ancillary sales (about 9 percent of overall UK manufacturing). In comparison, in 2000, the Japanese ?utomobile production accounted for 25 percent of the nation's total m?nuf?cturing produce. Likewise, many n?tions h?ve m?de ?utomotive export the b?ckbone of their foreign economic policy; Markets throughout Asia have been steadily expanding, with the growth of car markets in ASEAN countries in particular. Between 1986 and 1990, ASEAN domestic markets expanded 34% and 7% in Japan.
The Asian region is expected to develop into a world-class vehicle production center. Japanese manufacturers are focused on building closer tie-ups in countries like India, Pakistan, Taiwan, South Korea and China (1).
In South Korea however, the trend reversed, as its exports of c?rs earned the nation $2.5 billion in 2002, just 3 percent of the nation's total exports. Still, the vehicle industry remains one of its fastest growing sectors with s?les rising by 20 percent in 2002 from 2001.
Chinese advantage of competitive production includes its labor force, land and natural resources. China is the most populated country in the world with a population of over 1.2 billion people and a growth rate of seven percent (OCED, 2000). The huge population gives China a plentiful labor force. Workers salaries have shown little fluctuation over the years of investigation and remain relatively low (2000). OCED (2000) reported however, that China has had field shortages in the areas of skilled managers, engineers and technicians. Because of the globalization of the world economy, the liberalization of international trade, and the giant strides in technological innovation, the advantages of cheap labor force has become less important for foreign investors.
The energy reserve in China is plentiful (2000). China is the largest producer of coal and has one of the largest supplies of oil worldwide (2000). Electric has actually been an oversupply problem for China (2000).
Land, iron and other minerals are economically available in China (2000).
While China is plentiful in skilled technical personnel, it lacks qualified labour (2000). The technology gaps reported in 2000 by OCED were a major area of needed improvement, especially in regards to the qualified labour needed in that area.
Figure1 (see Appendix 1) shows the sectoral FDI distribution in China in 2004. The figure clearly shows the substantial importance manufacturing has on the nation's economy (Data courtesy: China Statistical Yearbook, 2005).
Over the last couple of years, joint ventures have been the preferred form of foreign investment. Foreign investors still regard joint ventures as a step to financial growth and lots of goodies. An equity joint venture is a separate legal entity and takes the form of a limited liability company registered in China. The partners have joint management of the company, and the profits and losses are distributed according to the ratio of each partner's capital contribution. Equity joint ventures fall into the category of Joint Ventures Using Chinese and Foreign Investment as promulgated in 1979. Although the Chinese contractual joint venture operates under a structure similar to that of Western-style partnership, the parties to the venture may apply for approval to have the company structured as a separate legal entity with limited liability. The profit and loss distribution ratio is established in the contract and can vary over the contact term. Contractual joint ventures are governed by the Law of the People's Republic of China on Chinese-Foreign Cooperative joint ventures, promulgated in April 1988.
'Eight trends emerged as China's auto industry experience fast expansion in recent times' read the headline. Chinese business heads found out that they needed to innovate to make an impression in the fast-growing auto industry. In order to achieve this, the leaders recognized the need to develop technical expertise and a comprehensive development strategy that focused on the economy, culture and society at large. China allows foreign car manufacturers to establish two joint ventures with local participation in the same category in the country. Moreover, the government has also said that further joint ventures can be established by this automaker through mergers and acquisitions of other companies in that country.
Many of the existing foreign auto companies have more than two joint ventures in the country. The Chinese auto manufacturing companies, Chery, Hafei and Changfeng are those companies that are still in the process of identifying global auto companies for partnerships. This only goes to show that local companies remain attracted to global tie-ups and dependency for their own survival.
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The Chinese companies, sans a few, have not really been able to come to terms with the prospect of facing global challenges on their own. They suffer from technology and funds.
Talking of local auto manufacturers, Saic Iveco Hongyan, Brilliance Auto and FAW-VW have now focused their attention to the western region of the country to beat high production and maintenance costs. It is believed that the western sectors of the country offer cheap labour and can reduce logistics. The marketing gurus of these companies believe that with their relocation, the companies can benefit immensely and grow substantially. The two towns of Chengdu and Chongqing are considered most suitable, as they are relatively more developed among the western cities of the country.
In an effort to help the local auto manufacturers, the Chinese government went on a shopping spree that included the purchase of high-end FAW Bestrun models. In their shopping list for 2007 and 2008 are thirteen local brand models, including Hongqi, Zhonghua and BYD. This comes as a big boost to these companies, as the Chinese believe that if the government chose private automakers for their official requirements, it would ignite a series of great opportunities for them.
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For the first time, Chinese auto manufacturers, Chery Automobile Co and Beijing Chrysler have finalized a deal to develop and export Chery built small cars globally. This was made possible on July 4th this year between Beijing Chrysler CEO Tom LaSorda and Chery Automobile Co. Chairman and President Yin Tongyue. With this, Chinese-made cars will be sold in the U.S. by an American car company and sets the trend for other auto manufacturers to emulate.
The number of joint-ventures and mergers suggest that the market for FDI in the developing world is extremely positive and highly profitable. It is no wonder that many multinational have chosen to relocate their manufacturing and services to countries like China and India where they have access to abundant raw materials, cheap labor, and government rebates and incentives. This has directly affected banking operations as huge amount of foreign exchange is transferred from one continent to another.