Make-or-break Decisions in Choosing Foreign Direct Investment Locations - Assignment Example

Journal article “Make-or-break decisions in choosing foreign direct investment locations” Name Professor Institution Course Date Description and analysis of journal article “Make-or-break decisions in choosing foreign direct investment locations” Introduction Foreign Direct Investment is a significant basis of getting capital and growing the economy in most developing nations (Bromiley, Miller & Rau 2001). It offers a platform for management techniques, new technologies, investment and access of the market for the manufacture of goods or provision of services. However, attraction of Foreign Direct Investment remains a major concern for host nations since it faces a key challenge of establishing the major elements that encourage and affect the Foreign Direct Investment’s location decision. Several literatures exist regarding the determinants of location for when choosing a foreign market location, but most of them do not offer much information on location factors for Foreign Direct Investment in various countries (Buckley, Devinney & Louviere 2007, p.6). Therefore, this article tries to fill the previous research gaps by analyzing how decisions can make or break the plans to invest in a foreign country. Description of the article The article “Make-or-Break Decisions in Choosing Foreign Direct Investment Locations” by Lailani Laynesa Alcantara and Hitoshi Mitsuhashi is an empirical research; it gives a clear summary of the whole article and a comprehensive literature review of the current and past researches. This article provides an abstract, introduction, literature review, methodology, results, discuss, conclusion and references. It begins by giving out a brief explanation of the rationale need, and the importance of the study. The abstract also gives a brief outcome of the study by stating that small companies with business relationship are more expected to enter foreign nations with an intense political instability compared to larger companies with such relationship. The introduction also clearly states the main objectives of the study connecting what has been mentioned in the abstract to the whole content of the journal article. It also links various studies carried out mentioning different risks organizations face in their global expansion plans. This literature gives examples of companies that have taken risks to enter new foreign markets while their local competitors have stayed away. A case in point is the Honda Motor Company that decided to set up its first company in the US in 1979, whilst other Japanese auto manufacturers consisting of Nissan and Toyota hesitated (Alcantara & Hitoshi 2012, p.336). Another example stated in the article is a Tokyo-based credit card company; Japan Credit Bureau that took risks to establish its company India in 1979 despite uncertainties. Gulf Oil and Shell also set up their companies in Nigeria despite of political and economic turmoil in the 1960s (Alcantara & Hitoshi 2012, p.336). The author compared previous studies and even points out some inconsistencies with the current studies. The main objective of this journal article was to report the outcome of the investigation on the circumstances under which companies make risky choices of location concerning their foreign direct investments (Alcantara & Hitoshi 2012). Another objective of the article is to assess the two risks associated with global expansion without proper research of the market. Alcantara & Hitoshi (2012, p.337) argue that one of the risks is the unpredictability of prospective demand and viability of carrying out business in the foreign nation market; marketplace opportunity risk. The second risk is the uncertainty of political, legal and regulatory situations which could affect business in foreign markets such as political risk. Just like any empirical article, literature review comes after introduction (Alcantara & Hitoshi 2012). This section is well written with clarity and is consistent with both abstract and introduction. The article also has a well organized paragraphs, one leading to the other. The literature uses Dunning’s eclectic paradigm to explain various determinants of FDI with regard to location. This paradigm is as old as 1973 but can never be overlooked. This demonstrates how previous researches can still be important for companies even as the business environment changes. The article clarifies research methods used to arrive at various conclusions. For instance, in Japanese automobile parts industry’s study, the article used longitudinal research on international expansion data to establish the outcome. The study found out that although companies usually evade risk in selecting foreign direct investment locations, they take up risks when undergoing strong native-country competition and insufficient business group relationship (Alcantara & Hitoshi 2012). The article however, provides a choice model they use to reach at the decision about firm’s entry into a new foreign country. Discouraging enough is that, the model is very difficult for a layman to understand. It contains very technical mathematical formulas which are complex. The research is controlled by both the variables were involved in the research, that is the dependent and independent variable. In the methodology section, various data in the form of tables are given to see which countries that took risks to make entries to other foreign counties and make direct investments. It also gives the method used to analyze data; descriptive statistics and correlations. Even though the methods of using models and regression are difficult, the article explains explicitly how the researchers arrive at the given results. The result is also represented in tables which is easier for viewing. The evaluation is done and results discussed while giving way forward. All the in text-references are listed at the end of the article. Analysis The article has contributed in a number of ways in the previous and current touching on selection foreign direct investment locations. First, the article contributes to fill the gaps in the previous research concerning the factors to consider when choosing the appropriate location for foreign direct investment. It states the risk associated with different locations that managers should take into consideration when intending to invest in a host country. The paper draws its comparison from the previous studies and links it with the recent situation (Alcantara & Hitoshi 2012, p.338). The author utilizes Dunning eclectic paradigm developed in 1973, modified in 1980 and 1993 to bring the article into perspective. The eclectic paradigm is an addition to other concepts from various database reports to make the literature more comprehensive in terms of research. The ideas passed here are clarified using examples, the time of occurrence and the outcomes. After a research the literature provides its methods of data collection, presents the results and also presents some of the shortcomings of the research. As such the reader is able to analyze and compare it with other researches regarding the same topic. The objectives and goals of the paper are met after qualitative and quantitative method carried out in the literature. To readers’ understanding is boosted by definition of key terms such as ‘risk’ and ‘uncertainty’ Bromiley et al., (2001, p.261) define risk as the unpredictability or shortcoming unpredictability of business result variables”, while uncertainty is defined as “the observed unpredictability of organizational and environmental contingencies” the article maintains that, even though firms enter international markets to achieve competitive advantage, it is important to understand the market risk and business environment first before venturing into the market. The literature cautions the managers at risks that come with globalization. It states that International expansion is linked with high degree of risks, since it entails a substantial level of resources under situations of uncertainty. However, it is argued that despite being risky to enter a market without proper knowledge, the firms have regarded it as a way of taking risks under certain circumstance to invest indirectly in a foreign country (Alcantara & Hitoshi 2012, p. 336). In this context, risk taking is considered a foundational factor of changes. The research in fact focuses on two categories of risks, that is the market opportunity risk and political risk. Alcantara & Hitoshi (2012, p.336) postulate that market opportunity risk is the unpredictability of prospective demand and the viability of carrying out business in the foreign country market while political risk has to do with unpredictability of political, legal and regulatory situations which could impact carrying out business in the foreign country market. Firms normally embrace outward FDI based on three-tier paradigm (eclectic paradigm) developed by Dunning that determine the outward FDI; benefit of ownership, location and internalization (Rugman 2010, p.6). Even though the article mostly focuses on the location as the main objective, it also touches on the other two paradigms. Ownership benefits provide competitive advantages emerging from the native country but can be transferred to the foreign market. Howell (2001) maintains that location benefits are far reaching of a particular host nation’s characteristic which promotes or support a multinational competitive advantage. These characteristics consist of the availability of natural resources, special taxes, tariffs, low-wage labor and infrastructure development which reduces production, communication and logistics costs. On the other hand, internalization advantages implies to the greatest benefit and the value of internalizing fiscal activities in relation to managing them externally by mean of licensing and affiliations (Reimann et al 2012, p.4). Some of the dunning eclectic paradigms identified to determine location in the literature are market seeking, resource seeking, strategic asset seeking and efficiency seeking. The attractiveness locations in the foreign country determine the FDI opportunities (Rugman 2010, p.7). Foreign countries having plentiful natural resources, considerable size of market, low cost of production is most likely to focus on resource-seeking, efficiency-seeking FDI, market-seeking respectively. Rugman (2010, p.3) claims that host nations having powerful strategic assets like technology and know-how are most likely to focus on asset-seeking FDI. Without analyzing the risk associated with foreign direct investment firms may ruin their corporate outlook. Firm expanding abroad without proper knowledge of the host country could face risk of geographical distance, risks arising from less accessibility of information concerning business prospective and consistent value chain in foreign markets, risks derived from discriminatory conduct by local stakeholders consisting of employees, customers, government towards the company and risks founded on the uncertainty of economic , political and legal environments for global investments (Reimann et al., 2012, p.12). If the significance of stability is not addressed by the host government foreign investors are likely to lose money or make looses that they did not expect (Howell 2001). The literature proposes that managers pursuing location for foreign direct investment they can choose one of two type’s information search, forward-looking or backward-looking searching (Gavetti & Levinthal 2000, p.123). The article uses archival data to test its hypothesis. The data relied on in this research had been employed by Banerji & Sambharya (1996) and Martin et al. (1998) to examine global expansion by auto parts producers. However, it is the same article that faults the same data source because they were used in different situation; that is the behavior of customers and the patterns of simulations of managers' entry while the current research focuses on the mechanisms under which managers make entry into host countries (Alcantara & Hitoshi 2012, p.338). This may actually make the reader question the results because conditions were different. When dependable variable, in particular, choice is paired against independent variables such as market opportunity risk, political risk, competition and business group affiliation different results are achieved. The coefficients of variables indicate the various ranges of transplanted competitors are negative and significant, showing that companies are less likely to select a foreign country which few or no competitors have located. Results also suggest that companies with no business group relationship are likely to penetrate foreign countries with strong opportunity risk compared to companies with business group association (Alcantara, LL & Hitoshi 2012, p.341). Conclusion Global expansion is a feasible, though risky, choice for organizations to improve growth and to safeguard its survival lies with the decisions made by a manager after considering factors discussed in this article. Each host country has its set of rules of FDI which decide the manner in which a foreign country can carry out business that a manager has to be acquainted with. The literature has best approach in analyzing the markets or locations which are best for every type of FDI, risk associated with them using different theories. As one of the articles at disposal managers must make use of the information while balancing with others that exist. The literature is logically written to provide enough information for the modern business, therefore it is a must read for managers intending to invest in a foreign country. References Alcantara, L & Hitoshi, M 2012, Make-or-break decisions in choosing foreign direct investment locations, Journal of International Management, Vol. 18, No. 4, p. 335-351. Banerji, K & Sambharya, RB 1996, Vertical keiretsu and international market entry: the case of the Japanese auto ancillary industry, Journal of International Business Studies, Vol. 27,No. 1, p. 89–113. Bromiley, P., Miller, K & Rau, D 2001, Risk in strategic management research, In: Hitt, M.A., Freeman, R.E., Harrison, S.J. (Eds.), The Blackwell handbook of strategic management, Blackwell Publishers Ltd., Oxford, UK. Buckley, P., Devinney, M & Louviere, J 2007, Do managers behave the way theory suggests? A choice-theoretic examination of foreign direct investment location decision-making, Journal of International Business Studies, Vol.1238, No. 7, p. 1-26. Gavetti, G & Levinthal, D 2000, Looking forward and looking backward: cognitive and experiential search, Administrative Science Quarterly, Vol. 45, No. 1, p. 113–137. Howell, LD 2001, The Handbook of Country and Political Risk Analysis, third ed, The PRS Group, East Syracuse, NY. Martin, X., Swaminathan, A & Mitchell, W 1998, Organizational evolution in the interorganizational environment: incentives and constraints on international expansion strategy, Administrative Science Quarterly, Vol. 43, No. 3, p. 566–601. Reimann, F., Ehrgott, M., Kaufmann, L & Carter, C 2012, Local stakeholders and local legitimacy: MNEs' social strategies in emerging economies, Journal of International Management, Vol. 18, No. 1, p. 1–17. Rugman, A 2010, Reconciling internalization theory and the eclectic paradigm, Multinational Business Review, Vol. 18, No. 2, p. 1–12. Read More