Transcript Document

INTERNATIONAL BUSINESS
CHAPTER VII
FOREIGN DIRECT INVESTMENT
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Learning Objectives
Describe the worldwide patterns of foreign direct investment
(FDI) and the reasons for these patterns.
Describe each of the theories that attempt to explain why
foreign direct investment occurs.
Discuss the important management issues in the foreign
direct investment decision.
Explain why governments intervene in the free flow of
foreign direct investment.
Discuss the policy instruments that governments use to
promote and restrict foreign direct investment.
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FOREIGN DIRECT
INVESTMENT
PORTFOLIO
INVESTMENT
The purchase of physical
Investment that does not
assets or a significant
involve obtaining a degree
amount of the ownership
of control in a company.
(stock) of a company in
another country to gain a
measure of management
control.
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I. PATTERNS OF FOREIGN DIRECT
INVESTMENT
Ups and Downs of Foreign Direct Investment
Worldwide Flows of FDI
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1.1 Ups and Downs of Foreign Direct
Investment (FDI)
Globalization
Mergers and Acquisitions
Role of Entrepreneurs and Small Businesses
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1.1.1 Ups and Downs of Foreign Direct
Investment (FDI)
Globalization
Companies were trying to export their products to markets
around the world  Wave of FDI
Another wave of FDI flows into low-cost newly
industrialized & emerging nations worldwide.
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1.1.2 Ups and Downs of Foreign Direct
Investment (FDI)
Mergers and Acquisitions
The number of Mergers and Acquisitions and their
exploding values also underlie long-term growth in FDI
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1.1.2 Ups and Down of Foreign Direct
Investment
Mergers and Acquisitions
Many cross-border merger and acquisitions deals are driven
by the desire of companies to do any or all of the following:
– Get a foothold in a new geographic market
– Increase a firm’s global competitiveness
– Fill gaps in companies’ product lines in a global industry
– Reduce costs in areas such as research and development,
production, or distribution
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1.1.3 Ups and Down of Foreign Direct
Investment
Role of Entrepreneurs and Small Businesses
these companies are engaged in FDI
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1.2 Worldwide Flows of FDI
Developed countries account for around 70%
Developing countries account for 30%
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II. EXPLAINATIONS FOR FOREIGN
DIRECT INVESTMENT
International Product Life Cycle
Market Imperfections (Internalization)
Eclectic Theory
Market Power
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II.1 International Product Life Cycle
International Product Life Cycle
Theory stating that a company will begin by
exporting its product and later undertake foreign
direct investment as a product moves through its
life cycle
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II.2 Market Imperfection (Internalization)
Market Imperfection (internalization)
Theory stating that when an imperfection in the market
makes a transaction less efficient than it could be, a
company will undertake foreign direct investment to
internalize the transaction and thereby remove the
imperfection
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II.2 Market Imperfection (Internalization)
Trade Barriers
One common market imperfection in international
business, such as Tariffs
Specialized Knowledge
The unique competitive advantage of company
sometimes consists of Specialized Knowledge
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II.3 Eclectic theory
Eclectic theory
Theory stating that firms undertake foreign direct
investment when the features of a particular
location combine with ownership and
internalization advantages to make a location
appealing for investment
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II.5 Market power
Market power
Theory stating that a firm tries to establish a
dominant market presence in an industry by
undertaking foreign direct investment
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II.5 Market power
Vertical integration
Extension of company activities into stages of
production that provide a firm’s inputs (
backward integration ) or absorb its output (
forward integration )
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III. MANAGEMENT ISSUES IN THE FDI
DECISION
Control
Purchase- or- Build Decision
Production Costs
Customer Knowledge
Following Clients
Following Rivals
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III.1 Control
Control
Partnership Requirements
Benefits of Cooperation
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III.1.1 Partnership Requirements
Partnership Requirements

Because of the importance of control

Many companies have strict policies regarding how
much ownership they will take in firms in other nations
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III.1.2 Benefits of Cooperation
Benefits of Cooperation

Have seen greater harmony between governments
and international companies

Governments of many developing and newly
industrialized countries have come to realize the
benefits of investment by multinationals.
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III.2 Purchase-or- Build Decision
Whether to purchase an existing business or to
build a subsidiary abroad from the ground upcall a greenfield investment.
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III.3 Production costs
Rationalized Production
System of production in which each of a
product’s components is produced where the
cost of producing that component is lowest
Cost of Research and development
lead multinationals to engage in cross-border
alliances and acquisitions.
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III.4 Customer Knowledge
 The behavior of buyers is an important issue in
the decision of whether to undertake FDI
 A local presence can help companies gain
valuable knowledge about customers that could not
be obtained in the home market.
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III.5 Following Clients
 Firms engage in FDI when doing so puts them close
to firms for which they act as a suppliers
 This practice of “following clients” can be expected in
industries in which many component parts are obtained
from suppliers with whom a manufacturer has a close
working relationship.
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III.6 Following Rivals
Many firms believe that choosing not to make a
move parallel to that of the “first mover” might
result in being shut out of a potentially lucrative
market.
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IV. GOVERNMENT INTERVENTION IN
FDI
Balance of Payments
Reasons for intervention by the host country
Reasons for intervention by the home country
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IV.1 Balance of Payments
Balance of Payments
A national accounting systems that
records all payments to entities in other
countries and all receipts coming into the
nation
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IV.1 Balance of Payments
Current account
National account that records transactions
involving the import and export of goods and
services, income receipt on assets abroad,
and income payment on foreign assets inside
the country
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IV.1 Balance of Payments
Current account surplus
When a country exports more goods and services
and receives more income from abroad than it
imports and pays abroad
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IV.1 Balance of Payments
Current account deficit
When a country imports more goods and
services and pays more abroad than it
exports and receives from abroad
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IV.1 Balance of Payments
Capital account
A national account that records transactions
involving the purchase or sale of assets
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IV.2 Reasons for Intervention by the Host
Country
Balance of Payments

FDI inflows are recorded as additions to the
balance of payments

Local production

Exports  host country’s balance of payment
Obtain Resources and Benefits

Access to technology

Management skills and employment.
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IV.3 Reasons for Intervention by the Home
Country
Investing in other nations sends resources
out of the home country
Outgoing FDI may ultimately damage a
nation’s Balance of Payments by taking the
place of its exports
Jobs resulting from outgoing investments
may replace jobs at home
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IV.3 Reasons for Intervention by the Home
Country…
Outward FDI can increase long term
competitiveness
Nations may encourage FDI in industries that
they have determined to be “sunset”
industries.
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V. GOVERNMENT POLICY
INSTRUMENTS & FDI
Host Countries: Restriction
Host Countries: Promotion
Home Countries: Restriction
Home Countries: Promotion
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V.1 Host Countries: Restriction
Host countries have a variety of methods to
restrict incoming FDI
Ownership restriction
Performance demands
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V.1 Host Countries: Restriction
Ownership restriction
Government can impose ownership restrictions that
prohibit nondomestic companies from investing in
certain industries.
Performance demands
Influence how international companies operate in the
host nation
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V.2 Host Countries: Promotion
Financial incentive


Lower tax rates
Offers to waive taxes on local profits for a period of
time extending as far out as five years or more
Infrastructure improvements

Better seaports suitable, improved roads, increased
telecommunications systems.
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V.3 Home Countries: Restriction
Impose differential tax rates
That charge income from earning abroad at a higher
rate than domestic earning
Impose outright sanctions
That prohibit domestic firms from making
investment in certain nations.
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V.4 Home Countries: Promotion
Offer insurance to cover the risks of investment abroad
Grant loans to firms wishing to increase their investment abroad
Offer tax breaks on profits earned abroad or negotiate special
tax treaties
Apply political pressure on other nations to get them to relax
their restrictions on inbound investment.
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THE END
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