University: German FDI in China: Analysis of Motives and Prospects

This report provides an in-depth analysis of German Foreign Direct Investment (FDI) in China, focusing on the application of the OLI framework. The study examines the motives and prospects of German companies investing in the Chinese market, considering ownership, location, and internalization advantages. It reviews relevant literature, including the theory of product cycle and internalization theory, to explain the drivers behind German FDI. The research employs a qualitative approach, utilizing secondary data from existing literature. The analysis highlights the significance of location-specific advantages and internalization strategies in managing German FDI within China's business environment. The report also explores the factors attracting German companies, the conditions and future prospects of expanded FDI, and the theoretical underpinnings of German FDI activities in China. The findings contribute to a better understanding of the dynamics and complexities of FDI in the context of the German-Chinese economic relationship.

Running head: FOREIGN DIRECT INVESTMENT
ANALYSIS OF MOTIVES AND PROSPECTS WITHIN THE OLI FRAMEWORK
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Abstract:
This study throws light on the analyzing the German FDI in business market of China through
the OLI framework, a comprehensive approach to analyze FDI. The various theories that help to
explain the prospects and motives of German FDI in Chinese market are the theory of product
cycle and internalization theory. This study is generally qualitative in nature and secondary data
is used from the current literature. It is further revealed that foreign direct investment of
Germany is managed through internalization and location specific advantages in the business
market of China.

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Table of Contents
1. Introduction:.............................................................................................................................3
1.1 Objectives of the Research................................................................................................4
2. Literature Review:.......................................................................................................................4
2.1 Methodology and Data Used.................................................................................................5
2.2 Literature Review on the Motives and Prospects of German FDI in China..........................6
3.Analysis and Discussion:..............................................................................................................8
3.1 Analysis of German FDI in China Applying the OLI Framework........................................8
4. Conclusion:................................................................................................................................10
5. Bibliography:.............................................................................................................................12

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1. Introduction:
The OLI framework was created by Dunning for the study of Foreign Direct Investment
(FDI) in China. This study emphasizes on the scrutiny of the objects as well purpose in the OLI
framework. The given study deals with the German FDI in China. Foreign Direct Investment
(FDI) plays a crucial role in the globalization of the economy as per Agarwal and Wu (2015). It
is quite different from the portfolio investments as it is carried by the MNEs and involves
package of assets and intermediate products. From the European countries Germany is the most
vital trade partners of China and is further ranked at sixth position. In the year 2003, China was
proved to be the third largest beneficiary of FDI after gaining maximum inflows of investments
(Chen and Chen 2016). In the same year, German corporations were ranked among the largest
investors and known as the leading European investors in China.
Few of the emerging organizations of Germany in Chinese market are Volkswagen,
Siemens and Bayers. This companies are trading in the Chinese market over more than hundred
years. Germany invested in a huge amount in the China market and further enhanced its outflow
of investment from $800 to $7.9 million. The trade flow and the communication between China
and Germany have been rapidly increasing. Currently there are 1500 companies in China
representing the German investments (Mathews and Tan 2014). In the year 2002, $ 52.7 billion
of FDI were attracted by China and it rose to $ 53 billion in 2003 and further it rose to $ 61
billion in 2004. During 2005, China topped the FDI Confidence Index for consecutive four years.
China’s FDI amounted to $73 billion until May 2007 (Buckley et al. 2017).
The issues that are besetting Germany’s foreign direct investment in China involve the sustained
legal uncertainties existing within the country due to absence of intellectual property rights

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protection. There is also a huge increasing competition in China due to the rising attractiveness
of its current market condition (Wang and Wong 2016). Hence as per the given context, the aim
of this case study is to analyze the outlook as well as the intentions of German FDI in China by
applying the OLI framework and their further evaluation. China is considered to be having low-
cost assembly line that proves to be a major driver to invest in the country.
1.1 Objectives of the Research
The major purpose of this study is to identify the following:
 To identify the vital factors that attracts the potential German Companies for investing in
China.
 To analyze the German FDI prospects and motives within the OLI framework in China.
 To analyze the causes and reasons of German FDI in Chinese market.
 To study the conditions and future prospects of Germany’s expanded FDI.
 To explain theoretical base involving the activities of the German FDI within China.
The objective of this research is to analyze the functions of OLI framework for rapid
development, as a model for German FDI and MNEs in the growing Chinese market.
2. Literature Review:
This research report represents the range of published works that relates to the
investigation and throws light on the important concepts. It includes the data used for the report
and description of the methodology.

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2.1 Methodology and Data Used
This study is generally qualitative in nature and involves reviews of the articles, journal,
qualified and qualitative data related for the survey of prospects as well as motives within OLI
framework: a Case Study OF German FDI in China.
To conduct the case study, methodical and systematic review of visual or textual material
is used. The study aims to reduce the potential cognitive biases and ensures the objectivity of the
research. The execution of this study is done step by step under defined parameters and is in the
following sequences:
 Description of objectives.
 Realization of the study of dataset and observations.
 Content analysis.
 Result formulation.
The research relies on interpretations as it is value-bond. The research is primarily
inductive while using techniques of discounting besides use of measurement done in natural
settings. The research uses a case study to describe the German FDI in China. The data that are
used for determining the complexity and particularity of the case is secondary data. These data
have been collected by an individual and further used by the researcher for fulfilling their own
motives (Vaccarini et al. 2017). Hence the data used are non-original in nature. In this research
report, the data primarily used are from academic journals, books. Moreover, adequate resources
available online that are related to the investigated topic. On the other hand, the search engines
that are used to avail the needed documents are Google Scholar and Google as well.

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2.2 Literature Review on the Motives and Prospects of German FDI in China
As per Chaudhuri and Mukhopadhyay (2014), the location characteristics of China would
help in understanding and appreciating the huge FDI within the nation. The main elements for
determining the factors of location-specific are the inflow of FDI are the dominant availability of
cheap labors, export promotion strategy and the orientation related to export of FDI caused by
several nations starting its business within China. In the incident of Taiwan and Hong Kong that
provides a crucial link related to China is a vital element. Qualitative approach is used in the
study to deal with the matter. It is revealed that the main focus of FDI in the market of China and
it has been emerged as a great place for the potential nations to involve in the Chinese market of
FDI. The main limitation that is further imposed through the case is its importance in Taiwan and
China but this not involve its importance of German FDI that proves that the study is relevant.
As per Chiu, Lo and Susy (2015) The German FDI involved in China is described to be
growing larger in terms of size as well as higher quality besides the technological activities with
broad market orientations and long term motives. German FDI further seeks and expands its new
market share in China. The author’s previous claim for the determinants of FDI in China
includes export orientation and cheap abundant leaders. As the China domestic market is huge
involving enforced tax incentives and access to the natural resources. The approach used in the
research by the authors includes database analysis and mail services. The study is applicable for
the current study due to its importance of the German FDI in the market of China.
According to the study done by Meyer(2015), the survey for the cause of FDI in China
for German organization is showcased. The author further shows the dissimilarity among the FDI
in China or in other nation elsewhere as well as in exporting. The sector activity and size are
controlled then the attributes related to the FDI in China includes employment, turnover, profit

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margins, net income and total assets. Due to China rapidly increasing business market it is
profitable to invest in China than making FDI in any other country as it results in a profitable
outcome. The methods used by Paul and Benito(2018) are generally descriptive and to address
the research econometric analysis is used. This throws light on the topic through the description
of German FDI and aiding the study. The main limitation related to this study is focused
generally on the location specific factors involving FDI. Whereas, on the other hand, Quer,
Claver and Rienda (2015) states that the FDI’s embodied technology and its expansion are the
two vital elements that developed the modernization and improvement of the automotive
industry in China. After, Hong Kong and United States, Germany is a crucial source of the direct
investment in China’s automotive industry.
During the 80s FDI in automotive industry was mainly focused on assembling the overall
automobiles. Later during the 90s FDI was more used for manufacturing vehicles components
(Penget al. 2017). During the period of 1990s, the Chinese government had stern management of
Greenfield investment projects for the manufacturing of the vehicles. The early movers already
occupied the dominant positions thereby increasing the entry barriers for the newcomers in the
market. Since the 80s, the European automotive multinationals has greatly influenced and put a
positive impact on the restructuring of automotives industry in China. Furthermore, the European
automotive manufacturers from China have been linked with the agreements of cooperation
related to local suppliers and Chinese government. They often extend financial and technical
assistance to the existing local suppliers. Like in the case related to contribution of 5 billion
Chinese Yuan for localization fund in Shanghai Volkswagen.
The approach of Ayden, Demurrage and Tatoglu (2018), study is in chronological form,
mainly related from the present secondary literature. The study is applicable and relevant for the

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research as it provides sufficient and useful insights about the automotive industry within China
and furthers the development and improvement of the European FDI in the nation. This aids in
analyzing the present outlook and purpose of German investment in China. Moreover, the
limitation of this research is within the automotive manufacturing industry of China.
3.Analysis and Discussion:
The detailed discussion and analysis related to the study is affixed on the review by using
OLI framework for analyzing the FDI of German in China.
3.1 Analysis of German FDI in China Applying the OLI Framework
The OLI framework is related with the three elements of advantages that are as,
Ownership, Location and Internalization, which is crucial for organizational decision arising in
the multinational operational level (Tavareset al. 2017). Ownership advantages reveal the
reasons of firm operating abroad and indicate the multinational enterprises that are successful
possess various benefits that are firm-specific that lead those to tackle the operating costs created
in other country. On the other hand, location advantage concentrates on the main location for the
multinational enterprises. Moreover, access to the natural resources further provides as the
advantage of location for selecting China as a top country to invest, like the German FDI.
The additional elements for selecting the vital location for investing in foreign countries
include easily accessibility of trained labors and local infrastructure quality. The other crucial
factors involve smooth and harmonious relationship with the Chinese authorities and experiences
to cope up with the Chinese bureaucracy. This kind of relationship is the major bottom line of
FDI from Germany to link with the cooperation agreements with the local suppliers and Chinese
bureaucracy, as highlighted by Torres et al. (2017). Tuman and Shirali (2017) also throw light in

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his survey that the location characteristics of China provide in understanding and appreciating
the huge FDI in the nation.
Internalization advantages- this is the crucial determinant of OLI framework helps to
ascertain the impact of an organization’s operational activities that is carried abroad, generating a
trade-off between monitoring costs and transaction savings of a fully- owned subsidiary. The
vital characteristics of the approach are to lay emphasis on the benefits for individual firm.
During 1970’s FDI was regarded as a global movement for physical capital due to the increasing
demands for higher returns according to Mathews and Tan (2014). The internalization advantage
that is connected to the OLI framework, according to the study of Santangelo and Meyer (2017)
in this literature review magnifies the major dissimilarities that are present among the conducted
FDI in China or in other countries or via exporting. It aims to obtain the benefits from selecting
the appropriate advantages options from the three determinants.
The OLI framework serves to determine the organizations FDI activities beyond the
domestic borders. The internalization theory of FDI is view MNEs as the firm that involves in
utilizing their internal market to generate products and further distributing them effectively.
Through FDI, all the MNEs are able to create and further distribute its product through internal
market and hence enabling them to improve the total profit and optimizing efficient production
(Tavareset al. 2017). This notion helps in determining the purpose and objectives of FDI from
Germany in the market of China. Moreover, MNEs also possess horizontal and vertical
integration that enables the generation of its own internal market. The immediate products like
know-how and technology are further converted as the organization’s most valuable asset. This
further represents the advantages of ownership in the OLI framework as per Tuman and

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Shirali(2017). Therefore, the MNEs retains its competitive advantages through its ownership like
the know-how of the management that can be further bolstered or utilized (Peng et al. 2017)
The Uppsala Model further reviews the internationalization process as practical, cyclical
and resource based learning that foresee the research flows regarding temporary competitive
advantages and dynamic capabilities (Yao and Wang 2014). Furthermore, based on this study,
the internationalization theory cannot be viewed as the separate entity from the viewpoint of
OLI framework due to the reason it has same trail with similar framework related with the
understanding the prospects and motives of the firm in Germany. Moreover, its main outlook is
to engage its foreign direct investment in nation likes China.
This theory further reveals that the mature phase related to the development of
industrialization further laid down by the overall country and region involving high dynamic
growth as per the research of Paul and Benito (2018). This is crucial to consider the OLI
framework to be fastened beyond the theory of product cycle for analyzing the FDI of Germany
in China. The relevance of the structure moreover cannot be kept aside, when the
industrialization process is taken into account. The application of OLI structure uses sequential
measures to discuss the increasing rate of European FDI in China. The three factors consisting of
ownership, internalization and location specific are determinants of firms in the European nation,
such as Germany to further invest in the automotive sector of China.
4. Conclusion:
This report focuses on analyzing the prospects and objectives of German FDI in China
enclosed in the OLI framework. The rapidly increasing market in the global level assists the FDI
from Germany to seek ongoing newer prospects of investment in China that is further surrounded

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by the rising rivalry and immense quest for the fierce advantage. The German FDI internalization
advantage in China includes benefits availed operating the FDI in the state through exporting or
rather elsewhere. The location specific advantages include export orientation of FDI and cheap
trained labors. Finally the ownership advantages including the technology based infrastructure
and the advanced management knowhow. Moreover, the OLI structure is a disciplinary model,
which suits the various interrelated theories of FDI.
Henceforth, these various issues involve limited market transparency, inefficient potential
supplier networks and increasing changing regulatory obstacles and conditional frameworks. As
there is problem caused due to identification of market segment on individual basis it further
leads to the difficulty in gathering relevant information about the market condition. The potential
German investor in China faces very high input prices including electricity and raw materials
further making it highly difficult to reach the desired profit margins. Among the rising nations
China is one of the huge recipients of direct investment from an international nation. Germany is
directly involved in the management and operational activities to obtain maximum profit for the
main purpose of gaining international capital output.