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ABSTRACT

By reviewing the existing literature on FDI theories and FDI performance determinants

studies, we find the necessity and possibility to provide for a synthetic model to measure

FDI performance. This model is not a simple combination of existing theories, but is a

reorganization of those theories arranged into a logical theoretical framework. A logical

connection between the MNE subsidiarys ability to realize OLI advantages and the

performance of the FDI was found and important extensions of the OLI paradigm have

been created. The synthetic model is a split OLI paradigm that includes all FDI

performance determinants in its 6 elements. An empirical study of 13 FDI cases in

China was done to test the concept of the synthetic model. This study reveals a high

correlation between the hypothesized results and actual results.

Key Words: FDI performance, OLI paradigm, Imbalance theory, Synthetic model

Student Number: 2002-23916


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TABLE OF CONTENTS

1. INTRODUCTION..................................................................................................... 1

2. LITERATURE REVIEW ......................................................................................... 3

2.1 General FDI theories ....................................................................................... 3

2.2 FDI performance determinants researches ......................................................4

3. THE SYNTHETIC MODEL ..................................................................................16

3.1 OLI Paradigm as the Framework..................................................................16

3.2 Necessary extension to the OLI......................................................................17

3.3 Split the O dimension .....................................................................................19

3.4 Split the L Dimension .....................................................................................20

3.5 Split the I Dimension......................................................................................21

3.6 Overview of the Synthetic Model....................................................................23

4. EMPIRICAL EVIDENCE ......................................................................................25

4.1 China is the Best Testing Ground for New FDI Theories...............................25

4.2 Sample Case Review ......................................................................................26

4.3 Case Analysis by the Synthetic Model............................................................28

5. CONCLUSION........................................................................................................31

6. REFERENCE ..........................................................................................................33

Appendix: sample cases brief introduction...................................................................36


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FIGURES

Figure 1 Splitting the O dimension ........................................................................... 20

Figure 2 Splitting the L dimension............................................................................21

Figure 3 Splitting the I dimension.............................................................................23

TABLES

Table 1 Linkage between OLI paradigm and the exist performance determinants

theories ..............................................................................................................17

Table 2 Sample cases review.....................................................................................27

Table 3 Result of the empirical study........................................................................30


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1. INTRODUCTIONThe FDI performance or the Multinational Enterprises oversea subsidiary performance is

one of those most often discussed topics, but the discussion on environmental

determinism versus strategic choice remains contested in the international business

management research field. From an academic viewpoint, there is space for developing a

new comprehensive model to include the existing theories and to find a theoretical

interrelation between them.

Theories proposed should be tested in practice. From the recent development ofChina, we can see that the MNEs international business environment has been changing

continuously. New changes are observed in several manifestations. MNEs are increasing

their investment and expanding subsidiary size. They are also trying to diversify their

investment, not only concentrating on the assembly business but also opening new

businesses other fields with high value added. They are also injecting more capital and

technology contents to build R&D centers in China as local competitors are becoming

adapting and improvising. Foreign firms are given more choices on entry mode selection.

MNEs may now enter China via international trade or by Joint Venture. The most recent

trend is of Merger and Acquisition. All these changes reflect that as China opens its

market and shapes it toward a global standard, foreign firms providing FDI to China are

given more strategic alternatives to maximize their performance. FDI activities have

become more complex for MNEs and any strategies final effect on the FDI performance

becomes more difficult to forecast. MNE strategy makers need a powerful tool which can

provide comprehensive understanding of FDI performance determinants, and by which

MNEs can model their FDI-related strategic choices.

Therefore, from both the academic and business fields, we see the necessity and

value of creating a comprehensive and logical synthetic model for measuring the FDI

performance determinant. This model should be able to measure the most important

issues related to FDI performance, such as entry mode choice, technical input, cultural

distance, partner relation, local government relation, subsidiary size, transactional cost,


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and liability of foreignness. Simply combining all these issues together will not provide auseful academic instrument, as the overlapping and logical connection may be

problematic. The new model should not only be comprehensive but also systematic. The

importance of providing a framework for the theories cannot be understated. This

framework should be able to categorize the existing theories and recognize the

interrelation among them.

This new model should be based on existing theories, especially those which are

better known and accepted. A necessary work is to summarize and arrange these theories

into a framework. The framework should be able to analyze most of the important factorsand processes of FDI activities. In another word, it should be able to give answers to the

questions on who, when, where, and how to do FDI and etc.

The new model is examined both theoretically and by realities. To examine the

validity of the model theoretically, the core task is to examine the validity of the

framework that is used to envelop the existing theories. To examine the model by

empirical evidence, we try to use it to explain the FDI performance determinants in some

real cases. As the initial idea of this study is to give a powerful business model to those

MNEs who is doing and will do FDI in China, the empirical evidences are mainly

selected from MNEs China FDI activities.


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2. LITERATURE REVIEW2.1General FDI theories

The international business theories have been developed for decades. Although there is no

and cannot be a perfect theory to cover all the aspects of international business activities,

the existing theories disclosed the main motivations of FDI and have important

implication on MNEs oversea operation.

Dunnings OLI paradigm (Dunning, 2000) and Moons imbalance theory (Moon1999, Moon and Roehl 2001) are especially important for this study. These two theories

are complementary to each other on explaining the motivations of FDI activities.

Dunning provided an eclectic OLI paradigm as envelop of FDI theories and this

theory has been regard as the most authorized FDI theory until now. It envelops the FDI

theories developed from Hymers market imperfection theory (Hymer 1976), Rugmans

internalization theory (Rugman 1980) and many others. The resource based approach

(Wernerfelt, 1995) can also be explained by OLI paradigm.

Based on the new emergence of upstream FDI from LCD and strategic investment,

Moon and Roehl pointed out the existing approach is unsatisfactory in providing adequate

explanation for the rich variety of FDI activity. They defined the new types of FDI as

unconventional FDI. The unconventional FDI, including LDC firms as well as DC firms

that make strategic investment, are trying to redress an imbalance in their competitive or

resource position through their investment. It is a lack of advantage, rather than the

exploitation of the existing advantage, which drives the investment. Therefore the

fundamental motivation for growth is not managerial resources per se, but an imbalance

in those resource, and it is true not only for unconventional FDI but for conventional FDI

as well. (Moon and Roehl, 2001)

The core idea of imbalance theory is to look at both the advantages and

disadvantages, or their imbalance, but not just the ownership advantage. The FDI

motivation of imbalance theory is not just to search for complementary assets (Teece,


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1992), but also to enhance the productivity of firm-specific assets, which will strengthenthe existing advantages and/or create a new advantage with the increased productivity.

Thus the FDI is not only an ownership advantage exploitation process but also can be a

learning mechanism, a catch-up mechanism, a regulation-bypassing mechanism, and a

resource-building mechanism. (Moon, 1999)

To formulize their idea, the motivation of FDI can be expressed as the following

function:

FDI = f (imbalance) = f (|T-T*|, |R-R*|, |M-M*|,...)

WhereT (R, M) = Actual technology (resources, market share)

T* (R*, M*) = Optimal technology (resources, market share)

This formula hypothesizes that the imbalance among the firms assets endowment,

either advantage or disadvantage, is the source of FDI motivations; the bigger the

imbalance among the disadvantage or advantage, the more the firm is willing to make

FDI. Another hypothesis, which is excluded from the above formula, is that the basic

assets endowment is still important do decide the capability for the firm to make FDI.

(Moon and Roehl, 2001)

The imbalance theory can be seen as an extension to Dunnings OLI paradigm.

Altogether these two theories can explain the main motivations for firms to participate in

international production by FDI, both down stream and up stream. Since the FDI

performance determinants are initially decided by the firms motivation to do FDI, these

two theories have important meaning in this paper. These two theories explaining power

is the most sufficient to cover main aspects and main types of FDI activities, therefore

they can direct the way to generate the framework to envelop the FDI performance

determinants theories.

2.2FDI performance determinants researches

There have been plenty of researches done by business scholars all over the world


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referring to the determinants of FDI performance. Their approaches diverse in many waysbut their aim are the same to figure out the most important factor(s) that have decisive

impact on the MNEs local subsidiary performance. Such researches are being renewed or

updated continuously, as the environment and MNEs activities change over time. The

most frequently discussed factor is the entry mode choice. Firms either choose highly

controlled entry mode, such as wholly owned subsidiary, or share the controlling right

with local partner, such as cooperative joint venture. They can achieve such kind of

entries either by Greenfield investment or by Merger and Acquisition. Another prevalent

topic is the liability of foreignness or cost of foreignness. Early from 1960s, Hymerpointed out that MNEs could not avoid certain disadvantages against local competitors

when they make FDI. Such disadvantages may come from the shortage of local business

experience, culture conflict with local people, or weak relationship with local authorities,

etc. Every element of the liability of foreignness has been studied respectively,

consequently many new topics emerged, such as relationship with local government,

relationship with local partner, cultural distance concern, etc. Also there are researches

based on the recipient country or regions condition, including the country condition and

industry condition. The assets endowment of the investing firm, including the technology

abundance, capital adequacy, are regarded as anther factor that directly effects the firms

local subsidiary performance. The transactional cost concern is another approach as well,

which is derived from the conventional FDI theory.

Such researches cover most the important aspect of FDI performance determinants,

but their focuses are different and even focusing on the same factor, their approaches are

different. The purpose of this paper is to generate a synthetic model to envelop these

existing theories by using a theoretical framework rather than simply combining them.

Dozens of theories mention or partly mention the FDI performance related factors,

both from eternal factors and external or environmental factors. Not like OLI paradigm in

the general FDI theory field, there is no leading theory or general framework in this field.

We tried to summarize and categorize the theories to ensure that no important

determinants are ignored. This process is very important and meaningful as a preparing


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stage of synthetic model generating. We finally collected the theories categorized into thefollowing 9 groups:

a. Firm technology endowment

Ji Li, Kevin C.K. Lam, Leonard Karakowsky, & Gongming Qian (2003) examined

the technology resources impact on the firms first-mover advantage and performance, in

a background of foreign firms FDI into Chinas telecommunication industry. In a

technologically dynamic industry such as the telecommunication equipment, firms

culture and technology resources can moderate the relationship between first-moverstrategy and firm performance. Specifically, in Chinas telecommunication equipment

industry, first-mover advantages seem to be contingent upon firms culture and

technology. For example, only the western firms with technological edge can achieve or

maintain first-mover advantages in the industry. On the other hand, among the firms

funded by overseas Chinese capital, little evidence is found of first-mover advantages.

Here the overseas Chinese firms seem to have difficulties in continuous R&D or

technological innovation. Without technological innovation and development, these firms

may have little technological edge so that they failed to maintain their first-mover

advantages in Chinas telecommunication equipments industry. As a result, there was no

significant difference in performance between the first movers and followers among the

firms funded by the overseas Chinese firms.

Walter Kuemmerle (1999) also mentioned those foreign firms were motivated to

invest into R&D sector, because of many reasons such as technology leadership, and

better network with local government. Because the local policy maker prefer those MNEs

with technology spillover effect than those without that.

b. Firm assets endowment

Firm assets abundance or firm size has been of interest to many researchers because

it is an important variable for the purpose of explaining firm strategies. It should affect

the way firms set up EJVs abroad. In the literature, firm size has been shown to affect a


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firms propensity to innovate, and its performance. Large firms tend to have a morecentralized management system and more non-personal mechanisms of control. In many

ways, smaller firms have weaker bargaining power than large transnational firms. Franko

(1989) founded that smaller U.S. firms were more likely to accept a minority or 50-50

equity position in oversea EJVs than larger U.S. firms were (Yigang Pan & Xiaolian Li,

2000).

Large firms have a greater tendency to integrate operations on a regional and global

basis. They are able to capitalized on the differences in resources across courtiers, and

achieve economies of scale, scope, and learning. According to a comprehensive study bythe United Nation (1993), small and medium-sized transnational corporations often suffer

from limited financial resources. They have a narrow market scope and are less likely to

invest in emerging markets. They have inadequate management and technology

capabilities, and lack the necessary international experience. In short, small and

medium-sized firms are more likely to pursue short-term goals and short-term outcomes.

The size of a firm correlates with the ability to raise the needed resources for

large-scale projects, the ability to leverage across country markets and industries, and the

ability to plan and act on a long-term basis. This abilities or inabilities either enhance or

reduce the firms competitive posture and bargaining power.

Yigang Pan & Xiaolian Li (2000) studied a sample of 1,298 foreign EJVs in the

Peoples Republic of China between 1981 and 1998, and found that large transnational

corporations bring in large-scale EJV investment to the host country and they also

demand a higher level of equity ownership and, with it, more control over the venture.

While they are more likely to stay over a longer period of time and is more likely to go

into global industries and upgrade the technology, production, and management in the

host country.

c. Country and industry condition

Petra Christmann, Diana Day & George S. Yip (1999) mentioned that country and

industry characteristics are mainly outside the control of management, whereas corporate


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characteristics and subsidiary strategy are under managements control. Their researchresults show that country characteristics are by far the most important determinant of

subsidiary performance, followed by industry structure, subsidiary strategy, and corporate

characteristics. Their results support the environmental determinism view more than the

strategic choice view and the resource-based view of the firm more than the industry

structure view.

These results have implications for MNCs regarding the selection of country

markets for entry and investment, and in the evaluation of subsidiary managers. The large

effect of external conditions on subsidiary performance suggests that an MNCs ability ofpicking the right countries for entry and investment should lead to significant competitive

advantage. This implies that strategic choice at the corporate level is very important for

corporate performance.

The large importance of country factors in determining subsidiary performance also

suggests a critical skill for MNC corporate management is managing country risk to

reduce the negative effects of fluctuations in country political and economic variables on

subsidiary performance.

The fact that political and economic instability were found to have negative effects

on subsidiary performance suggests that MNCs should purchase insurance against

political risk and use financial instruments to hedge against exchange rate exposure.

d. Relationship with local partner

Mehmet Demirbag & Hafiz Mirza (2000) discussed inter-partner relationships and

their impact on joint venture performance. Their research explores the changes in the

nature of relationships (conflict, commitment, co-operation, trust) which have important

implications for the continuity and performance of partnerships. In doing so, it identifies

the potential areas of co-operation and conflict, due to both partners overlapping interests,

and establishes constructs which help explain conflict, commitment and other soft

dimensions of joint venture operations.

The research findings presented in this paper confirm the view that there is a strong


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connection between the nature of relationships (conflict, commitment, cooperation, trust)and performance (defined both in terms of financial dimensions and satisfaction). There

are general and specific implications for firms, especially MNEs.

At the general level, foreign MNEs entering joint ventures with local partners should

be aware that IJVs are, by their very nature, cross-cultural marriages, relying on trust

building, long-term commitment and inter-partner co-operation. Understanding this,

rather than depending on written contracts and control activities can increase an IJVs

long-term prospect and survivaland therefore both parent firms satisfaction with

operations. Parent firms should also realize that, an adept handling of conflict situationscan increase the quality of inter-partner relations which in turn is likely to affect the

performance dimensions of IJV operations. This implies that as the respective

managements of partner firms gradually gain a working knowledge ofand trust

ineach other, the mechanisms created to protect the existing partnership structure may

change. It is best if these dynamic changes lead parent firms into a more organic

relationship and a greater understanding of each others characteristics, objectives and

culture. Given that the quality of inter-partner relations and harmony can influence IJV

performance, parent organizations should endeavor to create mechanisms which can

resolve conflicts as they emerge. A regular meeting of executives would perforce underlie

any effective solution.

e. Relationship with local government

Rajib N. Sanyal & Turgut Guvenli (2000) studied a survey of managers of American

firms in China indicating that they have been able to maintain good relationships with the

Chinese government; this is particularly true for larger firms. Statistical results suggest

that government interference in the operations of the subsidiary is generally minimal

though it is greater in the case of joint ventures as compared to wholly owned firms. The

performance of the subsidiary is influenced by the quality of the relationship with the host

government.

The role of governments, home or host, in international business has been


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extensively studied. While overall trends suggest that more and more governments haveembraced the concepts of free trade, unhindered flow of investments, and protection of

the rights of foreign firms, the propensity of governments to impede the activities of

foreign firms remain. This is particularly true for countries that have embarked on

transiting from a socialist economy to one based on free market tenets. Consequently,

maintaining good relations with the host government is of great importance to a foreign

firm. The foreign firm is anxious to avoid the deleterious effects of changes in

government policy; to seek the assistance of the government to address any difficulties it

experiences in the host country; and to build up a web of contacts and influences thatwould immunize it from hostility from host country firms and other interested groups.

The host governments role in the economic environment as perceived by the foreign

firm can be both positive and negative. Establishing transparent rules of ownership and

contracts, creating an independent judiciary to settle disputes and provide for due process,

enacting favorable tax laws, ensuring public policies that are consistent over time,

treating foreign firms on the same basis as domestic firms, and removing restrictions on

the transfer of resources across borders are some of the positive steps that the government

can take to encourage foreign investment. In contrast, the role and behavior of the

government can also be such that makes the carrying out of business activities much more

difficult. Policies that discriminate against foreign firms or which reserve profitable

segments of the economy to domestic firms; policies that change suddenly and arbitrarily;

the absence of clear cut rules and guidelines and the subjective interpretation of such

rules, precisely because they are ambiguous; the uncertain procedures to settle

commercial disputes; and unexpected demands on the foreign firm all create a negative

atmosphere for conducting business. Foreign firms have to ensure that the operational

climate in the host country remains conducive to profitable business activity and this

requires an active management of the relationship with the host government. The goal is

to limit the negative influences and accentuate the positive role that the state can play to

enhance the firms activities.

Rajib N. Sanyal & Turgut Guvenli (2000) studied the relationship between US firms


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and the Chinese government at a time of rapid change in China. Maintaining favorablerelationships with host governments anywhere is a key task for the managers of

multinational firms. The findings of their research suggest that despite the major role of

the Communist Party in China and the large size of the public sector, foreign firms,

especially those that are large and located in the business-friendly coastal regions, have

not encountered major difficulties in their dealings with the government. Most managers

acknowledge and recognize the need to cultivate good relations with the bureaucracy and

to the extent they are able to do so, the results are reflected in organizational success.

f. Cultural distance concern

Ji Li, Kevin Lam & Gongming Qian (2001) applied a resource-based view of the

firm to analyze data from a sample of 898 joint-venture firms in China, including both

joint ventures established by overseas Chinese and by firms from Western cultures. By

comparing this two groups of joint venture, they showed that firms cultural resource

have certain impact on the FDI performance. Their study shows evidence supporting

some effects of firm cultural resources. Specifically, the data suggest that Oriental culture

is valuable for East Asian firms in terms of efficiency and rapid market entry. Also, JVs

established by partners from East-Asian cultures might find it easier than their East-West

counterparts to manage human resources in China. This may partially explain why many

East-East JVs showed significantly lower capital commitment, which suggests that they

had more labor intensive operations than the East-West JVs.

Tomasz Lenartowicz & Kendall Roth (2001) found that not only the national culture,

but also the sub-culture within a country matters to the performance of FDI. Foreign

firms have to consider both the national culture and sub-cultures within the country when

they make the FDI.

g. Transactional cost concern

Transactional cost concern does not affect firm performance directly but uses entry

mode as a transition function. That is to say entry modes that designed by transactional


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cost concern promise greater chance for better performance. Keith D Brouthers (2002) pointed out those firms whose mode choice could be predicted by the extended

transaction cost model performed significantly better, on both financial and non-financial

measures; than did firms whose mode choice could not be predicted by the extended

transaction cost model.

Based on their analysis, it appears that an extended transaction cost model of mode

selection does a good job of predicting entry mode choice. Although not all the

transaction cost and cultural context variables were significant predictors of international

mode choice, the results suggest that mode selection appears to be driven by acombination of general transaction cost characteristics, institutional context (legal

restrictions), and cultural context (investment risk) variables. This study provides

additional support for those scholars (Brouthers and Brouthers, 2000; Delios and Beamish,

1999; North, 1990; Kogut and Singh, 1988) who suggested that the explanatory power of

transaction cost models of mode choice could be improved by including aspects of both

the institutional and cultural context.

h. Entry mode choice

Entry mode choice is highly related with the topics above and affects the FDI

performance more directly and heavily than other factors. Therefore the studies around

entry mode choice charge the biggest proportion and most of which are done in the

transactional cost framework.

Haiyang Chen & Michael Y. Hu (2001) studied the FDI cases in China and their

statistic analysis suggests that the wholly owned subsidiaries are more likely to be chosen

than contractual and equity joint ventures when the investments involve marketing skills

and long planned duration. Also the wholly owned subsidiaries are more likely to be

chosen than equity joint ventures when multinationals expanding into markets with high

regional growth, high industrial growth, or investing in smaller foreign operations. The

result indicates that wholly owned subsidiaries are more likely to be chosen than

contractual joint ventures when the investments involve proprietary products or cultural


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distance is large between home and host countries. The findings on the impact of thechoice on performance suggest that multinationals select entry modes according to the

prescription of the theory are more likely to be successful than those who choose

otherwise. Multinationals foreign operations with correctly selected entry modes

outperform those with incorrectly selected modes.

While they also mentioned that their study is not intended to provide a

comprehensive model of performance of foreign operations. The performance issue is

subject to many factors including entry mode choice. Thus, with only one of the many

potential factors, the results shown in their study relating entry mode and performance isquite remarkable. It is evident that the transaction costs associated with entry modes tend

to have a lasting effect on the performance of a foreign investment enterprise.

Yan Zhang & Haiyang Li (2001) studied the control design and performance in

international joint ventures based upon the data from eight IJVs operating in China. Their

study contributes to the IJV literature by examining the dynamic nature of the IJV control

design and its performance implications. They found that IJV control design tends to

evolve over time from shared management types, through dominant parent types, towards

independent types, with increasing levels of autonomy. The increased level of autonomy

is associated with better performance. This study has significant practical implications.

First, from the MNCs point of view, IJVs are seen as a rapidly growing means for market

entry. Their findings urge MNCs to consider local managers thirst for independence and

their career concerns, especially in developing countries. Because these local managers

are not likely to have their careers inside the MNCs hierarchy, they seek independence

from the MNCs and develop their own empires in the local market. Once they gain

independence, it is difficult to take it away. From the IJV managers point of view, this

study gives some advice on how to manage the relationship between the IJV and the

partner firms and how to gain independence in this relationship. They suggest that control

and its associated support from partner firms are essential for IJV success at the early

stages and the key to gaining independence is to develop the IJVs own capability.


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i. Liability of foreignnessSince Stephen Hymer introduced the concept of disadvantages of foreignness in

1960, this concept has received scholarly attention from various fields. Indeed, most FDI

theories assume that foreign subsidiaries are at a disadvantage relative to domestic firms

with respect to some aspects of doing business in host countries. Although Hymers

definition of the liability of foreignness (LOF) seems rudimentary, the concept has helped

us to better understand behaviors, decisions, and policies of MNEs during international

expansion. To succeed in foreign markets, MNEs need to overcome these disadvantages

or liabilities of foreignness through committing and deploying dynamic capabilities thatcan generate ownership-specific advantages superior to those of local firms.

At the beginning of the 21st century, MNEs, whether large or small, are operating in

a global environment that differs in many aspects from the international setting of past

decades. Many emerging markets provide MNEs with new business opportunities but

enormous LOF as well. These liabilities are heightened not only by the complexity and

uncertainty of regulatory and legal environments, but also by the specificity and criticality

of social and cultural environments. The coexistence of more promising opportunities and

more complex LOF in this new international context has many MNEs adjusting their

market entry, local operations, and integration strategies. Past research has focused on

investigating sources and types of advantages that MNEs must possess to overcome

whatever disadvantages they face. While FDI success does depend on such advantages,

disadvantages also affect performance. Investigating these disadvantages may uncover

ways to minimize LOF and improve FDI outcomes.

Deepak Sethi and Stephen Guisinger (2002) surveyed existing literatures on LOF

and they concluded that the LOF construct should include disadvantages caused by the

MNEs interaction with (1) the aggregation of all the elements constituting the IBE

(International Business Experiences), including those of the meta-environment through it,

(2) the increased complexity of the interactions due to both the larger number of elements

in the IBE and the vast geographical spread in the multi country, global integration

context, (3) the complexity due to the dynamically changing and kaleidoscopic nature of


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the IBE, (4) the relatively greater difficulty in evolving an optimal strategy that has agood fit with the IBE compared with domestic firms, (5) the complexity involved in

adapting all internal processes to the dictates of the IBE for more effective

implementation of that strategy and (6) the greater need for agility and flexibility of

internal processes to remain in sync with the rapidly changing IBE.


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3. THE SYNTHETIC MODEL3.1OLI Paradigm as the Framework

We chose the OLI paradigm as the framework based on which the synthetic model is

generated. This is not only because the OLI paradigm is the most widely recognized and

agreed theory in FDI research field but also because there is possibility to build the logic

connection between OLI paradigm and performance determinants theories.

The OLI paradigm explains the motivations of MNEs to do FDI. The ownership,location, and internalization advantages are the sources of FDI motivation. The bigger the

three advantages are, the stronger the motivation is; the smaller the three advantages are,

the weaker the motivation is. This relation can be expressed by the following formula:

FDI motivation = 1 (O, L, I) . (1)

This means MNEs expect benefit from the three advantages; naturally, the bigger the

expectation for benefit, the bigger the motivation for FDI activity, in another word, the

bigger the expectation for good performance of foreign subsidiary, the stronger the

motivation for FDI activity. From there we can define that an oversea subsidiary

performance means how much it can realized the initial motivation of the MNE to do FDI,

the more it can realize, the better its performance is, the less it can realize, the worse it

performance is. To express this idea in the following formula:

FDI performance = 2 (ability to realize the FDI motivation) (2)

To combine (1) into (2), we can see the result:

FDI performance = 2 (ability to realize the 1 (O, L, I))

Then

FDI performance = 3 (ability to realize O, L, I).... (3)

Formula (3) discloses the idea that MNEs oversea subsidiarys ability to realize its

ownership, location and internalization advantages respectively determine the

performance of it. Therefore the synthetic model should absorb the existing performance

theories and categorize them by their contribution to the realization of the three


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advantages. The following table (table 1) shows the linkage between the OLI paradigmand the existing performance determinants theories:

Table 1 Linkage between OLI paradigm and the exist performance determinants theories

OLI

paradigm

Existing Performance determinants theories

Firm technology endowmentO advantage

Firm assets abundance

L advantage Country and industry condition

Relationship with local partner

Relationship with local govt

I advantage

Cultural distance concern

Transaction

al cost

concern

Entry

mode

choice

Liability of

foreignness

The firm technology endowment and firm assets abundance are by all means two

aspects of the MNEs ownership advantage. The country and industry condition directly

represents the location advantage as well. Relationship with local partner, local

government, and cultural distance control are the means by which FDI firms reduce the

transactional cost, and transactional cost concern should be the starting point for the

MNEs to choose the right entry mode. Their aims are the same to exploit the

internalization advantage of FDI activity. Lastly the theory of LOF mainly refers to the

risk of policy change or regulatory change of local business environment, which is one

side of location advantage (or disadvantage); and the MNE subsidiarys reaction to these

changes; which can be enclosed into the internalization advantage.

3.2Necessary extension to the OLI Paradigm

Is the OLI paradigm enough to envelop all the performance determinants theories? The

answer should be no. OLI paradigm itself has some weakness that should be reinforced,

as it cannot explain the recently prevalent unconventional FDI. The imbalance theory


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could be an important extension to the OLI paradigm, especially to the ownershipadvantage.

As mentioned before, the imbalance theory points out both the ownership advantage

and the disadvantage can be the motivation for FDI activity. The bigger the imbalance is,

the stronger the motivation to do FDI. The theory also agrees that to be able to do FDI,

firms should have some basic resources; the imbalance does not mean only the ownership

advantages, or only the disadvantages. Thus the OLI paradigm should be extended in the

ownership advantage side, to concern both the general ownership advantages such as

technology endowment and assets abundance, and the structural imbalance among all thefirms assets.

Liability of foreignness theory points out that, for MNEs, the local condition is not

always an advantage. The uncertainty of local policy and regulatory change bring great

risk to the MNEs local operation. Therefore location problem is not only a problem of

market size or factor supply base, but also a problem of policy stability and market

system sophistication. Thus the OLI paradigm should be extended in the location

advantage side, to concern both the size and the sophistication of the location.

The entry mode choice theories show that firms choose different entry modes to

satisfy their different business strategies. If the general market failure is the only concern

of transactional cost and entry mode choice, then all the firms should prefer wholly

owned subsidiary rather than other mode of entry such as joint venture. But many of the

cases show that making equity JV with local firms sometimes help the foreign firms to

get better access to the local market, and to shorten the culture distance, as well as to

make good relationship with local government. Therefore the OLI paradigm should be

extended in the internalization advantage side, to concern both the general market failure

and local partnership accessibility.

The synthetic model is then an extension from the original OLI paradigm to give

response to the imbalance theory, liability of foreignness, and entry mode choice theory.

Each of these three theories requires an extension in corresponding dimension of the OLI

paradigm, so that the synthetic model is actually a split OLI paradigm. The splitting of


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each dimension of OLI paradigm is discussed in detail from the next.

3.3Split the O dimension

Considering the extension from the imbalance theory, the ownership advantage of the

OLI paradigm should be split into at least two basic dimensions. The traditional

understanding of the ownership advantage remains its important roll in this part, as the

firm has more capital or technology contents or any other kind of advantages, the more

powerful it is and the better performance it can achieve in its international businessactivities. This is explained by both firm technology endowment and firm assets

endowment theories. The imbalance theory shows another important factor in this sector,

that is the structural imbalance of the firms assets endowment. Firms have more

imbalanced assets structure are more motivated than the firms have less, because the FDI

can be used as a catch up or factor seeking mechanism to balance the firms assets

structure. A successful FDI performance requires the assets power of some basic strategic

foundation, so that firms can exploit the ownership advantage, and it requires imbalanced

assets structure, so that firms are highly motivated to go abroad and their oversea

business are more concentrated in seeking some certain factors rather than operating

without a clear focus.


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The following figure (figure 1) reflects that the ownership advantage should bespitted into two directions ownership advantage at the common sense and the assets

imbalance of the ownership:

Figure 1 Splitting the O dimension

3.4Split the L Dimension

From the LOF (liability of foreignness) concerns, the policy change risk and business and

market style and development level all have direct or indirect impact on the FDI

performance. Foreign firms must not ignore that besides the size of the local market, the

sophistication of it also has the same importance to a better local business performance.

Especially in a transactional economy, government policy on foreign investment has more

decisive meaning than any other factors. A transparent political system and stable marketdevelopment are essential to foreign investors. This fact is especially obvious in China,

the most attractive FDI target place with many uncertainties. Chinese governments

behavior changed the image of Chinese market to the foreign investors for many times.

The restrictions on foreign investment has been released step by step and market oriented

economics policies has taken the place of old central planned economy system. By

Assets imbalance

Ge

neralO

advantage

Low

Low

High

High

Strong

capability

Capable and

motivated

Strong

motivation


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now China has upgraded itself to a better place for foreign investors by building up thesophistication of the market. The original OLI paradigm mainly concentrates on the size

of the local market in its locational advantage dimension, while it is still important now,

but at least the same level of attention needs to be paid on the sophistication of the

location. In order to ensure a better FDI performance, foreign firm should target its

investment location at the places where the market size is relatively big, and the political

and economic system is relatively transparent and stable.

The following figure (figure 2) reflects that the locational advantage should be

spitted into two directions size and sophistication of the location:

Figure 2 Splitting the L dimension

3.5Split the I Dimension

Firms enter the foreign market by different entry modes because the way they plan to

exploit their internalization advantages are different. Original OLI paradigm concentrates

on the market failure concern, saying that by expanding their international business

network, MNEs can reduce the transactional cost by internalizing the global business

operation. This is still true today. Many firms are using FDI as an alternative of

Sophistication of the location

Sizeofthelocation

Low

Low

High

High

Favorable

location

Transparent

and stable

Sufficient supply

& potential market


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international trade to enter a foreign market. By doing so, they manage to reduce theproduction outsourcing cost and the cost from tariffs or other trade barriers. If this is the

only case, it is clear that MNEs should all prefer highly controlled mode rather than

cooperation with local partner. But in the reality, MNEs may not be able to do so as they

enter a new market without sufficient local business experience. In these cases, they may

try to form a joint venture with local firms, providing capital or technology and gaining

local business experiences. A theoretical explanation for this phenomenon is that the

market failure exists not only in the process of international trade or international money

transfer, but also in the process of FDI because every single market has its owncharacteristics that differentiate it from others, and MNEs may not be able to deal with all

these differences. This is very like the compatibility of computer hardware and software.

Usually MNEs are powerful and well experienced, but there management system may not

be compatible with their FDI target place. Changing their software to be compatible with

the local hardware is a complex and costly procedure without some outside supporters.

These outside supporters are the local firms, which can help the MNEs to deal with most

of the compatibility issues when build up a partnership with them. Therefore selecting

local partnership has been an important factor of MNEs local operation. Locally

partnership accessibility is then anther factor that determine the local performance of

MNEs, in anther word, MNEs have to consider both the local business controlling right

and the local partnership accessibility in order to save the most cost from the market

failure.


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The following figure (figure 3) reflects that the ownership advantage should bespitted into two directions ownership advantage at the common sense and the assets

imbalance of the ownership:

Figure 3 Splitting the I dimension

3.6Overview of the Synthetic Model

The synthetic model integrates the existing performance determinants and categorizes

them into the split OLI paradigm framework. The split O dimension explains the

determinants at the FDI initiating stage; the firms have sufficient assets capability and

strong motivation due to the highly imbalanced assets structure are more likely to achieve

better FDI performance rather than those do not have both or either. The spit L dimension

explains the determinants at the FDI targeting stage; firms target the potential market withhigh level of market sophistication are more likely to achieve better FDI performance

rather than those target the location with either or none of the conditions. The split I

dimension explains the determinants at FDI entry and operating stage; firms choose

appropriate entry mode with both general market failure concern and local partnership

accessibility concern are more likely to achieve better FDI performance rather than

Local partnership accessibility

G

eneralmarketfailure

Low

Low

High

High

Best fit

operation

Locally

compatible

Highly

controlled


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those choose the entry mode without concerning the both elements.The implementation of the synthetic model on MNEs may be different from those

individual performance determinants theories. This model gives a clear and systematic

view of the overall performance determinants through and guides MNEs to make optimal

strategic choices on preparing, targeting, entering and operating stages. But for certain

individual dimensions or elements, firms may also refer to the existing theories for more

detail instruction and techniques. Thus the synthetic model should be regarded as an

envelop of the existing theories, so that they are not substitutable or overlapped because

they are not on the same level.


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4. EMPIRICAL EVIDENCE4.1China is the Best Testing Ground for New FDI Theories

China has been a major accepter of inbound FDI from all over the world. China started

absorbing FDI from 1979, the starting point of Chinas economic reform and open door

policy. From 1979 to 1982, the inbound FDI was at its examining stage and it mostly

concentrated in the special economic zones. Every year just around 440 million USD

flowed in as FDI. Then from 1983 to 1991, the inbound FDI came to its improving stage.Government published more and more inbound FDI favorable policies and regulated the

market. At this stage, foreign firms tended to make joint venture with local firms, and the

investment also concentrate in the special economic zones in GuangDong province

because of the favorite policies. During this 9 year, averagely 2.6 billion USD flowed into

China every year as FDI. In 1992, Mr. Deng XiaoPing, then the prime minister of China,

announced the market economy plan, and this announcement reinforced the confidence of

foreign investors towards China market. After that, FDI flowed in at a rapid growth speed.

The inbound FDI growth rate shot up to 152% in 1992, and 150%, and the amount

achieved 27.5 billion USD in 1993. After that the growth rate started to fall but the yearly

amount kept higher than 40 billion USD. Due to the Asian financial crisis, China received

almost zero FDI growth in 1998, and minus growth in the following year. From 2000

Chinas inbound FDI started to rebound; the growth rate became 1%, 15%, and 12.6%

until 2002. According to the World Investment Report 2002, released by the United

Nations Conference on Trade and Development (UNCTAD), China has been ranking the

sixth economy according to the amount of FDI inflow of that year. With the world

investment recovers in 2004, high growth of inbound FDI into China is expected by many

economists.

China is the best testing ground for FDI theories because it almost contains all kinds

of FDI from all the famous MNEs around the world. Therefore plenty of samples are

available for testing and since the sample size is big, we can choose the samples which


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are the most representative ones without overlapping. Moreover, this testing ground provides dynamic background, because the FDI policy and local market condition are

under fast development and MNEs have to face new challenges all the time. Therefore the

samples from this testing ground can examine the dynamism of new theories; only the

theories with most comprehensive explaining power and great dynamism can explain the

samples from China completely.

4.2Sample Case Review

In order to test the synthetic model, we studied some of the successful FDI cases in China

from the early J.V. cases in the automobile industry till the most recent M&A cases in

diverse industries. The selection of the cases is based three criteria representativeness,

freshness, and information accessibility. Considering the purpose of the case study, we

focused on certain aspects of the cases such as parent company FDI motivation,

investment target location condition, and entry mode and after entry management. A

summary of the samples cases review is provided in the following table (table 2) and

more information can be referred in the appendix attached.


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Table 2 Sample cases reviewFDI motivation Investment location Local business typeParent company

Market

seeking

Factor

seeking

Geographical

position

SEZ Controlling

right

Local partner

Hyundai East inland N/A Beijing

motor

Kia East coast 40% Dong Feng,

Yue Da

GM East coast 34% SCIA

Liu Zhou

Honda South coast 65% Guang Zhou

motor

Toyota East inland 50% FAW

Nissan East coast N/A Dong Feng

Volkswagen East coast 50% SAIC

Anheuser-Busch East coast 4.5%

27%

Qing Dao

beer

Philips East coast 51%

80%

Suzhou

peacock

Emerson South coast N/A Ansheng

Huawei

New bridge

capital group

South coast 17.8% SDB

Alcatel East coast 31.6%

50%

Shanghai

Bell

Ford East coast 20% 30%

Jiang Lingmotor


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4.3Case Analysis by the Synthetic ModelThe above 13 successful FDI cases have some characteristics in common, and these

characteristics can be explained by the synthetic model as the source of their good

performance.

First of all, all these 13 foreign investor firms are powerful world class MNEs. Their

capital assets are abundant and have leading technology in their own industries

respectively. Their oversea subsidiary spread all over the world, from which they

accumulate deep experience of international business management. But this does notmean their assets components are perfect, if so, they do not need to do the FDI in China.

On the contrary, their assets constructions have different types of imbalance, and these

imbalances become their motivation to invest in China. One type of the imbalance is from

the lack of market access and the other is from the lack of certain production factors such

as working labor. Therefore these firms have strong motivation to seek their missing

assets elements and that is their initiation of market seeking and factor seeking FDI in

China.

Secondly, they target the favorable locations. Their subsidiaries are mainly built in

the east or south-east coastland areas, where has the highest income level in China. These

areas provide relatively big market potential and sufficient technological, managerial, and

working human resources. The coastland areas have better connection with the global

market through the harbors, and this provides the convenient condition for

export-oriented FDI and international outsourcing. Not only the locations itself have

advantage over other areas, the policy implemented in these areas and market

development level of them are relatively more sophisticated than other areas. After the

economic reform and open door policy, China started to open itself towards the world,

and later on, started to transfer from central planned economy system to the market

economy system. The central government decided to test all the new policies in some

certain areas, instead of implementing the new policy to the whole nation at the same

time regardless the cost of possible failure or mistake. Therefore the economic special


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zones are made. Inside the ESZs, market oriented economy system is supported by thepolitical authority, and more favorable policies on foreign investment are implemented.

Foreign firms saw the opportunities inside the ESZs, but they still worried about the so

frequent policy changes made by the central and local government. Until 1992, after the

then prime minister Dengs announcement of Chinas move into market economy system,

the market regulation and the related policies are made more transparent, and foreign

firms received the signal that China market is now upgraded to the level that worth of

investing. The 13 cases above almost happened after 1992, which means the

sophistication of the market does matter to the FDI performance.Thirdly, the 13 cases show the importance of entry mode choice concerning the

transactional cost and operation strategy. These successful firms mainly designed their

market entry and after entry operation as a step by step controlling mode. When they

enter the market at the very first time, they tended to make equity joint venture with local

firms, especially the local firms that have strong domestic brand image, close relationship

with local authorities, and better selling network in the location. Foreign firms can use the

joint venture as a learning process of its local operation. The local partners help them to

shorten the culture distant, and reduce other types of liability of foreignness. As the

learning process went on, foreign firms accumulated more and more experience and the

most important business element guanxi. Then they started to show the willingness to

increase their equity proportion in the joint venture and by M&A negotiations, they

achieved to do so. Thinking about both of the general market failure and local partnership

accessibility is one of the reasons these firms have good performance over time.


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The following table (table 3) concludes the result of the empirical study of the 13cases.

Table 3 Result of the empirical studySynthetic model Empirical study of the 13 cases

General O advantage

Investing firms are world class strong MNEs with

abundant technology, capital, and international

business experience, etc.O

advantageAssets Imbalance

The assets structure of these firms is lack of certaincomponents such as market access or production factor

such as working labor and raw materials.

Size of the location

The firms all invest in the east and south-east

coastland area where the market size is relatively large

comparing other areas in China.

L advantage

Sophistication of the

location

Their investment focus on the SEZs where the market

is relatively better developed and they start their

investment after the policy and regulation upgraded to

certain level.

General market failure

When all the other factors and well prepared, foreign

firm tend to increase its control in the local business in

order to reduce the transactional cost.

I advantage

Local partnership

accessibility

Firms tend to make equity joint venture with local

partner. They can use the J.V. as a learning process of

local business experience and reduction of LOF, at the

same time, they provide the factors that local partners

need, such as capital and technology, etc.


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5. CONCLUSIONBy studying the existing literatures on FDI theories and FDI performance determinants

studies, we find the necessity and possibility to provide a synthetic model of FDI

performance. This model is not a simple adding up of existing theories, but is a

reorganization of those theories into a well made theoretical framework. Logic

connection between the MNE subsidiarys ability to realize the OLI advantages and the

performance of the FDI is found. Therefore OLI paradigm is chosen as the framework

base of the synthetic model. OLI paradigm itself has some weaknesses that needextensions by other theories. The imbalance theory shows the necessity to split the

ownership advantage into general ownership advantages and assets imbalance. The

liabilities of foreignness theories point out the impact of policy and regulation change of

local environment on the FDI performance, therefore the location advantage should be

split into the size of the location and the sophistication of the location. Transactional cost

and entry mode theories show that reducing the cost made by the general market failure is

not the only factor firms have to concern when choose the entry mode and after entry

operation. Good local partnership should be made to get better access to the local market

and reduce the LOF. Therefore the internalization advantage should be split into general

market failure and local partnership accessibility.

An empirical study of 13 FDI cases in China is done to support the idea of the

synthetic model. Although the number of the sample cases is limited, they are significant

enough to present the situation in the key industries in China. The study result shows high

consistency between the reality and the theory.

Generally, the synthetic model is a split OLI paradigm which envelope all the FDI

performance determinants into its 6 elements. Therefore this model has its

implementation meaning for MNEs FDI strategy makers because it can be used as an

overall measurement for any FDI strategy. Any existing theories before can not provide

an overall measurement; they just focus on some specific aspects. When strategy makers

try to evaluate or estimate the effect of their new FDI strategy using previous theories, the


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result is only reasonable on those specific aspects and the effect on overall FDI performance may be somehow biased from such evaluation or estimation. Using the

synthetic model to give an overall evaluation on new FDI strategy, or making new FDI

strategy based on the synthetic model, strategy makers can highly reduce the risk of bias.

The limitation of this research should also be recognized. First of all, the synthetic

model is not a new invention or a one-for-all solution. The model is a reorganization of

the existing theories and it is comprehensive at figuring out the performance

determinants at the initiating, targeting, entry and after entry operating stages of FDI

activities but is not in detail of every element. The implementation of this model is notto give ideas on how to improve the performance, but to point out what can be the

determinants of the performance. Referring how to improve the performance, business

operators still need to refer to the existing theories. Secondly, the empirical studies need

to be enlarged in the number of the sample cases, and the approach need more statistics

supports. According to the time and capability limitation, we failed to provide more

persuasive empirical evidence to the model and this study remains plenty of places for

future improvement.


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Appendix: sample cases brief introduction

Case 1: Beijing Hyundai

Beijing Automobile Company and HMC realized the long-held ambition of

producing passenger cars in Beijing by establishing Beijing Hyundai Motor Company in

October 18, 2002. Initial investment amounting to 3.3 billion RMB was conducted in

January 2003 and the first years sales recorded over 50,000 units. The joint venture firm

introduced Avante XD and EF Sonata, which are also manufactured and sold in Korean

market. The company aims to simultaneously introduce the newest vehicle for sale inboth Korea and China.

Case 2: Dongfeng Yueda Kia

The formal re-statement of Dongfeng Yueda Kia, established in 1996, was signed by

Dongfeng, Jiangsu Yeuda Investment Co., and Kia Motors was signed to divide the equity

share into 20%, 40% and 40% respectively. The renewed Dongfeng Yueda Kia

Automobile Corporation officially came into being in August 2002 and the new vehicle

named Chenlima was introduced in December.

Case 3: Shanghai GM

Shanghai GM was transformed into a joint venture between two Chinese automakers

and a foreign firm. The equity share of each party is 50.1%, 34%, and 15.9% for SAIC,

GM, and Liuzhou Wuling. Through this transformation, the new Shanghai GM was able

to establish three automobile production facilities in China. The main objective of this

joint venture is to become the market leader of compact cars segment in China.

Case 4: Guangzhou Honda

The project proposal by Guangzhou Honda for export base was approved by the

Chinese government, which marked the actual initiation of the joint venture. This joint

venture will churn out 50,000 units per year at the initial period, which will all be

exported. The project financing will amount to RMB 1.61 billion, of which Honda Japan

will holds 65% equity share. This is the first incident in which a foreign firm will take

up the majority share in a Chinese automobile joint venture.


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Case 5: Toyota Tianjin

Toyota's ambitions in China are vast, but so are the challenges. The carmaker was

late to the game in China, but since 1998 it has invested some $1.3 billion in the country,

including the Tianjin operation and commercial-vehicle and parts factories. At this point,

it has managed to eke out just a 5% market share in passenger cars -- well behind its chief

competitors, Volkswagen and General Motors Corp. But it hopes to double its share by

2010 with a good bit of help from Toyota Tianjin, a 50-50 joint venture with state-owned

First Automotive Works Corp. (FAW), China's biggest auto-making group.

Clearly, other carmakers in China need to brace for the challenge. Last year, Toyotasold only 50,000 cars in the country, mostly Camrys and Corollas imported from Japan.

Industry leader Volkswagen, by contrast, sold 511,000 cars, and No. 2 GM sold 110,000.

With the Tianjin plant moving into full swing, Toyota hopes to increase its annual sales in

China to 300,000 over the next seven years.

Case 6: Nissan Dongfeng

Nissan joined forces with Dongfeng Motor Company in order to get a foothold in

China. Although Nissan trails its competitors, Honda Motor Co and General Motors, it

hopes to make up for lost time with a wider range of products.

The Nissan-Dongfeng hookup will produce 220,000 cars and 330,000 commercial

vehicles by 2006, according to company executives. In the joint venture it had put up $1

billion in cash while Dongfeng provides assets and factories in an equal amount. The

venture is regarded by many as quite risky but Nissan has been forced into it by its slow

start.

Case 7: Shanghai Volkswagen

Shanghai Volkswagen Automotive Company is a 50-50 venture between Volkswagen

and the Shanghai Automotive Industry Corporation (SAIC). The largest foreign-invested

enterprise in China in terms of sales, Shanghai Volkswagens standard Santana model is

the best selling sedan in China. The companys other models include the Santana 3000,

the Polo, and the Passat. Shanghai Volkswagen Automotive sells nearly 400,000 cars per

year, but in the last two years, the companys market share has fallen from 30% to 20%.


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The company identified a disconnection with its sister sales company SAIC-VW Salesand the two entities have merged in order to quickly react to market conditions.

Case 8: AB-QingDao Beer

Anheuser-Busch purchased QingDao Beer share. This is a case between the biggest

beer company of the world and the biggest beer company of China. QingDao Beer has a

100 year history in China, and has been the leading company in the beer industry.

QingDao Beer and AB formed strategic Alliance and agreed on a deal that AB purchases

QingDao Beers share in 7 years and eventually increase ABs share holding from 4.5%

to 27%. The purchasing deal is divided into 3 steps, and the total amount of the deal willbe 182 million dollars.

Case 9: Philips SuZhou Peacock Electronics

Philips China increased share in SuZhou Peacock Electronics Group. The deal

happened in the August last year, and before that, Philips China already had 51% share

holding in the SuZhou Peacock Electronics Group. This time Philips Chinas increased its

shareholding from 51% to 80%, using totally 50 million dollars.

Case 10: Emerson-Ansheng Electric

Emerson Electronic bought Ansheng Electric from HuaWei Group. Ansheng Electric

used to be one of the sub-companies of HuaWei Group. To solve the group companys

financial problem, HuaWei sold the Ansheng Electric to Emerson Electronic at a price of

750 million dollars.

Case11: New-bridge Capital Group China

New-bridge Capital Group bought Shenzhen Development Bank share. This is the

first case that foreign strategic investment is accepted in China. New-bridge Capital

Group bought 17.8% share of Shenzhen Development Bank, using totally 20 million

dollars.

Case12: Alcatel-Shanghai Bell

Alcatel corp. purchased Shanghai Bell share. Shanghai Bell used to be a

joint-venture companies formed up by Chinese investors, Alcatel corp., and Belgium

government. After an 18 months negotiation, Alcatel corp. bought all the shares of


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Belgium government and some of the shares from Chinese investors, and eventuallyincreased its share holding from 31.6% to 50% plus 1 share. Alcatel got the controlling

right of the companies and soon integrate it into its other subsidiaries in China, formed

the Alcatel Shanghai Bell corporation. The deal covered 300 million dollars.

Case13: Ford-Jiang Ling

Ford corp. purchased Jiang Ling automobile corp. share. Jiang Ling automobile corp.

is one of the earliest firms that invited foreign investment. The first step of the deal was

completed as Ford bought 20% share holding from Jiang Ling automobile corp. using 40

million dollars, and in the next step Ford corp. increased its share holding in Jiang Lingautomobile corp. from 20% to 30%, covered 55 million dollars.

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