Foreign Direct Investment

© Prentice Hall, 2006International Business 3e Chapter Chapter Preview Characterize global FDI flows and patterns Discuss each theory that tries to explain FDI Identify important management issues in the FDI decision Explain why home and host nations intervene in FDI flows List the methods that nations use to promote and restrict FDI

© Prentice Hall, 2006International Business 3e Chapter Foreign Direct Investment Purchase of physical assets or significant amount of ownership of a company in another country to gain some measure of management control By contrast, portfolio investment does not involve obtaining a degree of control in a company

© Prentice Hall, 2006International Business 3e Chapter Reasons for FDI Growth Increasing globalization International mergers and acquisitions Entrepreneurship and small firms

© Prentice Hall, 2006International Business 3e Chapter Worldwide FDI Flows World FDI inflows - Developed (70%), developing (30%) - European Union: 57% of world FDI Developing nations - China: 8% of world FDI - All of Africa: 2% of world FDI 64,000 multinationals with 870,000 affiliates

© Prentice Hall, 2006International Business 3e Chapter International Product Life Cycle A company begins by exporting its product and later undertakes foreign direct investment as a product moves through its life cycle

© Prentice Hall, 2006International Business 3e Chapter Market Imperfections (Internalization) Company undertakes FDI to internalize a transaction that is being made inefficient by a market imperfection Trade barriers (e.g., tariffs) Specialized knowledge (e.g., managerial ability)

© Prentice Hall, 2006International Business 3e Chapter Eclectic Theory A firm undertakes FDI when location, ownership and internalization advantages combine to make a location appealing - Location advantage (optimal location) - Ownership advantage (special asset) - Internalization advantage (efficiency)

© Prentice Hall, 2006International Business 3e Chapter Market Power A firm undertakes FDI to establish a dominant presence in an industry - Market power = Greater profits - Vertical integration Extends company’s activities into stages of production that provide its inputs (backward integration) or absorb its outputs (forward integration)

© Prentice Hall, 2006International Business 3e Chapter Management Issues and FDI Control - Partnership requirements - Benefits of cooperation Purchase-or-build decision Production costs - Rationalized production - Cost of R&D Customer knowledge Following clients Following rivals

© Prentice Hall, 2006International Business 3e Chapter Balance of Payments National accounting system that records all payments to entities in other countries and all receipts coming into the nation Current account - Records transactions involving the import and export of goods and services, income receipts on assets abroad, and income payments on foreign assets inside the country Capital account - Records transactions involving the purchase or sale of assets (including assets such as property and shares of common stock in a company)

© Prentice Hall, 2006International Business 3e Chapter Why Host Intervenes in FDI Balance of Payments (+) - Initial FDI boosts economy - FDI may decrease import demand - FDI may generate exports Obtain resources and benefits (+) - Access technology - Access management skills - Create employment

© Prentice Hall, 2006International Business 3e Chapter Why Home Intervenes in FDI – Removes resources from the nation – Can eliminate an export market – Might eliminate domestic jobs + May improve national competitiveness + Can offshore ‘sunset’ industries

© Prentice Hall, 2006International Business 3e Chapter Host Promotion Methods Financial incentives - Low or waived taxes - Low-interest loans Infrastructure improvements - Improved seaports, roads, and telecommunications networks

© Prentice Hall, 2006International Business 3e Chapter Host Restriction Methods Ownership restrictions - Prohibit investment in certain industries or businesses Performance demands - Local content requirements - Technology transfers - Export targets

© Prentice Hall, 2006International Business 3e Chapter Home Promotion Methods Insurance on assets abroad Loans and loan guarantees Special tax treaties Tax breaks on profits earned abroad Persuade other nations to accept FDI

© Prentice Hall, 2006International Business 3e Chapter Home Restriction Methods Higher tax rates on foreign income Sanctions on specific nations