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). 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