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IBM unit-06 (Foreign direct investment)
This document contains information about international business management education and foreign direct investment (FDI). It discusses: 1) The importance of knowledge about international business for management graduates who may find themselves working abroad. 2) Various topics covered in an international business management course, including globalization, trade, technology, economics, politics, and business strategy. 3) Different types, motives, and modes of FDI such as resource-seeking, market-seeking, and efficiency-seeking FDI as well as greenfield investments, mergers and acquisitions, and joint ventures.
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IBM unit-06 (Foreign direct investment)
- 1. 07/06/10 1 By : Prof.Amit Kumar
- 2. 07/06/10 2 “A studentpursuing management education from IILM- Graduate School of Management, for example may find himself or herself placed in a firm located in a totally different country. Knowledge about international business keeps the youngster mentally prepared to accept assignment in an alien environment. Forewarning is definitely forearming, for the fresh management graduate”. IILM-GSM Importance of this course Global Business Management
- 3. 07/06/10 3 Course: InternationalBusiness Management 1. Globalization 2. Global Trade & Theory 3. Global Technological Environment 4. Global Economic Environment 5. Global Political-Legal Environment 6. Foreign Direct Investments 7. Regional Economic Integration 8. Strategy and Structure of International Business IILM-GSM Global Business Management
- 4. 26/07/10 4 IILM-GSM Global BusinessManagement
- 5. 26/07/10 5 Contents • Natureof FDI, Why FDI? • Forms of FDI, Modes of FDI Entry • Theories of FDI • Measures to Attract FDI • Case-Study: ‘L & T Saga Continue’ • Presentation: Factors Influencing FDI, New Investment Policy(09-14) • Case-Study: ‘Honda in North America’ IILM-GSM Global Business Management Foreign Direct Investment
- 6. 26/07/10 6 In simpleterms, FDI refers to the purchase of a significant number of shares of a foreign company in order to gain certain degree of management control. The core of FDI are the international flows of capital. What share of equity bestows management control in a foreign company? Introduction IILM-GSM Global Business Management Foreign Direct Investment
- 7. 26/07/10 7 • Countriesset different thresholds at which they classify an international capital flow as FDI. • Most governments set the threshold at anywhere from 10 to 25 percent of equity ownership in a company abroad (In US, it is 10 percent). • In contrast, an investment that does not involve obtaining a degree of control in a foreign company is called portfolio investment. Introduction IILM-GSM Global Business Management Foreign Direct Investment
- 8. 26/07/10 8 The UN’sWorld Investment Report goes beyond equity investment. According to the Report, FDI includes three components, 1. Equity capital 2. Reinvested earnings 3. Intra-company loans Nature of FDI IILM-GSM Global Business Management Foreign Direct Investment
- 9. 26/07/10 9 FDI inflowin India said to include the following: 1. Reserve Bank of India’s automatic approval route for equity holding up to 51 percent. 2. FIB’s discretionary approval route for larger projects with equity holding greater than 51 %. 3. Acquisition of shares (since 1996). 4. RBI’s non-resident Indian (NRI) schemes, and 5. External commercial borrowings (ADR/GDR route). Indian FDI IILM-GSM Global Business Management Foreign Direct Investment
- 10. 26/07/10 10 • Indiandefinition of FDI differs from that of the IMF, as well as of the World Investment Report. • IMF’s definition includes external commercial borrowings, reinvested earnings and subordinated debts, while the World Investment Report excludes external commercial borrowings. Nature of FDI IILM-GSM Global Business Management Foreign Direct Investment
- 11. 26/07/10 11 Why docountries want FDI? There are strong reasons why MNCs are welcomed to invest in foreign countries. Why FDI? IILM-GSM Global Business Management Foreign Direct Investment
- 12. 26/07/10 12 Why FDI? IILM-GSM GlobalBusiness Management Foreign Direct Investment 1. Filling the gap between domestically available Supplies of savings, Foreign exchange earnings, Government revenue and Human capital skills (management, technology) and the desired level of these resources necessary to achieve the development targets.
- 13. 26/07/10 13 Why FDI? IILM-GSM GlobalBusiness Management Foreign Direct Investment 2. Factories set up by MNCs act as nuclei of growth. An industrial enterprise established by a foreign company gives birth to several other enterprises which supply inputs to current company. It is not as if only a few surrounding firms are the beneficiaries. An entire industry, steel for example, may get a boost. It is estimated that every dollar of FDI increases domestic investment by 80 percent.
- 14. 26/07/10 14 Why FDI? IILM-GSM GlobalBusiness Management Foreign Direct Investment 3. FDI can generate healthy competition in the recipient countries. When FDI assumes the form of green field projects, the results is the creation of new enterprises, adding to the number of players in the market. Intense competition enhances consumer choice, trends to bring down prices and boost economic welfare of the consumers.
- 15. 26/07/10 15 Why FDI? IILM-GSM GlobalBusiness Management Foreign Direct Investment 3. FDI can generate healthy competition in the recipient countries. But when MNCs buy out popular local Brands/ companies, benefits from expected competition will not result. For example, Such acquisition do not add to any additional benefits to economy.
- 16. 26/07/10 16 Why FDI? IILM-GSM GlobalBusiness Management Foreign Direct Investment 4. Too often, location advantages attract FDI. Hyundai, automobile giant (South Korea), has chosen Chennai for its new car manufacturing plant. • Skilled labour at low wages, • Location of auto parts manufacturers such as Wheels India, Brakes India, Sundaram Fasteners/Brakes, Bimetal Bearings, and India Pistons in and around Chennai, • Guaranteed power supply, Cheap land and • Proximity to sea port have attracted the plant to the capital city of Tamil Nadu.
- 17. 26/07/10 17 4. Toooften, location advantages attract FDI. France has been the target of much MNC activity. Daimler-Chrysler has recently built a new factory in France because of its faith in the worker’s productivity and work ethics. This explains the FDI undertake by many of the world’s oil companies, which had to invest where oil was located. Why FDI? IILM-GSM Global Business Management Foreign Direct Investment
- 18. 26/07/10 18 Why FDI? IILM-GSM GlobalBusiness Management Foreign Direct Investment 5. FDI often depends on a country’s political attempts to reduce security risks. For example: Another move behind FDI…During the 1980s, the US government instituted various incentives to increase the profitability of US investments in Caribbean countries that were unfriendly to Cuba’s Castro regime.
- 19. 26/07/10 19 Why FDI? IILM-GSM GlobalBusiness Management Foreign Direct Investment 5. FDI often depends on a country’s political attempts to reduce security risks. For example: US wanted to strengthen the economies of those friendly nations through growth of the FDI and make it difficult for unfriendly leftist govt. to gain control. With the end of Civil war, US ended investment incentives in Caribbean region, and much investment was diverted to Mexico because of NAFTA.
- 20. 26/07/10 20 Why FDI? IILM-GSM GlobalBusiness Management Foreign Direct Investment 5. FDI often depends on a country’s political attempts to reduce security risks. For example: Chinese state-owned petroleum companies have been investing abroad so as to minimize dependence on foreign companies for oil supplies. The move may also help China hold down prices on the petroleum it receives.
- 21. 26/07/10 21 6. Itis the poor countries that deserve FDI more than any others. How to alleviate poverty? Aid from international institutions and rich countries can be a temporary measure. Economic growth ushered in by increased investment can be a permanent solution. Why FDI? IILM-GSM Global Business Management Foreign Direct Investment
- 22. 26/07/10 22 6. Itis the poor countries that deserve FDI more than any others. ‘Many of the poorest countries are simply being bypassed by globalization, and the promises of the rich countries are not being fulfilled. We need more globalization that reaches poor countries. He added that FDI would be the strongest engine of growth in the developing world’. Why FDI? IILM-GSM Global Business Management Foreign Direct Investment
- 23. 26/07/10 23 TYPES OFFDI NATURE OF BUSINESS MOTIVE BASED VIEW ASSET- BASED VIEW ASSET AUGMENTING ASSET ACQUIRING GREENFIELD INVESTMENT MERGER & ACQUISITION BROWNFIELD Horizontal Vertical Conglomerate Resource Seeking Market Seeking Efficiency Seeking Strategic Asset Seeking IILM-GSM Global Business Management Foreign Direct Investment
- 24. 26/07/10 24 TYPES OFFDI NATURE OF BUSINESS Horizontal Vertical Conglomerate • This FDI said to take place when a firm invests abroad in the same industry in which it operates in the home country. • It represents, a geographical diversification of the MNE’s established domestic product line. • Most Japanese MNEs believe that this approach enables them to share experience, resources, and knowledge already developed at home, thus reducing risk. • The acquisition of Ranbaxy, a leading Indian pharmaceutical MNE, by Japan’s Daiichi Sankyo is an example of horizontal FDI. IILM-GSM Global Business Management Foreign Direct Investment
- 25. 26/07/10 25 TYPES OFFDI NATURE OF BUSINESS Horizontal Vertical Conglomerate • This FDI refers to investment in activities along the firm’s existing supply chain to avail the benefits of vertical integration. • It occurs when the MNE enters a foreign country to produce intermediate goods that are intended for use as input in its home country production process (backward vertical FDI), or to market its homemade products overseas (forward FDI). • ONGC, which is in the business of petroleum refining in India, has purchased oil fields in South Africa. • When Volkswagen entered the US market it acquired a large number of dealers rather than distribute its products through independent US dealers. IILM-GSM Global Business Management Foreign Direct Investment
- 26. 26/07/10 26 TYPES OFFDI NATURE OF BUSINESS Horizontal Vertical Conglomerate • If FDI abroad is to manufacture products not manufactured by the parent company at home, it is called conglomerate FDI. • Hong Kong MNEs often set up foreign subsidiaries or acquire local firms in mainland China to manufacture goods that are unrelated to the parent company’s product portfolio. • The main purpose is to seize emerging market opportunities. “ Horizontal FDI is used by both developed and developing country MNEs. It enables MNE to quickly establish its competitive advantage in the host country. Conglomerate FDI involves more difficulties”. IILM-GSM Global Business Management Foreign Direct Investment
- 27. 26/07/10 27 TYPES OFFDI MOTIVE BASED VIEW Resource Seeking Market Seeking Efficiency Seeking Strategic Asset Seeking • This FDI attempts to acquire particular resources at a lower real cost than could be obtained in the home country. • Resource-seeking FDI occurs when there is need to acquire or secure the supply of raw materials and energy sources in short supply at home. • Mainly classified into three groups: 1. Those seeking physical resources. 2. Those looking for plentiful suppliers of cheap and/or skilled labor. 3. Those seeking technological, organizational and managerial skills. IILM-GSM Global Business Management Foreign Direct Investment
- 28. 26/07/10 28 TYPES OFFDI MOTIVE BASED VIEW Resource Seeking Market Seeking Efficiency Seeking Strategic Asset Seeking • Market-seeking FDI attempts to secure market share and sales growth in the target foreign market. • Apart from this, the reasons for Market-seeking FDI includes: 1. The firm’s main suppliers or customers may have set up foreign producing facilities abroad and the firm needs to follow them overseas; 2. The firm may consider it necessary, as part of its global production and marketing strategy, to maintain a physical presence in the leading market served by its competitors. IILM-GSM Global Business Management Foreign Direct Investment
- 29. 26/07/10 29 TYPES OFFDI MOTIVE BASED VIEW Resource Seeking Market Seeking Efficiency Seeking Strategic Asset Seeking • Efficiency-seeking FDI aims to take advantage of different factor endowments, economic systems, policies and market structures to concentrate production in a limited number of locations and reduce cost of operation. IILM-GSM Global Business Management Foreign Direct Investment
- 30. 26/07/10 30 TYPES OFFDI MOTIVE BASED VIEW Resource Seeking Market Seeking Efficiency Seeking Strategic Asset Seeking • This FDI attempts to acquire the assets of foreign firms so as to promote their long-term strategic objectives, especially advancing their international competitiveness. • MNEs with this intension often establish global strategic alliances or acquire local firms. • Procter & Gamble has sales in over 140 countries and on the ground operations in over 70 countries. Its strategic aims behind product and geographical diversifications include better resources, larger markets and higher efficiency. IILM-GSM Global Business Management Foreign Direct Investment
- 31. 26/07/10 31 TYPES OFFDI ASSET-BASED VIEW ASSET AGUMENTING ASSET ACQUIRING GREENFIELD INVESTMENT MERGER & ACQUISITION BROWNFIELD • Greenfield investment is an investment process which results in the creation of new assets in the host country. • M & A as a form of investment may either involve the outright purchase of an existing company or the amalgamation of two existing companies. • Brownfield investment is a combination of Greenfield investment and M&A. It denotes an investment where an existing firm acquires another firm and infuses it with fresh capital and assets after the acquisition. IILM-GSM Global Business Management Foreign Direct Investment
- 32. 26/07/10 32 Modes ofFDI Entry BRANCH OFFICE Co-Operative Joint Venture Equity Joint Venture SUBSIDIARY JOINT VENTURE(GSA) Greenfield Investment Merger & Acquisition UMBRELLA HOLDING COMPANY IILM-GSM Global Business Management Foreign Direct Investment
- 33. 26/07/10 33 Modes ofFDI Entry BRANCH OFFICE A branch office is a foreign entity in a host country in which it is not incorporated but exists as an extension of the parent and is legally constituted as a branch. They are entitled to run businesses within a specified scope or location. Corporate law in many countries allows foreign companies to open branches that engage in production and operating activities. IILM-GSM Global Business Management Foreign Direct Investment
- 34. 26/07/10 34 Modes ofFDI Entry BRANCH OFFICE • Branch offices are particularly utilized by transnational banks, law firms and accounting or consulting companies. • Britain’s Standard Bank had 1,000 branches in South Africa in 2001, and was ranked the largest foreign bank in that country. • Branch offices may offer a simple means for establishing or expanding a presence in a target country, but since they do not have legal-person status, the foreign parent company is liable if civil charges are brought against the branch. IILM-GSM Global Business Management Foreign Direct Investment
- 35. 26/07/10 35 Modes ofFDI Entry JOINT VENTURES • These can take the form of either cooperative (contractual) Joint Venture or Equity Joint Ventures. • These are gaining importance worldwide as global competition intensifies for access to market, products, and technologies. • Most large MNCs such as Motorola, Siemens, Sony, GM, Daimler, and Toyota have built such alliances. • In Japan alone, Royal Dutch Shell has established more than 30 joint ventures. IILM-GSM Global Business Management Foreign Direct Investment
- 36. 26/07/10 36 Modes ofFDI Entry CO-OPERATIVE JOINT VENTURE • It is a collaborative agreement whereby profits and other responsibilities are assigned to each party according to a contract. These are not necessarily according to each partner’s percentage of the total investment. • Many cooperative programs today involve joint activities without the creation of new corporate entity. Like, Research partnership, co-production, joint marketing, long-term supply agreement. IILM-GSM Global Business Management Foreign Direct Investment
- 37. 26/07/10 37 Modes ofFDI Entry CO-OPERATIVE JOINT VENTURE Boeing entered in China in the late 1970s through a co- production agreement with the Xian Aircraft Manufacturing Company which co-produced 737 vertical fins, stabilizers and 757 cargo doors. • Co-operative Joint venture normally take the form of a document (agreement), whereas equity joint venture take the form of new entity. IILM-GSM Global Business Management Foreign Direct Investment
- 38. 26/07/10 38 Modes ofFDI Entry EQUITY JOINT VENTURE • The most common foreign entry for MNCs has been through equity joint ventures, establishing a new entity that is jointly owned and managed by two or more parent firms in different countries. • To set up an equity joint venture, each partner contributes cash, facilities, equipment, materials, intellectual property rights, labor or land use rights. IILM-GSM Global Business Management Foreign Direct Investment
- 39. 26/07/10 39 Modes ofFDI Entry EQUITY JOINT VENTURE According to JV laws in most countries, a foreign investor’s share must exceed a certain threshold of the total equity (25% in many nations). However, in government controlled or institutionally restricted sectors, foreign investment is often restricted with respect to equity arrangement. IILM-GSM Global Business Management Foreign Direct Investment
- 40. 26/07/10 40 Modes ofFDI Entry UMBRELLA HOLDING COMPANY • Umbrella holding company is an investment company that unites the firm’s existing investments such as branch offices, joint ventures, and wholly-owned subsidiaries under one umbrella so as to combine sales, procurement, manufacturing, training and maintenance within the host country. IILM-GSM Global Business Management Foreign Direct Investment
- 41. 26/07/10 41 Modes ofFDI Entry UMBRELLA HOLDING COMPANY • DuPont (as MNE that are multidivisional) faced the coordination problem in China. Some joint venture there belong to, and are controlled only by, its pharmaceutical division, whereas others belong to its plastic or petroleum divisions. In 1989 it established DuPont China Ltd as its holding company to unite and integrate existing investments. IILM-GSM Global Business Management Foreign Direct Investment
- 42. 26/07/10 42 Modes ofFDI Entry UMBRELLA HOLDING COMPANY “ To establish an umbrella company, MNEs may need to comply with certain conditions set by the host-country government. In China, for example, the foreign investor must have established a minimum of 10 subunits in the country and engaged in manufacturing or infrastructure construction to which it has contributed at least $30 million in registered capital”. IILM-GSM Global Business Management Foreign Direct Investment
- 43. 26/07/10 43 Modes ofFDI Entry Differences: (Joint Venture Vs Mergers) 1. The major difference between equity joint venture and mergers is that the former involves formation of a third entity whose duration is often limited and specified in the contract, whereas the latter does not form any third party nor does it specify any duration. 2. Joint venture parties remain independent after forming a venture, but two parties are integrated into a single organization after a merger. 3. Also, mergers combine all of the partners’ assets, while a joint venture involves only some of these assets. IILM-GSM Global Business Management Foreign Direct Investment
- 44. 26/07/10 44 Theories ofFDI IILM-GSM Global Business Management Foreign Direct Investment
- 45. 03/07/15 45 Theories ofFDI Theories of FDI IILM-GSM Global Business Management Foreign Direct Investment Eclectic Market Imperfections International Product Life Cycle Internalization Market Power
- 46. 26/07/10 46 Theories ofFDI International Product Life Cycle IILM-GSM Global Business Management Foreign Direct Investment • IPLC theory, propounded in 1960s by Raymond Vernon of Harvard Business School, has two lessons: why trade takes place? and why investment occurs?. • Theory explain how a company will begin by exporting its products and eventually undertake foreign direct investment, as the product moves through its life cycle. • Theory has identified 3 stages in the life of a product: 1. New Product Stage 2. Maturing Product Stage 3. Standardized Product Stage
- 47. 26/07/10 47 Theories ofFDI Market Imperfections • Market imperfection can be defined as anything that interferes with trade. It focuses on imperfections in the market (example trade barriers) that would decide FDI. • According to Hymer, Kindleberger and Caves, the existence of MNCs is reasoned by structural market imperfections. IILM-GSM Global Business Management Foreign Direct Investment
- 48. 07/06/10 48 Perfect orPure Competition in Market In economics, perfect competition occurs in markets in which no participant has market power i.e. every participant is a "price taker“. Specific characteristics may include: * Infinite Buyers/Infinite Sellers. * Zero Entry/Exit Barriers – It is relatively easy to enter or * Perfect Information - Prices and quality of products * All firms have relatively small market shares. * Homogeneous Products – firm sales identical product Managing MNCs in International Business IILM-GSM
- 49. 26/07/10 49 Theories ofFDI Eclectic Theory John Harry Dunning, (June 26, 1927 – January 29, 2009) was a British economist. He researched the economics of international direct investment and the multinational enterprise from the 1950s until his death. In the 1980s, he published the eclectic paradigm or OLI-Model/Framework as further development on the theory of FDI. IILM-GSM Global Business Management Foreign Direct Investment
- 50. 26/07/10 50 Theories ofFDI Eclectic Theory According to Dunning, FDI will occur when three conditions (advantages of ownership, location and internalization ) are uniquely combined. Ownership Advantage: – This advantage stems from the fact that the firm is proprietary to some unique competitive advantage that helps it overcome the disadvantages of competing with foreign firms in overseas markets. IILM-GSM Global Business Management Foreign Direct Investment
- 51. 26/07/10 51 Theories ofFDI Eclectic Theory Ownership Advantage: ‘IBM generates significant income from its voice recognition software used by many Chinese. This software, first developed in the US, did not generate sizeable income until a Chinese version was developed by the company’s subsidiary in Beijing’. IILM-GSM Global Business Management Foreign Direct Investment
- 52. 26/07/10 52 Theories ofFDI Eclectic Theory Location Advantage: – Advantage of locating a particular factory in a specific location because of unique characteristics of that location. Like, Availability of natural resources such as oil in the Middle East, timber in Canada and Copper in Chile. – Cater Pillar, manufactures bulldozers in Brazil to take advantage of lower labour costs and avoid high tariff walls on goods exported from its US factories. IILM-GSM Global Business Management Foreign Direct Investment
- 53. 26/07/10 53 Theories ofFDI Eclectic Theory Internalization Advantage: – Internalization refers to the firm’s inherent flexibility and capacity to produce and market through its own internal subsidiaries, rather than producing through an arrangement such as licensing or.... – The firm must benefit from controlling (internalizing) the foreign business activity than leaving it to a local company to provide the service. IILM-GSM Global Business Management Foreign Direct Investment
- 54. 26/07/10 Theories of FDI EclecticTheory IILM-GSM Global Business Management Foreign Direct Investment Ownership Advantage Location Advantage Internalization Advantage 1.Exporting YES 2.Licencing YES YES 3. Franchising YES YES 4. FDI YES YES YES
- 55. 26/07/10 55 Theories ofFDI Market Power • This theory states that a firm seeks to establish a dominant market presence in an industry by undertaking FDI. Dominant market presence results in greater profits to the firms. • Market power is often sought to be achieved through vertical integration. Such integration may be the extension of the company’s activities into its supply chain (backward) or absorbing of its output (forward). IILM-GSM Global Business Management Foreign Direct Investment
- 56. 26/07/10 56 Theories ofFDI Market Power Increasing numbers of manufacturers today are pursuing a forward integration strategy by establishing websites to sell products directly to consumers. Backward integration strategy can be especially appropriate when a firm’s current suppliers are unreliable, too costly or cannot meet the form’s needs. IILM-GSM Global Business Management Foreign Direct Investment
- 57. 26/07/10 57 Theories ofFDI Internalization Approach • Propounded by Buckley and Casson, the internalization theory is based on two principles: 1. Firms internalize missing or imperfect external markets 2. Firms choose locations for their constituent activities to minimize the overall costs of their operations. • The location aspect of the theory suggests three primary motivations: 1. Foreign-market-seeking FDI 2. Efficiency (cost reduction)-seeking FDI 3. Resource-seeking FDI IILM-GSM Global Business Management Foreign Direct Investment
- 58. 26/07/10 58 Theories ofFDI Internalization Approach • Market-seeking FDI will be undertaken by firms for traditional trade supporting reasons, to access distribution networks, to facilitate the exports of domestic products and to enhance exports from the host country. • Efficiency-seeking FDI will occur when outward investors seeks lower-cost locations for operations, in particular, in their search for lower cost labor. • Resource-seeking FDI occurs when there is need to acquire or secure the supply of raw materials and energy sources in short supply at home. IILM-GSM Global Business Management Foreign Direct Investment
- 59. 26/07/10 59 Factors InfluencingFDI IILM-GSM Global Business Management Foreign Direct Investment
- 60. 26/07/10 60 Factor InfluencingFDI Supply Factors Demand Factors Government Factors IILM-GSM Global Business Management Foreign Direct Investment
- 61. 26/07/10 61 Factor InfluencingFDI Supply Factors Production costs Logistics Resource availability Access to technology IILM-GSM Global Business Management Foreign Direct Investment
- 62. 26/07/10 62 Factors InfluencingFDI Supply Factor: Production Costs Firms seek competitive advantage through low production cost. MNCs locate production facilities in low wage countries. • Local incentives were the main objective behind establishing manufacturing operations by Intel in Costa Rica and by Mercedes in Alabama. • Ford has set up a company at Chennai to make one lakh vehicles per annum. Ford plans to export cars to South Africa from Chennai. IILM-GSM Global Business Management Foreign Direct Investment
- 63. 26/07/10 63 Factors InfluencingFDI Supply Factor: Logistics MNCs seek to invest in subsidiaries in foreign markets if the cost of shipping raw material is high. • Coke and Pepsi have set up bottling plants in India as the cost of transporting water from the country is considerable. • The liberalization of Latin American markets brought a surge of FDI in transportation and physical distribution, and foreign logistic providers have upgraded the region’s transportation and warehousing facilities. IILM-GSM Global Business Management Foreign Direct Investment
- 64. 26/07/10 64 Factors InfluencingFDI Supply Factor: Natural Resources MNCs tend to utilize FDI to access natural resources that are critical to them. Natural resources attract many MNCs. • Because of decrease in oil production in US, many oil companies have been forced to make significant investment worldwide to obtain new oil reserves. • To access cheaper energy resources used in manufacturing, Japanese firms are relocating production in China, Mexico & Vietnam, where energy cost is lower. IILM-GSM Global Business Management Foreign Direct Investment
- 65. 26/07/10 65 Factors InfluencingFDI Supply Factor: Access to Technology Motive behind FDI is to get access of technology. • Many of the Swiss Pharmaceutical companies, have invested in US small biogenetics companies in order to gain cutting edge technology. • Britain’s Smith Kline (now merged with Glaxo) invested $86 millions in Cadus Pharmaceutical of New York to access the latter’s yeast work. IILM-GSM Global Business Management Foreign Direct Investment
- 66. 26/07/10 66 Factor InfluencingFDI Demand Factors Customer access Follow clients Follow rivals Exploitation of competitive advantage IILM-GSM Global Business Management Foreign Direct Investment
- 67. 26/07/10 67 Factors InfluencingFDI Demand Factor: Customer Access Certain MNCs need to be physically present in foreign markets to serve customers better. • Starbucks can not serve fresh coffee to its customers in Japan from its head office in the US nor can KFC provide freshly fried chicken in India from its restaurant in US. IILM-GSM Global Business Management Foreign Direct Investment In a significant step toward market entry in India, U.S.-based Starbucks Coffee Company signed a non-binding memorandum of understanding (MoU) with Tata Coffee, one of the region's leading providers of premium Arabica coffee beans.
- 68. 26/07/10 68 Factors InfluencingFDI Demand Factor: Customer Access IILM-GSM Global Business Management Foreign Direct Investment The MoU will create avenues of collaboration between the two companies for sourcing and roasting high-quality green coffee beans in Tata Coffee's facility in Coorg in south India. In addition, Tata and Starbucks will jointly explore the development of Starbucks retail stores in associated retail outlets and hotels. The two companies also will explore social projects to positively impact communities in coffee growing regions where Tata operates. MOU
- 69. 26/07/10 69 Factors InfluencingFDI Demand Factor: Customer Access IILM-GSM Global Business Management Foreign Direct Investment Tata Coffee Chairman R. K. Krishna kumar said, “We welcome Starbucks entry into India because of its unique experience with the store format and for its commitment to society, values that we share.” “India is one of the most dynamic markets in the world with a diverse culture and tremendous potential,” said Starbucks Coffee Company Chairman, President and CEO Howard Schultz. MOU
- 70. 26/07/10 70 Factors InfluencingFDI Demand Factor: Competitive Advantage A company enjoying great reputation may seek to establish subsidiaries in overseas countries to encash on its popularity. An owner of a valuable trade mark, brand name or technology may choose to operate in foreign countries rather than export to them. • Toyota’s presence in India, though it entered Indian market late, Toyota has been able to leverage its world wide reputation & position itself well among Indian buyers. IILM-GSM Global Business Management Foreign Direct Investment
- 71. 26/07/10 71 Factors InfluencingFDI Demand Factor: Follow the Clients Often, clients of a company attract FDI. If one of the clients build a foreign facility, the company may decide to locate a new factory of its own nearby, thus enabling it to continue to supply its customer promptly and attentively. • When Japanese automakers set up their plants in the US, several Japanese component parts suppliers also joined the bandwagon by establishing their own factories, warehouses and research facilities there. • Similarly, after Samsung decided to construct and operate an electronics factory in northeast England, six of its Korean parts suppliers also moved into England. IILM-GSM Global Business Management Foreign Direct Investment
- 72. 26/07/10 72 Factors InfluencingFDI Demand Factor: Follow the Rivals Competitor analysis indicates the geographic strength and weaknesses of individual rivals. From such analysis, firms can select markets for investment. MNCs routinely monitor market sizes and growth rates in over 150 countries. Always, large and medium-sized growth markets are attractive one. IILM-GSM Global Business Management Foreign Direct Investment Market Growth /Size Growth Stable Declining Large 1 2 3 Medium 4 5 6 Small 7 8 9
- 73. 26/07/10 73 Factor InfluencingFDI Government Factors Economic priorities Avoidance of Trade barriers Economic development incentives IILM-GSM Global Business Management Foreign Direct Investment
- 74. 26/07/10 74 Factors InfluencingFDI Government Factor: Economic Priroties Economic priorities of developing countries often clash with profit motives of MNC. Hence, developing countries impose restrictions on the flow of FDI into their economies. • Compared to other developing countries, India followed a restrictive policy towards FDI until 1991, relying more on bilateral and multilateral agreements. • Precisely for many reasons, MNCs were avoiding investment in India till 1991. But, as is too well known, the scenario in India is totally different now. IILM-GSM Global Business Management Foreign Direct Investment
- 75. 26/07/10 75 Factors InfluencingFDI Government Factor: Avoidance of Trade barriers Fuji Photo Film Company has invested $200 million to set up a manufacturing plant in the US. • Earlier, the company supplied film to its US customers from its factories in the Netherland and Japan. While exporting to the US, Fuji was paying 3.7 percent of tariff imposed by the US government. This tax has been saved by producing film in the US itself. IILM-GSM Global Business Management Foreign Direct Investment
- 76. 26/07/10 76 Factors InfluencingFDI Government Factor: Developmental Incentives Many governments offer attractive incentives, many through red carpet welcome to MNCs, to invest in their economies, particularly the developing countries. The primary motive to attract FDI is to fill the resource gaps which exist in industrializing countries. IILM-GSM Global Business Management Foreign Direct Investment
- 77. 26/07/10 77 FDI isallowed under two routes: • Automatic Route : Where RBI approval is required • Non-automatic Route : where approval from government is required In the following areas 100% FDI is allowed…. Areas where FDI is Permitted IILM-GSM Global Business Management Foreign Direct Investment
- 78. 26/07/10 78 1. Airports 2.B2B e-commerce 3. Drugs & pharmaceuticals not falling under automatic route 4. Integrated township development 5. Courier services other than distribution of letters 6. Non-banking financial services 7. Hotel & Tourism 8. Software development 9. Film industry Areas where FDI is Permitted Automatic Route IILM-GSM Global Business Management Foreign Direct Investment
- 79. 26/07/10 79 1. Privateoil refineries 2. Pollution control and management 3. Management consultancy 4. Venture capital funds/companies 5. Exploration and mining of minerals other than diamonds and precious stones 6. Food processing and many more Areas where FDI is Permitted Automatic Route IILM-GSM Global Business Management Foreign Direct Investment
- 80. 26/07/10 80 1. Gambling& betting 2. Atomic energy 3. Lottery business 4. Business of chit fund 5. Nidhi company 6. Agricultural or plantation activities (excluding floriculture, horticulture, development of seeds, animal husbandry, cultivation of vegetables, mushrooms etc. under controlled conditions) and plantations (other then tea plantations). Areas where FDI is not Permitted IILM-GSM Global Business Management Foreign Direct Investment
- 81. 26/07/10 81 • http://www.gmrgroup.in/Corporate/Partners___Alliances.html •http://www.unctad.org/Templates/Page.asp?intItemID=4979 • http://dgftcom.nic.in/exim/2000/policy/ftp-plcontent-0910.htm • http://commerce.nic.in/ • http://commerce.nic.in/trade/national_ftpp.asp?id=3&trade=n Important Links IILM-GSM Global Business Management Foreign Direct Investment
Editor's Notes
- #3 To arm or prepare in advance of a conflict The part of the arm between the wrist and the elbow.
- #5 Start with route of G..at the top we discussued DI or FDI…with two routes..JV..WOS..the WOS by GFI & M &A
- #7 Bestow…to present as a gift or an honor FDI as a mode of foreign entry involves ownership of property, assets, projects and businesses invested in a host country. Firms undertaking FDI have a significant degree of control over overseas operations and economic activities. FDI as a foreign entry reflects the desire of a firm to utilize its competitive advantage for growth and profit. FDI as a foreign entry reflects the desire of a firm to utilize its competitive advantage for growth and profit. Increasing competition constantly drives countries to improve efficiency and reduce production costs pushing firms towards low cost sources of capital, natural resources, energy and labor.
- #8 In india…20 % FDI as a mode of foreign entry give controlling rights...involves ownership of property, assets, projects and businesses invested in a host country.
- #10 Foreign Investment Board’s ..FIB In India, FDI is understood to cover a few more routes than the equity route stated above. Specifically, FDI inflow .......... An American Depositary Receipt (abbreviated ADR) represents ownership in the shares of a non-U.S. company that trades in U.S. financial markets. The stock of many non-US companies trade on US stock exchanges through the use of ADRs. ADRs enable U.S. investors to buy shares in foreign companies without the hazards or inconveniences of cross-border & cross-currency transactions. ADRs carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of US-based companies. Each ADR is issued by a U.S. depositary bank and can represent a fraction of a share, a single share, or multiple shares of the foreign stock. An owner of an ADR has the right to obtain the foreign stock it represents, but US investors usually find it more convenient simply to own the ADR. The price of an ADR often tracks the price of the foreign stock in its home market, adjusted for the ratio of ADRs to foreign company shares. In the case of companies incorporated in the United Kingdom, creation of ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge by the UK government. Depositary banks have various responsibilities to an ADR shareholder and to the non-US company the ADR represents. The first ADR was introduced by JPMorgan in 1927, for the British retailer Selfridges&Co. There are currently four major commercial banks that provide depositary bank services - JPMorgan, Citibank, Deutsche Bank and the Bank of New York Mellon. Individual shares of a foreign corporation represented by an ADR are called American Depositary Shares (ADS). A Global Depository Receipt or Global Depositary Receipt (GDR) is a certificate issued by a depository bank, which purchases shares of foreign companies and deposits it on the account. GDRs represent ownership of an underlying number of shares. Global Depository Receipts facilitate trade of shares, and are commonly used to invest in companies from developing or emerging markets. Prices of GLOBAL DEPOSITARY RECEIPT are often close to values of related shares, but they are traded and settled independently of the underlying share. Several international banks issue GDRs, such as JPMorgan Chase, Citigroup, Deutsche Bank, Bank of New York. GDRs are often listed in the Frankfurt Stock Exchange, Luxembourg Stock Exchange and in the London Stock Exchange, where they are traded on the International Order Book (IOB). Normally 1 GDR = 10 Shares, but not always. An Indian enterprise borrowing in foreign exchange has to complyaa with the external commercial borrowings (ECB) policy announced by the regulator, the Reserve Bank of India (RBI). ECBs encompass commercial bank loans, buyers’ credit, suppliers’ credit, securitised instruments such as floating rate notes and fixed rate bonds, credit from official export credit agencies, foreign currency convertible bonds and commercial borrowings from the private sector lending arms of multilateral financial institutions—for instance, the International Finance Corporation and the Asian Development Bank. The ECB policy is monitored and updated by RBI on a regular basis, according to the macroeconomic conditions and foreign exchange liquidity situation. FIB…head is PM and finance minister…pranab mukherjee
- #11 Ideally, FDI flows, in recipient country should reflected in Capital formation Formation of new firms and factories Increase in foreign equity holdings in the existing firms Merger & acquisition of existing firms and factories
- #13 There is a GAP between the desired level of resources (expected) and the domestically available resources like all four If domestic savings are inadequate to generate enough investments, foreign capital is expected to fill the gap between targeted or desired investment and locally mobilized targets. (govt do the saving by investing in infrasturure like indian railway, power NTPC, real estates tec) Often, the foreign exchange earnings generated from exports and foreign aid fall short of the targeted requirements. This is typically called trade deficit or gap. A inflow of FDI can function to remove that deficit over time, if the MNCs can generate a net positive export earnings. There can be gap between targeted govt. tax revenues and locally raised taxes. By taxing the MNC’s profit and participating financially in their local operations, governments of developing countries are expected to be able to mobilize public financial resources for development projects. There is also a gap in management (management experties), entrepreneurship, technology and skill which is presumed to be partly or wholly filled by the local operations of MNCs.
- #14 Tea to truck conglomerate Tata arcelor mittal is a merger 62 rank , and tata corus is an acquistion of tata where corus is an anglo dutch company 236 rank Tata is having green field project in orrisa When walmart or carrefour fench enterded to india whole retail indutry go boosted It is not as if only a few surrounding firms are the beneficiaries. An entire industry, steel for example, may get a boost. It is estimated that every dollar of FDI increases domestic investment by 80 percent of the amount of FDI.
- #15 When FDI assumes the form of green field projects, the results is the creation of new enterprises, adding to the number of players in the market. Intense competition enhances consumer choice, trends to bring down prices and boost economic welfare of the consumers. Increased competition tends to stimulate capital investments by firms in plant, equipment and R&D, in order to gain competitive advantage over the rivals. All these tend to result, in the long run, in increased productivity, innovations and greater economic growth.
- #16 We are in emerging states//economy…it will take sometimes to indian firms to became a benchmark and competitive in the world economy..infact we started benchmarking in the industry like infosys in a benchmark in IT software development…may be tata and reliance also..so acqusition is not really good… For example, Coca Cola bought the dominant domestic brand Thumps-up, and then HUL acquired Tomco & Lakme. Such acquisition do not add to any additional benefits to economy. Thums Up is a best-selling brand of cola in India,[2] where its bold, red thumbs up logo is common. Introduced in 1977 to offset the expulsion of The Coca-Cola Company and other foreign companies from India, Thums Up, Limca, and Campa Cola gained nationwide acceptance. The brand was bought out by Coca-Cola who re-launched it in order to compete against Pepsi. Lakmé is an Indian brand of cosmetics, owned by Unilever. Lakme started as a 100% subsidiary of Tata Oil Mills (Tomco), part of the Tata Group; it was named after the French operaLakmé, which itself is the French form of Lakshmi, the goddess of wealth, also renowned for her beauty. Indian cosmet Lakme was started in 1952, famously because the then Prime Minister, Jawaharlal Nehru, was concerned that Indian women were spending precious foreign exchange on beauty products, and personally requested JRD Tata to manufacture them in India. Simone Tata joined the company as director, and went on to become its chairman. In 1996 Tata sold off their stakes in Lakmé Lever to HLL, for Rs 200 Crore[1](45 million US$), and went on to create Trent and Westside. Even today, when most multinational beauty products are available in India, Lakme still occupies a special place in the hearts of Indian women.[citation needed] Lakme also started its new business in the beauty industry by setting up Lakme Beauty Salons all over India. Now HUL (Hindustan Unilever Limited) has about 110 salons all over India providing beauty services. Lakme' has been ranked as 47th most trusted brand in India by The Brand Trust Report Hindustan Unilever Limited (HUL) (BSE: 500696) is India's largest fast moving consumer goods company owned by the European company Unilever. The Anglo-Dutch company Unilever owns a 52% majority stake. HUL was formed in 1933 as Lever Brothers India Limited and came into being in 1956 as Hindustan Lever Limited through a merger of Lever Brothers, Hindustan Vanaspati Mfg. Co. Ltd. and United Traders Ltd. It is headquartered in Mumbai, India and has an employee strength of over 15,000 employees and contributes to indirect employment of over 52,000 people. The company was renamed in June 2007 as “Hindustan Unilever Limited”.
- #17 Hyundai, the automobile giant from South Korea, has chosen Chennai in India for its new car manufacturing plant. We learn this location advantage in detail in one of the FDI theory…later on The location-specific advantages, in particular, include natural resources such as oil and other minerals, which are, by nature, specific to certain locations. A firm must undertake FDI to exploit such endowments. Another example is the valuable human resource, such as low-cost highly skilled labor force. The cost and skill of labor varies from country to country. A Canadian medium-sized plant is thinking in terms of renovating a plant near Warsaw in Poland as the price of labor in that country is fairly low. Similarly, one major benefit of locating plats in Mexico is highly skilled force that can be hired at fairly low wage rates. Additionally, manufacturing firms located in Mexico report high productive growth rates and quality performance.
- #18 ............productivity and work ethics. Additionally, France’s recent economic growth has impressed many MNCs. Explain the oil case not as a location advatnage but as ..political risk (next point in slide)
- #20 Nafta formed in 1991..
- #21 China National Petroleum is its nation’s largest state-owned oil and gas producer. Since its founding in 1988, the company has expanded across 12 countries from Asia to Africa to South America. It has 14 large oil and gas field enterprises, 14 large-scale refining and petrochemical companies, and R&D units located across China. This explains the FDI undertake by many of the world’s oil companies, which had to invest where oil was located. UAE 7 emirates just like the states in india and US...major one dubai, abu dhabi and sarjah..the economy of dubai is based on the foreign FDI...resulted in big big shopping mall..major streets and finacial institution at dubai But the major souce of income for the abu dhabi is...to have a prseence of oil resources...US /canada..austraila and India..they have invested in the oil refineray and extracted unit there...why bcz of the location advantage... So many investmenst can been seen in the OPEC countries oil producing and exporting countries manily gulf countries..like doha, katar, saudi..jordan...iraq etc Iocl invested in so many gulf countries….indian company like aban offshore also doing well…
- #22 Ushered..may be adopted/accepted
- #23 ..say one of the statement from former secratery general of United nationa..koffee annan..( seventh Secretary-General of the United Nations,) At present Secretary-General Ban Ki-moon addresses UN Climate 2011 Jeffrey Sachs, Special Advisor to the Secretary General Kofi Annan on the Millennium Development Goals, told a press on Sept 22, 2004, “ Many of the poorest ...........reaches poor countries. The kind of globalization that the poorest countries are feeling is brain drain.
- #24 to make larger; enlarge in size, number, strength, ... In strategic assets they talk aby jv and gsa
- #25 Discuss diversification strategy in business in order to fill strategic planning gap.
- #26 Key function of scm are procurement, processing and distribution
- #28 Physical means raw materials
- #29 Follow the clients follow the rivals..these are the demand factors
- #30 Funds or property donated to an institution, individual, or group as a source of income. 3. A natural gift, ability, or quality. ... By factor endowments, they meant the extent to which a country is endowed with such resources as land, labor, and capital…like in porters diamond we saw factor conditions Country will export those goods that make intensive use of those factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce. Investments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership. It is suggested that this kind of Foreign Direct Investment comes after either resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm. Usually, this kind of Foreign Direct Investment is mostly widely practiced between developed economies; especially those within closely integrated markets (e.g. the EU
- #32 Greenfield investment is an investment process which results in the creation of new assets in the host country. This can take the form of a branch office or a foreign collaboration called ‘global strategic alliances’. M & A as a form of investment may either involve the outright purchase of an existing company or the amalgamation of two existing companies. Brownfield investment is a combination of Greenfield investment and M&A. It denotes an investment where an existing firm acquires another firm and infuses it with fresh capital and assets after the acquisition. BROWNFIELD…When a company or government entity purchases or leases existing production facilities to launch a new production activity. This is one strategy used in foreign-direct investment. OR A related term to "Greenfield Investment" which is becoming popular is Brownfield Investment, where a site in advance used for a "un-clean" business purpose, such as a steel mill or oil refinery, is cleaned up and used for a less polluting purpose, such as commercial office space or a residential area. Like suppose..govt has acquired the existing land and infrastructure related to high school…and converting them into polytechniq and converting them into IITs….or IIMs
- #33 FDI entry can take four modes .. Global strategic allinace is also known as cooperative JV here Subsidiary means wholly owned subsidiary
- #34 ICICI having many branch office in gluf countries… http://madaan.com/incorporate.htm..WILL SHOW In India, the following types of business entities are available: Private Limited Company Public Limited Company Unlimited Company Limited Liability Partnership (LLP) Partnership Sole Proprietorship Liaison Office/Representative Office Project Office Branch Office Joint Venture Company Subsidiary Company
- #35 Project Office Foreign companies planning to execute specific projects in India can set up a temporary project/site offices in India for carrying out activities only relating to that project. The Government of India has now granted general permission to foreign entities to establish project offices subject to specified conditions. Branch Office Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for the following purposes: Export/Import of goods Rendering professional or consultancy services Carrying out research work, in which the parent company is engaged. Promoting technical or financial collaborations between Indian companies and parent or overseas group company. Representing the parent company in India and acting as buying/selling agents in India. Rendering services in Information Technology and development of software in India. Rendering technical support to the products supplied by the parent/ group companies. Foreign airline/shipping company. A branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer. Branch Offices established with the approval of RBI, may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines Permission for setting up branch offices is granted by the Reserve Bank of India (RBI).
- #36 http://www.gmrgroup.in/Corporate/Partners___Alliances.html The Royal Dutch Shell Group was created in February 1907 when the Royal Dutch Petroleum Company (legal name in Dutch, N.V. Koninklijke Nederlandsche Petroleum Maatschappij) and the "Shell" Transport and Trading Company Ltd of the United Kingdom merged their operations[6] – a move largely driven by the need to compete globally with the then dominant American petroleum company, John D. Rockefeller's Standard Oil. The terms of the merger gave 60% ownership of the new Group to the Dutch arm and 40% to the British. royal dutch…oil & petoliwm from netherland And shell trading and transport in UK..mergerd in 1907..in order to become globally no 1 (now in Fortune 500.Rank 2, Rank 1 Walmart)and compteer ameracn industry…exxon mobil (US)..BP (UK) Royal Dutch Shell plc (LSE: RDSA, LSE: RDSB), commonly known as Shell, is a global oil and gas company headquartered in The Hague, Netherlands and with its registered office at the Shell Centre in London, United Kingdom.[2] It is the largest energy company and the second-largest company in the world measured by revenues and is one of the six oil and gas "supermajors".[3] It is vertically-integrated and is active in every area of the oil and gas industry, including exploration and production, refining, distribution and marketing, petrochemicals, power generation and trading. It also has major renewable energy activities, including in biofuels, hydrogen, solar and wind power.
- #37 Generally in cooperative jv…not a new mgt formed But in equity JV..new entiry forms Research partnership between nokia and siemens as an strategic allanices Joint marketing allanices between GM and Volkswagen in India..probably a guess
- #39 Fuji xerox is most successful JV in the world..
- #41 Governmental Umbrella Organization of UNESCO UNESCO - the United Nations Educational, Scientific and Cultural Organization (UNESCO) was founded on 16 November 1945 Dabur with joint venture in nepal, green fuield projects in sri lanka and branch office in many countries like malaysia, thailand and singapore etc Aviva Life Insurance Company, a joint venture between Dabur India and CGU, a wholly owned subsidiary of Aviva Plc, is capitalised at Rs. 110 crore. ...Dabur Nepal Pvt. Ltd. is a joint venture company established in the year ...
- #42 ...http://www.dabur.com/About%20Dabur-History dow chemicals...for the bhopal gas explosion Dabur with joint venture in nepal, green fuield projects in sri lanka and branch office in many countries like malaysia, thailand and singapore etc Aviva Life Insurance Company, a joint venture between Dabur India and CGU, a wholly owned subsidiary of Aviva Plc, is capitalised at Rs. 110 crore. ...Dabur Nepal Pvt. Ltd. is a joint venture company established in the year ...
- #43 E. I. du Pont de Nemours and Company (NYSE: DDPRA, NYSE: DDPRB, NYSE: DD), commonly referred to as DuPont, is an American chemical company that was founded in July 1802 as a gunpowder mill by Eleuthère Irénée du Pont. DuPont was the world's third largest chemical company based on market capitalization and ninth based on revenue in 2009. Its stock price is a component of the Dow Jones Industrial Average. In the 20th century, DuPont developed many polymers such as Vespel, neoprene, nylon, Corian, Teflon, Mylar, Kevlar, Zemdrain, M5 fiber, Nomex, Tyvek, Sorona and Lycra. DuPont developed Freon (chlorofluorocarbons) for the refrigerant industry and later, more environmentally friendly refrigerants. It developed synthetic pigments and paints including ChromaFlair. DuPont's trademarked brands often become genericized. For instance, “neoprene” was originally intended to be a trademark, but quickly came into common usage.
- #48 Degree of IM is more ..more FDI requires Why makt is imperfect..bcz of trade barriers (tariff and non tariffs)…which resulted in finite Buyers/finite Sellers. * High Entry/Exit Barriers – It is relatively easy to enter or * availability of imperfect Information - Prices and quality of products * few firms may have monopoly in market shares. * Heteroneneous Products – firm sales idifferent product In Hymer's example, there are considered two firms as monopolists in their own market and isolated from competition by transportation costs and other tariff and non-tariff barriers. If these costs decrease, both are forced to competition; which will reduce their profits. Impecfaction means market is not perfect…means no of buyer and suppliers are very less..means lot of trade barriers are present in the market If trade barriers render a transaction less efficient than it could be, a company will undertake FDI to internalize the transaction and thereby remove the imperfections. In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange (restated: the cost of participating in a market). For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal. Or consider buying a banana from a store; to purchase the banana, your costs will be not only the price of the banana itself, but also the energy and effort it requires to find out which of the various banana products you prefer, where to get them and at what price, the cost of traveling from your house to the store and back, the time waiting in line, and the effort of the paying itself; the costs above and beyond the cost of the banana are the transaction costs. When rationally evaluating a potential transaction, it is important to consider transaction costs that might prove significant. A number of kinds of transaction cost have come to be known by particular names:[1] Search and information costs are costs such as those incurred in determining that the required good is available on the market, who has the lowest price, etc. Bargaining costs are the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract and so on. In game theory this is analyzed for instance in the game of chicken. On asset markets and in market microstructure, the transaction cost is some function of the distance between the bid and ask. Policing and enforcement costs are the costs of making sure the other party sticks to the terms of the contract, and taking appropriate action (often through the legal system) if this turns out not to be the case. Market imperfection can be defined as anything that interferes with trade.[10] This includes two dimensions of imperfections.[10] First, imperfections cause a rational market participant to deviate from holding the market portfolio.[10] Second, imperfections cause a rational market participant to deviate from his preferred risk level.[10] Market imperfections generate costs which interfere with trades that rational individuals make (or would make in the absence of the imperfection . In other words, a firm chooses to invest in overseas facilities if a transaction with a foreign firm (through franchise or licensing agreement or supply agreement) proves to be more costly. The transaction tends to be costlier because of lengthy negotiations, entering and monitoring, all brought about by market imperfections. Conversely, when transaction costs are low, MNCs are likely to contract with outsiders through licensing or franchising, instead of resorting to FDI. Starbucks is an expert in franchising with local stores and enforcing the contracts. Because Starbucks is so successful in reducing transaction costs between itself and its franchisees, it has more franchised stores overseas than own outlets. “ In most countries, particularly in Asia, Starbucks entered licensing agreements with local operators in return for royalties. Starbucks also sold whole bean coffee and related products to local licensees, who then resold them to customers. As in Japan, Starbucks insisted on intensive employee training programmes and strict specifications regarding the design of the store. However the presence was not encouraging. As a result, Starbucks converted several licensing agreements into joint ventures or wholly owned subsidiaries, particularly in Korea and Thailand”.
- #49 Restraing means to set back, hold back or to keep in check Indain auto market is very close to pure marlet…indian IT market is also..but indian bio tech industry is not a perfect one..so the foreign players in pharma trying to enter into india market
- #50 Unique advantage may be brand recognition, technical knowledge, economies of scale or management ability etc. Selecting or employing individual elements from a variety of sources, systems, or styles: an eclectic taste in music; an eclectic approach to managing the economy. Made up of or combining elements from a variety of sources: "a popular bar patronized by an eclectic collection of artists, writers, secretaries and aging soldiers on reserve duty" (Curtis Wilkie).
- #51 he died on January 29, 2009, after a year long battle with cancer. Recently apple owner steve jobs also died from cancer. Advocate by John Dunning, eclectic theory argues that location in question attract FDI because it combines the unique advantages of ownership, location and internalization. According to Dunning, FDI will occur when three conditions are uniquely combined.
- #52 International Business Machines (IBM) (NYSE: IBM) is a United States multinational technology and consulting firm headquartered in Armonk, New York. Founded in 1911, IBM manufactures and sells computer hardware and software, and it offers infrastructure, hosting and consulting services in areas ranging from mainframe computers to nanotechnology.[4] In 2010, IBM was ranked the 20th largest firm in the U.S. by Fortune and the 33rd largest globally by Forbes.[5][6] Other rankings that year include #1 green company (Newsweek), #1 company for leaders (Fortune), #2 best global brand (Interbrand), #15 most admired company (Fortune), and #18 most innovative company (Fast Company).[7] IBM employs almost 400,000 employees (called "IBMers" by IBM) in over 200 countries, with occupations including scientists, engineers, consultants, and sales professionals.[8] Its distinctive culture and product branding has given it the nickname Big Blue. IBM holds more patents than any other U.S.-based technology company and has nine research laboratories worldwide.[9] Its employees have garnered five Nobel Prizes, four Turing Awards, nine National Medals of Technology, and five National Medals of Science.[10] The company has undergone several organizational changes since its inception, acquiring companies like SPSS (2009) and PwC consulting (2002) and spinning off companies like SAP (1972) and Lexmark (1991).
- #53 Timber is a tree… Caterpillar Inc. (NYSE: CAT), also known as "CAT", designs, manufactures, markets and sells machinery and engines and sells financial products and insurance to customers via a worldwide dealer network.[2][3] Caterpillar is the world's largest manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines.[2] With more than US$7 billion in assets, Caterpillar was ranked number one in its industry and number 44 overall in the 2009 Fortune 500.[5] Caterpillar stock is a component of the Dow Jones Industrial Average.[6] Caterpillar Inc. traces its origins to the 1925 merger of the Holt Manufacturing Company, the inventor of the crawler tractor, and the C. L. Best Tractor Company, creating a new entity, the California based Caterpillar Tractor Company.[7] In 1986, the company re-organized itself as a Delaware corporation under the current name, Caterpillar Inc.[3] Caterpillar's headquarters are located in Peoria, Illinois, United States.[1] Caterpillar machinery is recognizable by its trademark "Caterpillar Yellow" livery and the "CAT" logo.[8] We discussed hyundai case also
- #54 Firm must choose those location where they can control the activites / internalize business activities so that they can save their brand name and firm reputation.. To expose to loss or injury jeopardized. For Dunning, not only the structure of organization is important.[20] He added 3 additional factors to the theory:[20] Ownership advantages[18] (trademark, production technique, entrepreneurial skills, returns to scale, brand recognition, technical knowledge, economies of scale or management ability )[19] Loccasional advantages (existence of raw materials, low wages, special taxes or tariffs)[19] Internalisation advantages (advantages by producing by own or through a partnership arrangement such as a joint venture, rather than licencing and franchsing) It is expensive when the firm’s reputation and brand name could be jeopardized by poor behavior of the local company. It arises from internalizing a business activity rather than leaving it to a relatively inefficient market. Or… Internalization advantages (advantages by own production rather than producing through a partnership arrangement such as licensing or a joint venture)[2] Firms may organize the creation and exploitation of their core competencies. The greater the net benefits of internalizing cross-border intermediate product markets, the more likely a firm will prefer to engage in foreign production itself rather than license the right to do so.[4]
- #55 Firm must choose those location where they can control the activites / internalize business activities so that they can save their brand name and firm reputation.. To expose to loss or injury jeopardized. For Dunning, not only the structure of organization is important.[20] He added 3 additional factors to the theory:[20] Ownership advantages[18] (trademark, production technique, entrepreneurial skills, returns to scale, brand recognition, technical knowledge, economies of scale or management ability )[19] Loccasional advantages (existence of raw materials, low wages, special taxes or tariffs)[19] Internalisation advantages (advantages by producing by own or through a partnership arrangement such as a joint venture, rather than licencing and franchsing) It is expensive when the firm’s reputation and brand name could be jeopardized by poor behavior of the local company. It arises from internalizing a business activity rather than leaving it to a relatively inefficient market. Or… Internalization advantages (advantages by own production rather than producing through a partnership arrangement such as licensing or a joint venture)[2] Firms may organize the creation and exploitation of their core competencies. The greater the net benefits of internalizing cross-border intermediate product markets, the more likely a firm will prefer to engage in foreign production itself rather than license the right to do so.[4]
- #58 This theory is an extension of the eclectic or market imperfection theory. Propounded by Buckley and Casson, the internalization theory is based on two principles: Firms internalize missing or imperfect external markets until the costs of further internalization outweigh the benefits, and Firms choose locations for their constituent activities to minimize the overall costs of their operations. 1. Expansion by internalization of markets means that firms use FDI to replace imperfect external markets in intermediate products and knowledge and appropriate the profits from doing so. 2.The location aspect of the theory suggests three primary motivations: Foreign-market-seeking FDI Efficiency (cost reduction)-seeking FDI Resource-seeking FDI
- #63 Hyundai also in chennai..we discussed in location attract fdi in why fdi? Hyundai also export i20 models cars to europe Inside Mexico, the Japan, Germany and US automotive firms have assembly facilities that ship final products to the US. Also in IPLC..in stand stage….. Local incentives in a sence..local benefits might be low wages of manpower supply…\ Many IT companies invested in india for their R & D project work,,,.bcz of availability of skilled man power at low wages
- #64 Supply cost or transportation cost.. Sometimes apply for the finished prodcut also.like shipping mrecedes from germany to india or tpyota from japan…
- #65 This is resource seeking FDI…based on motive based FDI.. US oil and petrolium company…exxon mobil…rank 4th…BP and well known in UK Japan..is small densely populated island with very few natural resources of its own specially forests. Company does import wood pump… Japan’s largest paper mill, Nippon Seishi owns huge forests and corresponding processing facilities in Australia & Canada. Because of decrease in oil production in US or india, many oil companies have been forced to make significant investment worldwide to obtain new oil reserves.
- #66 Cutting egde//state of the art tech.. n accord with the most fashionable ideas or style; "wears only the latest style"; "the last thing in swimwear"; "cutting-edge technology"; "a with-it boutique“ Swiss...novartis and roche... US as Johnson & J, Abott and Pfizer Technology influences every aspect of the global market place, driving innovation, affecting partnerships & locations and changing business-stakeholder relationships. Motive behind FDI is to get access of technology. Company form strategic allaince ..or GSA in order to access technology GSK was formed in 2000 by the merger of GlaxoWellcome plc (formed from the acquisition of Wellcome plc by Glaxo plc), and SmithKline Beecham plc Yeast is used in making wine, beer, baking and other alcoholic beverages (contain etanol c2h5oh) Yeasts are eukaryotic micro-organisms classified in the kingdom Fungi, with the 1,500 species currently described[1] estimated to be only 1% of all yeast species.[2] Most reproduce asexually by budding, although a few do so by binary fission. Yeasts are unicellular, although some species with yeast forms may become multicellular through the formation of a string of connected budding cells known as pseudohyphae, or false hyphae, as seen in most molds.[3] Yeast size can vary greatly depending on the species, typically measuring 3–4 µm in diameter, although some yeasts can reach over 40 µm.
- #67 EXPLOITATION..UTILIZATION OF COMPETITVE ADVANTAGES
- #68 18 Jan 2011 ... Starbucks has signed a pact with India's Tata Coffee to buy coffee from India and explore opening retail stores in the country.Tata and Starbucks will also jointly explore the development of Starbucks retail stores in associated retail outlets and hotels.Cusomer acess in banking..opening branches in India…RBS, Std Charetered,or HSBC..now Govt is forcing all the branch offices to covert as green field investment. Starbucks and tata coffess have a tie up recently…this is kind of agreement to wok together..now starbucks have access of indian market
- #69 Emphaiss on CSR..its time to think abt social responsibilyty mking..as we seen in holistic mkting concept/.
- #70 Emphaiss on CSR..its time to think abt social responsibilyty mking..as we seen in holistic mkting concept/.
- #71 Toyota’s presence in India is the case in context. Microsoft in IT..presesnce in 146 countries…IBM or indian reliance or tata Nestle in 126 countrise Company use to hace competitive advt if they have ownership advt..according to eclectic theory
- #72 This practice of following clients is likely to be followed in industries in which main components parts are obtained from suppliers with whom the company has a clsoe working relationships. Samsunf from korea only.. Clients like key accounts…key prodcure..key suppliers In india suppose…ceat provides tyre to tata motors ..in future if tata motors will think to open a new plant in malaysia or singapore then ceat will also think..so they will follow the clients..(here clients is tata motors and company is ceat..clents are major source of company revenues) Key suppliers having many clients like manufacturing firm….like tyre materail suppliers..supplying to many tyre making companies like MRF, CEAT etc..apollotyre
- #73 Growth rate in x axis means might be growing or stable and decling market Market size ..like large medium or small.. 1 Five forces 1.1 Threat of new competition 1.2 Threat of substitute products or services 1.3 Bargaining power of customers (buyers) 1.4 Bargaining power of suppliers 1.5 Intensity of competitive rivalry For the worldwide market size and growth raete..go through the world bank and imf website Top inestment priorities…1 2 and 4..primary market (BRIC as a major) as we seen in GE Matrix (market attractiveness and Competitve strangth of a firm basis)..so Invest and Grow..also latin ameriacan countries..(people spaek french and spanish mostly) Medium investment priroties: diagonal one 3, 5, and 7 …secondary market…selectiev startegy in Singapore, Thailand, Indonesia, large stable makt like North ameriac and europe is still attractive for FDI Low invest ment priroities: 6, 8 and 9…divest strategy…like Japan…korea etc Porter’s 5 force model for competitve analysiss..one is competitive rivaliry.among inductries.. Recently..sensex cam down from 21000 to 19000..one statement came from CNBC Awaz..that now foreign investors taking back their money invested theorth FII in Indian stick market..AND they are looking to do this investment in Singapore market…which seems to be more attractive one for the investment return point of view.. Declining..bcz of political risk ..givt rule and regulations…inward trade policies..nizeria and argentine are on high risk..PEST factors are not supporting one
- #75 In other words, developing countries want MNCs to invest in infrastructure development ares (throuth WOS or geen field investment) but the MNCs seeks to invest in consumer goods industries… Till 1991 FDI was allowed in certain industries subject to varying conditions on setting up JV with local partners, GSA etc…The Foreign Exchange Regulation Act 1974..stipulated foreign firms to have equity holding upto 40%..setting up branch was generally disaalowed..the law aloso prohibitaed the use of foreign banks…Precisely for many reasons, MNCs were avoiding investment in India till 1991. Restrictive policy meaning..inward policy…
- #76 Fuji from Japan..form a JV with xerox..Fuji-Xerox..as we seen in IPLC theory
- #77 Resouce gap or four gaps we descussed in why fdi? A red carpet is traditionally used to mark the route taken by heads of state on ceremonial and formal occasions, and has in recent decades been extended to use by VIPs and celebrities at formal events. Indian government allowing the domestic players and MNC to invest in SEZ areas..FTZ in Dubai..(no export import duties)…and many other incentitve Go through..www.sezindia.nic.in
- #78 Automatiac…upto 51 %..in certain induatry Non automatic..front of Investment board of india..givt body for holding more than 51%
- #81 Nidhi company is a company registered under Companies Act and notified as a nidhi company by Central Government under Section 620-A of Companies Act. It is a non-banking finance company doing the business of lending and borrowing with its members or shareholders. www.nbfc.rbi.org.in Rbf nidhi limited Horticulture is the industry and science of plant cultivation. Some would say that horticulture is the process of preparing soil for the planting of seeds, tubers, or cuttings.[1] Horticulturists work and conduct research in the disciplines of plant propagation and cultivation, crop production, plant breeding and genetic engineering, plant biochemistry, and plant physiology. The work particularly involves fruits, berries, nuts, vegetables, flowers, trees, shrubs, and turf. Horticulturists work to improve crop yield, quality, nutritional value, and resistance to insects, diseases, and environmental stresses. Horticulture usually refers to gardening on a smaller scale, while agriculture refers to the large-scale cultivation of crops.[2] The word is composite, from two words, horti, meaning grass, originating in the Greek χορτον, meaning the same (grass) and the word culture. Floriculture, or flower farming, is a discipline of horticulture concerned with the cultivation of flowering and ornamental plants for gardens and for floristry, comprising the floral industry. The development plant breeding of new varieties is a major occupation of floriculturists. Floriculture crops include bedding plants, flowering plants, foliage plants or houseplants, cut cultivated greens, and cut flowers. As distinguished from nursery crops, floriculture crops are generally herbaceous. Bedding and garden plants consist of young flowering plants (annuals and perennials) and vegetable plants. They are grown in cell packs (in flats or trays), in pots, or in hanging baskets, usually inside a controlled environment, and sold largely for gardens and landscaping. Geraniums, impatiens, and petunias are the best-selling bedding plants. Chrysanthemums are the major perennial garden plant in the United States. Animal husbandry, also called animal science, stockbreeding or simple husbandry, is the agricultural practice of breeding and raising livestock. It has been practiced for thousands of years, since the first domestication of animals. Livestock (also cattle) refers to one or more domesticated animals raised in an agricultural setting to produce commodities such as food or fiber, or labor. The term "livestock" as used in this article does not include poultry or farmed fish; however the inclusion of these, especially poultry, within the meaning of "livestock" is common. Livestock generally are raised for subsistence or for profit. Raising animals (animal husbandry) is an important component of modern agriculture. It has been practiced in many cultures since the transition to farming from hunter-gather lifestyles.
- #82 United nation conference on trade and development, Indian Ministry of commerce http://www.unctad.org/Templates/Page.asp?intItemID=4979 Established in 1964, UNCTAD promotes the development-friendly integration of developing countries into the world economy. UNCTAD has progressively evolved into an authoritative knowledge-based institution whose work aims to help shape current policy debates and thinking on development, with a particular focus on ensuring that domestic policies and international action are mutually supportive in bringing about sustainable development. The organization works to fulfil this mandate by carrying out three key functions: It functions as a forum for intergovernmental deliberations, supported by discussions with experts and exchanges of experience, aimed at consensus building. It undertakes research, policy analysis and data collection for the debates of government representatives and experts. It provides technical assistance tailored to the specific requirements of developing countries, with special attention to the needs of the least developed countries and of economies in transition. When appropriate, UNCTAD cooperates with other organizations and donor countries in the delivery of technical assistance. The Secretary-General of UNCTAD is Dr. Supachai Panitchpakdi (Thailand), who took office on 1 September 2005. In performing its functions, the secretariat works together with member Governments and interacts with organizations of the United Nations system and regional commissions, as well as with governmental institutions, non-governmental organizations, the private sector, including trade and industry associations, research institutes and universities worldwide. India New Foreign Trade Policy 2009 - 2014 The Government of India, Ministry of Commerce and Industry announced New Foreign Trade Policy on 27th August 2009 for the period 2009-2014, earlier this policy known as Export Import (Exim) Policy. After five years foreign trade policy needs amendments in general, aims at developing export potential, improving export performance, encouraging foreign trade and creating favorable balance of payments position. The Export Import Policy (EXIM Policy) or Foreign Trade Policy is updated every year on the 31st of March and the modifications, improvements and new schemes becomes effective from April month of each year.