Chapter 7 slides

Transcript Chapter 7 slides

Foreign Direct Investment

Chapter Objectives

• • • •

Describe worldwide patterns of foreign direct investment (FDI) and reasons for those patterns

•

Describe each of the theories that attempt to explain why FDI occurs Discuss the important management issues in the FDI decision Explain why governments intervene in the free flow of FDI Discuss the policy instruments that governments use to promote and restrict FDI

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Volkswagen

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Produces 8 million cars a year Modular production strategy Special protection in Germany

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Foreign Direct Investment (FDI)



Purchase of physical assets or significant amount of ownership of a company in another country in order to gain some measure of management control



By contrast, portfolio investment does not involve obtaining a degree of control in a company

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Yearly FDI Inflows

Source: Based on World Investment Report (Geneva, Switzerland: UNCTAD), various years.

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Reasons for FDI Growth

Increasing globalization

International mergers and acquisitions 7 - 6

Value of Cross-Border M&As

Source: Based on World Investment Report (Geneva, Switzerland: UNCTAD), various years.

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Worldwide FDI Flows

World FDI inflows

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Developed (49%), developing (45%)

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European Union: 28% of world FDI 82,000 multinationals Developing nations

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China and India attract most FDI

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All of Africa: 2.8% of world FDI

with 810,000 affiliates 7 - 8

Discussion Question

What is the difference between foreign direct investment and portfolio investment?

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Answer to Discussion Question

Foreign direct investment is the purchase of physical assets or a significant amount of the ownership of a company in another country to gain a measure of management control.

Portfolio investment does not involve obtaining a degree of control in a company.

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International Product Life Cycle

A company begins by exporting its product and later undertakes foreign direct investment as a product moves through its life cycle

Source: Raymond Vernon and Louis T. Wells, Jr., The Economic Environment of International Business, 5 th 85.

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Market Imperfections (Internalization)

A company undertakes FDI to internalize a transaction that is made inefficient because of a market imperfection

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Trade barriers (e.g., tariffs)

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Unique advantage (e.g., special knowledge)

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Eclectic Theory

FDI when location, ownership, and internalization advantages combine to make a location appealing Location advantage (optimal location)

Ownership advantage (special asset) Internalization advantage (efficiency) 7 - 13

Market Power

FDI used to establish a dominant presence in an industry

Market power = Greater profits Vertical integration Extends company’s activities into stages of production that provide its inputs (backward integration) or absorb its out puts (forward integration)

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Discussion Question

The

eclectic theory

says that firms undertake FDI when location, ownership, and __________ advantages combine to make a location appealing for investment.

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Answer to Discussion Question

The

eclectic theory

says that firms undertake FDI when location, ownership, and __________ advantages combine to make a location appealing for investment.

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Management Issues I

Control Purchase-or-build

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Management Issues II

Production costs Customer knowledge

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Management Issues III

Following clients Following rivals

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Balance of Payments

National accounting system that records all payments to entities in other countries and all receipts coming into the nation Current account

Capital account

The purchase or sale of assets (including assets such as property and shares of common stock in a company)

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U.S. Balance of Payments

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Discussion Question

What do we mean by a country’s

balance of payments

and what is its usefulness?

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Answer to Discussion Question

A country’s

balance of payments

is a national accounting system that records all payments to entities in other countries and all receipts coming into the nation.

The system helps monitor a country’s flows of goods, services, income, and asset transfers between itself and other nations. The balance of payments position sends warning signals about trade deficits with other nations.

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Host Intervention I

Balance of Payments + Initial FDI boosts economy FDI may decrease imports FDI may generate exports

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Host Intervention II

Obtain resources and benefits + Access technology Access management skills Create employment

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Home Intervention

– – –

Remove national resources Eliminate export markets Eliminate domestic jobs

Improve competitiveness Eliminate low-wage jobs 7 - 26

Host Promotion Methods

Financial incentives

■

Low or waived taxes

■

Low-interest loans Infrastructure benefits

■

Better seaports, roads, and telecom networks

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Host Restriction Methods

Ownership restrictions

■ Prohibit investment in industries or businesses

Performance demands

■ Local content requirements ■ Export targets ■ Technology transfers

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Home Promotion Methods

Insurance on assets abroad Loans and loan guarantees Special tax treaties Tax breaks on profits earned abroad Persuade other nations to accept FDI

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Home Restriction Methods

Higher taxes on foreign income Sanctions that prohibit investing

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Discussion Question

A host government may encourage an initial FDI because the inflow can __________ its balance of-payments position.

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Answer to Discussion Question

A host government may encourage an initial FDI because the inflow can __________ its balance of-payments position.

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