An Analysis of the FDI Decision: The Case of Johns Hopkins Medicine Investing in Saudi
Introduction
As the modern-day business climate becomes very competitive, an increasingly larger number of corporations with a global mindset are opting exploit the international market in an attempt to remain competitive. There are various strategies that firms can use to internationalise, but FDI (Foreign Direct Investment) is by far the most viable of these on account of its numerous benefits, including replacing declining market segments, creating jobs, and increasing wages (Vantrappen & Denefe 2006). More importantly, FDI helps to stimulate technology transfer and infrastructure development. Johns Hopkins Medicine, a renowned American healthcare provider, has partnered with Saudi Aramco, an oil company that is wholly owned by the Saudi government in order to establish Johns Hopkins Aramco Healthcare Co. The new entity is a joint venture between Johns Hopkins and Saudi Aramco. The motive of the FDI is to improve the standard of patient care through knowledge transfer and specialised training programs, improved operational efficiency, and Performance Elevation Programs (Al-Jishi 2013). The focus of this essay is to explore the key decisions involved in forming FDI, and the likely benefits and challenges.
Analysis
Entry mode
Corporations are today required to serve a global market, meaning that they must also be ready to face global competition. For this reason, an increasingly larger number of companies deem it necessary to venture into new foreign markets (Porter 2004). If all such firms are to succeed, they must embrace the right type of action. In a foreign market entry mode, a company makes the necessary arrangements in order to facilitate the transfer of its technology, products, or human skills into a foreign country for economic or other benefits (Porter 2004). However, Sanchez-Peinado, & Pla-Barber (2006) opine that the decision by a firm to enter a new foreign market is a huge one as it could have far-reaching implications on the business over a longer period of time. There are four main entry modes into the foreign market namely, licensing, exporting, sole venture, and joint venture. Seeing as all of these modes demand that the firm commit a lot of resources, the initial choice made by a firm may be hard to change without significant loss of money and time, the choice of entry mode thus constitutes a strategic and critical decision.
Theories of entry mode
Ekeledo and Sivakumar (2003) have identified three main theories on international entry mode namely, eclectic theory and internalization theory; and recourse-based theory. The internationalisation theory assumes perfect movement of resources, including technical know-how, between a firm and its partners, as well as perfect competition (Ekeledo & Sivakumar 2003:71). Through an FDI, it becomes beneficial to control the foreign firm as opposed to licensing a local company, and hence the internationalisation benefit. However, the theory has come under criticism on grounds that it would be unsuitable to compare exporting with FDI.
On the other hand, the eclectic theory came about as a means of dealing with the limitations of the internationalization theory that deals with the issue of ownership, location, and internalization benefits. The ownership advantage seeks to enable the foreign firm to surmount the challenge of having to compete against local firms.
Conversely, the country’s risk and market potential increase the possibility of a company doing business at a profit in a foreign market (Ekeledo & Sivakumar 2003). However, the theory fails to acknowledge such strategic considerations as capability enhancement. It also fails to explain why two firms characterised by similar internalization, location, and ownership advantage might fail to choose similar entry modes. This has paved way for the recourse-based theory which views individual firms, as opposed to the industry in which they operate, as the main source of competitive advantage. In addition, Ekeledo and Sivakuma (2003) opine that the recourse-based theory acknowledge that resources tend to be heterogeneous from one firm to another. The choice of entry mode into a foreign market hinges on three forms of determinant factors namely, ownership benefits, location benefits, and the firm's internalization benefits.
Ownership Advantages
If at all a foreign-based firm is to compete effectively with firms in the host country in their home market, it must possess superior skills and assets that will enable it to earn superior economic rents to offset the high cost incurred in serving the market. The key determinants of a firm's asset power include its multinational experience and size, as well as the skills required to design differentiated products (Lutz & Ron 2010). Asset power enables firms to successfully compete with other firms in the host country, while the firm size is an indication of its ability to absorb the costs of marketing products, realising economies of scale, and enforcing contracts and patents. A firm that possesses the skills to develop differentiated products tends to be more efficient due to higher control modes.
Johns Hopkins has extremely gifted medical personnel who are behind some of the most innovative clinical innovations today. Additionally, Johns Hopkins has made considerable progress towards training and education programmes in such diverse areas as safety and quality, leadership, nursing, and research, and these will go a long way in transforming Johns Hopkins Aramco Healthcare into a leading centre for innovations and healthcare excellence not just in Saudi Arabia, but also in the Middle East (Johns Hopkins Medicine International 2014).
A firm's experience at the multinational level is yet another form of asset power that has been shown to inflected entry choices. In this case, firms that lack foreign market experience could be faced with a host of challenges in managing foreign operations. On many occasions, such firms end up understanding the potential returns while overstating the potential risks that entail their operations in a foreign market. Consequently, such firms may decide not to invest in a given foreign market. This is not the first time that Johns Hopkins is venturing into the international market. For example, in 1983, the healthcare provider, in collaboration with the Saudi government, built the King Khaled Eye Specialist Hospital, a 250-bed facility (DuBois 2014). Ever since Johns Hopkins established various healthcare facilities across the Middle East.
Location Advantages
Firms that have shown an interest in foreign markets tend to settle on a selective strategy that will increase their possibility of venturing into an attractive market as they stand a better chance of realising higher returns in such markets. The attractiveness of a market can be categorised based on investment risk and market potential. In this case, the market potential in terms of growth and size acts as a vital determining factor in investing in foreign markets (Porter 2004). On the other hand, a host country's investment risk refers to the uncertainty likely to face a company in terms of the continuation of prevailing government policies, and political and economic conditions, all of which are essential for the profitability and survival of a firm. The Saudi market has a huge potential and is posed to grow even further in the coming years. The growing demand for diverse healthcare services is attributed to the increase in lifestyle diseases Industry experts estimate that by 2020, the Saudi health care market will be worth $ 27 billion (Arab News 2016).
One of the main criteria for location factors is cultural distance. This is a term used in reference to differences that exist in terms of how people from various countries perceive certain behaviours, that could impact work practices. Cultural differences are characterised by such dimensions as power distance, individualism, uncertainty avoidance, and short-term and long-term orientation. Going by Hofstede's cultural dimension index, Saudi Arabia has a score of 95 on power distance compared to 40 by the United States. This is indicative of a society that has accepted a hierarchical structure of organisations. Saudi Arabia has an uncertainty avoidance score of 80, which is quite high (Geert Hofstede n.d.). On the other hand, the uncertainty avoidance score of the United States is quite low at 46 (Geert Hofstede n.d.). This is indicative that Saudi society maintains rigid codes of behaviour and belief.
With regard to individualism, Saudi Arabia has a score of 25 compared to the score of 91 by the United States, which is indicative of a loyal, collectivist society. In terms of long-term orientation, Saudi Arabia scores highly (36) than the United States (26) (Geert Hofstede n.d.). This means that Saudi society takes a pragmatic approach to time-honoured norms and traditions.
Internalization Advantage
Many firms that seek to venture into a foreign market favour low control modes for many transactions seeing as they enable them to take advantage of economies of scale in the market and at the same time, bypass the bureaucratic limitations associated with integration. Nonetheless, low control modes are often accompanied by a higher cost in comparison with combining the skills and assets within the firm in case the management fails to forecast future contingencies or in case the market fails to offer competing options. In the current arrangement, Johns Hopkins Medicine has entered into a joint venture with Saudi Aramco. This agreement, which will initially involve a 10-year partnership, has integrated over 8-decade dedication by Saudi Aramco to provide quality healthcare services to its more than 350,000 beneficiaries and the globally acclaimed education, research, and clinical expertise of Johns Hopkins Saudi Aramco 2014).
Risks and challenges
A firm seeks to form a joint venture with a partner that can complement its capabilities and assets, as a means of minimising up-front investments, reducing risk, and fast-track market entry (Vantrappen & Deneffe 2016). There are various benefits associated with a joint venture, including technology transfer, access to markets and resources, enhancing a firm's competitive advantage, and minimising political risk. However, because of the shared ownership of joint ventures between foreign and domestic firms, the risks involved are much higher but this is usually more than compensated for by the potentially very high returns (Kwicinski 2016). Also, joint ventures involve a lot of cooperation between the two partners and as such, each partner depends on the reciprocity and trust that the other partner has to offer as a means of minimising the risk of opportunistic behaviour, thereby resulting in the realisation of cost and resource sharing. However, Ning (2008) opines that cultural differences could be a hindrance to the operation of international joint ventures. In this case, cultural differences could lead to increased transaction costs and difficulties, not to mention a possible distrust.
Conclusion
Johns Hopkins Medicine has identified a joint venture with Saudi Aramco as its entry mode into the Saudi health market. The ownership advantage allows Johns Hopkins Medicine to do business in a foreign market with limited challenges encountered from established firms in the market. The promising growth of the Saudi health market, the technical and research expertise of Johns Hopkins, and the financial strength of both Johns Hopkins Medicine and Saudi Aramco give the joint venture a competitive advantage over rival firms.
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