Abstract In order to understand the reasons why

Abstract

The motives and prospects of FDI
are explained by various theories. The most used by economists is the eclectic
paradigm (OLI), which expresses the need for benefits that exceed the costs of
direct investment abroad. In order to understand the reasons why Germany
invests in China, in this essay I am going to use the OLI framework.

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Introduction

China’s economic reforms successfully built an improved
environment for both state and private companies, providing them with the
necessary resources, such as infrastructure, access to capital and a more
prepared workforce. In 1986, China was granted the status of observer by the General
Agreement on Tariffs and Trade (GATT) and since then, it has begun working towards accession to the
World Trade Organization (WTO).

China became a member of the World Trade Organization in 2001 and agreed to
become a “responsible participant” and to accept the rules of the world
trading system. Its market was opened to foreign investment and quotas and
tariffs were reduced. At present, it is the second largest exporter after
Germany and the second largest importer after the United States.

China
has become a global manufacturing platform, and currently has the largest
manufacturing economy in the world. For example, China produces around 80% of
the world’s air conditioners, 80% of the world’s umbrellas, 70% of mobile
phones and 60% of the country’s footwear. It also became, in 2007, the world’s
largest producer of carbon dioxide, the main greenhouse gas responsible for
global warming. This was due to the growing demand for coal to generate
electricity and an increase in the production of cement to build
infrastructure.

The
rapid development of China is an economic miracle. No country in the world has
grown in such a vertiginous way. According to The Economist, Britain took more
than 150 years since the beginning of the industrial revolution to double GDP
per person (measured in purchasing power parity), from $ 1,300 to $ 2,600.

About 120 years later, the United States, with a population similar in size to
the United Kingdom, achieved the same in one third of the time. China has
achieved it in only twelve years.

 

 

Literature
Review

The OLI framework, or eclectic paradigm was proposed by J.H. Dunning in 1976. It
refers to the words Ownership, Location and Internalization. This model establishes the decision guidelines and
drivers for foreign growth, which allows companies to operate in international
markets. In recent years this model has been used significantly to analyze the
activities of Multinational Companies (MNEs) and the economic reason behind
their international operations. This paradigm, which is supported by several
empirical studies, does however not have complete acceptance, and it has been
criticized as limited in its precision in predicting international outcomes.

Nowadays, other different factors
beyond the economic advantages of the OLI framework, are also determinants in
FDI operations. For example, the gravity model, that attempts to avoid the
limitations of the eclectic paradigm (OLI) by analyzing the factors of bilateral
trade such as common borders, common languages, similarity of legal systems,
monetary system and past colonial ties. Other problems associated with the OLI
framework are the scarce distinction between vertical and horizontal models in
terms of the location of production centers within the new countries. Another
problem is that the underlying reasons for production that vary between regions
are not addressed. A case to show this fact is, for example, that the factors
that influence foreign investment of metal are abundant in a region of Latin
America but are different from those that influence the investments of
manufacturing of cars in a region in Africa.

Despite all of the above, the OLI
framework is useful for driving a large amount of FDI researches and proves to
be useful in establishing international operations guidance for multinational
companies, since it is a developed and well-argued model for expansion studies
and economics forecasts.  Its author,
Dunning, made later improvements in his model and reasoned that the competitive
advantages, the market obstacles, the associations and the variables of the
context should, similarly, be added to the model to guide in the expansion
decisions.

 

The case study proposed, uses three
questions to analyze the reasons and prospects of German investments in China.

These questions form the basis of this study. They state: what seems to
motivate German companies in China? To what extent can these motives fall
within the OLI paradigm? What are the main obstacle to German Investment in
China? Following the case study, the OLI model was used to evaluate the reasons
for FDI in China. The following chapters will explain the conclusions of these
questions.