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Fourth Edition
International
Business
CHAPTER 6
Foreign Direct Investment
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-3
Chapter Focus
This chapter seeks to ide...
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-4
Foreign Direct Investment
FDI occurs wh...
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-5
Foreign Direct Investment
FDI occurs wh...
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-6
Foreign Direct Investment
FDI takes two...
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-7
Foreign Direct Investment
FDI takes two...
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-8
Foreign Direct Investment
NOTE:
Investi...
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-9
Flow and Stock of FDI
Flow:
The amount ...
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-10
FDI Outflows
1982-2000
0
200
400
600
8...
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-11
FDI Flows by Region
0
100
200
300
400
...
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-12
Reasons for FDI Growth
FDI circumvents...
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-13
Reasons for FDI Growth
FDI circumvents...
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-14
FDI into Developed and Developing
Nati...
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-15
FDI Outflows by
Selected Countries, 19...
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-16
The Form of FDI: Acquisitions versus
G...
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-17
FDI and Risk
FDI is expensive and risk...
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-18
Horizontal FDI and Factor
Consideratio...
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-19
Horizontal FDI and Factor
Consideratio...
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-20
Horizontal FDI and Factor
Consideratio...
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-21
Vertical FDI
Two forms:
Backward: Prov...
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-22
Why Do Companies Engage in FDI?
Strate...
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-23
Impediments to the Sale of Know-
how
I...
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
6-24
A Decision Framework
Figure 6.6
Yes
Ho...
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Chapter 4 part 2(Foreign Direct Investment)

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Transcript of "Chapter 4 part 2(Foreign Direct Investment)"

  1. 1. Fourth Edition International Business
  2. 2. CHAPTER 6 Foreign Direct Investment
  3. 3. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-3 Chapter Focus This chapter seeks to identify the economic rationale that underlies Foreign Direct Investment. For example, why do some firms prefer FDI to exporting or licensing. Is the need for control, part of the answer?
  4. 4. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-4 Foreign Direct Investment FDI occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country. Starbucks invested $10m in Japan in 1996.
  5. 5. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-5 Foreign Direct Investment FDI occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country. Once a firm undertakes FDI, it becomes a multinational enterprise (multinational = more than one country).
  6. 6. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-6 Foreign Direct Investment FDI takes two forms: Green-field investment: establishing a wholly new operation in a foreign country. Example ; starbucks
  7. 7. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-7 Foreign Direct Investment FDI takes two forms: Green-field investment: establishing a wholly new operation in a foreign country. Acquiring or merging with an existing firm in the foreign country. Example: Rank-Xerox, Grameen-Danone
  8. 8. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-8 Foreign Direct Investment NOTE: Investing in foreign financial instruments (Portfolio Investment like govt. bond, foreign stocks) IS NOT FDI.
  9. 9. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-9 Flow and Stock of FDI Flow: The amount of FDI undertaken over a given period of time (usually one year). Stock: Total accumulated value of foreign-owned assets at a given time.
  10. 10. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-10 FDI Outflows 1982-2000 0 200 400 600 800 1000 1200 1400 82- 86 92 94 96 98 2000 $ Billions Figure 6.1
  11. 11. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-11 FDI Flows by Region 0 100 200 300 400 500 600 90 92 94 96 98 2000 Value Exports World GDP World FDI Figure 6.2 Index
  12. 12. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-12 Reasons for FDI Growth FDI circumvents potential future trade barriers. Many firms preferred the US for FDI because of the hostile trade attitude shown by the US
  13. 13. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-13 Reasons for FDI Growth FDI circumvents potential future trade barriers. Dramatic political and economic changes occurring in developing countries.(Opening up the economy in India , China, Singapore,etc )
  14. 14. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-14 FDI into Developed and Developing Nations: 1990-2000 0 200 400 600 800 1000 1200 94 95 96 97 98 99 2000 Dev Nations Devg. Nations W. Europe N. Amer. Asia L. Amer. $Billion Figure 6.3
  15. 15. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-15 FDI Outflows by Selected Countries, 1994-1999 0 50 100 150 200 250 300 1994 1995 1996 1997 1998 1999 2000 U.S. U.K. Netherlands Germany Japan Spain France Figure 6.5
  16. 16. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-16 The Form of FDI: Acquisitions versus Greed-Fields The majority of investments is in the form of mergers & acquisitions: Represents about 77% of all flows in developed countries. Represent about 33% of all flows in developing countries. Fewer target firms to acquire. Why the preference for mergers & acquisitions? Quicker to execute. Foreign firms have valuable strategic assets. Believe they can increase the efficiency of the acquired firm.
  17. 17. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-17 FDI and Risk FDI is expensive and risky compared to exporting or licensing: Costs of establishing facilities. Problems with doing business in a different Culture. But still FDI occurs . Why???
  18. 18. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-18 Horizontal FDI and Factor Considerations Horizontal FDI: when a firm invests in the same industry as in the home country Transportation Costs: High/low value to weight impacts costs. If the product is low in value-to-weight ration like soft drinks Or cement , then transportation costs add to the costs. Here , FDI is a better option. If the product has a high value-to-weight ration then exporting Is a better option unless there are other factors to consider.
  19. 19. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-19 Horizontal FDI and Factor Considerations Market Imperfections (Internalization Theory): Factors that inhibit markets from working perfectly. This includes (1) governments impeding the free flow of products between nations(Toyota), and (2) impediments to the sale of know-how.(RCA, Matsushita & Sony) Strategic Behavior: Concentrated industries (oligopoly) tend to mimic each other’s moves. Where there is multipoint competition, competing firms match each other’s moves to keep the competitor in check. Example: Orascom Vs Telenor
  20. 20. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-20 Horizontal FDI and Factor Considerations The Product Life Cycle: Suggests that foreign market demand leads to FDI, probably not true and therefore is not a good predictor of FDI. Location-Specific Advantages: Advantages that arise from using resource endowments or assets tied to a particular location (Dunning - eclectic paradigm) Example: Silicon Valley.
  21. 21. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-21 Vertical FDI Two forms: Backward: Providing inputs (raw materials, parts) for a firm’s domestic production processes. Forward: An industry abroad sells the outputs of the firm’s domestic production processes.
  22. 22. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-22 Why Do Companies Engage in FDI? Strategic Behavior: Can raise entry barriers or shut out new competitors, or circumvent barriers established by companies already doing business in the foreign country. Alcoa and Alcan went to T&T to gain control over bauxite. Market Imperfections: Need to overcome lack of know- how or the firm must invest in specialized assets whose value depends on inputs provided by a foreign supplier.
  23. 23. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-23 Impediments to the Sale of Know- how Impediments to the sale of know how Risk giving away know-how to competitors (BP & Shell) Licensing implies low control over foreign entity(Kodak Vs Fuji) Know-how not amenable to licensing(Starbu cks, P& G)
  24. 24. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6-24 A Decision Framework Figure 6.6 Yes How high are transportation costs and tariffs? Is know-how amenable to licensing? Is tight control over foreign operation required? Can know-how be protected by licensing contract? Then license ExportExport Horizontal FDIHorizontal FDI Horizontal FDIHorizontal FDI Horizontal FDIHorizontal FDI High Yes No Low No Yes No
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