lecture on fdi

7/30/2019 lecture on fdi

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7IB003 International Business EnvironmentLecture 5

FDI investment flows

theory and evidence


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Objectives for this

session Examine the differing definitions ofmultinational companies or enterprises(MNCs or MNEs)

Critically examine the methods forinternationalisation of firms

Assess the different motives for firmsbecoming multinational

Evaluate the financial benefits, challengesand risks for MNEs


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Definitions of MNEs

A firm that owns and controls activities in two or moredifferent countries (Buckley and Casson, 1976; 2009:

1564)

A coordinated system of cross-border value-creatingactivities, some of which are carried out within thehierarchy of the firm, and some of which are carried outthrough informal social ties or contractual relationships

(Dunning and Lundan, 2008; Cantwell et al., 2010: 569)

An enterprise that has operating subsidiaries, branches,or affiliates located in foreign countries (Eiteman et al.,

2010: 2)


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Definitions of MNEs

A company that has headquarters inone country but has operations in

other countries (Wall and Rees,2004: 23)

Stakeholders are from differentcountries


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Worlds leading MNEs in 2012 (source:

Fortune Global 500)

Rank Company Country Main sectorRevenues

($m)Profits ($m)

1 Royal Dutch Shell UK/Netherlands Oil refining 484,400 30,918

2 Exxon Mobil USA Oil refining 452,900 41,060

3 Walmart USA Retail 446,900 15,699

4 BP UK Oil refining 386,400 25,700

5 Sinopec China Oil refining 375,200 9,453

6China National

Petroleum CorpChina Petroleum 352, 300 16,317

7State Grid Corp. ofChina

China Power 259,100 5,678

8 Chevron USA Automobile 263,159 26,895

9 ConocoPhillips USA Oil refining 237,272 12,436

10 Toyota Motor Japan Automobile 235,364 3,591


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Selected Countries

GDP in 2011 (in $m)IMF list World Bank List CIA World Factbook

Hong Kong 243,302 243,666 243,300

New Zealand 161,851 142,477 161,900

Bangladesh 113,032 110,612 113,000

Kiribati 167 178 167

Data illustrates many MNEs have larger revenues than many

countries GDPs.


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Chinas leading MNEs in 2011 (source:

Fortune Global 500)

Rank Company GlobalRank

Revenues($m)

GlobalRank 2005

1 Sinopec 5 375,214 31

2 China National Petroleum 6 352,338 46

3 State Grid 7 259,142 40

4Industrial & Commercial Bank ofChina

54 109,040 229

5 China Construction Bank 77 89,648 315

6 China Mobile Communications 81 87,544 224

7 Agricultural Bank of China 84 84,803 397

8 Noble Group 91 80,732 -

9 Bank of China 93 80,230 339

10 China State Construction Engineering 100 76,024 -


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Indias leading MNEs in 2011 (source:

Fortune Global 500)

Rank

Company GlobalRank

Revenues($m)

1 Indian Oil 83 86,016

2 Reliance Industries 99 76,119

3 Bharat Petroleum 225 44,582

4 Hindustan Petroleum 267 38,885

5 State Bank of India 285 36,950

6 Tata Motors 314 34,575

7 Oil and Natural Gas 357 30,746

8 Tata Steel 401 27,739


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Rankings of MNEs The rankings of global MNEs, depend upon

the measurement of MNEs.

Revenue

Profits Internationalisation (number of affiliates)

Employment


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Methods ofInternationalisation

Export-based methodsIndirect exporting - through intermediaries

Direct exporting

Non-equity based methodsLicensing

Franchising

Equity-based methodsStrategic alliances

Joint ventures

Merger & acquisitions

Wh d fi b


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Why do firms becomeMNEs (Eiteman et al.,

2010) Market seekers

Raw material seekers

Production material seekers Knowledge seekers

Political safety seekers Brand seekers


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Dunnings View

The drivers of FDI(MNE) activity are:

The Search for markets The search for resources

Agglomeration economies Efficiency seeking motives


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Potential Financial Benefits

of MNEs (Butler, 2004) Enhancing RevenuesGlobal branding

The advantages of size

Flexibility in marketing and distribution

Reducing CostsLow-cost raw materials

Low-cost labour

Flexibility in global site selectionFlexibility in sourcing and production

Economies of scale

Economies of vertical and horizontal integration


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Other benefits from being anMNE

To save on transport costs To develop an international brand

Employment and Health and Safety legislationin other countries may be more relaxed

Reduce a companys tax bill

To take advantage of government grants


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The Challenges of

MNEs (Butler, 2004) Differences in marketing Differences in distribution

Differences in personnel management Differences in legal, accounting, and tax

systems

Differences in financial markets Differences in corporate governance and

institutions


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Risks of MNEs (Butler, 2004;

Eiteman et al., 2010) Country Risk - risk that business environment in host

country will unexpectedly change- sometimesthought of as economic risk

Political Risk - risk that business environment in ahost country will change due to political events

Financial Risk - risk of unexpected change in thefinancial or economic environment of a host country

Currency risks - transaction exposure; operatingexposure; translation exposure


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References Buckley, P.J., & Casson, M.C. (1976) The future of the multinational

enterprise, London:Macmillan

Buckley, P.J., & Casson, M.C. (2009) The internationalisation theory ofthe multinational enterprise: A review of the progress of a researchagenda after 30 years, Journal of International Business Studies, 40,

1563-1580 Butler, K.C. (2004) Multinational Finance, 3rd ed., Mason, Ohio:

Thomson South-Western

Cantwell, J., Dunning, J.H., & Lundan, S.M., (2010) An evolutionaryapproach to understanding international business activity: The co-evolution of MNEs and the institutional environment, Journal of

International Business Studies, 41, 567-586

Eiteman, D.K., Stonehill, A.I., & Moffett, M.H. (2010) MultinationalBusiness Finance, 12th ed., Boston, MA: Pearson Education, Ltd.

Wall, S., & Rees, B. (2004) International Business, 2nd ed., Harlow,Essex: Pearson Education Limited

lecture on fdi

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