Foreign direct investment strategy and implementation

Foreign Direct Investment Strategy

The work of Wei and Liu (2001) states that globalization, both in general and in terms of offshoring have directly and indirectly affected the supply chain for construction of real estate. It is reported that a leading producer and consumer of a great many building construction materials. The question that is posed is whether growth will result in excess capacity or excess demand in the years to come.

MNE Chosen for the Study

The multinational corporation chosen in this study is that of Cushman & Wakefield, a multinational enterprise that provides corporate and institutional occupier clients "with disciplined strategic approaches to managing their worldwide real estate." (Bardman and Kroll, 2007, p.1) Cushman & Wakefield has a "dedicated high-level single point of contact" which makes the provision of "strategic real estate and financial expertise and advice; real-time global technology; cost optimization; risk initiation; and flawless, integrated service delivery." (2007, p.1) Cushman & Wakefield report that overall performance of business "can be measurably improved through our proprietary methods of aligning real estate and corporate performance. Working as a collaborative solutions provider, we examine a company's real estate assets from three perspectives-Portfolio, Platform, and Performance- and show you unique ways to enhance business results." (Cushman & Wakefield, 2007, p.1)

I. Foreign Direct Investment in the Chinese Real Estate Market

According to reports, real estate entrepreneurs recently met in Beijing to conduct analysis of the challenges that are faced by multinational corporations in regards to their investments in the real estate industry in China. It is reported that at the Multinational Corporate Real Estate Strategy Seminar, the entrepreneurs also discussed some of the new trends in foreign investment in China's industrial real estate." (Yihang, 2013, .1) it is stated that approximately sixty percent of multinational corporations constructing their headquarters in Asia, establish them in Hong Kong or Singapore. However, the President of Beijing Kuntin Investment Management Group, qiu Guoming, "mainland cities such as Beijing and Shanghai will become the new favorites in the coming years." (Yihang, 2013, p.1)

The company operate by Guoming is one that is reported to facilitate investments between American and European international enterprises in China. Guoming states that companies such as GE "…which had made great gains in their overseas operations, has provided us with data regarding the average annual growth rate of their profits in Asia. It is 3.5-percent. GE also says the rate in the Chinese market alone has reached as high as 23% for four consecutive years." (Yihang, 2013, p.1) it is difficult however, for multinational corporations to locate suitable office facilities in China. The challenges faced by these companies include:

(1) "Before these multinational corporations enter China, they consider where they can locate their manufacturing center. They usually first evaluate whether the local production materials, human resources, institutions, climate, environment and preferential policies are conducive to their business development before finding a suitable location.

(2) Other problems include looking for a reliable business partner in China.

(3) Also, these international corporations appear unfamiliar with efficient and effective ways to contact local governments." (Yihang, 2013, p.1)

Recommendations for dealing with these challenges are reported as one suggesting that multinational corporations "…custom lease their property rather than purchasing it in order to save costs." (Wei and Yiu, 2001) it is reported that the statistics demonstrate that "…rentals of Grade -- a office towers in downtown Beijing have grown 21.3% year on year, now reaching 312.6 yuan per square meter per month. This has led foreign corporations to re-locate their operation bases to the outskirts of major cities or even further to second-tier cities." (Wei and Yiu ) the following table shows the 'major real estate employment categories, employment levels and growth for the years 1995-2006.

It is reported additionally that within the past two to three years that the company has witnessed the "…speeding-up of development of new business parks in the suburbs of Beijing BS Shanghai, which is a new trend in China although it's well-established overseas. And increasingly corporate occupiers are considering moving to less pricy locations, and their second move is transferring their headquarters to second-tier cities like Dalian or Shenyang and others." (Bardham and Kroll, 2007, p.1) There were 7,016 ventures newly established through foreign direct investment in China from January to April with the total number of foreign ventures being stated at 745,000.

According to one report, the following comprise the major real estate category of various industrial categories reported to include the following stated categories:

(1) Services;

(2) Finance; and (3) Construction. (Bardham and Kroll, 2007, p.1)

With nearly every type of domestic and international transaction that takes place possesses a "real estate component to transactions, both domestic and international…" (Bardham and Kroll, 2007, p.1) This is shown in the following illustration labeled Figure 1.

Figure 1

Source: Bardham and Kroll (2007)

It is reported in the work entitled "The Distribution and foreign Direct investment in China" that in Asia" the sectoral distribution of FDI in the primary sector has a very different patterns. According to reports, "an overwhelming proportion of Chinese service sector FDI has been concentrated in real estate. Despite the government's effort to curb new fixed asset investment and a recent decline in the flow of FDI into hotel businesses the share of approved FDI accumulation in real estate more that doubled between 1984-93." (p.15)

China is reported to have demonstrated in FDI inflows since the beginning of reform in 1978 showing that the impressive overall achievement has attracted an increased amount of FDI. Chinese authorities are reported to have begun to acknowledge the importance of the distribution of foreign direct investment in a more equitable manner. The present focus is one that emphasizes on development of infrastructure facilities to inland regions that have been disadvantaged historically to ensure that they are more inviting to the investment of foreign capital in addition to "fashioning polices to provide equal footing for FDI flows to certain manufacturing industries and underdeveloped services sectors." (Wei and Liu, 2001)

In regards to the regional development policy of China, the 'Ninth Five-Year Plan (1996-2000), special attention is given to the reduction of disparities within specific regions. Progress is reported to have been made in the creation of "some degree of FDI policy neutrality across locales." (Wei and Liu, 2001) in order to achieve greater balance between the SEZs and inland areas it is reported that announcements "have been made to begin a phase out of some of the tax preferences given to foreign investors in the SEZs.' (Wei and Liu, 2001)

These "better-than-rational-treatment' concessions are stated to have an opportunity cost in the amount of 1.2% of the GDP of China while simultaneously "yielding few real incentive to foreign investors." (Wei and Liu, 2001) Liberalization is presently being introduced in relation to FDI in some sectors and this is being accomplished in stages. Easing of FDI restrictions on transportation and communications, banking, management consulting, insurance, and other services industries" reported as being banned previously or only allowed on an experimental basis in specific coastal regions. (Wei and Liu, 2001)