Why do you think Cemex decided to exit Indonesia after failing to gain majority control of Semen Gresik?
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CEMEX is a global building materials company that provides high quality products and reliable service to customers and communities throughout the Americas, Europe, Africa, the Middle East, and Asia. They produce, distribute, and sell cement, ready-mix concrete, aggregates, and related building materials in more than 50 countries, maintain trade relationships in approximately 102 nations. Their approach can be best describe as constant evolution, flexibility in their operation, creative in commercial offerings, sustainable use of resources, innovative approach in global business, efficient in use of capital allocation and above all they are the leader in using information technology to match up with consumer demand. (Cemex, 2013). They also devote a great attention to marketing know- how in order to acquire unit and improve their performance globally. 1.1CEMEX’s theoretical explanation of FDI
According to the present case, the theoretical explanation that can best describe Cemex’s foreign direct Investment (FDI) is the theory of internalization. The Foreign Direct Investment occurs when a firm invests directly in new facilities to produce and/or market in a foreign country. Once a firm undertakes FDI it becomes a multinational enterprise. (Hill, 2008). As per, Buckley and Casson (2009) a firm will favour FDI over exporting as an entry strategy when transportation costs or trade barriers make exporting unattractive. So, a firm will favour FDI over licensing when it wishes to maintain control over its technological know-how, or over its operations and business strategy, or when the firm’s capabilities are simply not amenable to licensing.
However, Cemex’s foreign direct investment (FDI) activity is that of internalization due to limitations of licensing or also known as the market imperfection approach. Market imperfections are factors that inhibit markets from working perfectly. (DeGeneres, 2005). Furthermore, Buckley and Casson (2009) described that the market imperfection approach was due to the benefit obtain from internalization available in the presence of market failures. Internalization involves the acquisition of control, through vertical integration, over activities that would otherwise be carried out inefficiently through market transactions. They had also emphasis on different types of market imperfections, such as time lags and transaction costs that call for internalization, and listed a number of markets where such imperfections were more likely to be present.
However, it is the internalization of markets across national boundaries that explain the very existence of international production. Further extended by Anonymous (2011), a firm would choose to enter a foreign market via FDI rather than take advantage of its ownership internationally through other means, such as exporting its products, franchising a brand name, or licensing technology to foreign firms. As it relies heavily on the concept of transaction costs. Transaction costs are the costs of entering into a transaction, that is, those connected to negotiating, monitoring, and enforcing a contract. A firm must decide whether it is better to own and operate its own factory overseas or to contract with a foreign firm to do this through a franchise, licensing, or supply agreement. Thus, Internalization theory suggests that FDI is more likely to occur-that is, international production will be internalized within the firm when the costs of negotiating, monitoring, and enforcing contracts with a second firm are high. However, firms undertake FDI rather than simply exporting products or licensing their know-how.
So did Cemex. Cemex wants to maintain control over its technological know-how and over its operations and business strategy. As per Lambin (2007), licensing has disadvantage as a strategy for exploiting the foreign market opportunities which are as follows; •licensing may result in a firm’s giving away valuable technological know-how to a potential foreign competitor •licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability •a problem arises with licensing when the firm’s competitive advantage is based not so much on its products as on the management, marketing, and manufacturing capabilities that produce those products As a result, Cemex has applied the theory of internationalization, they wanted to expand horizontally because to reduce their reliance on their home market and provide some stability in the demand for their product.
Moreover, Cemex’s policy was to decrease its dependence on the local market due to the volatile nature of the market in Mexico. Therefore, CEMEX identified the huge demand for the cement in many developing countries. It felt that it has the capacity and technology to address the tremendous demand for construction. CEMEX focused on establishing business aboard directly. CEMEX did not focus on licensing due to the limitations of licensing. Due to its uniqueness in its business model, CEMEX was able to generate more value from market imperfection approach than it would from licensing. Also, they saw opportunities abroad and it could provide their service, which required building very personal relationships with the distributors and the builders themselves. Lastly they had spent a lot of time working on their information technology system that allowed them to control their supply and it was part of their competitive advantage. Due to their unique business model, they would not be able to get the same value by licensing their business thus they had to internalize the business abroad and directly set up business abroad.