Foreign Direct Investment

Foreign Direct Investment7Copyright 2012 Pearson Education, Inc. publishing as Prentice Hallhttp://www.youtube.com/watch?v=FQ1O9NlnugE&list=PLA91EE0C61284C7E2&index=4&feature=plpp_video17 - 2Copyright 2012 Pearson Education, Inc. publishing as Prentice HallChapter ObjectivesDescribe worldwide patterns of foreign direct investment (FDI) and reasons for these patternsDescribe each of the theories that attempt to explain why foreign direct investment occursDiscuss the important management issues in the foreign direct investment decisionExplain why governments intervene in the free flow of foreign direct investmentDiscuss the policy instruments that governments use to promote and restrict foreign direct investment27 - 3Copyright 2012 Pearson Education, Inc. publishing as Prentice HallForeign Direct Investment (FDI)Purchase of physical assets or significant amount of ownership of a company in another country to gain some measure of management control By contrast, portfolio investment does not involve obtaining a degree of control in a company

37 - 5Copyright 2012 Pearson Education, Inc. publishing as Prentice HallReasons for FDI GrowthIncreasingglobalizationInternational mergersand acquisitions

57 - 6Copyright 2012 Pearson Education, Inc. publishing as Prentice HallValue of Cross-Border M&As

Source: Based on World Investment Report (Geneva, Switzerland: UNCTAD), various years.67 - 7Copyright 2012 Pearson Education, Inc. publishing as Prentice HallWorldwide FDI Flows World FDI inflows

Developed (57%), developing (37%)

European Union: 30% of world FDI Developing nations

China: 6.4% of world FDI

All of Africa: 5.2% of world FDI

82,000 multinationalswith810,000 affiliates77 - 8Copyright 2012 Pearson Education, Inc. publishing as Prentice HallDiscussion Question

What is the difference between foreign direct investment and portfolio investment?87 - 9Copyright 2012 Pearson Education, Inc. publishing as Prentice HallAnswer 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. A portfolio investment is an investment that does not involve obtaining a degree of control in a company.97 - 10Copyright 2012 Pearson Education, Inc. publishing as Prentice HallInternational Product Life Cycle

A company begins by exporting its product and later undertakes foreign direct investment as a product moves through its life cycleSource: Raymond Vernon and Louis T. Wells, Jr., The Economic Environment of International Business, 5th ed. (Upper Saddle River, N.J.: Prentice Hall, 1991), p. 85.107 - 11Copyright 2012 Pearson Education, Inc. publishing as Prentice HallMarket Imperfections (Internalization)Trade barriers(e.g., tariffs)

Unique advantage(e.g., special knowledge)

A company undertakes FDI to internalize a transaction that is made inefficient because of a market imperfection117 - 12Copyright 2012 Pearson Education, Inc. publishing as Prentice HallEclectic Theory

A firm undertakes FDI when location, ownership, and internalization advantages combine to make a location appealingLocationadvantage(optimal location)Ownershipadvantage(special asset)Internalizationadvantage(efficiency)

127 - 13Copyright 2012 Pearson Education, Inc. publishing as Prentice HallMarket PowerA firm undertakes FDI to establish a dominant presence in an industryVertical integration

Extends companys activitiesinto stages of production that provide its inputs (backward integration) or absorb its out-puts (forward integration)Market power= Greater profits137 - 14Copyright 2012 Pearson Education, Inc. publishing as Prentice HallDiscussion Question

The eclectic theory says that firms undertake FDI when location, ownership, and __________ advantages combine to make a location appealing for investment.a. Internalizationb. First-moverc. Life-cycle147 - 15Copyright 2012 Pearson Education, Inc. publishing as Prentice HallAnswer to Discussion Question

The eclectic theory says that firms undertake FDI when location, ownership, and __________ advantages combine to make a location appealing for investment.a. Internalizationb. First-moverc. Life-cycle157 - 16Copyright 2012 Pearson Education, Inc. publishing as Prentice HallManagement Issues IControlPurchase-or-build

167 - 17Copyright 2012 Pearson Education, Inc. publishing as Prentice HallManagement Issues IIProductioncostsCustomerknowledge

177 - 18Copyright 2012 Pearson Education, Inc. publishing as Prentice HallManagement Issues IIIFollowing rivalsFollowing clients

187 - 19Copyright 2012 Pearson Education, Inc. publishing as Prentice HallBalance of PaymentsCapital accountCurrent accountNational accounting system that records all payments to entities in other countries and all receipts coming into the nationThe import and export of goods and services, income receipts on assets abroad, and income payments on foreign assets inside the countryThe purchase or sale of assets (including assets such as property and shares of common stock in a company)

197 - 20Copyright 2012 Pearson Education, Inc. publishing as Prentice HallU.S. Balance of Payments

207 - 21Copyright 2012 Pearson Education, Inc. publishing as Prentice HallDiscussion Question

What do we mean by a countrys balance of payments and what is its usefulness?217 - 22Copyright 2012 Pearson Education, Inc. publishing as Prentice HallAnswer to Discussion Question

A countrys 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 a country monitor the flows of goods, services, income, and transfer of assets between itself and other nations. The balance of payments position sends warning signals about trade deficits with other nations.227 - 23Copyright 2012 Pearson Education, Inc. publishing as Prentice HallHost Intervention in FDIBalance of Payments+FDI may generate exportsInitial FDI boosts economyFDI may decrease imports

237 - 24Copyright 2012 Pearson Education, Inc. publishing as Prentice HallHost Intervention in FDIObtain resourcesand benefits+Access technologyAccess management skillsCreate employment

247 - 25Copyright 2012 Pearson Education, Inc. publishing as Prentice HallHome Intervention in FDIImproves competitivenessOffshore sunset industries

Remove national resourcesEliminate export marketsEliminate domestic jobs

257 - 26Copyright 2012 Pearson Education, Inc. publishing as Prentice HallHost Promotion MethodsFinancial incentivesLow or waived taxesLow-interest loans

Infrastructure benefitsBetter seaports, roads, and telecom networks

267 - 27Copyright 2012 Pearson Education, Inc. publishing as Prentice HallHost Restriction MethodsOwnership restrictions Prohibit investment in industries or businesses

Performance demands Local content requirements Export targets Technology transfers

277 - 28Copyright 2012 Pearson Education, Inc. publishing as Prentice HallHome Promotion Methods Insurance on assets abroadLoans and loan guaranteesTax breaks on profits earned abroadSpecial tax treaties Persuade other nations to accept FDI287 - 29Copyright 2012 Pearson Education, Inc. publishing as Prentice HallHome Restriction MethodsHigher taxes onforeign incomeSanctions that prohibit investing

297 - 30Copyright 2012 Pearson Education, Inc. publishing as Prentice HallDiscussion Question

A host government may encourage an initial FDI because the inflow can __________ its balance-of-payments position.a. Levelb. Lowerc. Boost307 - 31Copyright 2012 Pearson Education, Inc. publishing as Prentice HallAnswer to Discussion Question

A host government may encourage an initial FDI because the inflow can __________ its balance-of-payments position.a. Levelb. Lowerc. Boost31

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