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The Changing Dynamics of
Chinese Foreign Direct Investment
in Italy
The Marco Polo Effect
Motivations for Chinese FDI
The literature on the motivations for Chinese FDI identifies four main categories:
Resource seeking FDI : Mainly directed towards resource-rich countries, especially in Africa and Latin America. Efficiency seeking : Not a relevant motivation for Chinese FDI in European countries, as China has a large domestic supply of low-cost labor, land, and capital. Market seeking : The host market size appears as one of the reasons for Chinese market-seeking investments. In the 1990s, many Chinese FDI were defensive, as firms set up foreign affiliates to serve their customers better and increase customer loyalty. Market-seeking investment also takes advantage of preferential access to developed country markets. Another reason for defensive market-seeking investments is to escape the excessive competition at home due to the large number of foreign MNEs in China, which has caused profit margins to fall and resulted in overcapacity in some mature industries. Strategic asset seeking : The other main attractor of Chinese firms to developed countries is access to strategic assets such as technology, know-how, managerial and marketing skills, recognized brand names, distribution networks, and reputation. Chinese firms carry out cross- border M&A to speed up the acquisition and control of these strategic assets. In many cases, the firms acquired are loss-making businesses, which are purchased to use their brand names.
Chinese FDI in Italy
Methodology
The data source used for the research is FDIMarkets.com, which includes information on the mode and year of investment, employment, sector, activity, and turnover. 78 Chinese investment projects in Italy were identified.
Characteristics of Chinese OFDI in Italy
The majority of Chinese FDI in Italy occurred after 2000, revealing a recent but rapidly increasing interest.
Most Chinese companies located in Italy also have investments in other European countries, and the decision to invest in Italy is part of a broader European strategy. The main sectors are household appliances, automotives, transport and logistics, electronics, and telecommunications. Chinese investments are concentrated in Lombardy, particularly the area of Milan, where the Bank of China and the Industrial and Commercial Bank of China (ICBC) are located to assist Chinese companies wanting to invest in Italy. The second Italian region attracting Chinese FDI is Piedmont, due to its manufacturing specialization in the automotive sector.
Motivations for Chinese Investments in Italy
The main motivations for Chinese investments in Italy are:
Market-seeking : Italy represents an important market for foreign investors, and Chinese companies are keen to strengthen their positions by acquiring European companies and investing in new infrastructure projects. Strategic asset-seeking : Chinese companies are seeking access to advanced skills and technological capabilities, as well as well-known brands. They are also seeking managerial experience, as managers with no international experience find it hard to deal with Western management models. Learning and knowledge acquisition : The Italian market is regarded as a test market for products adapted to European tastes, and Chinese companies are keen to obtain feedback on their products. They are also interested in gradually learning the marketing skills required for exporting and identifying new potential areas for investment, particularly related to post-sales assistance and customer care.
Li&Fung - Memorandum of Understanding
between the Government of the Italian
Republic and the Government of the People's
Republic of China on Cooperation within the
Framework of the Silk Road Economic Belt
and the 21st Century Maritime Silk Road
Initiative
Objectives and Guiding Principles of Cooperation
Both governments will work together within the Belt and Road project for greater cooperation and sustainable growth, which will also permit them to increase their political relations, economic ties, and people-to- people exchanges. The parties will promote three principles:
from low prices online, and online merchants help consumers locate, evaluate, and purchase a greater variety of products than traditional brick- and-mortar stores.
The Long Tail Phenomenon
The "long tail" phenomenon, coined by Anderson, has been identified in many IT-enabled markets where consumers' preferences have much more importance. In the book industry, for example, internet retailers sell 3 million books in print, but about half of their sales are in books that wouldn't be found in a physical bookshop.
Supply-side Drivers
For online retailers, the cost of storing and stocking products is much lower than for brick-and-mortar stores, which have to allocate physical space for each product. This allows online retailers to aggregate demand on a national or global scale and cater to niche markets.
Demand-side Drivers
When retailers make too many products available, consumers may reduce their purchases because it becomes harder to locate the products they are interested in. The Long Tail helps with the discovery of products through active and passive search tools, as well as customer reviews and online communities.
Hybrid Organizations
Origins
The book 'The New Pioneers' discusses the growth of non-profit organizations established to address environmental issues, human rights, women's liberation, and anti-war efforts. This has led to legislative innovations, such as new business registration categories.
Strategies
Like other social entrepreneurs, hybrid entrepreneurs initiate change to overcome a particular social or environmental problem. Researchers have developed a typology of hybrids based on social value creation, and provide advice on managing hybrids to align financial viability goals with social impact goals.
Impacts and Implications
Hybrid organizations are often built to serve markets that are unserved by mainstream firms and governments. Some hybrids are present in mainstream markets, and traditional firms often collaborate, acquire, and compete with them. The growth in hybrid organization numbers is due to
the passage of legislation, and their innovations are diffusing into mass markets.
The Rise of Middle Kingdoms: Emerging
Economies in Global Trade
The Shift in Global Trade
Due to the recent global financial crisis, developed economies like the USA, European Union, and Japan have been slow to recover, while many emerging economies, like China and India, are growing. This has led to a shift in international trade, with more trade between developed and developing countries, as well as increased south-south trade.
Growth in South-South Trade
The growth in south-south trade has been driven by factors such as the decrease in costs in emerging economies, the growth in World Trade Organization membership, and the reduction in shipping costs. Many middle-income countries have also specialized in manufacturing exports, contributing to the expansion of their trade.
The Return of Comparative Advantage
In the 1980s and 1990s, theories of trade based on comparative advantage were not widely accepted, as rich countries dominated global trade. However, the technological and resource differences between countries like China and India have revived the importance of comparative advantage in trade.
International Specialization
International specialization follows patterns of comparative advantage, with low-income countries exporting in labor-intensive sectors and middle-income and high-income countries exporting in capital-intensive sectors. South- south trade is growing on the lines of comparative advantage, with resource- poor emerging economies purchasing raw materials from resource-rich economies.
Dynamics in Specialization
Over time, the specialization of low- and middle-income countries can change rapidly. For example, China has been moving from the apparel and footwear sector to the production of cellphones and computers, using industrial policy to expand high-tech production.
as it was commercializing mostly in the lower end of the market in Japan and Southeast Asia.
Consumers in Indonesia and Malaysia
Consumers in Indonesia and Malaysia are used to driving under brutal road conditions and they replace parts quickly. They are more willing to sacrifice durability for price.
Shiramizu's Reforms at Daihatsu
In 2009, Shiramizu, who was in command of Toyota's business, decided to make a reform at Daihatsu. He wanted to terminate the redesign of the Mira mini-car and turn it into a strategic car that is high on fuel economy and low cost. This marked the beginning of the destruction of the keiretsu model at Daihatsu.
The Account System
Shiramizu made it impossible for new non-Toyota-group suppliers to do business with Daihatsu. Under the account system, only suppliers with Daihatsu accounts could supply parts to Daihatsu. These account holders were a more financially stable group of suppliers, and new suppliers had to ask them to sell through their accounts. This system increased costs because account holders charged a fee for the use of their accounts.
Searching for Lower-Cost Parts
The account system allowed purchasing managers to search for lower-cost parts across Japan. However, one of the account holders was slapping a high margin on components they procured cheaply in China.
Daihatsu's New Suppliers
Daihatsu had found two new suppliers of aluminum wheels for half the price of Toyota suppliers.
On-Time Delivery
Daihatsu's new procurement system was crucial to the success of the Mira e:S.
Daihatsu's Vertical Integration Strategy
Removing Intermediaries from Contracts
Daihatsu has begun to remove intermediaries from its contracts. This allows the company to buy directly from suppliers, ensuring that the logistics for parts delivery are sound and that orders are delivered on time.
Mira e.S Launch and Redesign
In June 2011, Shiramizu stepped down as Daihatsu's chairman, and the company launched the Mira e.S in Japan that same year. The redesign of the Mira e.S led Daihatsu to open an office in Shanghai, where the company began searching across China for low-cost parts, including generic parts.
Producing Core Parts In-House
Designs by generic parts producers are often robust, but the production quality can be unreliable. To address this, Daihatsu plans to realize a low- cost car, priced around $5,000, by producing many of the core parts in- house that it previously bought from Toyota suppliers.
