McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
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By Edhole
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McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
http://ebooks.edhole.com
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
CHAPTER
Foreign Direct Investment
66
http:/...
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Key Issues
• Why is FDI increasing?
• Why d...
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Foreign Direct Investment
• Foreign direct ...
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Foreign Direct Investment
• Involves owners...
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
FDI Growth in the World Economy
• FDI Outfl...
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Direction and Source of FDI
• Historically,...
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Forms of FDI
• FDI forms
– Purchase of exis...
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Alternative Modes of Market Entry
• FDI
– F...
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Why FDI?
• FDI over exporting
– High transp...
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Pattern of FDI
• Follow main competitors
– ...
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Eclectic Paradigm of FDI (Dunning)
• Owners...
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Government Policy and FDI
• The radical vie...
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Host Country Effects of FDI
• Benefits
– Re...
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Home Country Effects of FDI
• Benefits
– BO...
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Government Policy and FDI
• Home country
– ...
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Decision Framework for FDI
Are transportati...
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Free Ebooks Download
Mba Ebooks
By Edhole
M...
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Mba Ebooks ! Edhole

  1. 1. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Free Ebooks Download Mba Ebooks By Edhole Mba ebooks Free ebooks download http://ebooks.edhole.com
  2. 2. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. http://ebooks.edhole.com
  3. 3. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. CHAPTER Foreign Direct Investment 66 http://ebooks.edhole.com
  4. 4. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Key Issues • Why is FDI increasing? • Why do firms choose FDI over exporting or licensing to enter a foreign market? • Why are certain locations attractive for FDI? • How does political ideology influence government policy over FDI? • From a host or source country perspective, what are FDI’s costs and benefits? • How can governments restrict/encourage FDI? http://ebooks.edhole.com
  5. 5. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Foreign Direct Investment • Foreign direct investment (FDI) happens when a firm invests directly in facilities in a foreign country • A firm that engages in FDI becomes a multinational enterprise (MNE) – Multinational = “more than one country” • Factors which influence FDI are related to factors that stimulate trade across national borders Slide 6-1 http://ebooks.edhole.com
  6. 6. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Foreign Direct Investment • Involves ownership of entity abroad for – production – Marketing/service – R&D – Raw materials or other resource access • Parent has direct managerial control – The degree of direct managerial control depends on the extent of ownership of the foreign entity and on other contractual terms of the FDI – No managerial involvement = portfolio investment Slide 6-2 http://ebooks.edhole.com
  7. 7. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. FDI Growth in the World Economy • FDI Outflow of $25 billion in 1975 increased to $1.3 trillion in 2000 • FDI flow accelerated more than world trade (x 5 and x 1.8 respectively) • FDI Flow from all countries increased 1000%, trade 91%, world output 27% from 1984 to 1998 • FDI Stock increased to $3.5 trillion by 1997 • 63,000 parent firms with 690,000 foreign affiliates produced $14 trillion sales, almost twice global exports • FDI growing faster than world trade – Political risk issues – Economic reason issues – Globalization Slide 6-3 http://ebooks.edhole.com
  8. 8. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Direction and Source of FDI • Historically, FDI flow was to developed countries from other developed countries – Much of this to the US • Since 1985 there has been an increase of FDI towards developing countries – Much to the emerging Asian and Latin America economies – Africa lagging • Through 1970s US led in FDI outflows – 1985-1990 Japan 1st, UK 2nd, US 3rd – Effect of ¥ increase in value • In 2000 the USA received 21.6% of world FDI; the EU received 48.7% Slide 6-4 http://ebooks.edhole.com
  9. 9. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Forms of FDI • FDI forms – Purchase of existing assets • Quick entry, local market know-how, local financing may be possible, eliminate competitor, buying problems – New investment • No local entity exists or is available for sale, local financial incentives may encourage, no inherited problems, long lead time to generation of sales or other desired outcome – Participation in an international joint-venture • Shared ownership with local and/or other non-local partner Slide 6-5 http://ebooks.edhole.com
  10. 10. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Alternative Modes of Market Entry • FDI – FDI - 100% ownership – FDI < 100% ownership, International Joint Venture • Majority, Equal Share, Minority Participation • Strategic Alliances (non-equity) • Franchising • Licensing • Exports – Direct vs Indirect Slide 6-6 http://ebooks.edhole.com
  11. 11. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Why FDI? • FDI over exporting – High transportation costs, trade barriers • FDI over licensing or franchising – Need to retain strategic control – Need to protect technological know-how – Capabilities not suitable for licensing/franchising Slide 6-7 http://ebooks.edhole.com
  12. 12. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Pattern of FDI • Follow main competitors – Oligopolistic industries – Interdependence of the few major competitors forces immediate strategic responses • International product life-cycle (Vernon, see Ch. 4) • Eclectic paradigm of FDI (John Dunning) – Combines ownership specific, location specific, and internalization specific advantages that drive FDI choice over a decision to enter through licensing or exports Slide 6-8 http://ebooks.edhole.com
  13. 13. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Eclectic Paradigm of FDI (Dunning) • Ownership advantage: creates a monopolistic advantage which can be used to prevail in markets abroad – Unique ownership advantage protected through ownership – e.g., Brand, technology, economies of scale, management know-how • Location advantage: the FDI destination local market must offer factors (land, capital, know-how, cost/quality of labor, economies of scale) such that it is advantageous for the firm to locate its investment there (link to trade theory) • Internalization advantage: transaction costs of an arms- length relationship --licensing, exports-- higher than managing the activity within the MNE’s boundaries Dunning, John H. (1980). “Towards an eclectic theory of international production: Some empirical tests.” Journal of International Business Studies 11(2): 9-31 Slide 6-9 http://ebooks.edhole.com
  14. 14. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Government Policy and FDI • The radical view: inbound FDI harmful; MNEs – Are an instrument of imperialist domination – Exploit host to the advantage of home country – Extract profits from host country; give nothing back – Keep LDCs backward/dependent for investment, technology and jobs • The free market view: FDI should be encouraged – Adam Smith, Ricardo, et al: international production should be distributed according to comparative advantage – The MNE increases the world economy efficiency because it brings to bear unique ownership advantages on the local economy’s comparative advantages Slide 6-10 http://ebooks.edhole.com
  15. 15. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Host Country Effects of FDI • Benefits – Resource -transfer – Employment – Balance-of-payment (BOP) • Import substitution • Source of export increase • Costs – Adverse effects on the BOP • Capital inflow followed by capital outflow + profits • Production input importation – Threat to national sovereignty and autonomy • Loss of economic independence Slide 6-11 http://ebooks.edhole.com
  16. 16. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Home Country Effects of FDI • Benefits – BOP current account adversely affected by inward flow of foreign earnings – Positive employment effect from increased exports of raw materials / assemblies to the overseas subsidiary – Repatriation of skills and know-how • Costs – BOP trade position is negatively affected (lower finished goods exports) – Loss of employment to overseas market Slide 6-12 http://ebooks.edhole.com
  17. 17. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Government Policy and FDI • Home country – Outward FDI encouragement • Risk reduction policies (financing, insurance, tax incentives) – Outward FDI restrictions • National security, BOP • Host country – Inward FDI encouragement • Investment incentives • Job creation incentives – Inward FDI restrictions • Ownership extent restrictions (national security; local nationals can safeguard host country’s interests Slide 6-13 http://ebooks.edhole.com
  18. 18. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Decision Framework for FDI Are transportation costs high? Is know-how easy to license? Tight control over foreign ops required? Is know-how valuable and is protection possible? Export FDI FDI FDI License No No Yes Yes No No Ye s Ye s Import Barriers? No Yes Slide 6-14 http://ebooks.edhole.com
  19. 19. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Free Ebooks Download Mba Ebooks By Edhole Mba ebooks Free ebooks download http://ebooks.edhole.com

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