Definition of FDI

Direct Foreign (FDI) investment is the placement of long-term
capital in some part of the world, for the creation or expansion of a company internationally.

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There are several reasons for a company to decide to invest in another country.

Almost all the arguments that have been offered for the existence of FDI can be
grouped under three basic objectives:

1.    
The attempt to participate in new markets

2.    
The increase productive efficiency through cost
reductions.

3.    
The attempt to exploit certain strategic assets.

One of the main reasons that have been offered for the
various ways of explaining the presence of FDI in an economy is the search for
new markets. Traditionally, it was assumed that a company that provided a large
or rich economy could ensure its participation in that market through direct
investment. In that sense, FDI was traditionally understood as a direct
substitute for trade. Therefore, an explanatory factor of this type of FDI is
the size of the target market, which can be measured by the total income of an
economy or through its two components: the size of the population and per
capita income.

Definition of OLI

The eclectic paradigm is a theory in economics and
is also known as the OLI-Model or OLI-Framework.  It is a further
development of the internalization theory and published
by John H. Dunning in 1979.

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Ownership advantages: specific advantages refer to the competitive
advantages of the enterprises seeking to engage in Foreign direct
investment (FDI). The greater the competitive advantages of the investing
firms, the more they are likely to engage in their foreign production.

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Location advantages:  Locational attractions refer to the
alternative countries or regions, for undertaking the value adding activities
of multinational enterprises (MNEs). The more the immobile, natural or created
resources, which firms need to use jointly with their own competitive
advantages, favor a presence in a foreign location, the more firms will choose
to augment or exploit their O specific advantages by engaging in FDI.

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Internalization advantages: Firms may organize the
creation and exploitation of their core competencies. The greater the net
benefits of internalizing cross-border intermediate product markets, the more
likely a firm will prefer to engage in foreign production itself rather than
license the right to do so.

 

Chinese economic
situation

China’s economic reforms successfully built an improved
environment for both state and private companies, providing them with the
necessary resources, such as infrastructure, access to capital and a more
prepared workforce. In 1986, China obtained observer status under the General
Agreement on Tariffs and Trade (GATT) and since that year, it has begun working
towards accession to the World Trade Organization (WTO). China became a member
of the World Trade Organization in 2001 and agreed to become a
“responsible participant” and to accept the rules of the world
trading system. Its market was opened to foreign investment and quotas and
tariffs were reduced. At present, it is the second largest exporter after
Germany and the second largest importer after the United States.

Due to its negotiation skills, China has huge commercial
surpluses and large reserves in foreign currency. It also has the largest
foreign exchange reserves in the world, more than $ 4 billion, an incredible 40
percent of the country’s GDP.

As a result, China has become a global manufacturing
platform, and currently has the largest manufacturing economy in the world. For
example, China produces around 80% of the world’s air conditioners, 80% of the
world’s umbrellas, 70% of mobile phones and 60% of the country’s footwear. It
also became, in 2007, the world’s largest producer of carbon dioxide, the main
greenhouse gas responsible for global warming. This was due to the growing demand
for coal to generate electricity and an increase in the production of cement to
build infrastructure.

The rapid development of China is an economic miracle. No
country in the world has grown in such a vertiginous way. According to The
Economist, Britain took more than 150 years since the beginning of the
industrial revolution to double GDP per person (measured in purchasing power
parity), from $ 1,300 to $ 2,600. About 120 years later, the United States,
with a population similar in size to the United Kingdom, achieved the same in one
third of the time. China has achieved it in only twelve years.

 

 

German
investment in China
Foreign money, or more precisely Foreign Direct
Investment (FDI), has been one of the keys to China’s impressive economic
growth since the 1980’s to date.

During
2014, Germany was the country in which Chinese companies signed a greater
number of operations, followed by the United Kingdom and Italy, while by volume
of published transactions, the United Kingdom was the country with the highest
Chinese investment, followed by Portugal and Italy, which registered large
operations due to the privatization program applied by their respective
governments. During the first four months of 2015, 41 M & A operations of
Chinese companies in Europe were signed, for an amount of 15,426 million euros
(of those in which the investment figures have been published). The most
important operation that has been carried out signed has been the purchase of
Pirelli by the state company China National Chemical Corporation (Chemchina)
for an amount exceeding 9,000 million euros, the largest operation signed in
Europe in recent years and accounting for 60% of the figure total transactions.

The
German investment in China, which jumped from 2009 to 2013, has felt the impact
of the crisis in the eurozone, but neither this nor the Chinese campaign
against the monopolistic practices of foreign multinationals have affected the
appetite of German automakers such as Audi, BMW, Mercedes and Jaguar Land
Rover.

Chinese Investment in Germany

Germany is also one of the main destinations for Chinese
investment in Europe, and is among the top ten destinations for Chinese FDI
worldwide, in 2013 it ranked 11th. From China they perceive that the German
market is one of the safest where to invest for their economic growth and
financial stability. Many Chinese investors at the time of investing no longer
look for high returns (as they had been doing in the past), but the stability
of their investments and the German market is one of the main destinations that
meets these requirements. Investment in Germany by Chinese companies is a
relatively new process that began to be notable as of 2007, and has not stopped
growing until today.

China started investing abroad in the energy sector, very
important in its economic development, but in recent years they have shown
great interest in industrial and technological sectors, key sectors of the
German economy, to compete in the production of products. high-end; However,
the interest of Chinese companies in the German market goes further, as they
seek to use the companies as launching platforms for their expansion in Europe,
as evidenced by the purchase of Weichai Power of Kion Group, dedicated to high
hydraulic engineering. Pressure and leader in the European market.

Germany attracts investment thanks to its small and
medium-sized companies (known as Mittelstand, companies with a maximum of 500
employees and an annual turnover of no more than 50 million euros) that
constitute the backbone of its economy. From China they have shown a great
interest in this type of companies, a fact that was reflected in the purchase
of Putzmeister engineering, specialist in high technology concrete pumps, by
Sany Heavy Industry, the main Chinese industrial construction machinery
company.

Conclusions
China is a market in
strong growth, which a huge potential, rich in workers and potential partner’s
eager to learn and evolve, the country represents a productive base of low
cost.

However, it shows major obstacles because of the changing
legal context, administrative complexity, lack of transparency, corruption,
weak protection of intellectual property rights, the difficulty faced by westerners
to understand the business approach at a cultural and practical level, the shortcomings
at the of intermediate managerial staff and a high level of staff turnover are
obstacles that are often encountered in this market.

Also not all investment
possibilities offer the same advantages. There are different degrees of control
of the parent company and costs depending on the type of FDI. Policies and
society in China in general make some forms of investment more profitable and
safer than others. China has received most of the FDI flows in the form of
foreign-owned companies (WFOE), joint ventures and offshoring. The preferred to
enter the Asian market is companies with 100% foreign capital or WFOE. In these
entities the property belongs completely to the foreign investor and therefore
does not need any partner in the country. In China, this method of entry has
been possible after entering the World Trade Organization (WTO), and it is not
possible in all sectors. More than 70% invest in this way, since it allows them
greater freedom and total control over the entity that is established in China.

The second type in the Asian
country with more than 21% of FDI in 2013 was through joint ventures or joint
venture companies. These companies are defined as the union of two or more
companies with the objective of developing a business or investing in a new
market, a part of the capital will belong to the foreign partners and another
part to one or several partners of the receiving country.