Foreign Direct Investment Chapter 7 7 -2

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Количество слайдов: 55

Foreign Direct Investment Chapter 7

7 -2 Extra credit opportunity • Presentations on - a country or - a region (even a town/city in U. S. ) - some other subject in global business • An especially good chance to discuss your home or your ancestors’ home Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 -3 • Length – - 6 to 10 minutes (individual) - Up to 18 minutes (group) Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 -4 • A country presentation can describe - The economic environment • How do people live? • What is GNI per capita include both - unadjusted and - PPP-adjusted GNI, - compare to US • How does GNI per capita level affect life? Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 -5 - The political environment • How is the country/region governed? Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 -6 - Something of the cultural environment • You can’t summarize the culture; just say one or two things that strike you as important - The country or region’s role in global business • What does the country or region produce? • How important is it to people elsewhere? • Can you tell what is likely to happen in the future? Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 -8 What is foreign direct investment? • An indirect investment is one where the investor does not gain control of the entity he or she invests in - I can buy stock in Toyota, but Toyota’s management won’t pay much attention to my opinions • A direct investment is one where the investing company creates a new business or gains control - When BP bought the whole of Amoco (a U. S. oil company), it took control of the firm Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 -9 • Taking control of the business your firm will work with may: - decrease operating costs • because it results in better coordination - increase rate of technology transfer • because businesses are willing to transfer tech to units they control Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 10 You can enter foreign markets without control by… • Exporting – selling your goods overseas without setting up a unit abroad that you control • Licensing – selling others the permission to use your knowhow - Franchising – where you provide a complete package to allow others to set up a business like yours – is a kind of licensing Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 12 How companies make foreign direct investments • Acquisition: buying an existing company - Easy to execute - Gain brand identification and goodwill - Best if your company is attempting to acquire knowledge • Building a new unit from scratch (‘Greenfield’ investment): - hire or buy local resources - construct or buy buildings - build own labor force • Foreign personnel may be difficult to hire • You control the results Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 13 The Investor’s Advantage • Foreign direct investment is correlated with profitability. - Companies that do more foreign direct investment are, on average, more profitable • Why? - Create supremacy over other companies in countries of interest (monopoly) - Sell more efficiently - Get to know markets, resources better - Foreign currency may have a high buying power - May be able to borrow capital at a lower interest rate than companies from other countries Mc. Graw-Hill/Irwin International Business, 6/e, 7 e 8 -12 Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 14 Economists generally favor free flows of foreign direct investment • They believe freedom for FDI allows business knowhow to go where it will be most useful - Just as free trade allows people to use skills and resources most efficiently • We haven’t seen the dramatic problems from FDI that we’ve seen from the global capital market Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 15 Trends in FDI • Foreign direct investment increased in the last 20 years • In spite of decline of trade barriers, FDI grew even more rapidly than world trade because - Businesses feared protectionist pressures - FDI is seen a a way of circumventing trade barriers - Dramatic political and economic changes in many parts of the world encouraged investment - Globalization of the world economy created firms who see the entire world as their market Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 16 BUT – The FDI Slump • Between 2000 and 2004 the value of FDI declined almost 50% from $1. 2 trillion to about $620 billion • The slowdown in FDI flows was most pronounced in developed nations • Then FDI increased dramatically 2005 -2007 - And slowed radically in 2008 -10 Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 17 Trends In FDI Figure 7. 1: FDI Outflows 1982 -2006 ($ billions) Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 18 The Direction of FDI • Historically, most FDI was directed at the developed nations - advanced countries invested in other markets - The US has been the favorite target for FDI inflows • While developed nations still account for the largest share of FDI inflows, FDI into developing nations has increased - Most recent inflows into developing nations have been targeted at the emerging economies of South, East, and Southeast Asia - Flows to Africa are growing, especially from China Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 19 Foreign Direct Investment in the World Economy • The flow of FDI refers to the amount of FDI undertaken over a given time period • The stock of FDI refers to the total accumulated value of foreign owned assts at a given time Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 20 The Direction Of FDI Figure 7. 3: FDI Inflows by Region ($ billion), 1995 -2006 Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 21 The Direction Of FDI Figure 7. 4: Inward FDI as a % of Gross Fixed Capital Formation 1992 -2005 Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 22 • ‘Gross fixed capital formation’ is the total amount of investment in factories, stores, office buildings, and the like Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 24 The Shift to Services • A shift to services is being driven by four factors - In many developed economies, services make up growing portions of GNI - Many services cannot be traded internationally - Many countries have liberalized their regimes governing FDI in services - The rise of Internet-based global telecommunications networks has allowed some service enterprises to relocate some of their value creation activities to different nations to take advantage of favorable factor costs Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 26 Should a nation always accept foreign investment? • 19 th Century political economists showed countries gain hugely from trade, but the case for allowing free foreign direct investment is not as strong • Foreign firms bring technology and knowhow to a country • But they can also take over positions in the local economy where local firms could - learn new technology, - earn profits they would keep at home, and - create more jobs than a foreign firm Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 27 The Free Market View • Nations specialize in goods and services that they can produce most efficiently • Resource transfers benefit and strengthen the host country. It - gains investments gets new jobs substitutes for imports gets smart new competition in the domestic economy • Recent changes in laws and growth of bilateral agreements attest to strength of free market view Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 28 Pragmatic Nationalism • FDI has benefits and costs • Allow FDI if benefits outweigh costs - Block FDI that ‘harms indigenous industry’ - Court FDI that ‘is in national interest’ • Tax breaks • Subsidies Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 29 • Many of the most successful developing countries – past and present – followed a pragmatic nationalistic stance - Japan - South Korea - China • Economists note that Hong Kong, which followed the free market approach, was even more successful Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 30 The richest countries all practice a basically free market approach • They have an association, the Organization for Economic Cooperation and Development that requires members to open their markets to foreign direct investment Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 34 • Slides below here were not presented in class and are not required Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 35 Political Ideology and FDI Radical View Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Pragmatic Nationalism Free Market Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 36 The Radical View • Marxist view: MNE’s exploit less-developed host countries - Extract profits Give nothing of value in exchange Instrument of domination, not development Keep less-developed countries relatively backward and dependent on capitalist nations for investment, jobs, and technology Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 37 The Radical View • By the end of the 1980 s radical view was in retreat - Collapse of communism - Bad economic performance of countries that embraced the radical view - Strong economic performance of some countries who embraced capitalism rather than the radical view Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 39 Costs of FDI to the Home Country • Can drive out local competitors or prevent their development • Profits brought home ‘hurt’ (debit) a host’s capital account • Parts imported for assembly hurt trade balance • Can affect sovereignty and national defense Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 43 The Benefits of FDI to Host Countries • Four main benefits of FDI for a host country - Resource-transfer effect Employment effect Balance-of-Payments effect Effect on competition and economic growth • In a free market view - Many economists argue that the benefits of FDI so outweigh the costs associated with pragmatic nationalism that it is misguided - The best policy would be for countries to forgo all intervention in an MNE’s investment decisions Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 45 “Horizontal” FDI • Horizontal Direct Investment - FDI in the same industry abroad as company operates at home • FDI is expensive because a firm must bear the costs of establishing production facilities in a foreign country or of acquiring a foreign enterprise • FDI is risky because of the problems associated with doing business in another culture where the rules of the game may be different Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 46 “Horizontal” FDI – When • Transportation costs for a product are high • Market Imperfections (Internalization Theory) - Impediments to the free flow of products between nations - Impediments to the sale of know-how • Follow the lead of a competitor - strategic rivalry • Product Life Cycle - however, does not explain when it is profitable to invest abroad • Location specific advantages (natural resources) Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 51 Vertical FDI • Vertical FDI takes two forms - Backward vertical FDI is an investment in an industry abroad that provides inputs for a firm’s domestic production processes - Forward vertical FDI occurs when an industry abroad sells the outputs of a firm’s domestic production processes, this is less common than backward vertical FDI Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 52 Strategic Behavior • One explanation for firm’s choice of vertical FDI is that by using vertical backward integration, a firm can gain control over the source of raw materials - This would allow the firm to raise entry barriers and shut new competitors out of an industry • Another explanation of vertical FDI is that firms use this strategy to circumvent the barriers established by firms already doing business in a country Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 53 Market Imperfections • The market imperfections approach offers two explanations for vertical FDI - There are impediments to the sale of know-how through the market mechanism - Investments in specialized assets expose the investing firm to hazards that can be reduced only through vertical FDI Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 - 55 Market Imperfections • Market imperfections are factors that inhibit markets from working perfectly - In the international business literature, the marketing imperfection approach to FDI is typically referred to as internalization theory • With regard to horizontal FDI, market imperfections arise in two circumstances: - When there are impediments to the free flow of products between nations which decrease the profitability of exporting relative to FDI and licensing - When there are impediments to the sale of know-how which increase the profitability of FDI relative to licensing Mc. Graw-Hill/Irwin International Business, 6/e, 7 e Portions © 2007 -2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.