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Foreign Direct Investment: Kentucky Fried Chicken in China

Kentucky Fried Chicken in China

Case Assignment Background

Kentucky Fried Chicken is currently a huge success in China, although their decision to enter was considered highly risky at the time.

Go to Proquest to look up the following article:

Kentucky Hatches Its Chickens in Beijing
Caplen, Brian. Asian Business. Hong Kong: Feb 1988. Vol. 24, Iss. 2; p. 17

Abstract: With the opening of a 3-story restaurant in Beijing, Kentucky Fried Chicken (KFC) became the first international fast-food chain to penetrate the market in the Peoples' Republic of China. Generating average daily sales of 10,000 yuan (US $2,700), the outlet is being touted as an "instant success" by KFC officials. KFC now plans to establish a 2nd site in Beijing and a string of outlets in all major cities over the next 2-3 years. Competitors like McDonald's and Burger King have opted for a more cautious approach, as they are unconvinced that China can offer the high-quality supplies, disciplined labor, and receptive consumers needed. Using experience gained from a disastrous early foray into the Hong Kong market, KFC took time to address local supply sourcing, market research, capital funding, royalty payment, foreign exchange, location, and labor issues.

Click here for a more recent update on the fast food market in China. You might try to find recent information on Starbuck in China or on McDonald

Case Assignment Task

Perform additional updated research on this topic, then write a paper that refers to the following issues:

1. How big of a risk was it for KFC to enter the Chinese market? What could have gone wrong?

2. What would be your major concerns if you were the Chief Financial Officer of KFC and you were asked to find financing for further expansion into China?

3. How would the financing strategy of a China subsidiary of a large multinational food chain such as McDonald or Starbuck be affected by the perception of the 'political risk' for these companies in China?

Assignment Expectations:

A five page paper detailing the financial risks of entering the Chinese market.

Solution Preview

How big of a risk was it for KFC to enter the Chinese market? What could have gone wrong?

KFC's choice to enter the Chinese market was a big risk that could have been dogged by many obstacles. Starting from the fact that China is not very receptive to foreign brands, KFC managed to do its market research and identify ways it could effectively penetrate the socialist community. It is almost claimed that of all things that China has openly embraced from the West has been its love for the Kentucky Fried Chicken (KFC). Starting off in 1987, KFC had to choose a strategic location and went for its first retail outlet near Tiananmen Square within Beijing. The biggest risk that KFC initially faced was the fact that coming from a western culture of how things are done and other aspects such as tastes and preferences, business cultures, etc, KFC has to ensure a couple of vital ingredients were in place so as to succeed. The key ingredients of context, people, execution and strategy were the main pillars that made KFC stand to its current position within China (Cho, 2010).

On entering China, KFC was obviously faced with limiting market entry options which included franchising or licensing, going in as a wholly owned subsidiary, or getting into a joint venture. KFC has traditionally had a franchising strategy while entering new markets, emphasizing more on the standardization and reduction of financial risk at the expense of cultural sensitivity and control. As a result of China's strict foreign direct investment policies and laws, this strategy was not feasible for KFC and would have seen the retail giant fail from the start. As a pioneer within the fast foods industry within China, KFC was greatly faced with the uncertainty of what to expect, a very big risk when entering new markets with totally different ways of doing things. KFC had previously never been faced with the cultural demands of the Chinese, implying that it was taking a big chance of entering such a market. This is not to say that KFC had not in the past experienced problems related to aligning its corporate planning processes with its franchising short-term's vision on maximizing profits. With such a past, KFC knew first hand what the odds were against it when it decided to venture into the Chinese market (KFC, n.d.).

Entering China as a wholly owned subsidiary ...

Solution Summary

Foreign direct investment is examined for Kentucky Fried Chicken in China.