Expanding into Global Markets: Direct Investment

Some companies find that they cannot meet their global marketing objectives by continuing to export, so they make direct investments in international markets to gain access to manufacturing facilities, supplies, or labor, among other reasons. They become multinational corporations which the United Nations defines as “enterprises which own or control production or service facilities outside the country in which they are based.” While this definition makes all foreign direct investors “multinational corporations,” large corporations are the key players.

Building and managing operations outside the domestic market requires skills and resources beyond those used for exporting. Multinational firms with subsidiaries and other investments in other countries also deal with issues ranging from local versus headquarters control, to product or service standardization versus customization for individual market needs. At the highest level of marketing globalization, companies integrate thie international and domestic operations into relatively seamless enterprises that have portfolios of nations that they market to with unified strategies.

Putting products into the hands of customers overseas involves some degree of direct financial investment, whether it is done by acquiring assets in other countries or gaining access to another company’s assets through contracts. International marketers invest directly via full ownership, strategic alliances, or joint ventures to create or expand a permanent interest in an enterprise. It typically requires substantial capital and an ability to absorb risk, so the most visible players in this arena are large multinational corporations who invest either to enter new markets or to ensure reliable supply sources.

Foreign direct investment is defined by the United Nations as “enterprises which own or control production or service facilities out of the country in which they are based.” U.S. firms have significant investments in the developed world as well as in some developing countries. It is a major avenue for global market entry and expansion.

The top multinational companies come from a wide range of countries and depend heavily on their international sales, with their original home market accounting for only a fraction of total sales. Some have revenues larger than the domestic output of some countries. Many operate in more than 100 countries and do not even reference “global” and “domestic” anymore. Through their direct investment, these companies bring economic vitality and jobs to their host countries, often paying higher wages than the average domestically owned firms. At the same time, though, trade follows investment, and companies that invest in other nations often bring with them imports that could weaken a nation’s international trade balance.

The International Marketplace: Product Innovation May Come Mainly From China

           Since the 2007-2008 global recession, confidence in the American model of economic development has decreased significantly. Economists are eager to draw conclusions from China’s continued economic growth even though the economic slowdown that has affected much of the developed world. Many assert that Chinese economic policy is more stable because of the government’s large role. However, it may also be the demand of Chinese consumers which shapes innovation and supply.

            The American toilet company Kohler has just released the state-of-the-art Numi toilet. This toilet, designed and marketed primarily for the US and China, has many features included especially for the Chinese market. The toilet’s feet warming system is a solution to infamously cold Chinese bathrooms. Other Chinese market features include the Numi’s music system, Skype capabilities, and a bidet. This toilet suggests that even an American company must keep the Chinese populace in mind when developing products. In an editorial in the Financial Times, Christopher Caldwell concluded that the Numi toilet suggests more than just an increase in Chinese-centered goods. He claims that this toilet “is a sign that this era of US advantage is spiraling towards its close.” 

            Caldwell is not alone in his belief that Beijing will soon begin its reign of prominence. The Numi is not the only special global product marketed for China. In 2005 GM’s luxury sedan the Buick LaCrosse was redesigned especially for the Chinese market. Joe Qiu, designer of the Chinese version of the LaCrosse, told Fara Warner of Fast Company how he created a car that would sell well in the Chinese market. The interior of the car is meant to recreate the soft, luxurious environment of Chinese nightclubs and upscale Shanghai homes. The car’s exterior is sleek and trendy, targeting the chicest Chinese clientele. Since then, sales of the LaCrosse in China have outperformed those in the U.S. In 2010, GM released the updated version of the Buick LaCrosse globally. Much to US GM’s chagrin, the car’s interior was designed by Qiu. The US team was took point on the car’s interior, but had to take into account the input and edits from the Chinese design team. This move displayed how Chinese preferences trumped American ones. As a result, China gained more clout within the powerful American company GM. 

            With the second largest economy in the world and an envy-inducing continued growth, China is beginning to rival the United States’ position as the world’s economic leader. Whether the 21st century will become the age of China will be determined over time. Right now, Chinese preferences are beginning to share the lead in the development of new global products. 

Professor Michael R. Czinkota and Sophia Berhie

Sources: Caldwell, Christopher. “Telling Lessons for the Future from China’s Bathrooms.” Editorial, Financial Times (London), June 4, 2011; Waldmeir, Patti. “The Numi Toilet: Chinese Design for a Global Market.” Globe and Mail (Toronto), May 30, 2011. Accessed June 7, 2011. http://www.theglobeandmail.com/​report-on-business/​international-news/​ asian-pacific/​the-numi-toilet-chinese-design-for-a-global-market/​ article2040064/​; Warner, Fara. “Made in China.” Fast Company, April 1, 2007. Accessed June 7, 2011. http://www.fastcompany.com/​magazine/​114/​open_features-made-in-china.html.