Dr. Jean-Marc F. Blanchard's blog

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Racing along a bumpy road-Automobile MNCs in China

The China car market assumed great salience in 2009 as a result of the global financial crisis, which pummeled auto demand elsewhere, Beijing’s successful use of stimulus measures to speed economic and sectoral growth, and the rapid expansion of China’s car culture. In response, many foreign firms accelerated their China investment plans, greased local relationships, and expanded the local sourcing of parts. China, now the world’s largest market, has become vital to global car companies’ sales revenues, licensing and royalty fees, and profits.

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The Liability of Foreignness

Foreign firms have now found themselves confronting a challenging operating environment in Vietnam tied to violent demonstrations that involved thousands of protestors venting their displeasure with China’s deployment of an oil rig near the disputed Paracel/Xisha Islands, claimed by both China and Vietnam. Although protestors targeted “Chinese” firms, they also lashed out at plants owned or operated by firms from Hong Kong, Japan, Taiwan, Singapore, and South Korea. Indeed, factories with “any Chinese writing or names became targets of destruction.” Foreign companies suffered millions in losses from arson, looting, and vandalism, shutdowns, and damage to support facilities.

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Heading the opposite of south

The latest issue of the “Global Investment Monitor” (No. 16), prepared by the United Nations Conference on Trade and Development (UNCTAD), re-affirms a trend that began many years ago which is that developing economies are becoming critical players in the world of outward foreign direct investment (OFDI).

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Guilt by association

At the beginning of April, Japanese pharmaceutical giant Daiichi Sankyo dumped its multi-billion US dollar investment in India’s Ranbaxy, losing billions of its US $4.7 billion investment in this prominent Indian generics firm, not to mention lost management time. Daiichi made its original investment because it saw the deal as a way to broaden its distribution channels, to gain new products, and to tap into the Indian market. Signs were abundant soon after transaction was announced, however, that the deal might encounter serious problems.

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A corrupt anti-corruption campaign?

After he became China’s President, Xi Jinping made fighting corruption a central part of his domestic policy agenda. In line with this, state anti-corruption organs have investigated tens of thousands of Chinese Communist Party officials and government bureaucrats and numerous high-ranking officials at the central and provincial government levels have lost their posts or party membership, or have been put in jail. Many foreign companies welcome the anti-corruption campaign in concept because it means, if it works, they do not have to offer “gifts” or find “middlemen” and that they will not be at a competitive disadvantage if home country laws, scruples, or both preclude them from providing a gift.

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More about riches than reform

In late February 2014, China Petroleum & Chemical Corp (Sinopec) announced that it would give private investors an opportunity to invest in its domestic marketing and distribution operations. Many took this as an initial, positive sign that the government truly wanted to increase the role of private investment in the economy in line with policy pronouncements made during and following the Chinese Communist Party’s November 2013 18th Congress Third Party Plenum, and to reform state-owned enterprises (SOEs). The opening of Sinopec to foreign investment seemed to be based on the view that foreign investment provided a way to increase efficiency, decrease bureaucracy, and experiment with different SOE reforms.