The necessities that prompted the Asian companies to acquire European firms fill the gist of this paper. The strategies involved in that process constitute the literature review and they are analyzed in the analysis/discussion section. The liberal economic policies in Asian countries that enabled the companies in those economies to increase their investment capabilities have found place in review through authentic literature available on the topic. Consequently, the opportunities, as well as the management techniques and the knowledge assets like patents that helped Asian companies to foray into the European market, also find place in the review. Thus by the end of the literature review, the ways and means of Asian companies that made them go global have been discussed in general and in certain situations in countries like Taiwan and China as well as companies like Haier and Volvo.
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As part of the conclusion of the literature review, it has been stated that the Asian firms tried to consolidate their business by expanding globally in the wake of liberalization policies worldwide. The success of Japanese and Korean companies in global terms and the way they have set examples for other Asian firms has been analyzed as part of the discussion and analysis of the topic of the paper. The context of another Asian country India, as well as China, have been studied to know that Foreign direct investments into these countries have prompted the firms in these economies to invest overseas and resulted in outward investments into European firms. The increased funds of Asian firms also helped them to increase their credit rating internationally and thus resulted in more capability of investing overseas.
Thus the foreign direct investments into the Asian countries have given rise to outward investments from the country and ensured the expansion of the firms horizontally. After studying and analyzing the ways and means of Asian companies investing in Europe, it has been found that the European countries also can have their advantage by allowing them to do so. These investments can save the cash starve industries in European countries and this aspect forms the first recommendation. That means the increased liquidity of Asian companies not only helping them to consolidate their business but also helping some for the firms in Europe, which lost their competitiveness in the globalization era. In addition to that, governments in the Asian countries should frame the policies that encourage the domestic firms to utilize the credit availability in the international arena of business and grow, so that, they can expand their business as well as the knowledge base.
Research Question: What are the necessities that prompted Asian Companies to acquire European firms and what type of strategies is involved in those investments?
Background of the topic
The background for this topic is the business risk faced by Asian firms if they do not expand their organizations globally, more particularly, in European countries as well as in the United States of America. In this regard, Matheson-Connell C (2004, 59) shows Jardine Matheson & Company’s strategies are examples to show the growth and expansion in a changing world scenario. Matheson explains the growth of the company in the 20th century and particularly after 1974 the company being headquartered in Hong Kong operated throughout the pacific region as well as in the United Kingdom. The company’s activities range from shipping to civil engineering, and the diversity of operations resulted in a situation of compelling the expansion by investment or acquisitions in Western countries like the United Kingdom (Connell. C.M; 2004, 59). The same is the situation faced by companies in ASEAN countries as well as of the industries in China and India, an affluent company tried to acquire assets in the form of firms in Western countries and most of them were successful (Connell. C.M; 2004, 59).
The investments of any firm either domestic or overseas are to expand its business and in the wake of globalization, the competition, as well as business opportunities, increased. The ways and means of Asian governments to encourage their companies and the strategies of the latter to grow horizontally and vertically will find a review in the paper. Globalization in Asian companies has been driven by the foray of European companies coming into the developing countries that were presented in this study. The experiences of different countries and the way they used the situational factors that helped them to invest overseas have also been reviewed.
The review starts from the domestic limit of the Asian companies and passes through the way they mingled with European firms through the Foreign Direct Investments and joint ventures. The way joint ventures strengthened the domestic companies of Asian countries both economically and technologically has been discussed. In this course of discussion, the institutional transformation of Asian companies has been reviewed with the examples of Korean Multi-National Companies, which are front-runners in acquiring technological assets. Why Asian firms are compelled to acquire technological assets will be evident in the review of investments of Asian companies overseas in the initial stages. In this regard, Taiwan has been cited as an example, which has transformed itself from an agrarian economy to an industrial economy.
The liberalization of the Asian economies has allowed the firms in the region to invest in European economies and so will examine the process. In addition to the strategies, the compulsions of Asian companies to invest overseas and the manner, they mixed those compulsions with strategies has been inherent in the analysis part. The discussion and analysis chapter presents the situation of Asian companies acquiring European firms and the way Taiwan, China, and India have invested in European countries. As the strategies of these countries in investing in Europe differ determining why and how successful they are, could help in further research regarding the investments in Europe from the developing world. Therefore, this the overarching aim of my dissertation and the catalyst for examining the range of strategies adopted by Asian companies entering EU markets.
The acquisition of other firms by any company is an effort to increase its size as well as its presence in other areas. For Asian companies to acquire European firms, the implementation of international standards in business is necessary. One has to understand that the principles of management are universal (Hamlin M A; 2000, 83) which, when it is achieved, facilitated the Asian companies to look beyond their borders. The strategy of thinking globally and acting locally has been adopted by Asian companies to compete with European firms and in this regard, Hamlin Michael A explains that the Asian enterprises that rely on government favors did not live up to the global standards but the companies, which are thinking globally turned into a group of ‘New Asian Companies (Hamlin M A; (2000, 83).
The management of these companies and their CEOs and other top executives started to think that their business has to change and thus adopted the essence in the statement ‘Ownership, and management should be separate’(Hamlin M A; 2000, 83). Hamlin further quotes (PVC; 1998), about the survey conducted by them that found the agreement among CEOs in Asia that even ‘Western companies have a lot to learn from the attitudes, practices, and philosophies of leading the companies’(Hamlin M A; 2000, 84). However, Hamlin M A further explains a management area that Asians seem not so sure of their achievements.
That is about the training and education of the employees. In this regard, Michael cites CEOs in Asia Upbeat…” 1998) about the majority view of the management in Asia that brightest Asian students must be sent to West to have business education of international standards (Hamlin M A; 2000, p.82-85). With those people coming into businesses, Asian companies have adopted local HRM policies after acquiring European firms which a factor in allowing them to withstand the local competition, and this will be shown to be a significant context of Korean and Japanese globalization experiences discussed further in the review.
Thus the managers of Asian companies have thought globally, and that thought has brought the change in the way they do business. In this regard, George S. Yip (2000, 9) explains different ways in which the Asian companies do business. The first way of doing business is with extensive linkages that the diversified companies have due to their large size, which can be seen in the companies in Japan and South Korea. The second type of business is the one that is present in family-owned and oriented entrepreneurial organizations, which are present in countries like Hong Kong, Indonesia, Taiwan, and Thailand. These two ways of doing business are being transformed into the third type using the professional management in western countries. In order to adopt the western style professional manager approach (PMA), Asian companies are undergoing institutional rearrangements and considering that aspect can give a good scope of interaction between the citizens of different countries.
In this atmosphere, the Japanese and other multinational companies have played a major role in the region by investing in other countries and thus dispersed production and sourcing activities. The strategy of these companies is to form their units in other countries and to build integrated networks and companies in countries like India, China, and South Korea, taking a cue from other Multi-National Companies (George S. Yip; 2000, 9-10). Thus learning from the experiences from the network they created, it has been possible for Asian companies to show economic prudence. They used their credit rating and permits from their governments to invest overseas. Before the liberalization regime, these companies used to invest in other developing economies, but globalization helped these companies to turn into real Multi-National Companies in terms of economic and technological aspects.
Strategies of Asian Companies
Alongside the change in the way they do business, the Asian companies also followed a strategy of creating technological assets. About the technological assets of Asian companies, Keller W.W and Samuels R.J (2003, 19) explain that after the Asian economic crisis in 1997-98, the Asian countries tried to deregulate their financial system. Alongside of that deregulation, the companies in the countries, which implemented financial deregulation, have tried to create technological assets. Keller W.W and Samuels R.J (2003) opine that this is due to the liberal logic of ‘techno globalism. For example, the Japanese and Korean technological assets helped in the acquisition of foreign firms. The strategies of Asian firms have changed as their governments have introduced the policies regarding openness and the liberal nature in dealing with the industry.
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When these activities increased the competition in doing business, the states, as well as companies, have ‘hardened a mercantilist logic of retaining and building core national and technical competencies (Keller W.W and Samuels R.J; 2003, 19)’. However, there is another aspect of Asian people, especially Chinese in doing business. Backman and Butler state that the ‘Chinese are not just Chinese’ (Backman M and Butler C; 2003, 25). The authors suggest that the Chinese where economic migrants and their departure from their home country though is due to civil strife, they have formed a Diaspora overseas in the form of business people. This overseas Chinese had invested in the provinces in China like Shanghai and Ningbo and the success of these businesses resulted in Chinese investing and acquisition of companies overseas. However, along with China, other Asian countries have used the context of getting good information about businesses in the era of globalization and to achieve success in their ventures (Backman M and Butler C; 2003, 25-26).
In this regard, it is useful to mention the acquisition strategy of Thai firms, which can have implications for multinational executives. Park and Hitt cite Robbins and Duncan, who argued that ‘the major challenge facing organizations today is to develop the capability to anticipate and influence the changes affecting them in their markets’ (Park D & Hitt MA; 1997, Robbins; Duncans; 1998). After accumulating enough financial and technological assets in the era of globalization, the Asian companies deliberately developed strategies and distinctive competencies quite different from those of competing organizations’ (Park D, & Hitt M A; 1997) paving the way for acquisitions of them on foreign soil (Park D and Hitt M A; 1997).
However, the governments of Asian countries as well as the companies in those countries understood the financial crisis as systemic risk and coordination failure. In this regard, Marshall D states that the vast array of financial regulations in the United States and other developed economies is justified largely as a way of protection from the dangers of systemic risk that transforms into crisis. The same happened in Asian markets and it has been described as ‘a shock to the financial system that impairs crucial functions of the system’ (Marshall D; 1998). One such reason is the irrational piling-on of debt as well as complex relationships between counterparts. These relationships may hamper the trade activities of the companies in the new markets and sometimes dealers may be reluctant to do business with the companies. Apart from this, the failure of executive management teams of Central Banks of various countries to provide liquidity to the industry adds to the adverse shocks the companies receive and that situation paves the way for the crisis (Marshall D; 1998).
Difference in Strategies
Regarding the strategies of Multi-National Companies, they may differ with the country as socio-political situations as well as external factors, policies of the home country may affect the headquarter strategies of the company. In this regard, Gyu et al (2007) put forth the ‘the country of origin effect’. Regarding these strategies, the authors quote the differences between Western and Japanese subsidiaries and explain that the cultural and institutional factors are playing a role in deciding the HRM practices as ‘social embeddedness’ differ in various cultures. In the context of Japanese firms, the ‘spectacular economic performance of the Japanese economy during the 1980s’ (Gyu-Chang Yu, Woo-Sung Park, and Yung-Ho Cho: 2007) made Japanese firms to find a lot of money to invest in Foreign Direct Investments that resulted in overseas expansion of the companies.
Moreover, the transferability of the Japanese HRM system also helped in acquisitions as the companies can manage and build management styles according to local HRM practices. As the acquisitions are due to the availability of investments, the investment strategy also plays a major role. The Japanese or Korean firms when investing overseas carefully select the key local talents and train as well as motivate them. Hence, the successful Asian companies acquiring overseas; especially in European countries are ‘likely to adopt localization HRM strategy’(Gyu et al; 2007). However, Japan is an Asian country that was industrial long before than the other Asian nations.
Hence, the companies in Japan acted differently than the ones in other Asian countries as ‘emerging country governments open their markets to outside influences’(Louis D. Marino et al: 2008). Hence, the outside influences and the openness in the policies of the governments affect the strategies of expansion of companies in Asian countries. These can be termed as environmental shocks, and they result in ‘major shifts in technology, economic forces, and political regimes’ (Louis D. Marino et al: 2008). The environmental shocks also create change in the industry’s rules of the game and thus compel the change in strategies that favor acquisitions in the era of globalization.
The change in strategies of Asian companies to globalize their business has come from the economic nationalism that resulted due to the financial crisis of 1997-98. In this regard, John Ravenhill (2003, 108) explains the situation with the example of the Republic of Korea (South Korea), which has ‘undergone a fundamental institutional transformation’ (Ravenhill J: 2003, 108). As the Korean long-term economic record is better than another crisis facing countries because the growth in the country is due to the nurturing of domestically owned and controlled firms as the country’s developmental strategy is similar to that of Japan. This has led to the strategy of investing in Western countries also and as a result, the ‘Korean corporations became household names in the West in consumer electronics, automobiles, and domestic appliances’ (Ravenhill J; 2003, 108).
For example, a Korean company Daewoo was the only company having a base in an Asian country and still being present in Europe, Japan and the United States of America. The reason is the strategy of the Korean companies to secure an impressive number of patents in industrialized economies. This helped Korean companies not only to acquire and invest in Western countries but also to gain admission into an Organisation for Economic Cooperation and Development (OECD), which is also known as ‘rich man’s club’ (Ravenhill J; 2003, 108). The same type of strategy lies as under the current manner in the process of liberalization of China that is opening to the world economy in 2003. Before 2003, China took 20 years to make it’s economy market-oriented.
The strategy worked here as the government and the companies took the science and technology policies also as serious as the liberalization policies. This resulted in dismantling the central planning and state-owned enterprises and gave rise to individual innovation and entrepreneurship, making it possible to get foreign direct investments (FDIs). This resulted in multinational companies playing a greater role in the economic development of China, and this prompted the Chinese firms to invest in the west. China’s investments come from the concern of its leadership about autonomy and technological dependence on developed countries. China’s strategy will be different from other Asian countries. This is due to its size and diversity. The policy framing involves armed forces and tactical issues. Hence, to be open to business issues and to be innovative in doing business, the central government of China has ‘moved to diversify the technology policies and relax controls over many areas of the economy’ (Naughton B & Segal A; 2003, 163).
Alongside technology, according to Prema-Chandra Athukorala (2009), the process of internationalization has added to the entrepreneurial talents of Asian companies and helped in the rise of Indian Multi-National Companies that have come from import-substitution during four decades. After the liberalization reforms initiated in 1991, the process of industrialization attained pace and the established Indian businessmen who are dominant in the Indian private sector ventured into new sectors. In this regard, Prema-Chandra Athukorala (2009) quotes that J Tata who had successfully established the Cotton Mills had ventured into the Iron and Steel industry. However, only after 1991, the Indian entrepreneurs were able to foray into new sectors as well as domains and markets. ‘The relaxation of restrictions on overseas investment began in 1992 and the first step was to introduce an automatic route for overseas investment up to $4 million’ (Prema-Chandra Athukorala: 2009).
This journey of investments of Indian companies has accelerated when the limit for automatic approval for overseas investment has increased to $100 million per annum. After that in 2004, the Indian government made a strategic move that allowed the investment of 100 percent of the net worth of a company in foreign soil automatically. The real journey of Indian companies to European countries started when the limit was raised to 200 percent of the net worth of the company. This enabled the companies to remit transfers through any foreign exchange dealer; a facility that was not available in the past and was a factor of movement of investments that are necessary for acquisitions and establishments (Athukorala P.M; 2009). This paved the way for Indian companies also to acquire technological assets. After acquiring enough assets regarding technology, the Asian firms found a necessity to increase the currency inflow into their home countries and found acquisitions in foreign countries as a way to do that.
The legal landscape in Asian countries prompted them to acquire assets or firms in European countries, where the legal system is strong. In this regard, Tonkovich J (2001), explains the experience of Korea in relaxing barriers to the legal services market. The opening of the legal services market in Korea made it possible the companies in that country to understand the legal system in European countries. The liberal policies in the legal system are due to the important role of South Korea in the global market as one of the largest economies in Asia. The crash of Thailand’s currency in 1997 prompted countries like South Korea to encourage their companies to invest in Western countries so that the acquisitions are capable of increasing the inflow of foreign currency and demand for the local currency in the international market. Hence, instead of exporting to Western countries in limited sectors, the Asian companies are trying to expand their businesses as well as to increase the profit margin by acquiring and producing in the countries, they used to export the products in the past (Tonkovich J; 2001).
The context of Taiwan
The growth just mentioned above can be observed in Taiwan, which is an Asian Agrarian economy before 1950. It has been labeled as one of the ‘major post-war development successes in the world’ (Hoesel RV; 1996, 280). Hoesel (1996) explains that the Taiwanese authorities have attempted to take ‘full advantage of the synergies derived from cooperation with foreign firms. As FDI increased in the mid-1960, so did the number of technical cooperation agreements’ (Hoesel RV; 1996: 291) and Taiwan benefited from them by acquiring technological assets and had acquired the capacity of investing overseas. However, this type of activity has been made possible by Taiwan depending on Japan about technical know-how.
Though the data about investments of Taiwan ‘abroad are not reliable, a comparison of total outward flow data published by the central bank and the investment commission of the ministry of economic affairs shows a wide divergence between’ (Hoesel RV; 1996, 293) inward and outward FDI (Hoesel RV; 1996, 290-293). In addition to various factors just mentioned about Taiwan’s success, the interdependent policy the Taiwanese government has followed can be termed as the one that laid the foundation for the outward FDI in the later years. Instead of depending on developed countries, a developing country Taiwan has been trading with core countries, and those business activities have culminated in a state of interdependency between Taiwan and developed countries as the firms in the West as well as in Europe found Taiwan as the best place to invest and to enter joint ventures. However, this resulted in making Taiwan a manufacturing hub for European firms and Taiwanese firms gained enough knowledge about the organization and in some contexts acquired technological assets also. This resulted in technology-intensive exports and prompted the companies to initiate offshore production by ‘expanding their outward FDI in the mid-1980s’ (Peter CY Chow: 2002, 251).
In this context, Chow PCY (2002, 251) cites Chow (1996) who explained the outward FDI that has contributed positively to the change of commodity structure of export in Taiwan. The same phenomenon can be observed in ASEAN countries as well as China and resulted in outward FDI in European countries as well as in the US (Chow PCY; 2002, 243-251). The technological assets acquired in the meantime also helped the firms in Taiwan and ASEAN firms to invest in Europe. The technological assets mentioned above about Taiwan compel to discuss the opinions and research findings of Naresh Kumar & K.S. Krishnan Marg (2000 ). They opine that the technology is the dependent variable of the economy and stressed the necessity of modernization in developing countries, particularly in Asian countries to learn from the experience of developed countries. At the beginning of globalization, the technology transfer has been focussed on lighter industries like textiles, food processing. Hence, the gap in the technology assets regarding heavy industries has been a reason for the backlog of Asian companies in investing in European countries.
However, the joint ventures in Asian countries by European firms and the technology transfer due to that has resulted in a surplus of funds due to increased business as well as the creation of technological assets with the experience gained from joint ventures (Naresh Kumar & K.S. Krishnan Marg; 2000). This resulted in the necessity of investing overseas to increase their presence and to consolidate their business. Hence an outward flow of FDI has been a result due to the development as well as the necessity of Asian companies to invest overseas and it can be best understood from the East Asian firms’ strategies. According to Hal Hill & Juthathip Jongwanich (2009) explains that even in the global crisis period of 2008-09, and in the era of shrinking trade flows, the East Asian companies’ strategies resulted in finding enough opportunities overseas. However, the companies recognized that there is an increase in risk and finance is more difficult as well, but still, they viewed the assets that are cheapened due to the global crisis.
The indebted companies in Europe, which are affected by the crisis were tried by Asian companies as their point of view regarding profit is less in magnitude than the European MULTI NATIONAL COMPANIEs. These types of acquisitions are more from the companies of Asian nations like China and Singapore. The openness in international transactions also helped the companies from Asian countries to invest in European countries thus resulting in an outward FDI, which has been not known or familiar in developing countries (Hill H & Jongwanich J; 2009). This can be possible only when the existing work and policies in developing countries in Asia have resulted in competitiveness performance.
The manufactured export competitiveness index (MECI) based on per capita, long term growth as well as share in technology-intensive exports made possible the competitiveness with Western companies and this competitive nature when mixed with liberalization policies resulted in outward foreign direct investment from Asian economies through which the companies in those countries acquired the European assets or firms. The technological effort, human capital as well as communications infrastructure also played an important role in the above-mentioned outward foreign direct investments from Asian economies (Wignaraja G and Taylor A; 2002, 61-62). This can be evident from the fact that the outward FDI from South, East and SE Asian economies increased to 9.3 percent of their GDP in 1997 when compared to 2.8 percent in 1990 (Jha R; 2003).
Strategies and Performance of MULTINATIONAL Companies in China
After 2000, China emerged as ‘one of the major players in the world economy’(Luo Y; 2001, 3). Luo Y (2001) quotes it as a premier country that is attracting investments from Multi-National Companies worldwide. The basic point that attracted the investments is that the main focus of the country is on large infrastructure as well as manufacturing projects. This resulted in an increase of FDI in these projects with the help of Foreign Institutional Investors (FIIs). In this context of Foreign Direct Investments and Foreign Institutional Investments, it is necessary to underscore that the case of China can be a good example to study the strategies of Asian companies as the ownership is diverse. The ownership nature in China includes ‘state ownership, collective ownership, private ownership, shareholder ownership, Foreign Institutional investments’ (Luo Y: 2001, 6).
By 1998 the number of FIEs areas the state-owned firms in 1998 and there is an increase of 100 percent in the number of FIEs. This has been possible with the policies adopted by Premier Zhu Rongqui that encouraged the FIEs more than the state-owned enterprises as well as converting state ownership into collective or private ownership. As Foreign Direct Investments affected the local Chinese economy at both micro and macro levels, they influenced the technological and managerial efficiency of joint ventures as well as local firms. This increased domestic investment, economic growth, employment, exports, imports as well as competition. The compulsion of exports to increase the business and to get the same market share for much lesser cost, the Chinese Companies tried to invest in Western countries, which resulted in investments and acquisitions like that of Haier’s. The positive change in productive efficiency, as well as resource allocation in the strategies of Chinese domestic companies, turned them into Multi-National Companies (Yadong Luo; 2001, 3-8).
However, the strategies of the Asian companies find their roots in the American intention of cooperation from European countries to develop an antidumping protocol for common applications to Asian producers before 1995. The antidumping measures can spoil the chances of exports of Asian countries, and it compelled them to gather enough cash to invest in Western countries so that the anti-dumping laws may not affect them or the effect can be minimized. This resulted in technological progress that made Asian companies to acquire technological assets in the form of patents to invest in Western countries. Countries like Japan and South Korea led the Asian investment in this way, and their high-tech exports resulted in a decline in market share of USA and Germany. In addition to that the newly industrialized countries in Asia are primary beneficiaries of technological progress. The old joint ventures were broken to make way for new ventures as well as fresh joint ventures that help to the growth of Asian companies both technologically and economically (Andrew A. Procassini; 1995, 75 and 104).
An example by quoting Daimler Chrysler’s transaction, which ‘seemingly stands as an obvious counterexample’ (John C. Coffee; 1999) is suggestible. However, the acquisitions will be successful when the functional activities of two companies converge and a motor force in the form of economizing the costs of achieving the desired global scale in a cross-border merger. However, the family-controlled firms may well resist the overtures from the companies who want to acquire them as the ‘value of their controlling shares can exceed the per-share price that the acquiring firm will pay for the firm as a whole (John C. Coffee; 1999). These are the examples for the strategies to access new markets with less efforts or investment or more market access for a particular amount of investment as well as the consolidation of the business, which can be found in the joining of Volvo with General Motors (GM) in the US truck market. This step of Volvo can be termed as the boldest of them all and the Asian companies are doing the same by acquiring the European firms in the backdrop of increased competition in their countries in the era of globalization.
The merger of Asea of Sweden with Switzerland’s Brown Boveri to form the World’s largest electrical and power generating equipment is to consolidate the business of the two firms. Hence, the inherent and important strategy of Asian firms is to increase their market and presence to consolidate their business in the sector they operate (Eckley RS; 1991, 5). These strategies emerged from a situation that is the resultant of the financial crisis in Asia. In this regard, Dieter Ernst, and John Ravenhill (2001) quote the closing of European, US and Southeast Asian regional headquarters of Samsung. However, the author also quotes Hyundai’s efforts to move beyond the ‘DRAM production to non-memory chips, which generally enjoy higher profit margins’ (Dieter Ernst, and John Ravenhill: 2001, 246). Though the Asian companies are acquiring European firms or investing in those countries, some instances are resultant of the Asian financial crisis as Hyundai postponed the investment in a semiconductor plant in Scotland because it was unable to raise the required capital. In a similar situation, Daewoo also postponed the investment in France in a plant ‘to make glass for TV tubes and delayed its attempts to sell cars in the US market'(Dieter Ernst, and John Ravenhill: 2001, 246).
This means, though Asian companies are finding it difficult to mobilize cash resources for investments in Western countries, it is due to investments in other western countries. The compulsion of reducing debt ratios for Asian companies after the financial crisis also can be termed as a cause for the increased foreign ownership of domestic electronic companies. They searched for foreign partners who can provide capital and technology (Ernst D & Ravenhill J; 2001, 246). The searching for foreign partners, places to invest or companies to acquire can be understood from the regional integration and corporate strategies in the East Asian Electronic Industry. Regarding the activities of the East Asian electronics industry, Guerrieri P (2001, 31) opines that the increased competitiveness of these countries resulted in a large proportion of world trade concentrating in this part of the Globe. In the 80s and 90s, Japan played the role of leading as well as innovative countries followed by countries like South Korea.
However, the ASEAN countries like ‘Thailand, Malaysia, Indonesia, Philippines and China on entering the world electronics, especially in consumer electronics’ (Guerrieri P; 2001, 32), there is development in Asian companies in capturing the electronics market share worldwide. The reason for this growth is because the electronic companies in East Asian economies have exhibited a substantial increase in intraregional trade. Though Asia’s ‘regional trade integration can be gained by looking at the trade balance of the Easy Asian countries’ (Guerrieri P; 2001, 44), Japan led the positive trade balance activities more than those of North America and Europe. The trade surplus of Japan’s companies in North America and European countries is in the electronics sector (Guerrieri P; 2001, 31-44). However, it is difficult for small companies or SMEs to withstand and be successful in the competitive environment mentioned above as the globalized business is knowledge-intensive. However, the story of Asian companies particularly from Taiwan is different as ‘SMEs have been the main carries of rapid development’ (Ernst D; 2001, 110). The SMEs in Taiwan made the above-mentioned development possible despite
‘(1) tight restrictions by small domestic market on the ability to function as a buffer against heavy fluctuations in international demand: (2) the constraints of the development of sophisticated ‘lead users’ that are capable of stimulating innovation; (3) the limits in the scope for technological spillovers; (4) the limited size of national knowledge and capital base that restricted the choice of industries’ (Dieter Ernst: 2001, 110). The development achieved by SMEs in Taiwan made that country a place for the broadly based computer industry. In this regard, Dieter Ernst: 2001, 110) quotes the saying ‘David to grow in the shadow of Goliath’ due to continuously adjusted industrial development policies as well as networking linkages with large firms.
This was made possible with the establishment of a world-class supply source for a variety of electronic hardware products as the country turned into the World’s largest supplier of computer monitors, motherboards, SMPS, mouse devices, keyboards, scanners as well as adds on cards. The manufacturing capability mixed with the supply network was the secret behind the success of SMEs and other companies in Taiwan (Ernst D; 2001, 110-111). However, the same success though by bigger firms has been achieved by the companies of South Korea in electronic products. The companies, which dominated the low-end segment of world markets in CTVs, VCRs and microwave ovens until the late 1980s, have accumulated enough cash to acquire or invest in European companies. This resulted in increased overseas production for Korean companies. However, Youngsoo Kim (2001, 141) quotes that in 1993 three major Korean producers, Samsung, Goldstar and Daewoo announced their intention of increasing overseas production. After that, their overseas production increased from 20 percent to 60 percent by the onset of the year 2000.
The development of offshore networks by Samsung helped the company to adapt to the nature of the networks that are suitable for its products. The company acquired the mass production capability as well as international linkages. With the help of international linkages, the company acquired product designs as well as marketing outlets. This enabled the company to produce and market its products in European countries. This made the company dependent on foreign sources regarding product design and distribution. Though there is the retardation in the development of design, the products helped the company to foray into the international market. Though the Samsung’s initial strategy was to neutralize its Japan’s rivals, the global presence of the latter also resulted in the expansion of Samsung in other Asian as well as European countries (Kim Y; 2001, 141-146).
In this regard of competing with Japan, Wong P.K (2001, 176) explains that several East Asian countries other than Japan turned into major production platforms as the companies in these areas have acquired mass production capability as well as enough knowledge regarding electronics. The author explains that the growth of Singapore as a major hub in South East Asia has helped the Asian companies to acquire enough knowledge regarding mass production and marketing overseas as well as establishment. Though the growth of US-led computer industry growth has been sustainable, Singapore after 1990 witnessed the new wave of electronics investments and that resulted in mass production as well as research and development in the electronics sector resulting in a new wave of investments with the technological assets achieved. As ‘both US and Japan used Singapore extensively for their offshore manufacturing operations’ (Wong P.K; 2001, 183), differences exist.
As Japan and the US searched for a suitable manufacturing domain in the form of Singapore, the Asian companies also explored the domains of manufacturing in European countries not by establishing new industries but by acquiring old firms. In doing so, they forayed into the country in which they acquired the firm and got a grip of the expertise of the acquired company. The adaptation of culture, governance and R&D activities of these firms, the Asian companies have accrued technological patents, which they did not use to have (Wong P.K; 2001, 176-183). Along with Singapore Malaysia also provided a rich entry point for US and Japanese companies and these two countries developed a production network in Asia promoting the local companies in other Asian countries to expand internationally. In this regard, Linden G (2001, 198) explains that the investments of the US and Japan in countries like Malaysia are due to low-cost land and labor (Linden G; 2001, 198). These types of activities resulted in a trade surplus of Asian firms with European countries.
Trade and Banking Activities that decide the Course of Strategies
The trade surplus of some Asian companies resulted in the acquisition of European firms and that resulted in introducing corporate governance in financial activities after the crisis in 1997. In this regard, Zulkafli A.H, Amran A and Samad F.A (2009) cite Ou-Yang (2008) about the corporate governance practices as well as securitization aspects of financial institutions. ‘The corporate governance implementation after 1997 in Asian countries was focussed on measures taken to resolve the crisis such as restructuring, mergers and acquisition exercises as well as government intervention in the private sector’ (Zulkafli A.H, Amran A, and Samad F.A; 2009). The strengthening of corporate governance resulted in financing the mergers and acquisitions that consolidate business for firms and increase or stabilize the profits.
Hence, when financial organizations find that if any Asian firm is capable of consolidating business and of increasing profits, they used to finance the acquisition activities, a trend that is absent in the past. However, the important aspect that is a result of the introduction of corporate governance in financial activities is that the banks have started considering the credit rating organizations’ opinions about the companies while lending them. The analysis in financial organizations started rating the corporate disclosures of the companies as they see them to have positive or negative influence in cash flow as well as profit generation. Consequently, similar to their Western counterparts, the Asian banks used the credit-rating agencies as information-processing agencies to provide credit for the companies. This made enough credit availability for the affluent Asian companies that have produced and marketing capabilities at par with the firms in European countries (Zulkafli A.H et al; 2009).
To consolidate that position further in the future Thitapha Wattanapruttipaisan (2007) reminds that the leaders of the association of Southeast Asian Nations (ASEAN) in October 2003 decided to establish ASEAN Economic Community (AEC). The decision has been termed as Bali Concord II. This paved the way for the establishment of the ASEAN Economic Community by 2020 by integration of priority sectors. These nations feel that the integration should be accelerated for the establishment of the Association of Southeast Asian Nations Economic Community by scheduled time 2020. To the 11 sectors selected in 2003, the 12th one logistics has been added to them in 2006 to make the integration much stronger, and the target has been moved to 2015 from 2020 and integration protocols were made to achieve that in time.
The amalgamation of sectors and establishing of AEC is to take regional associations forward and backward by changing the Association of Southeast Asian Nations into a distinct market as well as a production base. This step helps in sustaining the trade surplus as well as investing activities in Western countries by Association of South East Asian Nations companies as they have enough production capabilities as well as cash resources that flow from the larger market available after establishment of the ASEAN Economic Community (Wattanapruttipaisan T; 2007). Added to these activities of ASEAN countries, the economic impact of China and India also affected Southeast Asia. Mostly it is the effect of China that was felt in Southeast Asia as the competition has been intensified in trade as well as attracting Foreign Direct Investments. The increase of competition in attracting Foreign Direct Investment also prompted the Association of Southeast Asian Nation countries and companies to establish and acquire in Western countries for the necessary cash flow (Bhaskaran M; 2005).
As per the review in this chapter, the acquisitions of European firms by Asian companies are due to the necessity of expanding the business overseas in the era of globalization. This has been made possible by the liberal policies of the respective governments which enabled Asian companies to invest considerable amounts equal to or more than their net-worth overseas. Using the policies of liberalization regarding investment in foreign soil, Asian companies have started mobilizing cash using their assets and are now capable of buying the overseas firms. To make the acquisitions or investments in Western countries easier, Asian companies have started acquiring technological assets in the form of patents to compete with European firms regarding investment. The technological assets combined with enough cash resources and liberalization policies in the backdrop of globalization have prompted the Asian companies to acquire European firms and expand internationally.
Conclusion: The literature review concludes that the strategies behind the Asian companies’ attempts to acquire European firms are to consolidate and to expand their businesses in the wake of liberalization. The availability of credit that funded the acquisitions and the permissions from the governments paved the way for these strategic acquisitions.
The methodology followed to answer the research question is a qualitative analysis that explores issues and helps to understand the phenomena involved in the business activities of Asian companies investing in European firms or acquiring them. This research describes, and the paper reviews the authentic literature about Asian companies, which have grown economically strong due to the liberalization policies of their governments in the backdrop of globalization. The necessities of the Asian companies to expand globally and the situation that helped or compelled them to acquire Western companies help in analyzing the situation.
In this course of analysis, the strategies followed by them to be successful in global acquisition, as well as the benefits accrued through those investments, helped in discussing and analyzing the results that were found in the literature review. In doing so, the researcher questions why it happened about the data or the facts found in the relevant literature and finds answers through analysis supported by authentic literature. The conclusions are drawn from the facts found in the literature review, and through the answers derived by discussion or analysis chapter. The recommendations given will be according to the conclusions drawn and may help in easing any difficulties that are found to be faced by businesses in the era of globalization.
In the course of the literature review, the background for the investment capabilities of Asian companies in European countries has been reviewed. This concluded that the strategy of Asian companies to acquire a European firm is to consolidate the business, a strategy that has been followed by the later when invested in the country of the former. After that, the discussion and analysis part had the case studies of Haier of China, Volvo of Sweden and IBM of United States of America and explained those companies’ strategies to consolidate business overseas despite competition they faced on technological as well as investment and management aspects.
After the discussion of the individual achievements of these companies, the ways and means followed by countries like China and India as well as Taiwan were discussed. The policies of these countries enabled the Asian companies to enhance their credit rating as well as investment capabilities. By exploring these activities of governments and companies in Asian countries, the paper concludes the discussion and analysis chapter that Asian companies consolidated their business by investing in Europe and by acquiring European firms. The reasons and opportunities that enabled the Asian companies to acquire European firms were found from relevant and authentic literature and the paper analyses and give a logical conclusion at the end.
The term and concept of FDI emanate from globalization and deal with cross-border economic interdependence. To be clearer, FDI is a result of greater mobility of factors of production of goods as well as services. Due to the FDIs, the national output of various countries rose over time, and Asian economies observed this aspect and tried to use the liberalization policies to invest in developed countries by acquiring European firms. ‘The convergence of consumption patterns and tastes over a broader range of products and services in a larger international market’(Campbell D; 1994) resulted in opportunities of various companies to expand their business overseas or to foray into new markets (Campbell D; 1994). This resulted in the foray of Asian economies into Europe. To understand this, it is necessary to understand the regionalism in the backdrop of globalization, which decided the ‘trajectory of the world political economy’ (Walker A.W: 1995, 74).
This has reversed the controls process also and the rationale and view on the use of exchange controls. ‘Countries have imposed controls on capital flows to address areas concerned’ (Merican C.L; 2002, 135). These controls are generally aimed at curbing capital outflows. However, in the backdrop of globalization and the role of FDIs, Asian countries like Malaysia have ‘used controls as measures to safeguard the economy from adverse effects of volatile capital flows'(Merican C. L; 2002). Though the controls on capital outflows can enable the countries to stabilize the domestic product, the globalization era has reversed the trend, and the governments were allowing the capital outflows from the companies in the form of outward FDIs when the capital outflow could guarantee a credit to the company to acquire a firm overseas (Merican C L; 2002, 135-136). The acquiring of firms overseas helps the companies to enhance their equity in markets as well as making.
According to Field and M., Hanna D (1999, 127) growth in Asia from the 1970s through to the mid-1990s outstripped growth rates seen in other parts of the world. For example, Hong Kong, Korea, Singapore, and Taiwan were the first group of countries that took hold of the growth and can be termed as newly industrialized countries. The ‘export expansion in these countries after 1970 had resulted in a remarkable increase in GDP’ (Field and M., Hanna D; 1999, 127). With the growth of economic activity in Asia, many of the developing countries in this region tried to enhance their equity in their markets by investing in Europe. Without investing overseas, the markets in Asian countries cannot be integrated with the international economy and the investments of companies in developing companies overseas can do so as these activities can enable them listed in European and US stock markets. This increased the value of the companies both domestically and internationally.
Hence, the FDI from Asian companies not only increased the profit but also enhanced their equity value (Hanna M.F; 1999, 127). To increase the opportunities of the companies in their countries governments have to open economies and Asian countries have done so in the liberalization process. They have allowed foreign companies to invest in their country and permitted the domestic firms to acquire overseas industries. This is due to the impact of globalization on the policy of national governments in Asia. Hence, globalization helped the immense number of structural adjustments in developing countries to happen in a way that can increase the business opportunities of the domestic companies and enabled them to foray into European markets.
The role of government has been limited to a facilitator and the investments of the companies have been decided by the competition and credit availability to them in the market. The availability of credit and the openness in the structures enabled the Asian companies to acquire knowledge that is necessary to organize or manage companies better than before. The openness and joint ventures also helped them to acquire enough knowledge about technology and this resulted in the accumulation of technological assets due to research and some affluent companies bought them with their surplus funds (Lipsey RG; 1999, 73).
The Economic Order and Regions
According to the economic order, the world has been divided into three macro-regions. They are ‘Europe, North America, and East Asia or in some contexts, Asia. These three regions battle for economic as well as geopolitical predominance through consolidating the business of the companies of their countries. This resulted in a reduction of ‘irrational as well as old-fashioned international politics of struggle for power’ (Walker A.W; 1995, 74). As per the research of Walker A.W (1995), the above aspect resulted in a world that trying to reduce the hegemonic order. The regionalization aspect in this context implies the ‘balance of forces in the world political economy that is shifting away from ‘multilateralism’, underpinned by a global American hegemony’ (Walker A.W; 1995, 75). This has been made possible by the trade pattern of the European community and Asian companies got a cue from it and tried to expand through acquisitions (Walker A.W; 1995, 74-75).
In addition to the intention of expansion of the business activities, the outward FDI, which is a result of financial globalization, can be termed as a ‘contagion effect’. The openness of the system results in the contagion effect of crisis or boom (Dilip K. D; 2005, 123). Hence, a crisis in one region may affect countries of various sizes as well as structures in different geographical areas. The boom in the 1990s that resulted in global capital flows into the developing countries has turned into a recession after 2000. This resulted in a lack of liquidity to some European companies and the Asian companies that are having cash surplus due to the joint ventures with their overseas partners and are less affected by the global economic recession started acquiring some of the cash-starved European firms (Das KD; 2004, 123).
The acquisitions or investments of Asian companies in European countries increased after the year 2000 and outward foreign direct investment (OFDI) from emerging economies expanded. The reason is that the transnational corporations in developing countries have acquired enough capabilities in products as well as processes. They improved their organizational and managerial capabilities also and are confident of successful abroad as they found that enough liquidity will be available if their surplus funds can be used strategically. They acquired the technological assets also as the Korean company Samsung has become the world leader in dynamic random access memory (DRAM) used in Computers. Acquiring of these strategic assets can be termed as a strategy to consolidate the business and that resulted in a compulsion of investing overseas, particularly in European countries to avoid costs due to exports (Rajah Rasiah, Peter Gammeltoft & Yang Jiang: 2010, p.333-334). Regarding this aspect, the experience of Korean MNEs with ASEAN can be useful in understanding the strategies of Asian firms in European countries.
Seo J.S and Suh C.S (2006) explains that in terms of factor intensity, labor-intensive manufacturing industries have been established in developing countries. However, the case is different from Korean FDI as they conducted in industrialized countries by capital intensive manufacturing. This outward FDI or the investment of Korean companies overseas has an impact on trade effect as well as on exports of the home country. However, the negative effect of outward FDI on exports of the home country can be neutralized by the positive effect on imports as they decrease due to the relocation of the industries in foreign countries. This can be further understood by the strengthening of the company by being established overseas, which can bring profits to the home country.
The policymakers, as well as management of Asian companies, especially Korean ones in this context, were concerned about the aspect of strengthening their companies and concentrated on their horizontal as well as vertical expansion by investing overseas; mostly, in European countries (Seo J.S & Suh C.S; 2006). This also increased the increase of foreign currency inflow as the companies invested overseas have brought some of the profits incurred to the home country. In addition to the foreign currency inflow, the Mergers and acquisitions resulted increase of returns to Asian stock markets. This aspect has been analyzed by José JMA. Pagán, and Chu Y (2009) by showing the example of the US business phenomenon and stating that it has been followed by the companies worldwide.
Jianyu Ma et al., (2009) further cite Gaughan (2005) who stated that the companies in ‘pursuing their goals and objectives related to strategic growth, used M&A. Jianyu Ma et al., (2009) quotes the legal aspect also a reason for mergers and acquisitions of Asian companies in Western countries as the latter had ‘strong legal system to protect the interests of shareholders and the welfare of consumers'(Jianyu Ma et al: 2009). However, the authors opine that the legal system is not so strong in Asian economies and as a result, to escape the weak enforcement of existing laws, the affluent and successful companies in Asia might have started acquiring European companies. In addition to that, the cultural and governance differences between Asian and European economies also attracted companies from the former countries to acquire assets in the latter areas and developing markets in Asia due to investments of Western firms have provided the necessary impetus to it (Jianyu Ma et al: 2009).
The background of acquisitions are joint ventures and some of them failed before the year 1992 (KvintP VL: 2001, 161). The joint ventures are generally a result of the efforts of a foreign company in a country when it was not able to find a partner or a firm to acquire. Using joint ventures, the foreign company forays into a country’s market using the network and the resources of a domestic company. As the European firms are not in a position to assist the Asian firms in allowing them to enter into the European market, the Asian firms have no other way except to acquire European firms to enter into the market of Western countries. For example, the acquisition lessons are learned by Asian companies from European firms only. In this regard David K. Tse Kevin Y & Aul Ilan Vertinsky (1996, 141) mention about enlarged market in Europe due to the integration of European countries and the efforts of firms to acquire, merger or to form alliances with other firms. In this way, the European companies entered one of the largest markets of the World-China.
This made the Asian firms to understand the governance practices and strategies of European companies and instead of joint ventures; they tried to foray into the European market by acquisitions. One such aspect that has been learned and applied by Asian companies in Western countries is framing a strategic alliance. European firms formed joint ventures in Asian countries, but it is not that much easy for Asian firms to do so in European countries (David K. T KY & Vertinsky AI; 1996, 141-145). Hence, they formed joint ventures with European firms in their country first and the business thus developed has given enough opportunities for Asian companies to expand their operations to the European domain. The strategies of Asian firms emanate from the competition they faced due to the foreign direct investments in their home countries from European Multi-National Companies. According to John H. D., Rajneesh N (1996, 5) due to entry of foreign firms into the domestic market, the Asian firms competed directly with them in different sectors and the increase in business as well as permissible investments than in the past, helped them to create assets of the activities.
These assets are ‘replaced by new technological, managerial or marketing innovations to compete with domestic firms as well as foreign firms’ (John H. D & Rajneesh N; 1996, 5). These are called O advantages and are likely to be based on the possession of intangible knowledge as well as the public good nature of the assets acquired by firms. As foreign firms try to exploit through cross border hierarchies, the domestic firms in Asian economies were also compelled to make of such advantages by investing in European countries. However, the joint ventures for Asian companies in European countries is not that much easy as they are in Asian countries for European firms. This situation has put a compulsion of acquiring a firm in the country to foray into the European market (John H. D & Rajneesh N: 1996, 5).
In this regard, Clegg J (1996, 43) explains Britain’s success and the way it benefited in the early years of the industrial revolution. The position of the UK to select the best resources and locations in the world was one of the reasons that contributed to its economic development after the industrial revolution. After that in the era of globalization, the same advantage the UK and other industrial countries enjoyed was made available to firms in Asian countries also and the European countries have started witnessing the inward flow of foreign direct investments, which was not seen in the past. The strategies of European countries and firms to consolidate the markets in developing countries have prompted Asian firms also to do the same to enter into the markets of European countries. Japan led this flow of foreign direct investment into European countries as it was one of the three entities that dominated the FDI in the world. US and European Union were the other two entities that dominated the FDIs in the world. ‘In the modern period particular regions, notably Asia and Pacific and central and Eastern Europe respectively, have demonstrated major growth as host countries’ (Clegg J; 19965 43).
According to Sung C. Bae & Sungoh Hwang (1997), this situation has been utilized by advanced in Pacific basin countries Japan and Korea. They have exhibited similarities in outward FDI activities. Japan strategically helped its companies to increase their exports and to expand globally to compete with European firms. Though Japan experienced economic downturns during the 1990s, the case of Koreans is no exception. They too faced hardships but opened the economy to Western countries and used that leverage to enter into European markets. As the Korean firms are facing a labor shortage, wage hike demands as well as frequent labor disputes, they did not find it more difficult to enter into competitive European markets as they have enough technological assets According to Sung C. Bae & Hwang S (1997) in 1990 for the first time the FDI by Korean firms was more than the foreign investment in Korea. The authors explain that the Korean outward FDI has been influenced by Japanese FDI as they both worked as partners as well as competed with each other.
They worked as partners while investing in European countries and worked as partners in other areas (According to Sung C & Hwang S; 1997). According to Park D & Estrada G (2009), this resulted in the transformation of developing Asian countries ‘from net capital importer to net capital exporter'(Park D & Estrada G; 2009). This further resulted in current account surpluses of Asian countries and the liberalization policies prompted the governments to allow their domestic companies to invest overseas more vigorously than before.
This created a situation of surplus funds accumulating with Asian companies and when they utilized the credit facilities offered by financial institutions and banks resulted in the capability of investing even in European countries by acquiring cash-starved firms. It means that the Asian firms used their liquidity to acquire the liquidity deficient European firms and the global crisis also has added to this situation. However, this doesn’t mean that Asian companies can acquire or invest in any firm in Europe. They have focussed on some companies, which lost liquidity due to the global economic crisis and cannot rely on decreased profits (Park D & Estrada G; 2009).
Strategy to come out of the Financial Crisis: The Case of Haier
After framing liberal policies by their administrations and using that aspect to acquire technological assets, it seems the Asian companies’ strategy is to acquire firms in foreign countries, particularly in Western countries. Explaining this aspect, Abdel M. Agami (2002) quotes the mergers and acquisitions of business in ‘Indonesia, Korea, Malaysia, Philippines, and Thailand during their financial crisis'(Abdel M. Agami: 2002). Agami argues that mergers and acquisitions have contributed to restore the economic health of these countries, which in turn helps the businesses thrive. This helped in the recovery of financial crisis as mergers and acquisitions provided ‘stable, long term, equity capital that replaced the mobile short term borrowing that was used before the crisis to finance the needs of businesses’ (Abdel M. Agami: 2002).
The acquisitions in foreign countries helped the companies in Asia to increase the inflow of hard currencies into the countries. This inflow of foreign currency has reloaded the foreign-currency reserves in their home countries, which were depleted during the crisis. Hence, it can be termed as the strategy of the Asian firms to come out of their necessity of borrowing money for their needs by expanding the organization and increasing the cash flow by business activities (Abdel M. Agami: 2002). Regarding an expansion aspect, Frank-Jürgen Richter (2011) quotes Haier’s case as interesting. When China’s capacity for manufacturing was not big enough in the 1980s, the government of Shandong selected Haier to be a state-owned enterprise.
The firm got technology from Liebherr, a German company through an agreement that granted a license to manufacture the refrigerators. However, within 11 years of production and marketing, Haier acquired two large complimentary white goods firms to expand its organization and increase its presence in the market. This is the first step of expansion by Haier and in the next step, the management followed the strategy of diversification along with expansion. The strategy of mixing the diversification with the expansion is to increase cash flow also, and it has been successful as Haier had taken over several state-owned enterprises in the Shandong and other provinces. The increase of business and cash flow resulted in the presence of Haier in Europe and West Asia as the company is planning to ‘construct factories in Asia and Europe and its latest achievement is a washing machine production plant in Iran'(Richter FJ; 2011, 95).
However, this growth of Haier cannot be contributed to its management only as the policies of Chinese government helped the firms like Haier to expand along with diversification as the government encouraged and implemented a ‘program of public investment in capital projects to jump-start the economy’(Richter F.J; 2011, 95). Regarding the policies of China that helped companies like Haier to expand themselves, Frank-Jurgen Richter (1999) has found that the Chinese government wanted the ‘large, multinational conglomerates to form the backbone of China’s industry in the twenty-first century'(Richter F.J; 1999, 244). Hence, it encouraged companies like Haier; the white goods manufacturer and Huabei the TV producer making them state-owned companies and encouraging them to expand with inherent diversification in the production of goods.
The government reduced tax rates and offered subsidies on loans and technological improvement projects for these companies and as a result of these strategies from the side of the Chinese government, Haier ‘acquired fourteen firms and entered several joint ventures with foreign Multinational companies (Richter FJ; 1999, 245) after 1990. The expansion with diversification resulted in the transformation of white goods manufacturer Haier into black goods manufacturer also as the firm now produces televisions, video sets and other high tech electronic gadgets. The firm had investments in pharmaceuticals also (Richter FJ: 1999, 244-245).
The Case of Volvo
However, the reverse context also helped the growth of Asian companies to expand and acquire European firms. The acquisition of Korean based Samsung Heavy Industries Co. Ltd by Volvo Constructions Equipment Corp of Sweden resulted in the globalization of Volvo’s operations and helped them to have a presence in Asia. In this regard, John C. Coffee (1999) opines that institutional hurdles that help in convergence of the companies can be predicted to such an extent that, where the systems of governance outperform one another. If that did not happen, it may be due to the tacit collusion of inefficiency in the presence of equilibrium that has been disturbed by destabilizing changes. However, when Asian companies started acquiring the European firms, that equilibrium has been disturbed and tacit collusion is no more possible.
The destabilizing impact of Asian as well as the Russian financial crisis resulted in the reform of corporate governance in those countries. The cash has been made available for Asian companies from World Bank and International Monetary Fund with a condition that ends ‘crony capitalism’. This made the governance structure in Asian companies efficient and made their companies rigid to competitive pressures. The type of pressure mentioned above has resulted in many large firms operating in international to grow quickly and the acquisition of Volvo by Ford can be such an example as well as the acquisition of Samsung by Volvo. In these contexts, the acquiring firms ‘are incorporated in jurisdictions that protect minority shareholders, that is, the United States or the United Kingdom'(John C. C; 1999).
The Case of IBM
IBM also has done similar to that of Volvo by investing in an Asian country. However, if Volvo invested in a Korean firm, IBM invested in China. According to Bernard A. (1998, 4), after China slowly stepped towards free enterprise, foreign investments from the companies like IBM had a big stake in China. The diversified market structure in the United States of America might have prompted IBM to invest in China to have entered into new markets other than the ones in which it has to compete with Motorola and Intel. As the companies like Toshiba, Fujitsu, Hitachi, and Mitsubishi have developed the capability of producing Dynamic Access Memory (DRAM) chips to compete with IBM’s very large scale integration (VLSI) chips, the IBM found it inevitable to foray into Asian markets to counter their move of entering into European markets.
However, IBM’s case is a bit different from Volvo and Haier as it competed technological terms as well as in investment and market entry issues with its competitors in Asia. The technological superiority in some areas like ‘Josephson junctions’, the chips which worked at higher temperatures than the chips manufactured by the companies just mentioned above enabled IBM to have a foothold in Asian economies, despite the technological competency of its competitors. In addition to that in Taiwan, IBM has collaborated with consortia headed by Acer and Tatung to help in the manufacturing of PCs in Asia. This made the company to withstand the threats by its competitors as it also had joint ventures with companies like Acer and Tatung and thus was successful in expanding in Asian countries (Bernard A; 1998: 4, 27, 79, 80, 81).
The Context of China
The activities that are mentioned in the cases of Volvo and IBM can also be explicitly seen in China as K. C. Fung, Herrero & Siu A (2009) state that the spectacular growth has resulted in increased inward investment in 2007 as they have reached $83.5 billion. However, to combat the slower economic growth in the backdrop of credit crisis due to the global economic slowdown prompted Chinese companies to invest overseas and the government has strategically approved, and that showed an outward investment of #26 billion for mergers and acquisitions overseas. Fung KC., Herrero AG & Siu A (2009) further states that the firms having exports as well as FDI activity has high productivity and the firms which sell only domestically have less productivity.
As the companies in China as well as the rest of Asia along with their governments realized this and are framing strategies accordingly using the liberalization policies in the backdrop of globalization. This resulted in Chinese companies mobilizing the required funds through credit for acquisition of firms overseas by using their surplus funds accrued until now by consolidating their business. The reason for the high productivity of the companies which have both export and outward FDI activities is due to the fixed costs faced by exporters and even with FDI. The companies resort to exports to the countries if the fixed costs are less to that location and try to invest directly in the country, where the fixed costs are less for FDI.
The firms in Japan, Korea, Taipei, China were investing overseas and are trying to expand both vertically and horizontally (Fung KC., Alicia Garcia-Herrero & Alan SiuP 2009). Moreover, the ‘emergence of China as a source of outward foreign direct investment (FDI) has roots in its recent economic prosperity’ (Morales R.R & Louis B: 2010). This economic prosperity has built the country as an important economic and political player in the world. In this regard, Ruth Rios-Morales & Louis Brennan (2010, 215) cite Deng (2004) about the institutional factors that helped the strategies of the Chinese companies to invest in or acquire European companies. Due to the implementation of the market economy and due to the policies of the government in the backdrop of economic reforms, the traditional Chinese owned firm has enhanced its view from domestic to international market.
However, the control and ownership of Chinese firms resulted in the development of Multinational companies from China in diversified sectors, and this resulted in the investment of these companies in Europe. The reason and strategy behind acquiring European firms are to compete at the global level. Simultaneously, the inherent aspect is to challenge the liability of foreignness. This opportunity to challenge the liability of foreignness prompted the Chinese companies to acquire European firms and the risk in that act has been mitigated by ‘acquiring up-to-date technology’ (Morales RR & Brennan L; 2010, 215-216).
The Context of India
After China, its neighboring country India also provides an example of strategic investments of its firms in European countries in the form of outward FDI. The outward FDI from Indian companies is due to the change of policy from the domestic investment environment to the internalization of Indian companies according to their nature of global operations. Eighty percent of Indian investments are acquisitions in developed economies; one third being in the United States of America and two thirds in Europe. Out of the investments in Europe, half of them were in the UK. The Indian companies strategically invested in automobiles, textiles and chemical industries as these sectors are related to labor and managerial cost.
The Indian MNEs that operate abroad have an advantage of getting cheaper labor and staff from India and that offers a cost advantage over their competitors in that country. It is to be noted that most of the Indian companies’ European acquisitions were in the manufacturing sector. It can be termed as a strategic move as in the service sector, the firms from developed economies are outsourcing their projects to countries like India. The next point is that the largest sector that Indian companies are investing overseas is textiles as it accounts for one-quarter of capital moved into foreign countries.
The investments and acquisitions of Indian companies in European firms are different from that of East Asian firms. Unlike East Asian firms that used overseas investments as export platforms, Indian companies used the new locations for ‘import substitution production’ (Athukorala PC; 2009). Infosys and TCS from India have turn out to be two of the foremost IT firms on the Globe. Though these companies when compared to those like Haier contribute only 0.4 percent of the world’s outward foreign direct investment in 1970, it has been grown to 15.8 in 2008. After China India has been the point of emergence of outward foreign direct investment from Asia (Contessa S & Ghazaly HE; 2010).
The development in trade and acquisition of technology assets as part of knowledge-intensive production activities enabled Asian companies to foray into European markets. Though the policies of the governments in the wake of liberal regimes with the backdrop of globalization may be a reason for the Asian companies’ investments overseas, the experiences of various countries are different. Taiwan has followed the policy of interdependency with developed countries, and Korea’s strategy is to acquire technological assets. Japan was ahead of all the Asian countries in this race and the countries like Korea have taken a cue from it. The ASEAN countries as well as Taiwan, including big countries like China and India, first attracted FDI into their countries.
They then allowed their companies to flourish through joint ventures. After 1990, the governments of various Asian countries started easing the restrictions on foreign investments of their domestic companies and this resulted in MULTI NATIONAL COMPANIE status for the hitherto domestic firms. The strategy behind the advancement of Asian companies from the domestic status to international acquisitions lies in using their credit rating. The enhancement in credit rating helped them to mobilize funds for overseas investments. The government policies that allowed investing more than their net worth added to the enhanced capability of credit rating. This helped their strategies of expanding both horizontally and vertically.
These business activities also resulted in thinking that a company being an Asian one is important irrespective of being public or private owned. The R&D activities in Asian countries also have followed the same path and that resulted in the logic of policies coupled with business and technology, which also developed a desire in the domestic industry of Asian economies especially led by China; to be modern, powerful by acquiring the mastery of technology as a key symbol of success. After acquiring enough technological assets and investment capabilities, the important compulsion is investing in a foreign country to reduce costs of exports as well as Foreign Direct Investments depending on the geographical location.
The Asian companies acted and are acting strategically in acquiring firms in the locations where FDI is easier and are exporting to countries, which allow exports more easily. Another compulsion of acquiring firms in Europe by Asian companies is due to the complexity and difficulty to form joint ventures with well placed European firms in their home countries. As the latter ones are technologically advanced states than the former ones, the option before the Asian companies is to search for a European firm, which is finding it difficult to get liquidity and to acquire it. After acquiring it the Asian company can gain profits on European soil and also can acquire technological assets using the culture and R&D facilities in the firm. One more strategic advantage the Asian companies might have found in global acquisitions is that they can have enough countries to market their products in and locations to sell their low tech products like textiles and services.
- In the wake of the advance of Asian companies in international business, European firms should ease the restrictions on inward FDI as they help the cash-starved industries in the backdrop of economic recession.
- Regarding Asian companies, the respective governments should understand the international situation of availability of funds to their domestic firms and encourage them to invest in European countries, as that can increase the knowledge base of Asian companies as well as technological assets further.
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