Essays on Analysis of German FDI in China within the OLI Framework Case Study

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The paper "Analysis of German FDI in China within the OLI Framework" is a great example of a business case study.   This report presents an analysis of foreign direct investment (FDI) in China by German companies, primarily using the examples of the two largest German investors in China, auto manufacturer Volkswagen AG and the engineering group Siemens AG. While there are a large number of German companies with investments in China, Volkswagen and Siemens are good examples because they represent two different kinds of firms; Volkswagen is in a specific industry (automobiles), while Siemens is a diversified firm with business interests in many sectors.

An examination of the auto industry is also useful because it represents the largest amount of German investment in China (Frey, 2005). German investment in China is largely driven by the OLI framework (Ownership, Location, Internalisation), to maximise the advantages presented by the Chinese environment. In this report, the basic concepts of the OLI framework are first briefly summarised, followed by an analysis of the different ways German companies enter and maintain a presence in China in the context of the OLI framework. Basics of the OLI Framework The OLI framework, also known as the ‘ eclectic paradigm’ , states that three independent variables determine the investment choices of multinational enterprises: Ownership (O), which is the competitive advantage the firm has in comparison to other firms, including those in prospective investment locations; Location (L), which describes the attributes of possible investment destinations in terms of available resources (human and material), favourable regulatory environments, physical distance to market, and other things; and Internalisation (I), which is a comparison of whether it is more advantageous for the firm to retain control over the investment, or put a different way, ‘ internalise transaction costs’ (Stevanović, 2008, 243), or whether it is better to simply export its products, or license their manufacture to a foreign company (Hill, Hwang & Kim, 1990; Dunning, 2000, 163-164; Griffith & Pustay, 2005; Stevanović, 2008, 241-243). Ownership advantage means that the firm controls or ‘ owns’ one or more unique – meaning, not readily available to competitors, and cannot easily be copied or substituted – assets that give it a competitive advantage.

Examples of these kinds of assets could be a well-known brand name, which is the intangible asset of reputation, or exclusive access to some kind of technology such as patented designs and formulas, or special production processes.

One way or another, the ownership advantage leads to higher profits; the firm can either use its advantages to produce at lower costs or if the assets are more intangible, charge higher prices than its competitors without reducing its market share (Hill, et al. , 1990; Griffith & Pustay, 2005). The location advantage is assessed by comparing the potential profit to be gained by producing in the firm’ s home country versus producing in a foreign location after all the potential costs are considered.

Dunning (2000) describes the location as an important sub-paradigm of the OLI framework, and it has three basic parts: Resources, labour inputs, and transportation costs. Natural resources may be needed for production, and the cost of locating production near where the resources are produced may be lower than transporting the resources. Labour inputs are more important for labour-intensive industries; if labour costs are lower in a foreign location, there may be a cost advantage to having the production done there and shipping finished products (such as what many clothing brands do).

Transportation costs refer not just to the costs of shipping finished products or materials, but also to things like taxes and tariffs; government burdens may be less if production is done in the foreign location. And of course, if the foreign location also represents a large consumer market, as China does, the cost of transporting products to that market is greatly reduced if they are produced locally (Dicken, 2003; Wang, 2003).

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