What is the value that Cemex brings to the host economy? Can you see any potential drawbacks of inward investment by Cemex in an economy?
Foreign Direct Investment by Cemex
INSTRUCTIONS FOR ASSIGNMENT
Your responses should be well-rounded and analytical and should not just provide a conclusion or an opinion without explaining the reason for the choice. For full credit, you need to use the material from the week’s lectures, text, and/or discussions when responding to the questions. It is important that you incorporate the question into your response (i.e., summarize the case in the Summary) and explain the principle(s) or concept(s) from the text that underlies your judgment. For each case, you should provide at least two references in APA format (in-text citations and references as described in detail in the Syllabus). Each answer should be double-spaced in 12 point.
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Number each question. Each specific question under the numbered Case Discussion Questions should be a paragraph in length because many Case Discussion Questions contain more than one question.
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Management FOCUS: Foreign Direct Investment by Cemex
In little more than a decade, Mexico’s largest cement manufacturer, Cemex, has transformed itself from a primarily Mexican operation into the third-largest cement company in the world behind Holcim of Switzerland and Lafarge Group of France. Cemex has long been a powerhouse in Mexico and currently controls more than 60 percent of the market for cement in that country. Cemex’s domestic success has been based in large part on an obsession with efficient manufacturing and a focus on customer service that is tops in the industry.
Cemex is a leader in using information technology to match production with consumer demand. The company sells ready-mixed cement that can survive for only about 90 minutes before solidifying, so precise delivery is important. But Cemex can never predict with total certainty what demand will be on any given day, week, or month. To better manage unpredictable demand patterns, Cemex developed a system of seamless information technology, including truck-mounted global positioning systems, radio transmitters, satellites, and computer hardware, that allows it to control the production and distribution of cement like no other company can, responding quickly to unanticipated changes in demand and reducing waste. The results are lower costs and superior customer service, both differentiating factors for Cemex.
The company also pays lavish attention to its distributors—some 5,000 in Mexico alone—who can earn points toward rewards for hitting sales targets. The distributors can then convert those points into Cemex stock. High-volume distributors can purchase trucks and other supplies through Cemex at significant discounts. Cemex also is known for its marketing drives that focus on end users, the builders themselves. For example, Cemex trucks drive around Mexican building sites, and if Cemex cement is being used, the construction crews win soccer balls, caps, and T-shirts.
Cemex’s international expansion strategy was driven by a number of factors. First, the company wished to reduce its reliance on the Mexican construction market, which was characterized by very volatile demand. Second, the company realized there was tremendous demand for cement in many developing countries, where significant construction was being undertaken or needed. Third, the company believed that it understood the needs of construction businesses in developing nations better than the established multinational cement companies, all of which were from developed nations. Fourth, Cemex believed that it could create significant value by acquiring inefficient cement companies in other markets and transferring its skills in customer service, marketing, information technology, and production management to those units.
The company embarked in earnest on its international expansion strategy in the early 1990s. Initially, Cemex targeted other developing nations, acquiring established cement makers in Venezuela, Colombia, Indonesia, the Philippines, Egypt, and several other countries. It also purchased two stagnant companies in Spain and turned them around. Bolstered by the success of its Spanish ventures, Cemex began to look for expansion opportunities in developed nations. In 2000, Cemex purchased Houston-based Southland, one of the largest cement companies in the United States, for $2.5 billion. Following the Southland acquisition, Cemex had 56 cement plants in 30 countries, most of which were gained through acquisitions. In all cases, Cemex devoted great attention to transferring its technological, management, and marketing know-how to acquired units, thereby improving their performance.
In 2004, Cemex made another major foreign investment move, purchasing RMC of Great Britain for $5.8 billion. RMC was a huge multinational cement firm with sales of $8.0 billion, only 22 percent of which were in the United Kingdom, and operations in more than 20 other nations, including many European nations where Cemex had no presence. Finalized in March 2005, the RMC acquisition has transformed Cemex into a global powerhouse in the cement industry with more than $15 billion in annual sales and operations in 50 countries. Only about 15 percent of the company’s sales are now generated in Mexico. Following the acquisition of RMC, Cemex found that the RMC plant in Rugby was running at only 70 percent of capacity, partly because repeated production problems kept causing a kiln shutdown. Cemex brought in an international team of specialists to fix the problem and quickly increased production to 90 percent of capacity. Going forward, Cemex has made it clear that it will continue to expand and is eyeing opportunities in the fast-growing economies of China and India where currently it lacks a presence, and where its global rivals are already expanding.
3. Read the Management Focus on Cemex and then answer the following questions:
a. Which theoretical explanation, or explanations, of FDI best explains Cemex’s FDI?
b. What is the value that Cemex brings to the host economy? Can you see any potential drawbacks of inward investment by Cemex in an economy?
c. Cemex has a strong preference for acquisitions over greenfield ventures as an entry mode. Why?
d. Why is majority control so important to Cemex?
Foreign Direct Investment
Foreign Direct Investment (FDI) has been increasing over the years as a result of the globalization process and the regional economic integration. FDI occurs when a firm invests in a foreign country directly in new facilities to produce and/or market a product. When analyzing FDI, it is important to differentiate between the stock and the flow of FDI. When we are referring to the stock of FDI, that means we are referring to the “the total accumulated value of foreign-owned assets at a given time. We also talk of outflows of FDI, meaning the flow of FDI out of a country, and inflows of FDI, the flow of FDI into a country” (p. 239).The past 30 years have seen a marked increase in both the flow and stock of FDI in the world economy. The average yearly outflow of FDI increased from $25 billion in 1975 to a record $1.4 trillion in 2000. It fell back in the early 2000s, but by 2007 FDI flows were again around $1.5 trillion (see Figure 7.1.2). Over this period, the flow of FDI accelerated faster than the growth in world trade and world output. For example, between 1992 and 2007, the total flow of FDI from all countries increased more than eightfold while world trade by value grew by some 150 percent and world output by around 45 percent. As a result of the strong FDI flow, by 2006 the global stock of FDI exceeded $12 trillion. At least 78,000 parent companies had 780,000 affiliates in foreign markets that collectively employed more than 70 million people abroad and generated value accounting for about one-tenth of global GDP. The foreign affiliates of multinationals had an estimated $25 trillion in global sales, much higher than the value of global exports, which stood at close to $14.1 trillion. (p. 239)
Why Foreign Direct Investment?
FDI is an alternate entry mode to enter foreign markets and countries at any point in time. Why do so many firms apparently prefer FDI to either licensing or exporting? This is something we will analyze this week, and the answer is framed in the limitations of these methods for exploiting foreign market opportunities, producing goods at home, and then shipping them to the host country for sale.
Some of the advantages of FDI include the fact that, “despite the general decline in trade barriers over the past 30 years, business firms still fear protectionist pressures.
Executives see FDI as a way of circumventing future trade barriers. Second, much of the recent increase in FDI is being driven by the political and economic changes that have been occurring in many of the world’s developing nations” (p. 241).
Benefits and Costs of FDI
FDI provides many benefits to the host country such as the employment effect, the competition and economic growth effect, and the resource transfer effect. FDI can make a positive contribution to a host economy by supplying capital, technology, and management resources that would otherwise not be available.
In addition to the above, FDI brings employment benefits to the host country and created jobs that would otherwise not be created there. The positive effect of FDI on a country’s balance of payment is an important element for most host governments.
Regional Economic Integration
Regional economic integration includes “agreements among countries in a geographic region to reduce, and ultimately remove, tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other. The last two decades have witnessed an unprecedented proliferation of regional trade blocs that promote economic integration. World Trade Organization members are required to notify the WTO of any regional trade agreements in which they participate. By 2008, nearly all of the WTO’s members had notified the organization of participation in one or more regional trade agreements. The total number of regional trade agreements currently in force is around 205″ (p. 275).
Regional Economic Integration in Europe
In Europe, there are two major trade blocks: the European Union (EU) and the European Free Trade Association. “The European Union (EU) formally removed many barriers to doing business across borders within the EU in an attempt to create a single market with 340 million consumers. However, the EU did not stop there. The member states of the EU have launched a single currency, the euro; they are moving toward a closer political union. On May 1, 2004, the EU expanded from 15 to 25 countries and in 2007 two more countries joined, Bulgaria and Romania. Today, the EU has a population of almost 500 million and a gross domestic product of €11 trillion, making it larger than the United States in economic terms” (p. 276). In this section of the class, we will analyze the influences of the EU and how the EU was formed as a result of economic and political factors.
The EU is formed by five main institutions: the European Commission (responsible for implementing aspects of EU law and monitoring member states to ensure they are complying with EU laws), the European Council (resolves major policy issues and sets policy directions), the Council of the European Parliament (the ultimate controlling authority within the EU), the European Parliament (debates legislation proposed by the commission and forwarded to it by the council), and the Court of Justice (the supreme appeals court for EU law).
One of the most significant contributions of this economic and political union was the adoption of a single currency commonly known as the Euro. The Treaty of Maastricht, signed in 1991, committed the EU to adopt a single currency, the Euro, by January 1, 1999. The Euro is used by 12 of the 25 member states. By adopting the Euro, the EU has created the second largest currency zone in the world after that of the U.S. dollar.
Class, what do you consider the benefits and the costs of the Euro to be?
Regional Economic Integration in Other Parts of the World
There are many regional economic integration agreements in other parts of the world like “The North American Free Trade Agreement (NAFTA), between the United States, Canada, and Mexico; The Andean Group (Bolivia, Colombia, Ecuador, and Peru and Chile, in the near future and after the resignation of Venezuela); and MERCOSUR (Brazil, Argentina, Paraguay, and Uruguay). In addition, there are plans to establish a hemisphere-wide Free Trade Area of the Americas (FTAA) in the near future. There are two other trade pacts in the Americas, the Central American Trade Market and CARICOM, although neither has made much progress as of yet” (p. 297).
The “Association of Southeast Asian Nations (ASEAN) includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. Laos, Myanmar, Vietnam, and Cambodia have all joined recently, creating a regional grouping of 500 million people with a combined GDP of some $740 billion (see Map 8.3). The basic objective of ASEAN is to foster freer trade between member countries and to achieve cooperation in their industrial policies. Progress so far has been limited, however” (p. 297).The “Asia-Pacific Economic Cooperation (APEC) was founded in 1990 at the suggestion of Australia. APEC currently has 21 member states including such economic powerhouses as the United States, Japan, and China. Collectively, the member states account for about 55 percent of the world’s GNP, 49 percent of world trade, and much of the growth in the world economy. The stated aim of APEC is to increase multilateral cooperation in view of the economic rise of the Pacific nations and the growing interdependence within the region. U.S. support for APEC was also based on the belief that it might prove a viable strategy for heading off any moves to create Asian groupings from which it would be excluded” (p. 297). Within the African continent, there are nine trade blocs; however, progress toward the establishment of meaningful trade blocs has been slow.
No. Of Words: 665
Foreign Direct Investment by Cemex
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