FOREIGN DIRECT INVESTMENT (FDI) Worldwide flows of FDI The Theory of FDI MNC-Government Relations & Government Policy Foreign market entry modes

Foreign Direct Investment by MNCs is either factor seeking or market seeking

Developed country to Developed country Factors (Technology & Skilled manpower) Market (Competitiveness) Developed country to Developing country Factors (Labor, Raw Material) Market (take advantage of Sellers’ market) Developing country to Developing country Factors (Labor, Raw Material) Market (take advantage of Sellers’ market) Developing country to Developed country Factors (Technology, Capital) Market (Specialized Products) DIRECTION OF FOREIGN DIRECT INVESTMENT

MAJOR INVESTORS (%) TABLE 1

Major Investors (notes to Table 1) Total FDI: (annual flow in US$ billions) 1975: : 644 LDC Investor countries: (%) Total LDC percent Asia-Pacific LDCs other LDCs

MAJOR RECIPIENTS (%) TABLE 2

MAJOR RECIPIENTS (%) TABLE 3 (na)

Stock of FDI in top 12 LDCs (US$ bil.) China 2* 129(* 1985) Mexico 9 60 Singapore 7 53 Indonesia Brazil Malaysia 6 38 Argentina 5 25 Hong Kong 2 22 Greece 4 20 Thailand 1 19 Taiwan 3 17 South Korea 1 16

RESPONSE TO TRADE PROTECTION overcome tariff & non ‑ tariff restrictions - eg. EU, NAFTA FOLLOWING COMPETITORS primarily in oligopolistic industries prevent competition from getting an edge MARKET CONTROL getting/maintaining access to strategic input markets getting/maintaining access to output markets GEOGRAPHIC DIVERSIFICATION Maximizing synergy between different market locations Spreading risk over different markets COMMON MOTIVES FOR FDI (all of which can be addressed by the “eclectic paradigm”)

THE THEORY OF FOREIGN DIRECT INVESTMENT (FDI) – John Dunning Dunning’s “eclectic model”~ three eclectic aspects:  Ownership advantages  Location advantages  Internalization advantages  the “OLI paradigm” Dunning developed his conceptual framework on the basis of “advantages that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets.” (CWL Hill)

OLI – Eclectic Model by John Dunning OWNERSHIP Advantages: Firm Specific Factors (in some cases, but not all, these are oligopolistic advantages) experience curve economies scale economies integrated global management systems product differentiation asset specificity and resource embeddedness (We later use the term, core competencies.) LOCATION Advantages: Country Specific Factors least cost production site global web national incentives for investments or against imports

OLI – Eclectic Model by John Dunning (contd.) INTERNALIZATION Advantages: (Impediments To Licensing ) Risk giving away know-how to competitors Licensing implies low control over foreign entity Know-how not amenable to licensing Impediments to the sale of know how

FDI - Political Economy Radical View - MNCs are neo- imperialist ventures that extract value without adequate compensation. Market View - MNCs facilitate the efficient global allocation of resources.

MULTINATIONALS~ EVERYBODY’S FAVORITE MONSTER Back in fashion early controversy; today a change of view Creatures of imperfection Theory of FDI: imperfect competition  FDI Country impediments/incentives Firm-specific advantage may require Internalization Examples: ( Have imperfection, will travel )

continued: MULTINATIONALS~ EVERYBODY’S FAVORITE MONSTER The non-global firm Multinationalization: extension of home base Holding hands The variety of reasons for alliances –is it a fad? A global game of monopoly? Great theoretical issue: Is global industry becoming more concentrated (oligopolistic), or more free? On present trends (trends in where FDI is going, and government policy)

 POLITICAL & FINANCIAL STABILITY  SOPHISTICATED INFRASTRUCTURE  REDUCE TRANSACTIONS COSTS IN INPUT MARKETS PROACTIVE STRATEGY BY SINGAPORE GOVERNMENT TO ATTRACT FDI

REDUCE TRANSACTIONS COSTS IN INPUT MARKETS -1 CAPITAL  No restrictions on inflows and outflows LAND & PLANT SET-UP  Sophisticated infrastructure and construction  Minimize set-up time with one-stop shopping CHEAP LABOR  Import if necessary  Utilize provisions under SIJORI* agreement * Singapore – Johore (Malaysia) – Riau Islands (Indonesia)

REDUCE TRANSACTIONS COSTS IN INPUT MARKETS -2 HIGH-SKILL LABOR  Educated domestic workforce  No restrictions on hiring of expatriates  No local hiring requirements TECHNOLOGY  Protection of intellectual property rights  High-tech infrastructure MARKET INTEGRATION  SIJORI, ASEAN, AFTA, APEC, bilateral agreements

Entry Modes Exporting Turnkey Projects Licensing Franchising Joint Ventures Wholly Owned Subsidiaries

Advantages and Disadvantages of Entry Modes Entry ModeAdvantageDisadvantage ExportingAbility to realize location and experience curve economies High transport costs Trade barriers Problems with local marketing agents Turnkey contracts Ability to earn returns from process technology skills in countries where FDI is restricted Creating efficient competitors Lack of long-term market presence Licensing Low development costs and risks Lack of control over technology Inability to realize location & experience curve economies Inability to engage in global strategic coordination

Advantages and Disadvantages of Entry Modes Entry Mode AdvantageDisadvantage FranchisingLow development costs and risks Lack of control over quality Inability to engage in global strategic coordination ventures Access to local partner’s knowledge Sharing development Costs and risks Politically acceptable Lack of control over technology Inability to engage in global strategic coordination Inability to realize location and experience economies Wholly owned subsidiaries Protection of technology Ability to engage in global strategic coordination Ability to realize location & experience economies High costs and risks Joint

Selecting an Entry Mode Technological Know-How Management Know-How Wholly owned subsidiary, except: 1. Venture is structured to reduce risk of loss of technology. 2. Technology advantage is transitory. Then licensing or joint venture OK. Franchising, subsidiaries (wholly owned or joint venture). Pressure for Cost Reduction Combination of exporting and wholly owned subsidiary.