2000 Chp 8 FDI
Transcript of 2000 Chp 8 FDI
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Chapter 8
Foreign Direct
Investment
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What Is FDI?
Foreign direct investment (FDI) occurswhen a firm invests directly in newfacilities to produce and/or market in aforeign countrythe firm becomes a multinational enterprise
FDI can be in the form ofgreenfield investments - the establishment of
a wholly new operation in a foreign countryacquisitions or mergers with existing firms in
the foreign country
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What Is FDI?
The flow of FDI (OVERTIME) - the amountof FDI undertaken over a given time period
Outflows of FDI are the flows of FDI out of acountry
Inflows of FDI are the flows of FDI into acountry
The stock of FDI (SNAPSHOT) - thetotal accumulated value of foreign-
owned assets at a given time
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What Are The Patterns Of FDI?
Both the flow and stock of FDI haveincreased over the last 30 years
Most FDI is still targeted towards developednations
United States, Japan, and the EU
but, other destinations are emerging
South, East, and South East Asiaespecially China
Latin America
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What Are The Patterns Of FDI?
FDI Outflows 1982-2010 ($ billions)
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What Are The Patterns Of FDI?
FDI Inflows by Region 1995-2010 ($ billion)
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What Are The Patterns Of FDI?
The growth of FDI is a result of1. a fear of protectionism want to circumvent trade barriers
2. political and economic changes
deregulation, privatization, fewer restrictions onFDI
3. new bilateral investment treaties designed to facilitate investment
4. the globalization of the world economy many companies now view the world as theirmarket
need to be closer to their customers
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What Are The Patterns Of FDI?
Gross fixed capital formation - the totalamount of capital invested in factories,stores, office buildings, and the like
the greater the capital investment in aneconomy, the more favorable its futureprospects are likely to be
So, FDI is an important source of capitalinvestment and a determinant of the futuregrowth rate of an economy
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What Are The Patterns Of FDI?
Inward FDI as a % of Gross Fixed Capital Formation 1992-2008
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What Is The Source Of FDI?
Since World War II, the U.S. has been thelargest source country for FDI
the United Kingdom, the Netherlands, France,
Germany, and Japan are other importantsource countries
together, these countries account for 60% of
all FDI outflows from 1998-2010
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What Is The Source Of FDI?
Cumulative FDI Outflows 1998-2010 ($ billions)
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Why Do Firms Choose Acquisition
Versus Greenfield Investments?
Most cross-border investment is in theform of mergers and acquisitions ratherthan greenfield investments
between 40-80% of all FDI inflows per annumfrom 1998 to 2009 were in the form ofmergers and acquisitions
but in developing countries two-thirds ofFDI is greenfield investment
fewer target companies
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Why Do Firms Choose Acquisition
Versus Greenfield Investments?
Firms prefer to acquire existing assetsbecausemergers and acquisitions are quicker to
execute than greenfield investmentsit is easier and perhaps less risky for a firm to
acquire desired assets than build them fromthe ground up
firms believe that they can increase theefficiency of an acquired unit by transferringcapital, technology, or management skills
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Why Choose FDI?
Question: Why does FDI occur instead ofexporting or licensing?
1. Exporting - producing goods at home
and then shipping them to the receivingcountry for sale exports can be limited by transportation
costs and trade barriers
FDI may be a response to actual orthreatened trade barriers such as importtariffs or quotas
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Why Choose FDI?
2. Licensing - granting a foreign entity the right toproduce and sell the firms product in return fora royalty fee on every unit that the foreignentity sells
Internalization theory (aka market imperfectionstheory) - compared to FDI licensing is less attractive firm could give away valuable technological know-
how to a potential foreign competitor does not give a firm the control over manufacturing,
marketing, and strategy in the foreign country the firms competitive advantage may be based on
its management, marketing, and manufacturingcapabilities
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What Is The Pattern Of FDI?
Question: Why do firms in the same industryundertake FDI at about the same time and thesame locations?
Knickerbocker - FDI flows are a reflection ofstrategic rivalry between firms in the globalmarketplacemultipoint competition -when two or more enterprises
encounter each other in different regional markets,
national markets, or industries
Vernon - firms undertake FDI at particular stagesin the life cycle ofa product
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What Is The Pattern Of FDI?
Question: But, why is it profitable for firms toundertake FDI rather than continuing to exportfrom home base, or licensing a foreign firm?
Dunnings eclectic paradigm- it is important to
consider location-specific advantages - that arise from using
resource endowments or assets that are tied to aparticular location and that a firm finds valuable tocombine with its own unique assets
externalities - knowledge spillovers that occur whencompanies in the same industry locate in the samearea
Wh A Th Th i l
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What Are The Theoretical
Approaches To FDI?
The radical view - the MNE is an instrument ofimperialist domination and a tool for exploitinghost countries to the exclusive benefit of theircapitalist-imperialist home countries in retreat almost everywhere
The free market view- international productionshould be distributed among countries accordingto the theory of comparative advantageembraced by advanced and developing nations
including the United States and Britain, but no countryhas adopted it in its purest form
Wh A Th Th i l
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What Are The Theoretical
Approaches To FDI?Pragmatic nationalism - FDI has both
benefits (inflows of capital, technology, skillsand jobs) and costs (repatriation of profits tothe home country and a negative balance of
payments effect)FDI should be allowed only if the benefits outweigh
the costs
Recently, there has been a strong shift towardthe free market stance creatinga surge in FDI worldwidean increase in the volume of FDI in countries with
newly liberalized regimes
H D FDI B fi
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How Does FDI Benefit
The Host Country?
There are four main benefits of inwardFDI for a host country
1. Resource transfer effects - FDI bringscapital, technology, and managementresources
2. Employment effects - FDI can bring jobs
H D FDI B fit
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How Does FDI Benefit
The Host Country?
3. Balance of payments effects - FDI can help acountry to achieve a current account surplus
4. Effects on competition and economic growth -
greenfield investments increase the level ofcompetition in a market, driving down pricesand improving the welfare of consumers
can lead to increased productivity growth, product
and process innovation, and greater economicgrowth
Wh t A Th C t Of
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What Are The Costs Of
FDI To The Host Country?
Inward FDI has three main costs:
1. Adverse effects of FDI on competitionwithin the host nation
subsidiaries of foreign MNEs may havegreater economic power than indigenouscompetitors because they may be part of a
larger international organization
Wh t A Th C t Of
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What Are The Costs Of
FDI To The Host Country?
2. Adverse effects on the balance of payments
when a foreign subsidiary imports a substantialnumber of its inputs from abroad, there is a debit onthe current account of the host countrys balance of
payments
3. Perceived loss of national sovereignty andautonomy
decisions that affect the host country will be madeby a foreign parent that has no real commitment tothe host country, and over which the host countrys
government has no real control
H D FDI B fit
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How Does FDI Benefit
The Home Country?
The benefits of FDI for the home countryinclude
1. The effect on the capital account of the home
countrys balance of payments from the inwardflow of foreign earnings
2. The employment effects that arise fromoutward FDI
3. The gains from learning valuable skills fromforeign markets that can subsequently betransferred back to the home country
Wh t A Th C t Of
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What Are The Costs Of
FDI To The Home Country?
1. The home countrys balance of paymentscan suffer
from the initial capital outflow required to
finance the FDI
if the purpose of the FDI is to serve the homemarket from a low cost labor location
if the FDI is a substitute for direct exports
Wh t A Th C t Of
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What Are The Costs Of
FDI To The Home Country?
2. Employment may also be negatively affected ifthe FDI is a substitute for domestic production
But, international trade theory suggests that
home country concerns about the negativeeconomic effects ofoffshore production (FDIundertaken to serve the home market) may notbe valid may stimulate economic growth and employment in
the home country by freeing resources to specializein activities where the home country has acomparative advantage
H D G t
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How Does Government
Influence FDI?
Governments can encourage outward FDI
government-backed insurance programs tocover major types of foreign investment risk
Governments can restrict outward FDI
limit capital outflows, manipulate tax rules, oroutright prohibit FDI
H D G t
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How Does Government
Influence FDI?
Governments can encourage inward FDI
offer incentives to foreign firms to invest intheir countries
gain from the resource-transfer and employmenteffects of FDI, and capture FDI away from otherpotential host countries
Governments can restrict inward FDI
use ownership restraints and performancerequirements
How Do International
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How Do International
Institutions Influence FDI?
Until the 1990s, there was no consistentinvolvement by multinational institutions inthe governing of FDI
Today, the World Trade Organization ischanging this by trying to establish auniversal set of rules designed to promote
the liberalization of FDI
What Does FDI
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What Does FDI
Mean For Managers?
Managers need to consider what tradetheory implies about FDI, and the linkbetween government policy and FDI
The direction of FDI can be explainedthrough the location-specific advantagesargument associated with John Dunning
however, it does not explain why FDI ispreferable to exporting or licensing, mustconsider internalization theory
What Does FDI
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What Does FDI
Mean For Managers?A Decision Framework
What Does FDI
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What Does FDI
Mean For Managers?
A host governments attitude toward FDI is
important in decisions about where tolocate foreign production facilities and
where to make a foreign direct investmentfirms have the most bargaining power when
the host government values what the firm has
to offer, when the firm has multiplecomparable alternatives, and when the firmhas a long time to complete negotiations