Summary of FDI

Foreign Direct Investment (FDI) has been regarded as a crucial path for boosting innovations, creating jobs, and guiding the general economy in host nations. Due to its significance, nations make an effort to draw FDI by creating benevolent policies and methods. The present study investigated the FDI techniques used by the US to draw FDI. The study also looked at the entry methods MNEs utilize to enter the nation as well as the current ethical issues it faces. The primary point of comparison used in the study was the MNE with a basis in China called the Dalian Wanda Group. All US-based businesses, Legendary Entertainment and AMC Theaters, were acquired by the corporation in 2016 and 2012, respectively. Key results of the study indicate that MNEs use any of the following three entry modes; contractual mode, investment modes, and export mode. In its entry to the US, the Dalian Wanda Group has tended to use the investment mode of entry, through the form of acquisition. The decision to move into foreign international markets by Dalian Wanda is influenced by the portfolio diversification hypothesis that assumes perfect markets.

Introduction

The role of Foreign Direct Investments (FDI) in the global economy cannot be underestimated. FDIs lead to job creation, wealth expansion and overall innovation and economic growth in host countries (Stringer, 2015). As a result, nations and economic regions tend to compete for and welcome FDI. The conventional definition of an FDI involves a company setting up or running a factory or any other form of business in a foreign country. However, the term has been advanced to include situations where corporations acquire lasting interests in a foreign country. To actively and successfully compete for foreign direct investments, states implement policies and develop strategies geared towards attracting FDI. Governments play a crucial role in creating an enabling environment for business. Such environment becomes an incentive for attracting foreign investments (Bah, Kefan & Izuchukwu, 2015). The aim of the current research is addresses two main issues. First, the study explores the foreign direct investment strategies developed and implemented by the United States. Secondly, the study examines the entry modes adopted by Multinational Enterprises (MNEs) in the US in relation to the ethical concerns they face. The MNE considered in the research is Dalian Wanda Group, which acquired US-based media companies; Legendary Entertainment in 2016 and AMC Theaters in 2012 (Brzeski, 2016).

The study seeks to answer the following research questions:

What strategies has the United States implemented to attract foreign direct investments?

What are the entry modes adopted by the MNE when moving to the United States in relation to the contemporary ethical concerns it faces?

Theoretical Background

FDI Motives

The motives for FDI can be looked at from three broad perspectives. They include the horizontal, vertical and export-platform views. Concerning the horizontal view, FDI arises in countries that are considered to have a similar cost of production and relatively identical market size when the price of exporting finished goods is high (Sleuwaegen & Onkelinx, 2014). As a result, companies invest in foreign countries to serve the local market hence gaining an advantage. Dalian Wanda's decision to move to the US was primarily influenced by the company's desire to diversify its market (Brzeski, 2016). Regarding the vertical view of FDI, foreign investments occur between countries that are considered to be dissimilar concerning factor-price. As a result, companies invest in foreign countries to take advantage of lower production costs. The export-platform view of FDI combines both the vertical and the horizontal view (Sauvant, 2015). The FDI theories can explain the motive to invest in foreign countries. The theories are divided into three broad categories; those that assume markets are perfects; that assumes that markets are imperfect; and theories that consider other variables.

These FDI motives imply that countries have different options when it comes to the kind of strategies that they can put in place so as to attract foreign investors. For instance, states may opt to utilize the benefits of the horizontal view and focus more on reducing the cost of production to attract FDI seeking to minimize the cost of production. Host countries may attract foreign investments by providing incentives on the factors of production such as capital to the foreign investors (Calegario, Houston & Bruhn, 2015). On the other hand, host countries may tend to take advantage of the horizontal view of FDI motive and hence concentrate on enhancing the purchasing power of their citizens. Empowered citizens become ready markets for prospective foreign investors. Host countries can increase citizens’ purchasing power by adopting some strategies such as reducing income taxes on individuals and empowering the citizens through strategies such as increasing employment rates. Taking advantage of both views is likely to yield the best results. In such cases, host countries will take advantage of the low cost of production, favorable business environment and abundant consumer market, hence attracting foreign investments.

FDI Entry Modes

The uncertainties in domestic markets are forcing companies to seek growth opportunities in foreign countries. Firms are therefore investing in foreign countries to take advantage of the broader market and lower production costs. As a result, MNEs such as Dalian Wanda Group have been seeking diversification avenues through foreign investments in international markets such as the US. Dalian Wanda’s expansion endeavors resonates with the portfolio diversification hypothesis. The entry mode adopted by an MNE plays a crucial role in determining the extent of its success in the foreign country. An entry mode is an institutional arrangement that is necessary for the entry of MNE’s products, human capital, and technology (Sleuwaegen & Onkelinx, 2014). For MNEs, the entry mode will determine the kind of governance mechanism that the company will seek. Governance is critical for the performance and survival of any multinational corporation. MNEs will, therefore, try to ensure that they adopt an entry strategy that guarantees a good governance structure in the foreign country. Factors behind the choice of MNE’s entry mode can be attributed to the host country, ethical considerations or the firm itself. Ethical concerns may dictate the kind of products introduced to the foreign market. Some goods and services may be unethically accepted in the host countries. Additionally, issues of labor laws and ethical dealings may shape how an MNE enters the new foreign market.

In its diversification bid, Dalian Wanda Group was confronted with many decisions that it had to make. First, the company had to decide the entry mode to pursue. Secondly, the MNEs had to decide the kind of customers it wished to serve and the best way of satisfying their needs (Sauvant, 2015). Different MNEs may pursue alternative strategies when entering the same foreign market. The type of product offered by a given company will influence the entry strategy adopted. Entering a foreign country is not always an easy endeavor, and as a result, the process may take years to realize. Entering a country for the first time is usually more engaging than when introducing a different product line to existing operations.

There are three primary entry modes that MNEs may opt for using when entering foreign markets. These include use of contractual modes where the MNE does business with a partner in the foreign country; use of investment modes where the company sets up an own business platform; and an export mode where the business is done from home. Contractual modes may take the form of licensing and franchising and joint venture (JV) (Gubik & Karajz, 2014). The most common example of investment mode of entry used by MNEs is through the use of wholly owned subsidiaries (WOSs). The main feature of export entry mode is that production is done locally and then the final products are exported to the international markets. When choosing the kind of decision to make, MNEs tend to consider the level of business flexibility desired and the level of control that the MNEs wish to maintain.

Case Analysis

Over the last ten years, China-based property developers such as Dalian Wanda have been pushing for diversification. In 2012, Wanda Group concluded the acquisition of AMC Theaters, US cinema chain, for a total of $2.6 billion US dollars. In 2016, Dalian Wanda Group announced that it had concluded that it had acquired Legendary Entertainment for a total of $ 3.5 billion (Brzeski, 2016). According to Brzeski (2016), acquisition of Legendary Entertainment was the most prominent acquisition agreement of a US Media company by a China-based company.

The United States is an attractive destination for foreign direct investments. Some factors can be attributed to the country's attractiveness to FDI (US Economic Development Administration, 2017). For instance, the state is considered to have a significant consumer base, legal protections, a sizeable productive workforce and innovative environment. It is estimated that approximately 12.1 million jobs in the United States are attributable to foreign investments. Further, 6.4 million Americans are directly employed by foreign-owned firms. 2.4 million jobs in the US can be attributed to the economic activities of the significant foreign-owned companies in the country (Pretty & Poe, 2017). These include jobs created by the FDI supply chains. It is further estimated that the manufacturing sector attributable to FDI has contributed to more than 3.5 million jobs as a result of productivity growth. These trends give a glance of the function played by the FDI in the country's economic growth. It is, therefore, very critical to analyze the kind of strategies that the US has put in place to attract and secure the business of FDI.

In 2013, the investment by international firms to the US economy amounted to $ 236 billion (Stringer, 2015). Traditional FDI in the US is companies from Canada, the United Kingdom, South Korea, Japan, Australia, and Germany among others. It is predicted that foreign investments from China will increase significantly due to the growing cost of production in China. Additionally, Chinese firms are seeking to add a ‘Made in US' label to their product as a way of increasing their market through perceived improved quality (Anderson & Sutherland, 2015). The US works hard to attract foreign investments. Mostly, all economic sectors in the US offer opportunities for foreign investments. The manufacturing industry, however, received the highest share.

Strategies for attracting FDI in the US are developed and implemented both in the federal and at the state level. The country takes advantage of its conducive investment climate and opens markets to retail itself as a favorable destination for international foreign investments (Hohenthal & Johanson, 2014). Further, the country has invested heavily in developing a skilled workforce who attracts the foreign investments. The country boasts of hosting world's renowned universities, which adequately equip the nation with the required skills for FDIs. Investments in research institutions have led to the development of crucial innovations which support all the activities of the foreign investors.

The US has also invested in encouraging its population to develop an entrepreneurial culture and economic empowerment, hence further increasing the consumer base for FDI products (Stringer, 2015). Apart from the federal initiatives to attract investors, individual states have played a significant role in encouraging FDI. For instance, the South Carolina State has established offices in foreign cities such as Munich and Tokyo, where the representatives from these countries attend regular meetings with prospective investors. The US chamber of commerce develops strategies aimed at attracting foreign investments in the US. The department also offers different incentives and sponsoring programs which support the actions of FDIs.

Contemporary Ethical Concerns

Since the acquisitions by Wanda Group, some ethical concerns have been raised. For instance, the CEO of Legendary Entertainment stepped down without giving reasons as to why the CEO was replaced by Jack Gao, who is a Dalian Wanda Group’s insider (Brzeski, 2016). The replacement by the Wanda Group Insider raises critical ethical questions, mainly because Thomas Tull was the founder of Legendary Entertainment. In 2017, Dalian Wanda also noted that it would sponsor legal proceedings against individuals and media bodies that were spreading information it termed as "unfounded gossip and misinformation." The motive behind this move raises significant ethical concerns because the company had acquired a renowned media company in the US.

Results and Discussions

MNEs, such as Dalian Wanda Group, seeking to expand to the US use two prime avenues; first, they consider setting up a facility or a sales office in the US or secondly, create a business partnership with an existing business in the country. The business partnerships either tend to take the form of contractual arrangements between the MNE and the company in the host country (Akbar et al., 2014). The main reason as to why MNEs opt to use the contractual mode of entry into the US is to share the risks with their partners. Significant business partnerships created through the use of contractual ways include Joint Ventures, franchising and licensing agreements. In the case of the franchising agreement, the franchisor gives the franchisee, who in this case will be a US-based firm, the rights to use the business concept of the MNE. To ensure that control is guaranteed, a close business relationship between the franchisor and the franchisee is fostered.

The Dalian Wanda Group has tended to use investment entry mode, mainly through the use of acquisitions. The principal motive behind these acquisitions by Wanda Group is to diversify its portfolio. The decision resonates with the portfolio diversification hypothesis. Portfolio diversification hypothesis lies under the FDI theory which assumes that markets are perfect. The desire to move into new international markets is therefore informed by the desire to expand market portfolio, rather than the willingness to cut production costs. Since 2005, Chinese companies have been seeking to diversify their portfolio. There is no doubt, therefore, that Dalian Wanda pursues the diversification hypothesis in its move to acquire US firms, legendary entertainment and AMC theatres.

The US Department of Commerce, through its Economic Development Administration (EDA), acknowledges that FDI is one of its investment priorities. These priorities have been designed as a way of creating a framework to attract foreign investments such as Dalian Wanda Group in the US. EDA has continued to invest heavily in strategies that are aimed at boosting FDI. As of June 20017, EDA had made investments of more than $109 million in different projects which help in advancing local strategies to favor and attract FDI. EDA has invested in projects in various states in the United States. For instance, the agency has bankrolled in Mississippi and Georgia (US Economic Development Administration, 2017). As a way of attracting FDI, the Ohio State has developed a strategy that focuses on recruiting efforts in the fields of aerospace, automotive and other advanced materials.

Conclusion

FDIs have been playing a significant role in the global economy. Some of the benefits most cited benefits of FDI include job creation, wealth expansion and overall economic growth in host countries. To reap the benefits created by FDIs, governments usually develop policies and strategies to attract the foreign investments. Different theories explain the reason behind MNEs decision to move to overseas international markets. These theories are divided into three broad categories; those that assume markets are perfects; that think that markets are imperfect; and theories that are considering other variables. The portfolio diversification hypothesis mostly influences Dalian Wanda's entry mode. The United States has always worked hard to make itself a preferred destination by MNEs. Key strategies which have made the US stand out as a preferred destination by MNEs includes large consumer base, legal protection, renowned universities and research institutions and support from both the federal and state governments. The Dalian Wanda Group has used the investment mode of entry through acquisition, where it acquired Legendary Entertainment in 2016 and AMC Theaters in 2012.



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