Cemex Company: International Business Management

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Table of Contents

Background
Theoretical Explanations
Value to a Host Economy
Preference for Acquisitions
Exit in Indonesia
Politicians in Indonesia
Works Cited

Background

The case study revolves around Cemex, a leading cement manufacturer headquartered in Mexico and having a presence in more than 50 countries globally. The questions answered in this paper underscore important issues in foreign direct investment as they relate to the company’s international expansion strategy.

Theoretical Explanations

The theoretical explanations that best explains Cemex’s foreign direct investment (FDI) is the resource-based view (RBV) and the internalization theory. RBV is best demonstrated by how Cemex expanded its operations beyond national borders mostly by purchasing low-performing foreign-based cement companies and turning them around through efficient manufacturing processes, management and operational know-how in the construction sector, focus on customer service, and innovative information systems. Cemex had successfully developed these resources in its domestic market and was sure that it could be used in other countries to the company’s competitive advantage. The internalization theory is best amplified by how Cemex was influenced by an international attitude developed through its successes in initial international expansion initiatives to continue venturing abroad (Andersen, Ahmed, and Chan 44, 61).

Value to a Host Economy

FDI is defined in the literature as an investment that relates to the “transfer of a vast set of assets (capital, advanced technology, and know-how, better management practices, etc), and is carried out by an entity (a multinational firm) in foreign firms, involving an important stake in, or effective management control” (Forte and Moura 1). From the case study, it is clear that Cemex brings these assets to a host country through resource transfer effects. Other benefits include creating employment for local people, transforming the cement industry in host economies, developing and restructuring local companies, contributing to human capital formation, increasing competition in host economies, and ensuring the integration of local economies into the global economy (Forte and Moura 3).

Cemex experienced a drawback of inward investment in Indonesia, where political influence and nationalization sentiments forced the company to exit the local market after it was denied the opportunity to acquire a majority stake in Semen Gresik. It can be argued that Cemex’s injection of capital and other resources into the Indonesian economy failed to fetch the highest returns for the company due to risk from political changes and negative local sentiments revolving around the perception that Indonesian assets were being taken over by foreign-based companies.

Preference for Acquisitions

From the case study, it is clear that Cemex prefers the acquisitions methodology over “greenfield” ventures when expanding into international markets to not only reduce existing entry barriers (e.g., tariff barriers, legal restrictions, quotas, import licenses, and technical standards), but also to benefit from the existing experience and knowledge of established companies in the host countries in terms of demographics, customer preferences, and nature of the markets (Cheng 202).

Unlike “greenfield” ventures which may prove risky and less cost-effective, acquisitions help the cement manufacturer to purchase the stocks of established companies and improve their performance through the transfer of key resources. Additionally, acquisitions enable Cemex to exercise sufficient control over the purchased establishments and at the same time gain competitive advantages over competitors in the host market through the use of its internal resources and capabilities (e.g., company size, efficient manufacturing processes, excellent customer service, innovative information technology solutions, and distributor partnerships).

Although “greenfield ventures” may enable Cemex to use these resources to its own advantage based on the fact that the firm will establish new affiliates in host countries and have complete control over the affiliates, the acquisitions mode is more preferred as the acquiring firm gains immediate access to foreign markets. Available literature demonstrates that the construction time associated with “greenfields” inconveniences most multinational enterprises such as Cemex since “it lowers the speed with which they can enter, causing them to forego revenues and profits, especially when the industry entered is growing rapidly” (Slangen 265). Lastly, it can be argued that Cemex prefers acquisitions over “greenfield” ventures to reduce industrial concentration in host countries and hence increase market capacity (Cheng 203).

Exit in Indonesia

Cemex decided to exit Indonesia after it failed to gain majority control of Semen Gresik, a local cement maker, as it could not influence the decision-making process or control the operations of Semen Gresik with its 25 percent stake. As such, the company was unable to transfer its resources and business processes to Semen Gresik due to fear that such a transfer could work to its own disadvantage as it happens in many licensing agreements where the parent company has minority control.

Additionally, Cemex could have exited the Indonesian market due to political and social uncertainties, as politicians, labor unions, and citizens lobbied the government to block the deal that could have enabled Cemex to acquire a majority stake in Semen Gresik. Available literature shows that adverse policy shifts, societal discontent, as well as political interference, can work to the disadvantage of multinational enterprises operating in host countries, resulting in reduced profit margins and difficult operating environments (Slangen 267-268).

Majority control is extremely important for Cemex is it enables the company to not only implement its policy of transferring resources to acquired firms in host countries but also to synchronize its operations and hence achieve cost savings. Additionally, majority control is important as it gives Cemex an opportunity to entrench its leadership capabilities, gain dominance over joint ventures, and achieve a better coordinated internal management (Cheng 204-205).

Politicians in Indonesia

Politicians in Indonesia attempted to block Cemex’s proposition to gain majority control over Semen Gresik to not only protect the local cement sector from being taken over by a foreign-based company (protectionism) but also to safeguard their national economy from what they perceived as external interference. Available literature also demonstrates that politicians can take such a decision to restore societal support for the government by using MNE subsidiaries or partnerships as scapegoats for poor economic performance (Slangen 267). Politicians are also known to whip up nationalization sentiments by portraying MNEs in a bad light with the view to winning the political support of the local masses.

Limiting Cemex’s FDI in Indonesia was a poor strategy if the benefits arising from FDI are put into consideration. The protectionism view acknowledges that the country may have been successful in protecting its local cement industry from apparent takeover by a foreign-based firm. However, in the long-term, the country failed to benefit from a multiplicity of FDI-related benefits that include balance-of-payment effects, resource transfer effects (e.g., capital, technology, and management resources), employment effects, as well as effects on competition and economic growth (e.g., increases in the level of competition in the market, low prices, consumer welfare improvements, increases in productivity growth, increases in economic growth, as well as product and process innovation).

Works Cited

Andersen, Peter, Syed Zamberi Ahmed and Wai Meng Chan. “Revisiting the Theories of Internalization and Foreign Market Entry Mode: A Critical Review.” International Journal of Business and Commerce 4.1 (2014): 37-86. Academic Search Premier. Web.

Cheng, Yung-Ming. “Determinants of FDI Mode of Choice: Acquisition, Brownfield, and Greenfield Entry in Foreign Markets.” Canadian Journal of Administrative Sciences 23.3 (2006): 202-226. Business Source Premier. Web.

Forte, Rosa and Rui Moura. “The Effects of Foreign Direct Investment on the Host Country’s Economic Growth: Theory and Empirical Evidence.” Singapore Economic Review 53.3 (2013): 1-28. Business Source Premier. Web. 20

Slangen, Arjen. “Greenfield or Acquisition Strategy? The Role of Policy Uncertainty and MNE Legitimacy in Host Countries.” Global Strategy Journal 3.3 (2013): 262-280. Business Source Premier. Web.

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