Proceedings of 9th Annual London Business Research Conference
4 - 5 August 2014, Imperial College, London, UK, ISBN: 978-1-922069-56-6
Too Similar to be True: Comparing Foreign and Domestic
Strategic Investment Decisions
Christine Soh
This paper investigates the broad extent of convergence or divergence in
financial and strategic techniques used in the strategic decision making
process between western and eastern advanced countries. To distinguish
between foreign direct investments (FDIs) and domestic investments, 18
Singaporean strategic decisions from the primary, secondary and tertiary
industries are streamlined into 9 cases with Singaporean FDIs into China
versus 9 cases with domestic investments. Significant inter-cultural and
investment type differences are found. From the conclusions, the
differences between FDIs and domestic investments from a strategic
management accounting perspective are addressed sequentially in the
investment typology.
Keywords: Strategic investment decision making; foreign direct investments;
domestic investments; management accounting
Field of research: strategy
Introduction
As the economy globalises, political, technological and economic developments are
driving the world towards global convergence in management and investment
techniques (Carr and Pudelko, 2006). To decrease costs and increase a company‟s
competitive advantage, it is getting increasing important for companies to invest
globally for today‟s formulation of strategic collaborations and decisions (Cheng,
Rhodes, & Lok, 2010; House, Hanges, Javidan, & Gupta., 2004). Despite the case
for global convergence, there are still systematic cross-cultural worldwide differences
in the strategic decision making strategy of a firm which needs to be understood
further (Harris and Carr, 2008). Further, a neglected aspect of strategic decision
making studies is the propelling factors inducing a firm to invest overseas versus
domestically from the perception of a management accountant.
This paper is organised around this research question to address a current gap in
strategic decision making studies. (3) What are the differences between foreign
direct investments(FDIs) and domestic investments? In order to keep country as a
constant variable, 9 Singaporean companies with investments in China are matched
with 9 Singaporean companies with domestic investments. From the results, we
organise the differences between foreign and domestic investment types across the
primary, secondary and tertiary sectors into 6 contextual categories in our
investment typology. In view of global convergence in strategic decision making
practises, this study aims to help both practitioners and researchers understand
unique contextual and cultural strategic decision making differences.
_________________________________________________________
Christine Soh, Kean University, Wenzhou, Zhejiang, China,
Email: csohlikh@kean.edu
Proceedings of 9th Annual London Business Research Conference
4 - 5 August 2014, Imperial College, London, UK, ISBN: 978-1-922069-56-6
Literature Review
Strategic decisions are often defined as ill-structured, long term, complex and
irrevocable financial decisions involving the participation of top management
(Eisenhardt and Zbaracki, 1992; Dean and Sharfman, 1993b). The company‟s future
financial robustness and corporate strategy is often determined by the tangible
success of the strategic decision. Corporate changes due to company restructuring
as a result of acquisitions, alliances and joint ventures may result into unanticipated
managerial costs. It is important to understand the strategic decision more
thoroughly to prevent wastage of time, intangible resources and financial outlays
when conducting cross-cultural negotiations with diverse decision makers. However,
the strategic decision is still not well-understood by current researchers due to its
confidential nature.
Overall, there is still sparse research on strategic decision making outside the AngloSaxon context (Cheng et al., 2010). Notwithstanding the attention drawn to the
usefulness of systematic approaches, the economic, financial and commercial
performance of Asian countries far exceeds Europe and other Western countries like
America and Britain (Carr and Tomkins, 1998) which makes Asia an important
research area. Limited degree of eastern strategic decision making research
conducted in Japan and China shows higher strategic emphasis in Japan and China
(Carr et al., 2010; Carr and Pudelko, 2006; Carr and Tomkins, 1998; Delios and
Henisz, 2000; Thomas III and Waring, 1999). Yet, the studies are often conducted in
Japan and China which may not be representative of other Asian countries. With the
need for better collaboration in the cross-cultural context, more research outside the
Anglo-Saxon context need to be conducted in order to modify certain Anglo-Saxon
based strategic decision making conclusions in the Asian environment (Carr et al.,
2010).
Singaporean strategic decision making research tends to be neglected and focused
theoretically (Heaney, Li, & Valencia, 2011). Whilst China‟s big story is incoming
FDIs, it‟s surprising when it comes to outward FDIs, Singapore is bigger than China
(UNCTAD, 2010) despite its tiny size. China emerged as Singapore‟s most popular
FDIs location (Department of Statistics, Singapore., 2011; UNCTAD, 2010). A study
of Asian based strategic investment decisions based in Japan, and Singapore is of
interest due to their unique differences (Petrescu, Joia, Titulescu, & Hurduzeu, 2011)
and satisfies the need for further comparative contextual cross-cultural strategic
decision making style research (Lu and Heard, 1995; Carr et al., 2010; Cheng et al.,
2010).
In addition to the current lack of cross-cultural decision making research, prior
strategic decision making research still focuses on one major strategic decision. New
strategic decision making research needs to include cultural depth, contextual
applicability and more specificity by differentiating between strategic decisions. A
new cultural element is introduced in the paper by investigating contextual themes
and its influence on strategic decision location. FDIs and domestic investments are
categorised as components of strategic decisions as they can be considered as an
focal aspect of capital allocation, to enhance further collaboration in the globalisation
of today‟s economy (Buckley and Strange, 2011).
Proceedings of 9th Annual London Business Research Conference
4 - 5 August 2014, Imperial College, London, UK, ISBN: 978-1-922069-56-6
There are a few weaknesses in the literature despite the attention on FDIs versus
domestic investments. It can be seen that a large amount of literature focus on the
benefits of social relationships or networks with arguments that relationships are
only effective in underdeveloped contexts and reduces firm performance in
developed ones (Carney, Gedajlovic, Heugens, Marc, & Oosterhout, 2011). It is also
speculated that the higher the level of close relationships formed, the lower the level
of perceived risk (Li and Tang, 2010). There is scarce literature that examines the
importance and influence of such relationships to the firm with ample resources in
contrast to another with limited resources (George, McGahan, & Prabhu, 2012).
Correspondingly, the strategy decision making literature shows no distinction
between domestic and foreign investments. Both fields tend to be standalone and
feature no Asian based research addressing strategic decision making themes with a
distinction between FDIs and domestic investments. Therefore, by integrating these
two fields of research, current decision makers will be empowered to make suitable
decisions relevant to their company types. Hypothesis 1 is constructed as follows:
Hypothesis 1: There are subtle differences within matched single-country
contextual companies in separate sectors.
Companies have the potential to perform much better if they select overseas or
localised investments depending on the competitive and financial situation of the
company. A deeper understanding of strategic decision making themes from a FDI
and domestic investment perspective as reflected in hypothesis 1 is significant for
pre strategic decision making by increasing recipients‟ understanding of their
investors‟ entry motivations.
Methodology
A case study approach incorporating broad, cultural and industry strategic decision
making contexts based on past strategic decision making research (Eisenhardt,
1989; Eisenhardt and Graebner, 2007) is used to tailor the Anglo-Saxon approach
across to the East. In total, 18 case studies of matched manufacturing Singapore
companies from the primary, secondary and tertiary industries are conducted. Out of
the 18 Singaporean cases, 9 strategic decisions in China were used for comparison
with 9 strategic decisions in Singapore.
Discussion and Analysis
We examine the subtle differences between Singaporean strategic decisions, with
regards to investment types in hypothesis 1. We found compelling similarities
between the 18 Singapore strategic decisions as reflected in the quotations below.
Overall, the Singaporean companies are aware of strategic tools/principles used and
applied some financial techniques, though there is limited financial influence on their
strategic decision making strategy as shown in these quotations.
Finance Director of S3 China, “We did the usual business plan that we submit
to Spring. These requirements are mandatory but it is more of the fact that we
know certain important people in Spring that can help us get our application
across.”
Proceedings of 9th Annual London Business Research Conference
4 - 5 August 2014, Imperial College, London, UK, ISBN: 978-1-922069-56-6
Finance Director of P2 China, “Its mainly to account to our shareholders. For
show, I will say.”
Strategic versus financial forecasting are not prioritised in their approach as shown in
the series of quotations below:
CEO of P2 Singapore “The figures are not real. They are extrapolated. We
want to see tangible things. Not fanciful calculations.”
CEO of S2 Singapore, “I like your diagram. It looks fancy. I think this customer
power thing is our driving force. But no, we do not use these diagrams”
However, the lack of use of financial and strategic management accounting
techniques might not mean that strategy versus finance tools are not important to the
Asian decision makers as reflected by the CEO of T1 Singapore, “We didn‟t learn all
the tools hence we don‟t use them. But it may be integral in us.” This behaviour is
similar to the Anglo-Saxon firms though they differ by the extent of vigour used in
formal strategic and financial planning. It is therefore deducted that informal financial
influences dominate the Singaporean strategic decision making process dismissing
the popular theoretical conclusion that Asian firms are highly influenced by strategic
concerns. The financial figures and strategic analysis are obtained by gross
approximations provided by the majority of the firms as indicated by the CEO of T2
Singapore: “I read the reports on American and UK companies, seriously they are
very different. But it may not be sensible for us to try and use financial analysis like
them as our industry is changing all the time and we do not want to rely on past data
or imagine the future. As again, maybe we understand our industry so well that we
do not need tools to help us.”
However, despite the approximated figures, the extent of priority placed on financial
profitability and “safety” of the investment are higher than any strategic reasons for
the 3 strategic types. Cash reserves/surplus budgeting appears to be used as the
primary financial tool for Singaporean pre-decision evaluation with average budgeted
financial figures of less than 10% from their total reserve cash allowances. This
implies that the size and percentage of total profits and cash surplus involved in
financing decisions are kept remarkably conservative and more has to be invested
for better corporate performance. To address the differences in investment types,
the quotations are structured into the 6 boxes as illustrated in Table 1.
Proceedings of 9th Annual London Business Research Conference
4 - 5 August 2014, Imperial College, London, UK, ISBN: 978-1-922069-56-6
Table 1: Illustrative Quotations from strategic decisions: Singaporean FDIs
versus domestic investments
International, conservative strategic decision
International, large, related strategic decision
International, aggressive strategic decision
Conservative, cost-pressured attitudes
Resource
attitudes
inclined
Aggressive attitude motivated by fast moving
environment
CEO of S2 China “Of course we are long term in
outlook. We want maximum return of 100%, but
that is not realistic. I will say, full payback of our
initial investment in 5 years, including
appreciation of our property purchase and return
on investment of the restaurant of 20-30%. I
monitor the investment closely to make sure our
funds turn around as fast as they can. We expect
positive return after 5 years”
Finance Director of P2 China, “In 2012, our
capital expenditure is expected to be 15% or
more. Growth from national oil companies and
integrated oil companies would contribute 97% of
the capital expenditure growth in 2012. Due to a
positive economic demand outlook in 2012, we
are increasing as much capital expenditure as we
can offshore in our own industry.”
CEO of T1 China, “Well, we give our partners a
free hand. Basically, our Chinese partners asked
us for S$2 million at the start and other amounts
to be paid gradually. I will not say I used any
calculation, but we can afford S$2 million and we
decided to loan it to them. There is no need for
calculation. Based on experience and hindsight
that it will make money, I invested. But if they did
not produce return on investment of say 10
percent, we will not invest more, but rather look at
other interesting investments.”
Partnership relationships key reason for venturing
into China
Partnership relationships key reason for venturing
into China
Partnership relationships key reason for venturing
into China
CEO of P2 China “Mainly, it‟s important to work
with partners that are very familiar with the
business. Also, me, myself is very familiar with
the business.”
CEO of T1 China “Our main reason for
investment is that we are comfortable with the
investment and our partners.”
Domestic, Diversified strategic decision
Domestic,
decision
CEO of S1 China “We went to China for an
environmental survey in order to pick a good site,
on the advice of our partner. Honestly, we
wouldn‟t have invested in China if we do not have
people that are familiar with the country there.
You know, doing things in China depends a lot on
their so called Guanxi, or whether we pay cash to
the correct government official. It can be very fast
or very slow.”
Domestic, Large, conservative strategic
decision
Long term, conservative attitude, however not
pressured by cost due to stability of customers.
CEO of P1 Singapore “In the short term, we may
not make money, but as long overall, our
business is sustainable, we are fine. We look at
the big picture.”
CEO of P2 Singapore “Our business is simple.
The customers are fixed. If we take over our rival,
the customers have one less supplier and we can
charge higher. It‟s purely war tactics. While there
is pressure, we do not panic unnecessarily as this
is part of our excess funds”
Invest reluctantly, only in related business to
increase market share
CEO of P1 Singapore “We maintain our top
position in the industry by buying over rivals if an
opportunity arrives.”
Finance Director of P2 Singapore “Rivalry is the
primary consideration. If possible, we want to be
the steel monopoly. My finance director saw the
opportunity and alerted the board to it. We have
contemplated investing in a worthwhile venture
for 2 years before 2007, and were looking for
opportunities. Of course we have set aside a cash
budget of less than 10%, of our after tax profits
but we can look at increasing it later, which
happened in 2010.”
orientated,
strategically
Strategic attitude towards investment to increase
overall market share.
CEO of T3 Singapore, “ you need to keep the
customers happy, and surprise them accordingly”
CEO of T4 Singapore “ we cannot look at profit so
fast. Investments require time to turn around,
giving the large amount of new machinery
needed. But still, we require a high return on
capital employed before any investment decision
is made. “
Main reasons relate to product diversification due
to low product-life cycle
CEO of T3 Singapore, “we need to diversify our
product offering to increase our market share.”
CEO of T4 Singapore “ If the product sells well
now, we cannot rest, but we have to look at new
and more interesting products to keep the market
aroused”
smaller,
conservative
strategic
Attitude of investing fast and small to keep up
with fast moving environment.
CEO of S1 Singapore, “. When Singaporeans do
business, we do not spend too much time
planning and analysing. The environment moves
very fast. Look at the Japanese restaurant over
there, it just closed down. we invest without much
thought and worry about the consequences later.”
Finance Manager of S4 Singapore, “There is no
planning. If we need the machinery, we make a
purchase. The economy is always moving, if we
plan too much, we lose out.”
Cost pressured due to nature of goods produced
and fast moving environment
CEO of S3 Singapore “In the supply chain, we
vertically integrate. The main reason is cost
savings. We have been buying the drums from
our suppliers for many years, resulting in hefty
transport and supply costs. Therefore we decided
to manufacture the drums ourselves. The cost of
transport is crucial. If we transport the drums from
the suppliers, transport cost is heavy.”
Finance Manager of S4 Singapore “The purchase
of this factory is primarily to save rent. Cost
savings is important in the competitive
environment.”
Proceedings of 9th Annual London Business Research Conference
4 - 5 August 2014, Imperial College, London, UK, ISBN: 978-1-922069-56-6
The overall scoring of the 18 Singaporean firms in the 6 contextual categories is
shown in Figure 1 below.
Figure 1: Investment Typology: Scoring
International,
International, large,
International, aggressive
conservative strategic
related strategic
strategic decision
decision
decision
T1 China
S1 China
P2 China
T3 China
S2 China,
S3 China
P1 China
T2 China
S4 China
Domestic, Large,
conservative strategic
decision
Domestic, Diversified
strategic decision
T1 Singapore
P3 Singapore
Domestic, smaller,
conservative strategic
decision
S3 Singapore
S1 Singapore
P1 Singapore
T2 Singapore
P2 Singapore
S4 Singapore
S4 Singapore
We structure their similarities and differences in strategic decision making
approaches in the investment typology shown in Figure 2 below which supports
Hypothesis 1.
Proceedings of 9th Annual London Business Research Conference
4 - 5 August 2014, Imperial College, London, UK, ISBN: 978-1-922069-56-6
Figure 2: Investment typology- Contextual Explanation
International, conservative strategic
decision
International, large, related strategic
decision
International, aggressive strategic
decision
Medium ROCE, Low Sales Growth
Ratios
High Cash Reserves, most financially
stable
High ROCE, High Sales Growth Ratios
Shortest Payback Periods, highest
expected ROIs and IRRs
High ROCE, High Sales Growth Ratios
Medium Cash Reserves, financially
stable
Lowest expected ROI/IRR and highest
Payback Periods
Long Payback Periods, Lower ROIs and
IRRs
Highly strategically orientated
More strategic than financially
orientated
Low Cash Reserves
Often produce secondary products who
are identical to other competitors
High barriers to entry
More financially orientated than
strategic
Pressured to lower costs to meet
expectations of customers
Mostly invest internationally to obtain
resources not available in home country
High velocity environment, unstable
local environment
Strong foreign relationships
Strong foreign relationships
Low barriers to entry
Stable domestic environment with need
to pursue lower cost resources
overseas.
Strong foreign relationships
Domestic, Large, conservative
strategic decision
Domestic, Diversified strategic
decision
Domestic, smaller, conservative
strategic decision
Highest Cash Reserves, most
financially stable
High ROCE, High Sales Growth Ratios
Low ROCE, High Sales Growth Ratios
Short Payback Periods, high expected
ROIs and IRRs
Short Payback Periods, high expected
ROIs and IRRs
Low Cash Reserves, Often produce fast
moving consumer goods with medium
market share
Low Cash Reserves, highly leveraged
Low ROCE, Low Sales Growth Ratios
Lowest ROI and Payback Periods
Most strategically orientated
Financially conservative
More strategic than financially
orientated
Mostly in stable primary sectors with 5/6
companies nationwide producing same
product (I.E: steel)
Low barriers to entry
Often produce fast moving goods with
low market share (ie technological,
retail, component)
Most financially orientated
Lowest barriers to entry
Medium velocity, unstable environment
High customer loyalty as suppliers are
few
High velocity, unstable environment
Good access to government funding
High barriers to entry
Only invest in local related SID to
strengthen foothold
Our findings show that high performing companies who perform in market oriented,
high velocity, rapid changing environments are typically more adventurous in their
investment mindsets, with a higher tendency to invest overseas. To invest overseas,
the company prioritised the development of sturdy competitive advantage in the
country where they are interested in. Singaporean FDIs tend to be largely focused
on gearing towards acquisition of knowledge and foreign partners in the country they
are interested in to decrease their risk and increase their competitive awareness.
Financial returns are strongly prioritised in companies producing secondary products
Proceedings of 9th Annual London Business Research Conference
4 - 5 August 2014, Imperial College, London, UK, ISBN: 978-1-922069-56-6
in contrast to primary versus tertiary products. Overall competitive gain and strong
knowledge of the foreign market is of primary significance to the companies
embarking on FDIs to lower their investment risk. In contrast to FDIs, domestic
investments are typically sole decisions made by the key decision maker, with some
or limited help from his finance director. Domestic investments are typically made to
decrease cost, satisfy customer‟s requirements and normally require a shorter
decision period due to lower perceived risk by the firms embarking on the
investments. Firms that invest overseas tend to be better performers with overall
higher return on capital employed and sales growth figures. They are more long term
in perspective with higher payback years and lower internal rate of returns than firms
who prefer to invest domestically. We found that strong competitive advantage and
financial strength is essential in large strategic decisions for the Singapore, Japan
and Anglo-Saxon companies. Singaporean firms are remarkably centred on the
prospect of financial performance of the potential strategic decision despite not
making any formal strategic or financial analysis as shown in the comment by the
CEO of P1 Singapore. “We are all in the business to make money. But definitely the
investment is long term.”
To encourage strategists to invest more, scoring the companies into the investment
typology will help strategists build a firm foundation by understanding strategic
decision making practises more deeply before embarking on specific strategic
decision type suitable for their industry.
Conclusions
Strategy process research has often been divided into generalised views debating
why and how firms decide to invest (Sminia, 2009). Guidance for strategy formation
is still premature in development for empirical and theory formation (Sminia, 2009).
In this paper, we narrow down our comparative study to the differences between
investment types; using Singaporean FDIs into China versus Singaporean domestic
investments as comparative examples. Contextual differences were found where
overseas investments tend to be longer term and more strategically orientated than
domestic investments which are shorter term and more financially orientated. By
differentiating between FDIs and domestic investments in 3 sectors, we organise
their differences and similarities in the investment typology. We are confident that
our framework will apply to these investment types regardless of country origin. New
research can score the differentiated strategic decision into the 6 new contextual
categories, for a deeper understanding of strategic decision making differences, for
global collaborative understanding.
To decrease the research limitations, the environment which the firm operates in is
controlled and the sample was kept consistent in size, manufacturing context and
operating conditions. However, one limitation in our research is the inability to test
the differences between the determinants of market entry and their influences on the
market entry choices of green-field entry, acquisition, joint venture or equity
ownership, which might have a significant influence on the strategic decision made
(Meyer et al., 2009). Thus, future research should look into the various categories of
FDIs choices, in order to add even more specificity to our 6 contextual categories.
Our analysis is not only useful for Asian investors, but helps to stand as a guideline
Proceedings of 9th Annual London Business Research Conference
4 - 5 August 2014, Imperial College, London, UK, ISBN: 978-1-922069-56-6
for western investment criteria inflows into China and Singapore. Further, it helps
recipients of FDIs to prepare for expectations from both eastern and western
investors.
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