Analysis of Motives and Prospects within the OLI framework: A Case Study of German FDI in China
Abstract
This report presents the analysis of motives and prospects within the OLI framework is the right approach to obtain the pertinent rationale of internalization. German firms such as Volkswagen has expanded the business in China due to market potential, extensive customer range, healthy competition developed infrastructure, and the possible increase in sales and profitability. However, being a well-positioned company, Volkswagen has to face a different challenge as well. OLI framework streamlined some location, ownership, and internalization benefits for this firm in China, which justified the incredible investments. Integration with the OLI framework seems worthy to increase overall business outputs and enable long term business sustainability.
Introduction
In the global business era, many firms intended to streamline operations in different countries to gain financial advantages. However, the internalization of the business must be perceived differently as well. Different countries have to create the appropriate business environment to attract international investors. Increasing foreign direct investment (FDI) has become the main priority of both developed and developing countries. This study revolves around German FDI in China along with different motives and prospects within the OLI framework.
· Importance
Navigating the German FDI in China is important because it can help to identify several factors, which drive the international business. Understanding motives and prospects seem appealing, as it may facilitate understanding the global business strategies, strategies, and advantages. The OLI framework triggers FDI, and different related aspects drive international business expansion.
· Objectives
- To identify different international business issues
- Understanding Motives and Prospects of German FDI
- Integrating with OLI framework and derive some business Benefits
Literature Review
Germany has been in the limelight for many years due to its rapid advancements in the automobile industry. Interestingly, China has become one of the most potential markets in this country to expand its business and generate revenues. Top automobile giants such as Volkswagen started operations in this country due to different motives and prospects. The illustration of these motives and possibilities along with different insights are the blow
Motives of German FDI in China
One of the prominent international business issues is to find prosperous customers who can buy a car. In China, almost 76 million affluent customers were observed in 2001, and it justifies the potential of the market. German automobile companies had to grab this new range of customers in the new potential market, as it was the motive regarding FDI. In Germany, automobile companies are struggling to reduce the cost of business outputs due to the high cost of the assembly line. It seems a big concern for these companies. However, in China, the assembly line cost is comparatively low. Apart from it, labor cost in the assembly line is more economical than in Germany. Thus, investment in China can help to decrease the cost of production and increase the profit margins, and Volkswagen did it successfully. New opportunities are also in the limelight due to Chinese integration with the world trade organization. It has been revealed that China contains flexible agreements with different countries due to world trade organization membership. It can be said that the membership of the WTO is one of the vital drivers regarding the foreign direct investment of Germany (Petroff, 2018).
Obstacles in Investing in China
German automobile firms are looking to gain success in this potential or competitive market. However, lack of information and planning may create barriers when intending to invest expands in this country. The protection of intellectual property rights is not visible in this region (Clark, 2018). Apart from it, local Chinese automobile manufacturers are emerging due to the low-cost production process and incredible imitation capabilities. Interestingly, Volkswagen is enjoying low labor cost, but they are struggling to gain the expected profit margins. For Instance, due to input costs such as electricity process and legal complications, the overall cost of the business is increasing. Thus, growing possible input process in China for German companies is a significant concern, and it is to be considered in the strategic planning process. In China, firms gain a competitive advantage due to mass production. However, big automobile makers, including Volkswagen have to invest more to produce more business outputs. Maximum unit cost requires additional investment. Thus, profitability has not been materialized by these companies due to these possible shifts. Due to interventions of major companies in this region, automobile companies, including German firms have to reinvent existing projects. Therefore, business stabilization has not been attained yet. Apart from the motives of German FDI in China, companies must have to identify or consider these obstacles or barriers in the business planning process (Xuan, 2018).
Prospects of German FDI in China
Possibilities of German FDI in China are also quite visible. For Instance, from 1991 to 2003, a prominent rise in sales has been experienced by German and other international firms. It has been observed that China became a potential manufacturing industry in the world. Many foreign firms have outsourced the production or manufacturing process due to a possible increase in sales and low business cost. Prospects of German FDI in China can be understood by navigating some future ideas of German firms.
Table 1: FDI Inflows by Country and by Industry
| Main Investing Countries | 2017, in % |
| Hong Kong | 72.1 |
| Singapore | 3.6 |
| Virgin Islands | 3.0 |
| South Korea | 2.8 |
| Japan | 2.4 |
| USA | 2.0 |
| Cayman Islands | 1.6 |
| Netherlands | 1.6 |
| Taïwan | 1.3 |
| Germany | 1.1 |
(National Bureau of Statistics of China, 2018)
| Main Invested Sectors | 2017, in % |
| Manufacturing | 25.5 |
| Information transmission, computer services, and software | 15.9 |
| Real estate | 12.8 |
| Leasing and business services | 12.7 |
| Wholesale and retail trade | 8.7 |
| Financial intermediation | 6.0 |
| Scientific research, technical service, and geologic prospecting | 5.2 |
| Transport, storage, and post | 4.2 |
| Production and supply of electricity, gas, and water | 2.6 |
| Construction | 1.9 |
(National Bureau of Statistics of China, 2018)
Strategic considerations of these firms include equal attention to functionality, design, safety, and environmental compatibility (Zhang and Khabelashvili, 2003). In China, German firms find environmental compatibility, as political stability, sound economic growth, production facilities, and an immense range of customers can become drivers of investment (Fusheng, 2019). Apart from business expansion, the company can enhance product development or unit expansion. For Instance, depending on customer needs and segments, some new projects such as a multi-purpose vehicle in golf class and sports utility vehicle can be initiated in this country. The low cost and promising future of the automobile may compel Volkswagen to take these strategic initiatives and make a difference.
(National Bureau of Statistics of China, 2018)
The above table shows the total exports and imports in 2017 in China from Germany. One of the primary prospects is a possible competitive advantage over the other rivals. Still, in intense competition, firms even got the potential to sustain the business effectively. It is a fact that the annual new investments in China reached a record number in 2002, and still, despite containing some spikes, these numbers are increasing. Also, it has been seen that China is a different market from other global markets due to numerous commodities.
(National Bureau of Statistics of China, 2018)
This table shows how Net Overseas direct investment in the two years has improved from Germany.
(National Bureau of Statistics of China, 2018)
The tables and pictures above show the recent snapshot of the German FDI, exports, and imports in China. The data shows that Germany is still investing 1.1% of the total FDI inflow in China. However, the rate of FDI has declined substantially as shown in the above table comparing the FDI inflows from Germany in 2000, 2010 and 2017. The figures show that the FDI inflow has declined in China from Germany.
It seems an excellent opportunity for German automobile companies to increase or expand the product portfolio. The diversification of the portfolio can help to meet the needs of different customer segments. Another prospect is trending Chinese currency. Due to the positive trend in the current appreciation market, companies, including German manufacturers got a chance to survive during the inflationary cycle. In a flexible business environment, cultural integration is not a big problem for companies. Cultural diversity is increasing in this region, which creates more space for these big automobile giants to enhance their business (Ti, 2016).
Both motives and prospects must be considered by companies when planning to invest or embrace the business in China. In the contemporary business era, increasing profitability and generating revenues are significant concerns. However, business sustainability and survival in the competitive market is mandatory. Thus, identifying these motives and prospects is always a good option to shape different strategies accordingly. Due to these motives and opportunities, Volkswagen is leading both the passenger and premium vehicle market. The Go west and go south strategy for further growth has been shaped by the company. Prospects and motives are drivers for forming the portfolio, including more than 92 new models. Thus, in terms of design, functionality, sustainability, and profitability, and production, the German FDI in China has been justified. Still, Volkswagen is positioning itself to maintain the top position in the automobile market by producing and delivering vehicles in a million units.
OLI Framework
Critique of OLI
Despite having ownership advantages in China, German firms can face several counterfeit brands. Critically, ownership advantages have been streamlined in this country, but laws and regulations have not been executed or implemented effectively. Thus, as far as ownership is concerned, risk is always here. Also, it has been revealed that China is the best location for international businesses, especially German firms. However, critically, it has become competitive due to the intervention of many other international rivals. Without competence, it will be tough for German firms to get an advantage and make the business successful. In the international business process, German firms may have to align with local culture. Internalization may increase the business cost as well, and ultimately, u may hit the financial condition.
Analysis and Discussion
Analysis
German FD in China can be analyzed by navigating OLI framework. Motives and prospects are necessary to make critical business decisions. However, integration with the OLI paradigm seems worthy to get more insights regarding business investments or expansion in China.
Ownership Specific Advantages
Despite experiencing intellectual property rights in China, German firms are still getting the advantage of ownership. For Instance, Chinese laws are strict regarding imitation. Differentiation is a significant competitive factor in this market, which may restrain the companies from imitating business outputs. Volkswagen depends on its design and functionality in China, and the whole production process is owned. Interestingly, there is no need for any strategic partnership of acquisition, which can put the ownership of the business at risk. Business management wholly owns entrepreneur skills and returns to scale. No doubt, the German firm has to rely on the local labor force to keep the business cost low. However, the number of vehicles to be produced every year or quarter must be owned and delivered by the company. Research and development processes can also be initiated for further unit projects. Thus, design and functionality are held by German firms. It is a great benefit for these firms to run the business and maximize the production independently. Concerns of stakeholders must be considered in business planning, but ownership will remain the same in China (Cantwell and Narula, 2003).
Location Specific Advantages
One of the critical motives mentioned above is the market potential. However, in the OLI paradigm or framework, some advantages for German firms must be derived. German firms have invested and sustained the business due to several location advantages in this country. All cities got the potential due to adequate business infrastructure, but Shangri has emerged as a top priority of businesses. As elaborated in motives and prospects, a possible increase in sales and new customer range can help the company to expand the business. Shanghai is a prominent city for companies like Volkswagen due to developed infrastructure, big port, and increasing disposable income of people (Li, 2000). The most significant part of the country can help German firms to maintain trade relations with other countries as well. On the other hand, increasing disposable income justifies prosperous customers along with low bargaining power. Thus, it is an excellent opportunity for automobile companies to hit this region to take advantage of infrastructure and generate revenues for further business expansion. Go west and Go south strategy, elaborated in prospects of German FDI, it’s a result of these environmental advantages. Growing in clusters of different German investors can be observed due to these regional benefits, but firms can also plan to hit other areas to maximize operations. Apart from this potential city, Northeastern parts of China have been developed to attract investors. Newly developed infrastructure and growing needs of the automobile are different factors, which may compel automobile giants to depict further expansions. It can be said that if the company wants to cover the whole of China, it can be done effectively due to these incredible location advantages. In 2013, Beijing product unit demonstrated the mass production of Volkswagen (240k cars/year), and Shanghai and Guangzhou depicted 120k cars/year. Therefore, location is a big factor in Chain to expand and sustain the business (Mull, 2013).
Internalization Specific Advantages
According to internationalization theory, Imperfections in the intermediate product markets can lead a business to international expansion. German automobile companies, including Volkswagen, conducted the internalization to gain long term business benefits. These business benefits have been elaborated in the form of the motives and prospects. The internalization theory can be applied to German automobile companies, as these companies had to increase the business cost to maximize the business benefits. China, being a potential market was considered accordingly. Global firms were restrained from investing in this country due to limited business space. However, WTO membership has helped these companies to reconsider this lucrative investment (Worldbank.org, 2010). Ownership of production, design, and return to scale are some key advantages, but in the context of the international business environment, merger or acquisition can always be used as an effective exit strategy. Business risks in the internal business environment are still in the limelight, but internalization also provides some opportunities to sustain the business. For Instance, in the competitive market like China, German firms can depict the active internalization by integration with the culture. Strategic partnerships or mergers can be enhanced to portray the incredible cultural fit to be lucrative and relevant in the market. Internalization can be conducted effectively by identifying both social and business environment, and German automobile makers did it quite remarkable. Internalization is a driver of the internalization, and Volkswagen has maintained its top position by this consideration. Despite containing no merger or acquisition, the alignment with social and business culture has helped to exist strongly (VW Volkswagen AG, 2015).
Discussion
OLI framework is triggered by location, ownership, and internalization. In the global business environment, it is necessary for any firm to analyze the market to obtain motives and prospects. Furthermore, these motives and opportunities are to be aligned with the OLI framework (Cantwell and Narula, 2003). German foreign direct investments in China have been increased due to location, ownership and internalization benefits. An automobile company such as Volkswagen is always willing to derive motives and communicate with all key stakeholders. Of course, the international business management of the firm may contain some strategic considerations or plan. Based on different insights, obtained from motives, prospects, and OLI framework, the firm shapes the market entry strategy. Interestingly, these insights or factors provide a pertinent rationale for the management of the company to expand the business in a particular market. Foreign direct investment of Germany in China can be justified because different German firms can get several location advantages. Volkswagen can understand what is required to make the business successful in China. FDI has been always one of the most stringent market entry strategies, as it needs enormous capital investment. Even establishing a single plant in a new market or country is not risk-free. However, in China, FDI can be expressed. Volkswagen and other German firms have considered both resource seeking investments and market seeking investments in China. Motives and prospects also include access to raw materials or other business inputs, which can also reduce the cost of the business. On the other hand, the Chinese market is always lucrative for global firms due to its increasing population and potential customer segments. The business sustainability and profitability are part of the business objectives of German automobile companies, and of course, these firms can make the difference.
German FDI into China in the future
In future German FDI in China will be increased. It is a fact that China is investing in different countries in both short- and long-term projects. Thus, it needs international firms to collaborate and maximize outputs. Apart from automobile companies in this region, other corporate sectors will be emerged in China. However, German government is intending to come up with some tough FDI regulations to sustain the local business growth. In future, when entering in new markets, especially China, German firms may have to face these tough regulations, and it may decrease the overall FDI (Buck, 2018).
Conclusion
In the end, it is to conclude that some motives and prospects trigger German FDI in China. However, these motives and chances are to be assessed through the OLI framework. The German automobile sector experienced the market imperceptions, and accordingly, they identify the Chinese market to expand the business. In this study, the focus was on the motives and projects behind this remarkable business expansion in China. A comprehensive analysis is conducted by using three significant aspects of the OLI framework. Volkswagen was the first firm which is used to perform this analysis. Business development seems mandatory in this market to make further internal expansion.
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