Your SlideShare is downloading. ×
0
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
FDI
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

FDI

12,980

Published on

Published in: Economy & Finance, Business
0 Comments
7 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
12,980
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
593
Comments
0
Likes
7
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. Foreign Direct Investment
    GEETA SHIROMANI
    ASSOCIATE PROFESSOR
  • 2. Foreign Direct Investment
    • Why is FDI increasing in the world economy?
    • 3. Why do firms often prefer FDI to other market entry strategies?
    • 4. Why are certain locations favored for FDI?
    • 5. How does political ideology affect government FDI policy?
    • 6. What are key FDI related costs and benefits for receiving and source countries?
  • Foreign Direct Investment
    • Involves ownership of entity abroad for
    production
    Marketing/service
    R&D
    Access of raw materials or other resource
    • Parent has direct managerial control
    Depending on its extent of ownership and
    On other contractual terms of the FDI
    • No managerial involvement = portfolio investment
  • FDI - Flow versus stock
    FDI occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country
    Flow: Amount of FDI over a period of time (one year)
    Stock: Total accumulated value of foreign owned assets at a given point of time
    FDI is not the investment by individuals, firms or public bodies in foreign financial instruments
  • 7. Why is FDI important ?
    Firms want a presence in foreign markets
    Firms want control over growth of these foreign markets
    To gain first mover advantages
    To ward off competitors
    To determine locations, advertising and other related strategic decisions in the firm’s interest
  • 8. Trends in FDI
    Flow and stock increased in the last 30 years
    In spite of decline of trade barriers, FDI has grown more rapidly than world trade because:
    Businesses fear protectionist pressures
    FDI is seen as a way of circumventing trade barriers
    Dramatic political and economic changes in many parts of the world
    Globalization of the world economy has raised the vision of firms who now see the entire world as their market
  • 9. FDI Growth in the World Economy
    • FDI Outflow:$35 billion in ‘75 to $1.3 trillion in ‘00 to $620 billion in ‘04
    • 10. FDI Flow (from all countries): from ‘92 to ‘04 up 260%, compared to trade up 100% and world output up 32%
    • 11. FDI Stock:$3.5 trillion by ‘97 to more than $ 8.1 trillion in ‘03
    • 12. In ‘03:
    61,000 MNEs had:
    9,00,000 foreign affiliates
    54 million employees
    $17.6 trillion in global sales
    $9.2 trillions global exports
    • Conclusion: FDI flow growing faster than world trade and world output
  • FDI- inflows & outflows
  • 13. Direction and Source of FDI
    • Most FDI flow has been to developed countries from developed countries
    Much to the US from EU, Japan
    • FDI increase to developing countries since ‘85
    Much to the emerging Asian and Latin America economies
    Africa lagging
  • 14. Inflows in developed vs. developing countries
  • 15. Outflows in developed vs. developing countries
  • 16. FDI trends: 2001-2002
    The value of FDI slumped almost 60 percent in 2001-2002
    Slowdown in world economy
    Heightened geopolitical uncertainty since September 11, 2001
    Bursting of the stock market bubble in the US
  • 17. Developed countries- FDI outflows
  • 18. Top 10 sources of FDI outflows, 2005-06
  • 19. Types of FDI
  • 20. Types of FDI
  • 21. Types of FDI
  • 22. Horizontal FDI:
    Investment in the same industry abroad as a firm operates in at home
    Vertical FDI:
    Backward Vertical FDI: investment in an industry abroad that provides inputs for the firm’s domestic production processes eg: oil refining, Royal Dutch/shell, British petroleum etc.)
    Forward Vertical FDI: investment in which an industry abroad sells the outputs of the firm’s domestic production processes eg: Volkswagon in U.S.
    Types of FDI
  • 23. Types of FDI
  • 24. Types of FDI: By Motive
    Resources seeking - looking for resources at a lower real cost.
    Market seeking - secure market share and sales growth in target foreign market.
    Efficiency seeking - seeks to establish efficient structure through useful factors, cultures, policies, or markets.
    Strategic asset seeking - seeks to acquire assets in foreign firms that promote corporate long term objectives.
  • 25. Types of FDI
  • 26. Green-field Ventures
    • A Greenfield Investment is the investment in a manufacturing, office, or other physical company-related structure or group of structures in an area where no previous facilities exist.
    • 27. The name comes from the idea of building a facility literally on a "green" field, such as farmland or a forest.
    • 28. Green field operation:
    • 29. Mostly in developing nations
  • Mergers & Acquisitions
    • Mergers and acquisitions:
    • 30. Quicker to execute.
    • 31. Foreign firms have valuable strategic assets
    • 32. Believe they can increase the efficiency of the acquired firm
    • 33. More prevalent in developed nations
  • FDI when and why?
    Transportation costs 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)
  • 34. Pattern of FDI Explanations
    • Eclectic paradigm of FDI (John Dunning)
    Combines ownership specific, location specific, and internalization specific advantages
    Explains FDI decision over a decision to enter through licensing or exports
  • 35. Pattern of FDI Explanations
    Eclectic Paradigm of FDI (Dunning)
    • Ownership advantage: creates a monopolistic advantage to be used in markets abroad
    Unique ownership advantage protected through ownership
    e.g., Brand, technology, economies of scale, management know-how
  • 36. Pattern of FDI Explanations
    Eclectic Paradigm of FDI (Dunning)
    • Location advantage: the FDI destination market must offer factors (land, capital, know-how, cost/quality of labor, economies of scale) that are advantageous for the firm to locate its investment there (link to trade theory)
  • Pattern of FDI Explanations
    Eclectic Paradigm of FDI (Dunning)
    • Internalization advantage: transaction costs of an arms-length relationship --licensing, exports-- higher than managing the activity within the MNC’s boundaries
  • 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
    • Follow few main competitors
    Immediate strategic responses
  • 37. Decision framework
    Low
    How high are transportation costs and tariffs?
    Export
    High
    No
    Is know-how amenable to licensing?
    FDI
    Yes
    Is tight control over foreign operation required?
    Yes
    FDI
    No
    No
    Can know-how be protected by licensing contract?
    FDI
    Yes
    Then license
  • 38. Factors affecting investment decisions
    Costs
    Barriers
    Control
    Incentives like tax concessions, subsidies etc
    Location advantages
    Essential Criteria
    Access to skilled and educated workforce
    Proximity to world class research institutions
    Quality of life
    Access to venture capital
  • 39. Factors affecting investment decisions
    Important Criteria
    Reasonable costs of doing business
    Established technology presence
    Available bandwidth and adequate infrastructure
    Favorable business climate and regulatory environment
    Desirable Criteria
    Presence of suppliers and partners
    Availability of community incentives
  • 40. Political Ideology and FDI
    Radical
    View
    Pragmatic
    Nationalism
    Free
    Market
  • 41. 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
  • 42. The Radical View
    By the end of the 1980s radical view was in retreat
    Collapse of communism
    Bad economic performance of countries that embraced the radical view
    Strong economic performance of some countries that embraced capitalism rather than the radical view
  • 43. The Free Market View
    • Adam Smith, Ricardo: international production should be distributed per national comparative advantage
    Nations specialize in goods and services that they can produce most efficiently
    Resource transfers benefit and strengthen the host country
    Pro-investment changes in laws and growth of bilateral agreements attest to strength of free market view
    But all countries impose some restrictions on FDI
  • 44. Pragmatic Nationalism
    FDI has benefits and costs
    Allow FDI if benefits outweigh costs
    Block FDI that harms indigenous industry
    Encourage FDI that is in national interest
    Tax breaks
    Subsidies
    But who can predict which FDI is in national interest?
    Regulations open opportunity for favoritism
  • 45. Pragmatic Nationalism
    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 marketapproach, was even more successful
  • 46. The Benefits of FDI to Host countries
    Resource transfer effects
    Capital
    Technology
    Management
    Employment effects
    Effect on competition & economic growth
  • 47. The Benefits of FDI to Host countries
    Balance of payment effects
    Initial capital inflows
    Import substitution
    Export of goods & services to other countries
    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
  • 48. Costs of FDI to the Host Country
    Adverse effects on competition
    Adverse effects on balance of payment
    Outflow of earnings from foreign subsidiary to its parent company
    Imports of raw material results into adverse effect on current account
    Adverse effect on national sovereignty and Autonomy
  • 49. Benefits of FDI to Home country
    Positive effect on Balance of payment due to inward flow of foreign earnings & demand of home-country exports of capital-equipments
    Employment effects due to demand of home country products
    MNE’s learn valuable skills from foreign markets that can be transferred back to the home country
  • 50. Costs of FDI to Home countries
    Adverse effect on BOP account:
    Adverse effect on capital account due to outflow of capital
    Adverse effect on current account due to imports from low production locations in foreign countries
    Adverse effect on current account due to export substitution
    Reduced home country employment
  • 51. Government Policy and FDI
    • Home country
    Outward FDI encouragement
    Risk reduction policies (financing, insurance, tax incentives)
    Outward FDI restrictions
    National security, BOP
  • 52. Government Policy and FDI
    • 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
  • 53. International institutions & the liberalization of FDI
    WTO (world trade organization)
    OECD (Organization for economic cooperation & development)

×