Running head: Cemex’s Foreign Direct Investment Cemex Foreign Direct Investment Jeff Panian Davenport University Abstract Cemex is one of the fastest growing cement manufacturers in the world. Starting out more than a decade ago Cemex, “has transformed itself from a primarily Mexican operation into the third-largest cement company in the world” (Hill, 2008). The success of Cemex has been attributed to its skills in customer service, marketing, information technology, and production management.
Its idea to originally enter into the global market, was to acquire inefficient cement manufactures and turn them around by implementing its proven strategies. This global introduction has worked well for the most part, “not all of Cemex’s expansions have worked out as planned” (Hill, 2008). Cemex has run into local government hinderence and was forced out of the Indonesian market. These issues surrounding Cemex’s Foreign Direct Investment (FDI) has brought about some root problems. “Three costs of FDI concern host countries.
They aries from possible adverse efects on competition within the host nation, adverse effects on the balance of payments, and the perceived loss of national sovereignty and autonomy” (Hill, 2008). Introduction While Cemex has a strong preference for acquisitions over starting fresh, this poses several key root problems for both Cemex and the host nations. Cemex had to face some challenging questions; What are the primary factors in why Cemex has chosen Direct Foreign Investments versus some alternatives; What is the impact of their choice in FDI on the host-country, as well as home-country.
What are the primary factors in why Cemex has chosen Foreign Direct Investments versus some alternatives? There are several options to consider when a company wants to move into the international global market. The biggest questions firms usually ask is, “Why do firms go to all of the trouble of establishing operations abroad through foreign direct investments when two alternatives, exporting and licensing, are available to them for exploiting the profit opportunities in a foreign market? (Hill, 2008). This question was undoubtedly debated heavily by Cemex prior to investing in foreign markets. One of the industry specific novelties of cement manufacturing, is the product itself. “The company sells ready-mixed cement that can survive for only about 90 minutes before solidifying, so precise delivery is important” (Hill, 2008). This industry is already at a predisposed peril if it were to consider exporting their goods. The cement industry requires this product to be made on site.
Due to this requirement, Cemex could have considered Licensing, “Occures when a firm grants a foreign entity the right to produce its product, use its production processes, or use its brand name or trademark in return for a royalty fee on every unit sold” (Hill, 2008). Licensing is a very real alternative to FDI. The answer to Cemex’s decision ultimately lies in the fundamental successes that made Cemex grow, its skills in customer service, marketing, information technology, and production management.
Following the ideas of the internalization theory, “The argument that firms prefer FDI over licensing in order to retain control over know-how, manufacturing, marketing, and strategy or because some firm capabilities are not amenable to licensing” goes to show the true benefits of Cemex’s decision to utilize FDI as its global initiative. Because Cemex has developed proven strategies in its technology, customer services, and manufacturing management styles – it can clearly benefit from FDI. Cemex also recognized some additional benefits of why FDI is an important consideration when going global. Circumventing trade barriers, hidden and otherwise. • Making the move from domestic export sales to a locally-based national sale office. • Capability to increase total production capacity • Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc; (Graham, 2005) What is the impact of their choice in FDI on the host-country, as well as home-country? The benefits of FDI in Cemex’s global strategy have proven successful. Their ability to “create significant value by acquiring inefficient cement companies in other markets” (Hill, 2008) proved to be a very valid assumption.
Although Cemex proved for the majority of its acquisitions successful, there are still some fundamental root problems with FDI. Host-Country governments and local perception can be very negative. Three issues faces Cemex with its decision to utilize FDI. Adverse effects on competition can be a major hurdle to overcome, even just at the perception of such. Cemex has already had to deal with this issue with its Indonesia operations. “Host governments sometimes worry that the subsidiaries of foreign MNE’s may have greater economic power than indigenous competitors.
If it is part of a larger international organization, the foreign MNE may be able to draw on funds generated elsewhere to subsidize its costs in the host market, which could drive indigenous companies out of business and allow the firm to monopolize the market” (Hill, 2008) This worry is very real, especially in some of the newly developing host-countries Cemex has targeted. As with the Indonesia operation, the host government ultimately refused to allow Cemex the ability to buy a majority share of its cement company.
A second and sometimes more devastating downfall to FDI is the perception of National Sovereignty and Autonomy. “Some host governments worry that FDI is accompanied by some loss of economic independence. The concern is that key decisions that can affect the host country’s economy will be made by a foreign parent that has no real commitment to the host country, and over which the host country’s government has no real control” (Hill, 2008). This concept was another major factor in the Indonesia operation, and ultimately part of the reason the host government refused majority ownership.
Although there seems to be some primarily negative impacts FDI’s can have on host-countries, there are also some very beneficial impacts. “The main benefits of inward FDI for a host country arise from resource-transfer effects, employment effects, balance-of-payments effects, and effects on competition and economic growth” (Hill, 2008). Cemex not only brings with it capital investments, but it also brings with it a host of other valuable contributions like technology, management resources, that might not otherwise be available to the host-country.
Cemex also employs mostly local workers, providing another beneficial contribution. While the positive effects of FDI are sometimes obvious and overlooked, it is important to understand that these impacts are very real, and often sought out by host-countries and their governments. Home-Country benefits can also be somewhat obvious. In the case of Cemex the home-country is Mexico, which can see its benefits from an inflow of foreign earnings. Mexico can also realize an increase of demands for home-country exports. Another less obvious benefit, is the valuable skills learned from its exposure to a foreign market or markets.
While primarily home-countries benefit from FDI, there are some apparent costs. “The most important concerns center on the balance-of-payments and employment effects of outward FDI” (Hill, 2008). Concerns stem from the initial outflow of capital required to finance the operations. This however is usually offset by the amount of foreign earnings coming in. Home-countries can also see negative costs if the outward FDI is seen as a substitute for domestic production. This however is limited again due to the uniqueness of Cemex’s industry primarily requiring local operations.
There are few if any, home-country exporters of cement, that would negatively be affected by the outward FDI of Cemex. Conclusion While Cemex has had various options regarding its introduction into the global market, and its choice to utilize FDI has negative effects on both the host-country and home-country; Cemex’s has found it very successful in turning foreign inefficient cement manufactures and turning them around by implementing its proven strategies. Cemex has seen some failure on the road to its success, primarily in Indonesia and potentially other future locations where government interaction will be negative.
Ultimately Cemex has chosen the best possible avenue for its international operations. In 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” (Hill, 2008). References Graham, J. P. (2005, June 18). Understanding Foreign Direct Investment (FDI). Retrieved July 24, 2009, from Going Global: http://www. going-global. com/articles/understanding_foreign_direct_investment. htm Hill, C. (2008). Global Business Today. Boston: McGraw-Hill Irwin.