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Foreign Direct Investments in the Czech Automotive Industry

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Foreign Direct Investments in the Czech Automotive Industry Norwegian School of Economics Bergen, Spring 2016 Foreign direct investments in the Czech automotive industry A Case Study of Hyundai Motor Company Eliška Doležalová and Yuliya Dailida Supervisor: Associate Professor Linda Orvedal Master of Science in Economics and Business Administration Master Thesis within the main profile of International Business NORWEGIAN SCHOOL OF ECONOMICS This thesis was written as a part of the Master of Science in Economics and Business Administration at NHH. Please note that neither the institution nor the examiners are responsible − through the approval of this thesis − for the theories and methods used, or results and conclusions drawn in this work. Acknowledgments We would like to thank our supervisor Associate Professor Linda Orvedal for guidance and advice. We would also like to thank to our families and friends for help and patience during the thesis period. Furthermore, we would like to thank to Richard Schneider from Czech investment agency CzechInvest for providing data about investments in the Czech Republic and to Henrik Schia for support and help with final reviews. Abstract This thesis is a strategic analysis of the 2006 greenfield investment in the Czech Republic, by the global automotive manufacturer Hyundai Motor Group. We analyse the factors that made Czech Republic an advantageous location for automotive FDIs, and how this influenced Hyundai when they decided to open a production plant in Europe. Through applying relevant theories, our thesis aims to show that Czech Republic is an attractive location for automotive FDIs due to strong industrial traditions of automotive manufacturing, high labour productivity and a cheap workforce, wide range of automotive parts and components suppliers, a favourable geographical location with access to both Western and Eastern European markets and a stable investment climate. Furthermore, investment in the Czech Republic was beneficial to Hyundai in particular, due to the close proximity to sister company Kia’s factory in Slovakia, and access to the European market which at the time were limited by trade barriers between Korea and the EU. In addition, favourable investment incentives from the Czech government were important to Hyundai when deciding to invest in the Czech Republic. Table of Contents Introduction ............................................................................................................................................ 1 Personal Motivation............................................................................................................................ 2 PART I: Theoretical concepts ................................................................................................................... 3 1 Multinational Enterprises and Foreign Direct Investments ............................................................ 3 1.1 Classification of foreign direct investments and multinational enterprises ........................... 3 1.1.1 FDIs by relatedness ......................................................................................................... 4 1.1.2 FDIs by ownership ........................................................................................................... 4 1.2 Motivation to engage in FDIs .................................................................................................. 4 1.2.1 The natural resource seekers .......................................................................................... 5 1.2.2 The market seekers ......................................................................................................... 5 1.2.3 The efficiency seekers ..................................................................................................... 5 1.2.4 The strategic asset seekers ............................................................................................. 6 1.2.5 Other motives ................................................................................................................. 6 2 Theoretical Concepts on Foreign Direct Investments ..................................................................... 6 2.1 The Eclectic Paradigm of international Production and the Knowledge-Capital Model ........ 7 2.1.1 Ownership advantage ..................................................................................................... 8 2.1.2 Internalization advantage ............................................................................................. 10 2.1.3 Location advantage ....................................................................................................... 11 2.2 An Imbalance Theory ............................................................................................................ 13 2.3 The Diamond Model ............................................................................................................. 14 2.3.1 Factor conditions .......................................................................................................... 15 2.3.2 Demand conditions ....................................................................................................... 16 2.3.3 Firm strategy, structure and rivalry .............................................................................. 16 2.3.4 Related and supportive industries ................................................................................ 17 2.3.5 The role of the government .......................................................................................... 17 2.3.6 Interplay between the attributes in the diamond ........................................................ 17 2.3.7 The Diamond Model & Cluster Theory ......................................................................... 18 2.4 The Cluster Theory ................................................................................................................ 18 2.4.1 Productivity ................................................................................................................... 19 2.4.2 Innovation ..................................................................................................................... 20 2.4.3 Business Formation ....................................................................................................... 20 PART II: Introduction to Case Study ....................................................................................................... 21 3 Czech Republic & The Hyundai Motor Company .......................................................................... 21 3.1 Introduction .......................................................................................................................... 21 3.2 Hyundai Motor Company ...................................................................................................... 21 3.3 The Czech Republic ............................................................................................................... 21 3.4 The Hyundai investment in the Czech Republic .................................................................... 22 4 Trends in the global automotive industry ..................................................................................... 25 4.1 Introduction .......................................................................................................................... 25 4.2 Global automotive industry .................................................................................................. 25 4.3 Hyundai global strategy ........................................................................................................ 26 PART III: Analysis .................................................................................................................................... 29 5 Motivation for investment ............................................................................................................ 30 6 The Czech Republic and investment climate ................................................................................ 31 6.1 The Investment climate in the Czech Republic ..................................................................... 31 6.1.1 Political environment .................................................................................................... 31 6.1.2 Economic climate .......................................................................................................... 34 6.1.3 Cultural and social environment ................................................................................... 35 6.2 Foreign Direct Investments in the Czech Republic ............................................................... 38 6.3 Investment incentives ........................................................................................................... 42 6.3.1 Impact of EU membership ............................................................................................ 42 6.3.2 Investment incentives into manufacturing sector in the Czech Republic .................... 42 6.3.3 Investment incentive for Hyundai and its suppliers ..................................................... 43 6.4 Automotive Industry in the Czech Republic .......................................................................... 45 6.4.1 International trade ........................................................................................................ 47 6.4.2 Suppliers .......................................................................................................................
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