SoftBank
SoftBank, the Japanese technology firm, was one of the firms most actively involved in FDI during this period. This was due to a couple of reasons, the first being to become a leader in the ‘internet of things’ (IOT), the next big technology market (Financial Times, 2016). IOT is the interconnecting of physical devices, vehicles, buildings, and other items. These objects are embedded with chips that allow them to send and receive data, allowing for the interconnectedness of all devices.
One of the most highly discussed investment relating to SoftBank during this period was the acquisition of UK’s ARM Holdings for £24.2bn. ARM Holdings is a market leader for processors in smartphone and tablet computer and ships 15 billion chips a year. They also design the processors that are included in computing devices such as smart TVs, smartwatches, laptops, desktops, and servers. This together with Masayoshi Sons’ belief that computers will one day outsmart mankind, and that the IOT will eventually become a reality, led to Mr Son’s big gamble on the chipmaker. Mr Son payed a 43 per cent premium for the company, and he justified this large figure with his belief that ARM will be the key to making SoftBank a leader in the IOT. This acquisition also received lots of news coverage, as it was the largest ever acquisition of a European tech firm. It was also one of the first big size bets on the UK post referendum, showing the confidence Mr Son had in the British economy. The timing of the acquisition was also said to be a great influence in the decision of the acquisition, as the Pound Sterling had fallen nearly 30 percent lower against the Japanese Yen since the referendum on 23 June 2016. An acquisition of this size, especially after the referendum, would have seen a lot of political involvement. However, in this case of SoftBank and ARM, Mr Son had promised to maintain ARM’s UK headquarters, double its UK-based staff over the next five years, and also increase its overseas headcount. This allowed for UK Prime Minister, Theresa May, to welcome the deal.
SoftBank’s next big investment was the investment of $1bn into the US start-up OneWeb. OneWeb is a global communications company, with plans to launch the ‘OneWeb satellite constellation’, a network of Low Earth orbit microsatellites. This investment gives SoftBank a 40 per-cent stake in OneWeb. The aim is to provide affordable internet access to remote parts of the world. This is in line with SoftBank’s goal to be the leader in the next big market, IOT. The investment is also the start of SoftBank fulfilment of its promise to Donald Trump to bring more money and jobs to the US. In December 2016, Mr Son made a promise that over the next four years, he would bring $50bn and 50,000 new jobs to the US, through its new $100bn tech investment fund, SoftBank Vision Fund. Although this OneWeb deal is separate from the tech fund, Mr Son emphasized that this was in line with his promise.
Asahi
Asahi, the Japanese brewer, was a firm involved in big foreign investments into Europe during this period. The firm was the country’s biggest brewer, with 38 percent market share. However, with a declining population and a change in Japanese consumer’s preference from beer to wine, beer sales have been suffering a decline for the past 20 years (Reuters, 2017). To combat this problem, Asahi’s set its objective towards expanding into the European market hence increasing its global market share, as well as its beer sales.
Its two big investments were the acquisition of some of SAB Miller’s beer brands including Peroni and Grolsch for €2.55bn, as well as the acquisition of SAB Miller’s eastern European brewing assets for €7.3bn. The result of these two acquisitions was Asahi becoming Europe’s third-largest beer group allowing it to gain a long coveted foothold in Europe, as well as an expected increase in its overseas sales from 13 to 24 percent. These are in line with the objectives of Asahi.
Despite the positive outcomes and expectations, the markets were skeptical about the price of the acquisitions. In both deals, many analysts felt that Asahi was paying a sky-high price for the assets given that SAB Miller was a forced seller. SAB Miller was a British brewer that was acquired by Belgian brewer AB InBev in a £79bn mega-deal. As a result of the deal, AB InBev was forced to sell some of SAB Miller’s European brands, in order to satisfy European competition concerns about the takeover. Before the announcement of the first investment into the brands including Peroni and Grolsch, shares in Asahi fell 8 percent with speculation that the company would pay more than €3bn. With the announcement of the second investment, Asahi’s share price took a 4.6 per cent dive, as the €7.3bn cost was higher than the initial estimate of £5bn.
1. Foreign Direct Investment Theory
Eclectic Paradigm (OLI Framework)
The eclectic paradigm was a theory published by John Dunning and since its publication in 1979, has been the dominant analytical framework for determining the reasons behind the foreign activities of multinational enterprises (Dunning, 2000). This theory explains how the decision is formed when deciding on which mode of entry is used to enter into a foreign market. The decision formed is based on the combination of advantages that the firms possess (Dunning, 2000). According to the work of Agarwal and Ramaswami (1992),
1) Ownership (O) Specific advantages
Firms possess ownership specific advantages when they can offer products that are unique and different from the competitors in the specific host country. Furthermore, brand trademarks must be transferrable through geographic boundaries. Large asset sizes and high levels of multicultural experience also results in high ownership specific advantages. The size of the firm depends on the number of countries that the firm has invested in. Firms that possess high levels of ownership advantages will be more likely to choose investment rather than exporting modes.
2) Location (L) advantages
Firms possess location advantages when the level of attractiveness in the specific market is high. Higher levels of attractiveness increase the chances of firms generating greater earnings. The level of attractiveness will be based on market potential and investment risk. Market potential refers to the size and growth of the market while investment risk refers to the uncertainty of economic and political conditions along with government policies.
High market potential indicates a large or growing market size and high purchasing power, thus most firms will decide to choose investment modes as the mode of entry due to the increased chances of higher long term profitability (Sabi, 1988)
Investment risk is a factor firms have to consider as unstable economic situations and government policies in the host country may affect their investments (Rugman, 1979). Thus, low investment risk will attract firms to choose the investment mode of entry.
3) Internalization (I) advantages
Firms possess internalization advantages when there are high levels of transaction cost in the specific targeted market. High levels of transaction cost occur when the costs of monitoring, collecting information, and evaluating partner’s performances are high (Peng & Meyer, 2011). Thus, if their targeted country has high levels of transaction cost, the firm will be able to gain internalization advantages by purchasing the target company through FDI. Ownership of a company means that transaction costs can be eliminated
However, if the targeted country has low transaction costs, the company may gain less benefit from internalization and would be better off relying on the existing market place rather than internalizing.