Institutional foreign direct investment entails investment made by a company based in one country and expands it investment to a company based in a foreign country. Foreign direct investment is beneficial to a company since it has the influence and control over the company into which investment is instilled (Acemoglu, Robinson, & Johnson, 2005, pp. 555-556). The existence of open economies with ample skilled labor enhances foreign direct investment as compared to closed economies. A company invests in the overseas company through a merger, subsidiary or acquisition of shares. This paper focuses on the risks experienced by FDI in terms of political, economic and institution distance in china and Brazil as compared with Germany. .
Germany is among the largest economies in the world with high purchasing power parity and it is a leading vehicle exporter. The GDP of contracted during financial crisis of 2007-2008 reflecting uncertainty in the economy leading to low investment spending. Moreover, decreased demand for exports was realized in recession stricken emerging economies. Germany has been disadvantaged by low population in terms of investment and the high unemployment caused by financial crisis in 2007-2008 leading to reduction of GDP to 5.1% though the economy is recuperating through reforms of adopted such as tax cut in efforts of stabilization (Dachs, Biege, Borowiecki, Lay, Jäger, & Schartinger, 2012).
The table explanation of growth trend in Germany since 2011-2013
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Source from World Bank ( The World Bank, 2015)
Germany the exist difference in terms of approaching the economy and maintaining the growth of the economy and development. Germany has also maintained political stability enhancing growth and development of the economy and companies. The service sector contributes to 70% of the GDP with industry contributing 29% and agriculture managing only 0.9% (Dachs, Biege, Borowiecki, Lay, Jäger, & Schartinger, 2012). Automobile is among the many products of the country specializes in production. The economy is highly boosted by increased export being listed among top three largest exporters.
Germany has created efficient and functional institutions that enhance growth of economy and trade. The institutions have the responsibilities of ensuring comparative advantages through development of mechanisms to remain relevant in the market and expansion of the firms. The governments intervene in the institutions through by laws that guide industrial policies necessary for development. Germany has institutions that pose extensive and complex mechanism for solving the economic recession enabling the firms to expand.
In comparison to Germany, Chinese economy that is characterized by gradual growth due to adoption of open market oriented economy that plays a great role in economic expansion. The two economies differ in terms of mechanism of financing the economy and methods of dealing with the inconsistencies of recession. China has focused on improving and reforming the institutions that facilitate growth of the economy. For instance, the stock markets, banking sector and opening of foreign trade and investment has been capitalized on. Moreover, it has capitalized on state owned sectors in sector it considers significant to economic security. A Germany car assembling company may be attracted by the economic stability, openness of the economy and high population in china. However it faces economic risks in investing in China due to the challenges that faces it economy. China saving rate is very high and correspondingly low demand in the country. In this case, the company may fail to sell as expected since the demand is low as compared to the export the country sells. Liability of foreignness is a risk that Car Company is likely to experience in China. The increased social and economic cost arises as the companies adjust to the host country. The assembling company will incur the cost of the ownership structure of the company, specific firm resources, understanding the environment and linkages of the company such as affiliated company. Moreover, emerging economy like China tends to have undeveloped systems of business functions. In this case, an assembling company is posed by the risk of the low transaction, and high cost leading to ineffectiveness in developing firm-specific advantages (FSA)
Considering resource-based theory (RBT) an overseas company investment is driven by the scarcity of valuable resources. Basically, this creates competencies in emerging economy facilitating firm-specific advantage in the market and creating dynamic capabilities. Development of capabilities revolves around developing and the acquisition of the resources (Zhao, Yeung, & Morck, 2008, pp. 340-342). However, an overseas assembling Car Company has few capabilities of developing dynamic capabilities. The inability to develop this capability is facilitated by inadequate understanding of the market and difficulty in adjusting to the abilities of operating effectively within the host economic and institutional systems.
Economically investors need confidence about the safety in terms recession and stability through the government adopting policies intending to expand the economy more and strengthening ties with other country. In this case, the assembling company needs ties being strengthened with Germany.
The table explanation of growth trend in China since 2011-2013
(The World Bank, 2015)
In comparison to Germany, Politically China has ensured stability through the government policies of steering the economic growth. The government has approached the economy through capitalizing on agricultural sector, construction/manufacturing and the services sector. China government has laid policies of attracting FDI in enhancing trade relation with foreign country to counter the demand in the market. The government has managed to deal with the recession through policies responses to global financial crisis.
Companies from overseas face risk in investing in China due to policies that have been laid down of regulating the recession of economy globally. An assembling company from Germany might experience insignificant sale as the country is regaining from recession. In this case, the Germany currency is weaker thus subject the company to risk (Andersson, Holm, & Forsgren , 2007). Moreover, the exchange of the currency is different and the country with a weaker currency against the dollar loses in business. Moreover, the policies of the government to diverse development in the entire country may risk the company by the location of setting the business in China.
Adoption of a uniform currency between trading countries may instill confidence where the investor is disadvantaged by the exchange rate. Policies should harmonize all investors both local and international enhancing competency in the market.
China has developed institution systems that enable economic development in the country. The systems assist in developing competency mechanisms in order to sustain innovation and the ability to involve institutional. The innovations must be compatible with the catch up policies through the firms investing required to access the required resources (Démurger, 2001). The institution is bestowed with the responsibility of assisting potential domestic and international company in accessing and utilizing resources effectively. The assembling company has the risk of accessing the licenses or accessing the resources where corruption is prevalent. The Germany car company also faces risk in the event the institution system fails to suitably develop the national resource pools (Eden & Molot, 2002). The institutions system should enhance the support of both international and domestic firms. In the event, this support is inadequate there exists the risk of international firms surviving in the market.
The confidence of investor can be instilled through creation of institution systems that creates extensive ways and means to build and sustain a resource pool suitable for economic development. The adoption of a compatible institution system in the economy will lead to utilization of resource attributing to economic growth and expansion of the investor company.
Brazil economy is characterized by moderate open market and inward oriented market. It is among the largest economies in Latin America with a fast growth rate of 5% in 2002 up to 2012. However, currently Brazilian economy is not doing well with the country GDP reflecting deceleration in 2013-2014 with growth not being reported during the year. Fiscal policies adopted since 1990 has fostered a good platform towards fiscal sustainability and the measures adopted to liberalize open economy has significantly boosted the fundamentals of competitiveness (Fu & Gong , 2011). This has provided a good platform for private sector investment. However, here exist the risk of a company from overseas willing to invest due to the uncertainty existing in the economy and slow growth rate in the country. The assembling company may face the risk of low sales and high cost due to inflation leading to high price levels. Economically the companies experiences liability of foreignness. The existence of this liability exposes the companies to additional costs that local companies are protected from by the laws (Andersson, Holm, & Forsgren , 2007, p. 813).
The economy of Brazil demands adjustment for stability to be achieved. Policies that focus on integrating foreign trade through structures governing the operation in the economy will instill confidence to investors. Fiscal policies adopted in the economy should be favorable to attract investors in the economy with minimal cost.
The table explanation of growth trend in Brazil since 2011-2013
(The World Bank, 2015)
The economy of Brazil is financed by tax payment and financial operations. The government of Brazil is in control of many sectors of the economy as a strategy to hold sensitive sector.
In comparison to Germany, Brazil is recently experiencing politics hurdles negatively affecting the economy. Recently the people demonstrated due to their dissatisfaction with the leadership existing currently. Politics plays a vital role in ensuring the growth of both internal and multinationals firms. The emerging economy depends on the stability of the politics in order to increase the attraction of financial direct investment. In this case, investment from overseas company faces various risks in event of investing in the country. The volatility of hurting the profitability of the company is determined by the political environment in the host country (Neumayer & Spess, 2005, pp. 1571-1573). In this case, the risk bestowed to an overseas company in terms of profit and sales results due to low production and low demand in the market.
The status of the politics in Brazil needs reforms in order to attract the foreign investor through political stability. Adopting of policies that focuses on stabilizing the economy of the country by expanding international links in order to increase demand through inflation control. This will instill confidence to investor such as the Germany assembling company.
In comparison to Germany, Brazil Institutions have the priorities to ensure the effectiveness of the business operation. In terms of licensing and creating a business environment that favors both international and domestic investors. Firms should interact with the institution systems laid down to facilitate operation of business smoothly. Proper management of the institutional systems facilitates innovations, increase the value of the product and ensure standardization of the products. The assembling company from Germany may encounter some risks before maneuvering in the market (McDermott, 2007). The risk results from the institution inability to entrench many firms into foreign direct investment trade flows and accessibility mean at low-risk cost. The institutions system has the responsibility of permitting and encouraging sustaining innovation and the ability to engage entrepreneurship in all the entity. The risk arises where the institutions system in emerging economies has not developed to the extent an overseas company expects (Eden & Molot, 2002, p. 366). The assembling company risk is losing the induced capital in an oversea company before the prospecting economy fully develops to handle the products offered in the market.
The confidence can be instilled to the assembling company through assurance of adherence to the stipulated laws governing the foreign direct investment. Existence of institutions checking the quality of services offered in various services enhances confidence to companies investing in foreign countries.
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