Foreign Direct investment

1. © 2001 Prentice Hall 11-1
International Business
by
Daniels and Radebaugh
Chapter 11
Governmental Attitudes
toward Foreign Direct
Investment

2. © 2001 Prentice Hall 11-2
Objectives
To examine the conflicting objectives of MNE stakeholders
To discuss problems in evaluating MNE activities
To evaluate the major economic impacts—balance of payments and
growth—of MNEs on home and host countries
To introduce the major criticisms about MNEs
To provide an overview of the major political controversies surrounding
MNE activities

3. © 2001 Prentice Hall 11-3
Introduction
Multinational enterprises (MNEs) operate largely through foreign
direct investment (FDI)
• Governmental policies encourage and restrict MNE
operations
• MNEs may not be concerned about interests of nations in
which they operate
Very large MNEs are especially worrisome
• Have considerable negotiating power
• Executives frequently deal directly with heads of state to
negotiate terms under which the MNE can operate
Pressure groups push to restrict MNEs’ activities at home and
abroad

4. © 2001 Prentice Hall 11-4
OPERATIONS
OBJECTIVES
STRATEGY
FDI
MEANS
• Trade
• Other equity
and nonequity
arrangements
Home-country
enhancements
and restrictions
Host-country
enhancements
and restrictions
Home- and Host-Country Influences on Companies’ Use of FDI

5. © 2001 Prentice Hall 11-5
Evaluating the Impact of FDI
Trade-offs among constituencies
• Stakeholders—include stockholders, employees, customers, and
society at large
– in the short term the aims of these groups conflict
– in the long term all of their aims must be achieved adequately
or none will be attained
• Management must be aware of these interests and make
appropriate trade-offs
– must resolve cross-national controversies
Trade-offs among objectives
• Actions of MNEs may affect a country’s economic, social, and
political objectives
• Countries want a greater share of benefits from MNE activities
• It is incorrect to assume that if one stakeholder gains, another
must lose

6. © 2001 Prentice Hall 11-6
Evaluating the Impact of FDI (cont.)
Cause-effect relationships
• It is extremely hard to determine whether societal conditions are
caused by MNEs’ actions
• Technological developments, competitors’ actions, and
governmental policies encumber cause-effect analysis
• Studied at the individual and aggregate level of analysis
Potential contributions of MNEs
• Size of MNEs suggests that they can contribute to a wide range
of country objectives
• MNEs—account for most of the world’s export of goods and
services
– create access to foreign exchange for purchase of imports
– are major producers and organizers of technology

7. © 2001 Prentice Hall 11-7
Environment
• Access to clean
technologies
• Pollution-
abatement skills
• Companywide
standards
Trade
• Export
expansion
• Lower-cost
imports
MNEs
Investment
• Links to local
companies
• Increased
productivity
• Improved
efficiency
Capital formation
Technology
• R&D
• Industrial
upgrading
• New capital
equipment
Human
Resources
• Training
Employment
• Managerial
skills
Resources and Possible Contributions of MNEs

8. © 2001 Prentice Hall 11-8
Economic Impact of the MNE
Balance-of-payment effects—FDI brings both capital inflows and
outflows
• Place in the economic system
– country must compensate for a trade deficit by
reducing its reserves or receiving an influx of capital
» greater capital inflow permits more imports and
allows some trade deficit
– FDI crucial given stagnation in foreign aid
– gains are a zero-sum game
» one country’s trade or capital surplus is another’s
deficit
– countries’ regulation of capital flows influence
companies’ decisions on FDI

9. © 2001 Prentice Hall 11-9
Economic Impact of the MNE (cont.)
Balance-of-payment effects (cont.)
• Effect of individual FDI
– may have positive or negative effect on balance-of-payments
– the formula to determine effects is simple, but the data used
must be estimated and are subject to assumptions
net import change
» marginal propensity to import—portion of increase in
national income from imports that will be spent on
additional imports
» net export effect
» net capital flow
– equation does not reflect effects that are not readily
quantifiable
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10. © 2001 Prentice Hall 11-10
Economic Impact of the MNE (cont.)
Balance-of-payment effects (cont.)
• Aggregate assumptions and responses
– effects of FDI usually are:
» positive for the host country and negative for the home
country initially
» positive for the home country and negative for the host
country later
» time period before reversal of fortunes varies
substantially
– home and host countries make policies to try to improve
short- or long-term effects:
» home countries establish outflow restrictions
» host countries impose repatriation restrictions, asset-
valuation controls, and conversion to debt as opposed to
equity

11. © 2001 Prentice Hall 11-11
Economic Impact of the MNE (cont.)
Growth and employment effects—not a zero-sum game because MNEs
may use resources that were unemployed or underemployed
• Both home and host country may profit
• Home-country losses
– foreign production displaces domestic production
» transfer of technology
» jobs are exported
» wages decline
• Home-country gains
– MNE investment initiates local development
– more optimal use of production factors
– use of unemployed resources
– upgrading of resource quality
– competition forces local companies to become more efficient

12. © 2001 Prentice Hall 11-12
Economic Impact of the MNE (cont.)
Growth and employment effects (cont.)
• Host-country losses
– MNEs undermine local entrepreneurial drive
– MNEs may attract best local resources
» able to bid up prices when competing with local
companies
» absorb local capital
– local companies may decrease R&D spending
– purchase of local firms by foreign investors
• General conclusions—FDI more likely to generate growth in the
host country:
– when the product or process is highly differentiated
– when the foreign investors have access to scarce resources
– in the more advanced emerging economies

13. © 2001 Prentice Hall 11-13
Political and Legal Impact of the MNE
Countries are concerned that MNEs will undermine sovereignty of host
countries
• MNEs act as foreign-policy instruments of their home-country
government
• MNEs are independent of any government
• Dependent MNEs become pawns of host-country governments
Extraterritoriality—occurs when governments apply their laws to their
domestic companies’ foreign operations
• Trade restrictions—U.S. attempts to apply the Trading with the
Enemy Act to foreign subsidiaries of U.S. companies
• Antitrust laws—U.S. acted against domestic firms’ foreign
investments when there has been concern about possible harm to
U.S. consumers
– U.S. Justice Department has acted ambiguously

14. © 2001 Prentice Hall 11-14
Political and Legal Impact of the MNE (cont.)
Key sector control—political concerns include:
• Foreign influence over local politics
• Foreign control of sensitive sectors of the local economy
– MNEs home-country headquarters often decide how foreign
subsidiaries will operate
» may cause different rates of expansion and contraction
in different countries
– MNEs have primary loyalty to home country
» tend to favor home-country’s goals over host country’s
during conflicts
• Key industries—affect a large segment of the economy or
population
– countries have selectively prevented foreign domination of
key industries
– government may require MNEs to manage facilities with local
personnel

15. © 2001 Prentice Hall 11-15
Political and Legal Impact of the MNE (cont.)
MNE independence
• MNEs can play one country against another to avoid coming
under unfavorable restriction
– this tactic more common when an MNE is negotiating
permission to operate in a country
– once operating, MNE reluctant to abandon fixed assets in a
country to move to another
Host-country captives
• MNEs attempt to influence home-country government to adopt
policies favorable to foreign countries in which they have
operations

16. © 2001 Prentice Hall 11-16
Political and Legal Impact of the MNE (cont.)
Bribery
• Practice is widespread among MNEs
• Payments to government officials intended to:
– secure government contracts
– facilitate governmental services
– reduce tax liabilities
– keep competitors from operating in the country
– gain governmental approval of price increase
• U.S. Foreign Corrupt Practices Act (1977)
– makes certain payments to foreign officials illegal
» critics contend that U.S. firms lose business
» critics contend that law represents meddling in other
countries’ affairs

17. © 2001 Prentice Hall 11-17
0 1 2 3 4 5 6 7 8 9 10
Most corrupt No corruption
Sweden 8.3
Australia 8.1
Canada 8.1
Austria 7.8
Switzerland 7.7
Netherlands 7.4
United Kingdom 7.2
Belgium 6.8
Germany 6.2
United States 6.2
Spain 5.3
France 5.2
Japan 5.1
Singapore 5.7
Malaysia 3.9
Italy 3.7
Taiwan 3.5
South Korea 3.4
China 3.1
Likelihood of Paying Bribes Abroad by
Nationality of Companies

18. © 2001 Prentice Hall 11-18
Differences in National Attitudes toward MNEs
Host countries—policies toward MNEs vary over time
• Seldom completely restrictive or completely laissez-faire
• Policies intended to attract investment and receive the most
benefits from it
Host- and home-country concerns about MNEs:
• Are greater for MNEs with large international commitments
• Are greater about large MNEs because of their greater potential
impact on national economic and political objectives
MNEs acquire reputations in one country that affect perceptions in other
countries
• Modern communication has facilitated the spread of negative
publicity about MNEs’ practices