Foreign direct investment CEMEX's FDI Case Fateh ROUIDJALI Dawood ABBASI Singh SUKHDEV Gurwinder SRAN
Contents What is FDI? History of Cemex Review of Cemex FDI Question Answer Session
FDI - Concept Long term investment by a foreign direct investor FDI relationship: a parent enterprise and a foreign affiliate which together a Transnational Corporation (TNC) FDI relationship:Parent enterprise investment must afford the parent enterprise control over its foreign affiliate The IMF defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm; lower ownership shares are known as portfolio investment.
AdvantagesDisadvantages Inflow of equipment and technology Competitive advantage and innovation Financial resources for expansion Employment generation Contributions to export growth Access to global marketplace for domestic players Access to low cost resources for investor Access to new market/ distribution channel for products Improved consumer welfare through reduced costs , wider choice and improved quality. Crowding of local industry Loss of control Repatriation of profits/dividends by investor Conflicts of codes/laws Possible exploitation resources-material/ wages Effect on local culture/sentiments – socio cultural effect Effect on natural environment
History of CEMEX The world's largest building materials supplier and third largest cement producer (Home market = Mexico) In 2005 : $15 billion of sales / $2 billion in net profits More than 60% of the Mexican (domestic) market Cemex’s domestic success:
Obsession of efficient manufacturing = lower costs
Focus on customer service = superior customer service
Using information technology to match production with consumer demand
Cemex’s Foreign Direct Investment Several factors to explain Cemex’s international expansion:
Reduce its reliance on the Mexican construction market because of the very volatile demand in Mexico
A lot of demand for cement in many developing countries
Cemex believed that it understood the needs of construction businesses in developing countries
Cemex’s Strategy: Create significant value by acquiring inefficient cement companies in other markets (by transferring their skills in customer; technology; production...)
Question Answer Session Question 1: Which theoretical explanation (or explanations) of FDI best explains Cemex’s FDI?
Cemex wanted to reduce its reliance from its domestic market : because of too volatile demand in Mexico
Cemex realized there were tremendous demand for cement in many developing countries
They believed they understood the need of construction businesses for developing countries and transferring their technologies and production management to those units.
Question 2: What value does Cemex bring to a host economy?
Cemex valued a host economy by transferring its technological, management and marketing KNOW-HOW to acquired units, thereby improving their performance on economy.
Can you see any potential drawbacks of inward investment by Cemex in an economy?
Principle drawback for Cemex: In 2004, they made major foreign investment move. They bought RMC (a Britain cement company) but before purchasing this company, Cemex had to analyze its capacities (production; sales…)
Question Answer Session Question 3: Cemex has a strong preference for acquisitions over Greenfield ventures as an entry mode?Why?
Because Cemex prefers transferring its skills to other cement companies
They believe they can reduce mistakes with their own organizational management
Question 4: Why do you think Cemex decided to exit Indonesia after failing to gain majority of Semen Gresik? Why is majority so important to Cemex?
Cemex wanted the majority because when the acquired a new company they transferred their own managing organization: by controlling the new company as a majority. But in the case of Indonesia exit: they purchased only 25% of Semen Gresik but were promised to be given the majority from Indonesian government. The country never fulfilled their promise due to politics and lobbies pressure.
Question Answer Session Question 5: Why do you think politicians in Indonesia tried to block Cemex’s attempt to gain majority control over Semen Gresik?
To avoid Indonesian asset falling in foreign hands: The government suffered from strong pressures (lobbies)