Research Proposal:
The impact of Foreign Direct Investment (FDI) on local brand – The automotive Industry
Name:
Elaine Yi Ling Chua
Jiayao Xu
Qianwen You
Yongheng Zhang
Unit: International Business Strategy Research
Tutor: Dr. Charles Cheng-Lung WANG
Date: 07/08/2020
Word Count: 2451
Introduction
A myriad of foreign direct investment (henceforth referred to as FDI) theories posits a double–
edged impact of inward FDI on host or home country’s firms. Before mid 1990s, mainstream
FDI theories posited a countervailing or antagonistic relationship between foreign
multinationals and host or home country firms especially in the aftermath of the two
economically devastating world wars when the influx of foreign multinationals to Europe
under the Marshal Plan ruined domestic economy of most European nations (Guillon and
Chauvet 2013). The increase in Foreign Direct Investment (FDI) in recent years is an integral
part of globalization. According to Haskel, Pereira and Slaughter (2007), a major
repercussion of this increase is that a significant share of the output of a country is accounted
for by foreign affiliates of multinational corporations. According to UNCTAD (2012), from
2000 to 2011, the inward stock of FDI in developing nations reached a record high of 32.4
percent of the total share of the global inward FDI rising from $1735 billion to $6625 billion.
Such a significant growth depicts the increasingly changing attitudes of most developing
economies towards multinational firms and FDI in general as they continue to craft even
more cooperative policies towards attracting more of these inward investments (Gerschewski
2013).
It is apparent that governments in emerging, developing, and transitioning economies have
increasingly perceived FDI as a source of employment opportunities, income growth,
modernization and economic development. In addition, these economies have attempted to
attract FDI eyeing the spillover effects relating to the various benefits of increasing the
productivity of domestic firms as well as the diffusion of technology from these foreign
entities to the local economy (Gerschewski 2013). Indeed, the overall advantages of FDI to
these economies have been sufficiently documented. Depending on the basic degree of
development and policies of the host country, research has established that FDI not only
assists in human capital formation and through triggering technology spillovers but it also
enhances local enterprise development by creating a more competitive business environment
and contributing towards the integration of international trade (OECD 2002). However,
current literature has failed in establishing clarity around these spillover effects particularly
on how they directly impact the local corporations. There is a growing body of scholarly
work on the impact that FDI has on local brands. However, very little exploration has been
done in the context of the automotive industry. This is very unfortunate given that according
to Nieuwenhuis and Wells (2015), the automotive industry remains to be one of the largest
global manufacturing sector. Despite the surge in studies on this domain, prior works are
marred with inconsistencies and ambiguity that create confusion on the impact of FDI on
local firms. Therefore, this study is motivated by this existing literature gap on this subject
matter. The study will immensely contribute to the currently existing literature more so on the
two fronts of the need and impact of FDI on the local firms. It will add an integral theoretical
contribution to the existing pool of literature. To the best of the researcher’s knowledge,
there is no prior research exploring FDI through the integration of the different attributes of
the local and foreign firms in the automotive industry.
Literature Review
The role of FDI in the overall environment and market capitalization
The International Monetary Fund defines globalization as the free movement of people,
goods, and capital, which stimulates economic and social growth. It is because of trade
liberalization and technological development, especially on reducing trade barriers by
introducing foreign direct investment (FDI) (Landefeld and Whichard 2007).
Some major factors have spurred FDI in the global market as a common market entry
strategy, such as garnering new resources and improving the efficiencies by reducing
business-related costs. The latest research focuses on investments by multinationals in
emerging markets. A report shows that foreign direct investment is conducive to emerging
countries such as China, India, and Mexico’s economic health because it can improve
productivity, improve the quality and choice of consumers (Farrell 2004). Some factors, such
as tax-related benefits, government attitudes, and the infrastructure of the labor force, may
influence FDI site-selection. When the FDI enters into local markets, it can grow faster and
stronger if it is with high levels of education, freer international trade, and lower levels of
risks. The government gives more subsidiaries, it can be more independent in connecting
local businesses and facilitating spillovers (Ghauri 1992). FDI plays an important role in non–
debt financial resources for economic growth and supports the improvement of local
businesses by enhancing the export competitiveness and employment generation (Ansari and
Ranga 2010). Meanwhile, FDI promotes the performance of domestic suppliers by
implementing working standards and sharing information (Slaughter 2004).
Delivery, Productivity, Competition, and R&D
The structure of services in manufacturing is changing, Internationalization of services in
manufacturing are becoming increasingly intertwined, which implies that the elements of
service are turning more tangible compared to the situation in the past. In the real world, the
difficulty for attracting automotive manufacturing FDI is to create higher‐skill exports, then
using FDI in manufacturing to exhibit high‐performance for foreign investors and indigenous
suppliers. Manufacturing companies often resist spillovers in the horizontal aspect because it
may create the rivals, however, the shift for workers and managers and the imitation of
technology still exist. Thus, those local automotive manufacturers often build up the
vendor‐development network to establish reliable relationships with vertical suppliers, which
can be beneficial for both local firms and foreign multinationals. And when manufacturing
multinationals often introduce them to their sister affiliates beyond the host countries that
generate more competitive export advantages after they recognized the good performance of
