Cemex's Foreign Direct Investment

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What are the advantages of a joint-venture entry mode for Starbucks over entering through wholly owned subsidiaries? On occasion, Starbucks has chosen a wholly owned subsidiary to control its foreign expansion (e.g., in Britain and Thailand). Whv?
Which theory of FDI best explains the intemational expansion strategy Starbucks adopted?

1.

7.

In 2004, inward FDI accounted for some 24 prt. cent of gross fixed capital formation in Ireland, but only 0.6 percent in Japan. What do you think explains this difference in FDI inflows into the two countriesJ Compare and contrast these explanations of FDI: internalization theory, Vernon's product life-cycie theory, and Knickerbocker's theory of FDI. Which theory do you think offers the best explanation of the historical pattern of
FDI? WhY? Reread the opening case on Starbucks and then answer the following questions;

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You are the international manager of a U.S. busi. ness that has just developed a revolutionary new

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personai computer that can perform the same

a.

InitiallyStarbucks expanded internationally by licensing its format to foreign operators. It soon became disenchanted with this strat. egy. Why?

b. \fhy do you think Starbucks has now elected to expand internationally primarily rhrough local loint ventures, to whom it licenses its format, as opposed to using a pure licensing strategy? functions as existing PCs but costs only haif as much to manufacture. Several patents protect the unique design of this computer. Your CEO has asked you to formulate a recommendation for how to expand into Western Europe. Your op. tions are (a) to export from the United States, (b) to license a European firm to manufacture and market the computer in Europe, or (c) to set up a wholly owned subsidiary in Europe. Evaluate the pros and cons of each alternative and suggest a course of action to your CEO.

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C*## transnationai firms. Are there any common tralts

Use the globalEDGErM site to complete the following

you notice concerning countries with many transnational firms?

1.

The Worll, Inuestment Report published annuaily by UNCTAD provides quick electronic access to comprehensive starisrics on foreign d irect investment (FDI) and the operations of transnational corporations. Garher a list of the top transnational corporations in terms of foreign direct investment. Also, identify each company's home counrry (i.e., headquarters country). Provide a commentary about the characteristics of countries that have the greatest number of

2.

Your company is consldering opening a new factory in Latin America, and management is in the process of evaluating the specific counrry locations for this direct investment. The pool of candidate countries

has been narrowed to Argentina, Mexico, and Brazil. Prepare a short report from a well.known organization's publication of Counwl Fact Sheers to compare the foreign direct investment environment and regulations of these three countries.

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In little more than

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*rest nvestrment fi a decade, Mexico's largest cement manufacturer, Cemex, has transformed itself from a primariiy Mexican operarion into the third.largest cemenr

company in the world behind Holcim of Switzerland

and Lafarge Group of France with 2005 sales of

$15 billion and more than $2 billion in net profits. Cemex has long been a powerhouse in Mexico and cur. rently controls more than 60 percenr of the market for cement in that country. Cemex's domestic success has been based in large part on an obsession with efficient

Part 3 . , The Gl bal TiaC: 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 comoanu sells ready-mixed cement that can survive for only atour 90 minutes before sohdifying, so precise delivery is im. portant. But Cemex can never predict with total certainty what demand wiil be on any given day, week, or month. To better manage unpredictable demand patterns, Cemex developed a system of seamless information technology, inciuding truck-mounted global positioning systems, radio transmitters, satellites, and computer hardware, that allows it to control the oroduction and distribution of cemenr like no other comoanv can, responding quickiy to unanticipated changes in demand and reducing waste. The results are lo.er costs and superior customer service, both differentlatins factors for Cemex.

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in the United Srates, for $2.5 billion. Following the Southland acquisition, Cemex had 56 cement piants in 30 countries, most of rvhich were companies 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 biilion. RMC was a huge multinational cement firm with sales of $8.0 billion, only 22 percenr of which were in the United Kingdom, and operations in more rhan 20 other nations, including many European narions where Cemex had no presence. Finaiized in March 2005, the RMC acquisition has transformed Cemex inro a globai powerhouse in the cement industry with more than $15 billion in annual sales and operations in 50 countries. Only about 15 percenr of the companv,s sales are now generated in Mexico. Followins the acquisition of RMC, Cemex found that the RMC plant in Rugby was only running at 70 percent of capacity, partly because repeated production problems kept causing a kiln shutdown. Cemex brought in an rnterna. tional 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 it currently lacks a presence and where its elobal rivals are already expanding. Still, not all of Cemex's expanslons as planned. In 2006, Cemex announced that it would exit Indonesia after a long.running dispute with the government there. Cemex entered Indonesia in 1998 as part of an lMF-sponsored privatization program by purchasing a 25 percenr stake in a government.owned Indonesian cement maker, Semen Gresik. At the time, Indonesia promised to allow Cemex to acquire a majority stake in Semen Gresik in 2001. However, the country never granted that permission, as local vesred interests, including politicians and unions, voiced worries about "lndonesian assets fallins into foreign hands" and lobbied the central government ro block the deal. A frusrrared Cemex euentually reached an agreement to sell its 25 percent stake to another Indonesian enterprise. 5'

gained through acquisitions. In all cases, Cemex devoted

The company also pays lavish attention to its distriburors-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 disrriburors cn., prr.h"r. trucks and other supplies through Cemex at significanr discounts. Cemex also is known for its marketine drives that focus on end users, the builders themselves. For examnle. Cemex trucks drive around Mexican buildins sires. and if Cemex cement is being used, the .o.rrt.u.1ior-, .r.r", win soccer balls, caps, and T-shirts. Cemex's international expansion strategy was driven

by a number of factors. First, the companv wished to reduce its reliance on the Mexican consrruction market, which was characrerized by very voiatile 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 cemenr companies, all of which were from developed narions. Fourth, Cemex believed that it could create sisnificant value by acquiring inefficient cement companies in other markets and transferring its skills in customer service, marketing, information technology, and production

have worked our

management ro those units. The company embarked in earnesr on its international expansion srrategy in the early 1990s. Initially, Cemex targeted other developing nations, acquiring established cement makers in Venezuela, Colombia, Indonesia, the Philippines, Egypt, and several other counrries. 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 expansiorr opporrunities in developed nations. In 2000, Cemex purchased

Case Discussion Ouestions

1. \fhich 2. 3.

theoretical explanation (or explanations)

Houston-based Southland, one of the largest cement

of FDI best explains Cemex's FDI? What value does Cemex bring to a host economy? Can you see any porential drawbacks of inward investment by Cemex in an economy? Cemex has a strong preference for acquisirions over greenfield ventures as an entry mode. Why?

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4.

Whv do vou think Cemex decided to exit Indonesia after failing to gain majority control of Semen

5.

Gresik? Why is majority control so important to Cemexl

Why do you think politicians in Indonesia tried to block Cemex's attempt to gain majority control over Semen Gresik? Do you think Indonesia's best interests were served by limiting Cemex's FDI in the country?

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Sources; Starbucks 10K, various years; C. Mclean, "Starbucks Set to Invade CoffeeLoving Continent," Seattle Times, October 4, 2000, p. E1; J. Ordonez, "Starbucks to Start
Major Expansion in Overseas Market," TlrcWall Street Journal, October 27, 70A0, p. B10; S. Homes and D. Bennett, "Planet Starbucks," BusinessWeek, September 9, 2002, pp. 99-110; t3 Ibid.
See D. J. Ravenscrafi and F M. Scherer, Mergers, Sello//s and Economic Efficiency (Washington, DC: The Brookings Institution, 1987); and

I4

A. Seth, K.

"Starbucks Outiines International Growth
Strategy," Basiness V/ire, October 14, 2004; and

P. Song, and R. R. Pettit, "Value Creation and Destruction in Cross-Border Acquisitions," Strateglc Management Journal 23 (7002), pp.921_/0.

r5.

A. Yeh, "Starbucks Aims for New Tier
z.

in

China," F inrmcial 1imes, February 14, 7006, p. I7 . United Nations, World Inuestment Report, 2000

(New York and Geneva: United Nations,
2001 ).
3.

For example, see S. H. Hymer, The International Operations of National Firms: A Study of Direct F or eign Inu estment. ( Cambridge, MA: MIT Press, 19 7 6) ; A. M. Rugm an, Inside the Multinationals : The Economics of Internal Markets (New York:

Columbia University Press, 1981); D. J. Teece,

5. 6
7
B

United Nations, V/orld Inuestment Report, 2006 (New York and Geneva; United Nations, 2006); and "Foreign Direct Investment Rose by 34o/o tn 2006," UN Conference on tade and Development, press release, January 73, 2007 World Tiade Organization, International Trade Sradscics, 2006 (Geneva: WTO, 2006); and United N ations, W orlA Inu e stment Rep or t, 20 0 6 United Nations, World Inuestment Report,
. .

"Multinational Enterprise, Internal Governance, and Industrial Organizattorr," American Economic Reuiew 75 (May 1983), pp.733-38; C. \7. L. Hill and W. C. Kim, "Searching for a Dynamic Theory of the Multinational Enterprise: A Transaction Cost Model ," Strateglc Management Journal 9 (special issue, 19BB), pp. 93-104; A. Verbeke, "The Evolutionary View of the MNE and the Future of Internalization Theory," Journal of International Business Studies 34 (2003), pp. 498-501; and J. H. Dunning, "Some Antecedents of Internalization Theory," Journal of International Business Studies 34 (2003), pp. 108-28.
16.

2446.

Ibid. Ibid.

United Nations, WorLd, In,Lestment Report, 20A6; and "Foreign Direct Investment Rose by 34o/o tn
2046."

J. P. lUomack, D. T. Jones, and D. Roos, The Ma.chine That Changed the \X/orld (New York:
Rawson Associates, 1990).

9. 10. 11.

by the author while in China; United Nations, World Investment Report, 2A06; L. Ng and C. Tuan, "Building a Favorable Investment Environment: Evidence for
18.

Ibid. Ibid. Sources: Interviews

17.

The argument is most often associated with

F. T. Kn i ckerbocker, O ligopolls tic Re acti on and Muhi notional Enterpris e ( Boston: Harvard Business School Press. 1973).

The studies are summarized in R. E. Caves, Multinational Enterprise and Economic Analysis, Znd

the Facilitation of FDi in China," Tlrc World
Economy,2002, pp. 1095-1 14; and S. Chan and

ed. (Cambridge, UK: Cambridge University
Press. 1996).

G. Qingyang, "lnvestment in China Migrates Inland," Far Eastern Economic Reuieur, May
2006, pp. 52-57.

t9

See R. E. Caves, "Japanese Investment in the US: Lessons for the Economic Analysis of For-

17.. United Nations, World In'Lestment Report,
2046.

eign Investment," The World Economy

16

(1993), pp.27940A; B. Kogut and S. J. Chang,