FDI
Foreign Direct Investment (FDI) is has proven to be a major contributor to economic progress in the modern world economy. The main reason is due to the fact that FDI significantly solves the problem of scarcity of capital in the economy. The fact that foreigners come in with funds to be utilized within the economy improves both the levels of resource utilization and in the process improving the level of employment in the economy.
Indeed, experts asset that all the countries registering high levels of economic growth and development across the world record high levels of inward FDI. China is one such country. Since the year 1979 when the country launched comprehensive economic reforms focusing on implementation of an outdoor policy, the country has become the second largest recipient of FDI after the US. In fact it is the leading recipient of FDI among countries categorized as developing economies.
Implementation of the economic reforms was in phases. The first phase was between the years 1979 and 1983. During this period, the government was able to attract a paltry $1.8 billion as FDI over the 5 years. The period was characterized by the establishment of Special Economic Zones with special policies aimed at attracting investments in the Zones.
Most of the FDI was thus mainly within these zones but it was clear that the incentive was weak. The second phase saw the opening up of about fifteen cities along the Chinese coast. A commendable increase was recorded for the five years ending in 1989 with a total inflow of $2.1 billion. Afterwards other factors such as the Tiananmen incidents slowed down the growth of FDI from a high of 6.2% to 2.8%.
The third phase saw a push towards an overall reform process which would see even bigger commitments towards an open door policy as well as market orientation. These reforms were very popular among international investors as they were a remarkable departure from the traditional socialist policies which had for decades scared of capitalists from the rich western nations.
These policies were nationwide rather than regional implemented between the year 1992 and 1998 resulting in a peak of $45 463 in 1998. For the entire three phases it was clear that the Chinese economic growth was almost in tandem with the rate of growth of inward FDI. In the 1970’s the growth levels were below 5% but by the end of the 20th century, the country was able to maintain growth levels of above 10% for decades.
There are several factors which attract business to China. The first and most important one is the availability of cheap labor. Western investors may have high levels of capital but labor is always a challenge mainly due to the high living standards there. China has the largest population in the world and the educational levels are considerably high.
This means that foreign investors are able to access cheap labor in China. The implication of this is that the rates of return got from investing capital in China are considerably higher than investing in home countries. Secondly, China has a very expansive domestic market mainly due to the high population levels. Consequently, with the right environment, it is easier to acquire the required market share in China hence reducing the level of business risk.
The most important factors hampering even higher levels of FDI in China are cultural as well as political. There are stack contrasts between culture in China and the most important sources of FDI (the west). The government has come in strongly to defend the strong conservatism among the Chinese.
This is demonstrated by actions such as internet restrictions which have significant implications on the free flow of information. Again, the Chinese government is seen by many as being undemocratic issues which curtails the levels of liberalism experienced by the business as well as general societies in the west.
Cultural differences and International business
Business expansions to the international markets are a challenge mainly due to the difficulties in understanding different cultures which have inherent impact on the performance of the organization. Indeed many managers overestimate their ability to understand different cultures leading to poor performance by many international ventures.
It is clear among management experts that a comprehensive understanding of the different cultures in which the organization operates in is crucial in the determination of the success of cross-border business ventures. The most important remedy for this problem is for organizations to be as polycentric as possible. Polycentrism entails engaging in decision making processes which are in full consideration of the indigenous cultures in the country of operation.
As a manager in the retail food industry in the US and considering expanding to Malaysia, it is important for me to fully internalize the culture in Malaysia so as to enhance my chances of success in the country. First, Malaysia is a true multi racial nation. The indigenous Malays however make up over 60% of the population while Chinese and other groups fill up the remaining 40%.
The implication is that, the overall Malay culture is a combination several different cultures with the most significant being that propagated by the indigenous Malays. Unlike the US the dominant religion is Islam.
While investing in Malaysia, I would first make several general considerations based on culture as outlined by Hofstede. First are the high levels of collectivism as opposed to individualism. This is guided by the religious as well as indigenous cultures. This has implications on the way in which to best approach the market.
Instead of having outlets purely on take away basis as is the case in my current outlets, it would be more appropriate to have adequate sitting space to take advantage of this cultural aspect. Even in management, it is prudent for tasks to be assigned in groups rather than individually.
Secondly, as has been mentioned above, the dominant religion is Islam. This religion prohibits consumption of pork. Consequently, it may not be possible to replicate a significant portion of the products sold in the US to Malaysia. All products made using pork have to be dropped and replaced with beef mutton and other products. Any mention of pork products would mean a complete avoidance of the company’s products.
More importantly, the Malaysian culture requires that people as well as organizations portray a selfless outlook for them to be accepted in society. This being the case, the company will need to develop a comprehensive plan for effective corporate social responsibility. Where possible, it will be important to act selflessly in order to protect and promote a caring and concerned attitude which will guarantee acceptance in the society.
The Malay society abhors direct ways of communication. Direct negative feedbacks are seen as signs of rudeness and insensitivity. Consequently, there is need to save face for the sake of maintaining harmony among people who in this case will include employees and the general public. The implication of this is that, unlike the US where feedback to employees is given plainly, it may be important to devise different mechanism of performance appraisal for the company.
Cultural differences
Cultural differences are an important contributor to business risk. This is mainly because an organization which goes against the norms has minimal chances of success. People are most comfortable when dealing with ideas, products and services which conform to their expectations.
Consequently, it may be impossible for them to attach much value to anything which significantly disturbs their comfort. As the company analyst for my company (Duke Energy) which intends to expand to India to take advantage of growth opportunities there, I have to ensure that I obtain a comprehensive analysis of the cultural differences between the US and India.
The first important tool for establish the difference is the concept presented by Hofstede in defining the different dimensions of culture. The first dimension is the Power Distance Index (PDI). In India, the PDI measure stands at 77 above the global average of 50. The implication of this is that a larger percentage of the society endorses the inequalities which characterize the society.
The society is highly structured. The implication of this is that there has to a clear hierarchical structure which clearly defines who is senior to who and this has to be done in close consideration of the social structures present such as the caste system. The US on the other hand records a PDI of 62.
Secondly, the levels of collectivism are high in India as compared to the US. The implication of this is that management in India requires higher application of teamwork than in the US. Thirdly, the Uncertainty Avoidance level in India is much higher than in the US. UAI refers to the society’s ability to operate in unstructured rather than structured situations. The implication of this to the company is that there is the need for management to develop more structured instructions than is the case in the US.
In India, the Long Term Orientation (LTO) in India is estimated at 61 while that of the US is estimated at 26. The LTO measure depicts the country’s cultural orientation towards perseverance. In the US, fewer disturbances can trigger radical decisions such as resigning while in India, people are able to soak up more pressure before making decisions. Consequently, the company can safely relax some of the benefits enjoyed by workers in the US.
Other tools applicable in assessing the differences include the analysis of whether the culture is specific or diffuse. This defines the extent to which public and private spaces are separated. In USA, public spaces are highly limited in comparison to the India. Again there is more emphasis on being indirect in India rather than being direct as is the case in the US.
In addition, I can assess whether the Indian Society is focused on achievement or ascription. This defines whether an individual is required to prove him or herself in order to achieve status. In some cultures, status is bestowed to individuals on birth or without any tangible achievement. In others one has to work hard to achieve status. Clearly, in India, the caste system bestows some status to a person on birth. This is unlike the US where the status is determined largely by the achievements made by the individuals.
Taking to considerations all these cultural differences, the management of the Energy Company will be able to employ prudent management practices which will save the company from failing in India due to replication of management practices.