The Investigation of Volkswagen's Entry Strategy in China's Car Market

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MA MANAGEMENT DISSERTATION XIAOFENG WEN non-traditional forms of investment will play an important role in the future. Many governments, especially in industrialized and developed nations, pay very close attention to foreign direct investment because the investment flows into and out of their economies can and does have a significant impact. In the United States, the Bureau of Economic Analysis, a section of the U.S. Department of Commerce, is responsible for collecting economic data about the economy including information about foreign direct investment flows. Monitoring this data is very helpful in trying to determine the impact of such investments on the overall economy, but is especially helpful in evaluating industry segments. State and local governments watch closely because they want to track their foreign investment attraction programs for successful outcomes. What are factors influencing the firm’s decision to undertake FDI Griffin and Pustay (2005) summarized that into 3 factors, there are supply factors, demand factors, and political factors (Table 2.32), they are well explained why firms choose to undertake FDI to enter into foreign market. Dunning’s eclectic theory also shows three conditions of FDI, there are ownership advantage, location advantage and internalization advantage (Brouther et al, 1996). It is a very popular framework too. Table 2.32 factors affecting the FDI decision Supply factors demand factors political factors Production cost Customer access Avoidance of trade barriers Logistics Marketing advantages Economic development incentives Resource availability Competitive advantages Access to technology Customer mobility Source: Rick W. Griffin, Michael W. Pustay (2005) - 19 -
MA MANAGEMENT DISSERTATION XIAOFENG WEN 1. Supply factors Supply factors include production cost, Logistics, Resource availability and Access to technology, and these factors are influence decision when the firm undertakes FDI. Production costs: the foreign locations may have lower land prices, tax rates, commercial real estate, or lower cost of labor, it made the production cost lower, and the firm will gain more profit. For example, China is famous for its low-cost workers, the salary rates it much lower than developed countries (e.g. one- third to western countries), and a lot of firms have flocked to China to benefit from its low cost workforce. Logistics: firms may produce their produce in the foreign countries when transportation costs are high. In other word, FDI may save the large transportation costs rather than exporting. Availability of natural resources: because of the limitation of natural resources or raw material in home country, firms may choose to undertake FDI. Access to key technology: technology may share between domestic factories and foreign factories when the firms undertake FDI. 2. Demand factors Demand factors include customer access, marketing advantages, exploitation of competitive advantages and customer mobility. These factors are influence decision when the firm undertakes FDI. Customer access: a lot of international businesses require firms to have a physical presence in the market, so in the foreign countries they have to undertake FDI. For example, KFC has to locate outlets in foreign countries in order to provide its freshly prepared fired chicken to foreign customers. - 20 -
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The Investigation of Volkswagen's Entry Strategy in China's Car Market

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