Welcome to AB 220 Global Business Unit 5 Foreign Direct Investments Bill Okrepkie AIM - WSOkrepkie (262) (h) (605) ©

Agenda Welcome everyone Admin Review unit 4 Discuss Unit 5 Conclusion of Seminar

Hi everyone and I hope you all are having a great week and weekend!

Are there any questions so far in the class or any questions I missed?

AB220 Unit 4 Objectives During this unit, we will: Explain the different theories of foreign direct investment Understand how political ideology shapes a government’s attitudes toward FDI Describe the benefits and costs of FDI to home and host countries Explain the range of policy instruments that governments use to influence FDI

What is FDI? Stock of FDI – Accumulated value of foreign-owned assets at some period of time. At least 10% foreign ownership Flow of FDI- Amount of FDI undertaken in a year. Inflow FDI – Flow of FDI coming into a country Outflow FDI – Flow of FDI out of a country.

A few definitions FDI: Occurs when a business invests directly in facilities to produce or market a product in a foreign country (Hill, 2009). Greenfield investments – establishing a new operation in a foreign country (Hill, 2009) Flow of FDI – amount of FDI for a year (Hill, 2009) Stock of FDI – total accumulated value of foreign-owned assets at a given time (Hill, 2009) Outflows of FDI – The flow of FDI out of a country (Hill, 2009) Inflows of FDI – The flow of FDI into a country (Hill, 2009)

Foreign Direct Investment in the World Economy Trends – From 1992 to 2008 the flow of FDI increased 8X By 2009 – Global stock of FDI was about $15 trillion. By 2009 – 82,000 parent firms had 810,000 affiliates in foreign markets worldwide. These employed 77 million. By 2009 – Foreign affiliates of global firms had sales of more than $30 trillion. (Source, Hill, 2011, p. 243).

United States FDI Inflow During the past 10 years, FDI in the US has employed between 5-6 million US workers. FDI has supported 2 million manufacturing jobs in the US FDI firms pay wages 30% higher than non-FDI jobs. FDI fluctuates widely with the US business cycle: Stock of direct foreign investment - at home: $2.581 trillion (31 December 2010 est.) $2.41 trillion (31 December 2009 est.) Currently, 84% of US FDI came from 8 countries: Switzerland, the United Kingdom, Japan, France, Germany, Luxembourg, the Netherlands, and Canada.  Question: Does this list of countries surprise you? Source: US Dept. of Commerce and States/FDI_Statistics /

Who Has Invested In The US?

United States FDI Outflow Stock of direct foreign investment - abroad: $3.597 trillion (31 December 2010 est.) $3.367 trillion (31 December 2009 est.) States/FDI_Statistics/

Why FDI Advantages - Maintain control of technological know-how - Control over operations - Not amenable to licensing Disadvantages - Expensive – cost of establishing the facility - Risky – dealing with different cultures - May make costly mistakes

Problems with Licensing Gives away technical know-how to potential competitors Loses control over manufacturing, marketing, and strategy Lose of competitive advantage from it’s management, marketing, and manufacturing capabilities

Political Ideology and FDI Radical view – imperial domination, taking everything from the host country and return nothing Free market view – production should be based on comparative advantage. Pragmatic nationalism – FDI has costs and benefits -Benefits to host country – capital, skills, technology, and jobs -Costs to host country – profits go back, may import parts

Foreign Direct Investment Globally, there is a marked trend upwards in FDI worldwide.

Home-Country Policies Encouraging outward FDI -Government backed insurance programs -Special funds or banks to support developing countries -Eliminated double taxation on foreign income -Encouraged host countries to relax formal restrictions Restricting outward FDI -Limit capital outflows (country’s balance of payments) -Using tax laws to encourage domestic investment -Formal and informal restrictions on FDI

Host-Country Policies Encouraging Inward FDI -Providing incentives to companies -Tax breaks -Low-interest loans -Grants -Subsidies Restricting Inward FDI -Ownership restraints -Firms restricted from certain activities – national security/competition -Use of joint ventures -Performance requirements -Maximize benefits and minimize costs.

Foreign Direct Investment The theory of FDI: Firms where FDI IS likely to be a good option: Firms in industries where licensing is more common and profitable. Firms in low-tech, fragmented industries.

Any Questions

U. S. Foreign Direct Investment Source: U.S. Department of Commerce

FDI Rates of Return:

Money Talks (and Walks!) Over the last 25 years: The accounting rate of return on FDI inflow investments into the United States has averaged 4.3% The accounting rate of return on FDI outflow investments from the United States has averaged 12.1 % Source: Harvard Business School

Unit 4 Work: Readings: pp Chapter 7 & pp Chapter 8 Hill Text. Class Discussion: Wal-Mart in China (PP ). Drop box Assignment: Zip-6 Scenario : Based on your assigned reading in this unit, and after reading the following information on FDI Inflows at: point/state_2011_point/2011_6.aspx?lang=eng&view=d Which of these three countries would you, as CEO of Zip-6, suggest as the next country for expansion and why? Which form of entry strategy (Greenfield Investment, Licensing, Acquisition, and Exporting) would be best and why? Journal Activity: Foreign Ownership of Businesses Seminar

Any Questions?

AB220 Unit 5 Objectives During this unit, we will: Describe the functions of the foreign exchange market Describe the historical development of the modern global monetary system Explain the role played by the World Bank and the IMF in the international monetary system  Question: Have you heard of the IMF or The World Bank?

The Foreign Exchange Market Converts one country’s currency into that of another country.  Question: Why would this be critical to global business?

Foreign Exchange Functions: Two Main Functions: 1.Converts one nation’s currency into that of another; 2.Provides some insurance against foreign exchange risk (the risk that some unanticipated change in exchange rates will adversely impact the parties involved)  Question: Why would the second function be important to global business?

What is The Foreign Exchange Market? A global network of electronically connected exchange dealers, brokers, banks, and other financial institutions. Has several geographic centers of activity: -London 34% -New York 16% -Zurich, Tokyo and Singapore 6% -Operates 24/7/365 It never closes!

International Monetary System: Agreed upon arrangements that govern foreign exchange rates; 1. Floating Exchange Rates – Allows rate to “float” against the agreed upon value of other currencies (The U.S. Dollar, The EU Euro, The Japanese Yen, and The British Pound) 2. Pegged Exchange Rates – “Peg” the value of the exchange rate to some reference currency (Like the U.S. Dollar) 3. Dirty Float – Links the value of currency to some “basket” of currencies within a certain range and artificially manipulates or intervenes to keep currency within an acceptable range (China) Fixed Exchange Rates – Fixes the value of a currency against the value of an agreed upon set of currencies that do not fluctuate.

The Gold Standard The practice of pegging the value of a currency to the convertibility of a nation’s gold reserves. By 1880, most leading trading nations had adopted the gold standard. Provided a strong incentive for nations to maintain a trade equilibrium in which imports equals exports.  Question: Why do you believe this would create such an incentive?

The Gold Standard Declined After WW I World War I Caused Massive Inflation Countries Financed the War by Printing More Currency This Could Not Be Supported by The Gold Standard Following The War, Countries Were Largely Unsuccessful in Returning to Gold as a Standard

Bretton Woods System During WWII (1944) 44 Countries met in Bretton Woods, New Hampshire to design a new international monetary system: Established The International Monetary Fund (IMF) Established the World Bank Called for Fixed Exchange Rates Policed by The IMF Agreement Not to Use Currency Devaluation as a Trade Weapon

The IMF Functions: Discipline – Halts competitive devaluations of currencies and encourages self-discipline in each nation’s internal fiscal management (World Trade Stability) Flexibility – Created lending facilities to assist nations during temporary periods of “balance of payments” problems Flexibility – Parity allowed certain nations to devalue their currencies more than 10% in the event of a permanent decline in the demand for their products or services.

IMF Goals Impose Discipline and Stability in Foreign Exchange Promote Overall Economic Development Reduce Overall Unemployment Instill Confidence in Global Trading Systems  Question: Do you Believe the IMF Has Largely Been Successful During Its 68 Year History?

International Bank for Reconstruction and Development aka “The World Bank” First Goal – To reconstruct the war-torn economies of Europe by making low-interest loans to nations. 1950’s – Turned its focus towards helping third-world economies. 1960’s – Began loaning to support agricultural, education, population control, and urban development.

Two World Bank Lending Approaches: Money is raised for lending by selling bonds in the international capital market. Loans are them made at cost plus the World Bank’s expenses. Money is also raised for lending by the International Development Association (IDA) by subscribing directly to wealthy members like the U.S., Japan, and Germany and then made on terms of 50 years at 1% interest rate. -Question: Do you feel this last approach is equitable or fair to residents of these member countries?

The Collapse of The Fixed Rate System 1973 – The Fixed Exchange Rate System established at Britton Woods collapsed. Many feel that this was again due to war! To finance the Vietnam War, the United States engaged in heavy spending to finance the war that was not funded by an increase in tax rates on its citizens. As a result, U.S. trade balances began to deteriorate and inflation increased from 4% to 9%. ( ) This started speculation that the German currency fixed against the U.S. currency would be devalued. This “run” on German currency forced the German central bank to intervene in the crises. Despite attempts to successfully address the problem in the United States, speculation grew until the currencies of many of our larger trading partners were floating against the Dollar. This finally led to a 1976 meeting of the IMF at which our current set of rules governing this floating exchange rate were placed into operation.

How Did This Impact the United States: Question: Do these issues with exchange rates merely reflect the changing global business landscape and a decrease in U.S. dominance? First, it exposed a fundamental weakness in the Britton Woods Agreement. It was only good so long as the U.S. Dollar was stable, U.S. inflation remained low and the U.S. did not experience a balance-of-payments deficit! Second, since 1973, exchange rates have been much more volatile and have required a series of IMF adjustments and intervention.

Unit 5 Work: Readings: pp Chapter 9 & pp Chapter 10 Hill Text. Class Discussion: Visit to Coca-Cola Corporate site and a discussion of monetary policy and global corporations Drop box Assignment: Zip-6 Scenario : Part 1 of your Final Project: The Development of a Power Point Outline addressing the Final Project Assignment Points (7 Power Points) Journal Activity: A visit to the IMF Website Seminar

Any Questions or Comments ?

It looks like the hour is up. I hope this session was valuable to you and I look forward to seeing you in our next seminar. Have a great week and weekend and see you next week and in the discussion board.