Chapter 5 Foreign Direct Investment (FDI) and transnational Corporations of Service Industry

5.1 Overview of FDI and Transnational Corporations in Service Industry

5.1.1 FDI of service industry What ’ s Foreign direct investment ?

 Foreign direct investment scale in service industry 1  Regional differences of FDI in service industry 2  Industrial characteristics of FDI in service industry 3  Liberalization of FDI in service industry 4

Foreign direct investment scale in world

The proportion of Service industry in GDP

FDI in service industry in China in 2007

The flow of FDI in service industry in China in 2013

Regional differences of FDI in service industry developed countries dominate over transnational direct investment USA, the EU

Transnational FDI in developing countrie s is basically 1/3 of that of the world South Asia, East Asia and the Caribbean region of Latin American.

Industrial characteristics of FDI in service industry: finance-related and trade-related service industry are dominant

Merger and acquisition

5.1.2 Transnational corporations in service industry  Investment of manufacturing transnational companies in service industries

Transnational corporations in service industry 1)Management internationalization 2)Business diversification

3)Development imbalance

4) Technology diffusion driven by transnational corporations in service industries

5 ） Frequency in mergers and acquisitions of transnational corporations in service industries

6) Strategic changes guided by transnational corporations in service industries

5.2 Theoretical analysis of reasons for development of FDI and transnational corporations in service industry

Contents Review Why the transnational corporation in manufacturing and service industry could initiate FDI? External factor Internal factor

External Factor Capital Labor Natural resources goods Producing country All Kinds of trade barriers transport costs insurance expenses taxation Country of consuming consumers

External Factor capital capital export country A Capital outflow Goods Capital Natural resources labor consumers Capital import country B

Theory of monopolistic advantage Theory of product life cycle (PLC) Theory of internalization Eclectic theory of international production Internal factor (Determinant )

Theory of product life cycle (PLC)

Eclectic theory of international production the reasons for development of FDI and international enterprises

Ownership-special advantages Locational-choice advantage Internalization advantages

5.3 Organizational forms of transnational corporations in service industry Non-equity cooperation 1 Equity cooperation 2 Key Point

Presentation Group work: (3-4 persons) Choose one multinational company related to service industry. Including: brief introduction, organizational structure, business scope, organizational form, finance and business situation after M&A.

Organizational forms Non-equity cooperation Equity cooperation Case study

Non-equity cooperation It means enter target market by contractual transfer of one or more intangible assets on condition that equity or corporate property right is not involved.

Franchise Potential franchiser—possess famous commodity, trade mark and technology. Potential franchisee—money For example

FranchiserFranchisee Pay money product and trademark franchising contract

Franchise allow franchiser to carry out international business with less input; (McDonald’s) Enable franchisee to introduce mature brand, managerial experience without taking risks. Advantages

Disadvantage Difficult pricing of brand and management Creates potential rivals It is possible to suffer losses due to secrets disclosure CocaCola corporation

Equity cooperation largely new establishment Equity investment mergers& acquisition It means that FDI investors carry out business in target country through full or partial participation, such as overseas branches, foreign affiliates and offices.

东京迪士尼

巴黎迪士尼

上海迪士尼

Advantage & Disadvantage Merits: ★ Realization of internalized transaction of intangible assets through sharing information and resources inside transnational corporation system ★ minimize market failure caused by information asymmetry ★ avoid difficult pricing of brand and management ★ avoid losses due to secrets disclosure ★ No huge threat to investor Demerits: ★ big cost of direct investment

How to choose? Trade-off 1.The comparison between relative cost and gains. Equity investment cost: capital needed for investment, the risk of losing capital, managing and monitoring foreign equity investment.

The risk of non-equity investment: The cost of transaction property including searching for appropriate contractual partner, price, specifications for services provided, number and time delivery.

2. The degree and types of governmental interventions, including direct administrative intervention, policy measures such as tax and tariff.

The choice of different forms by service enterprise is influenced by the governmental policy orientation. For example, if a country’s foreign capital of service industry is under rigid control, the enterprise tends to use non-equity forms such as offices. If the control is loose, equity investment appears.

5.4. Effects of FDI and transnational corporations in service industry Effects on the world economy 1 Key Point Effects on parent country and host country 2

Effects on the world economy  Play important promotional roles for development of global service industries  Intensify market integration and corporate reshuffle of global service industries

(2) Effects on parent country and host country On parent country

On host country Dual influence 1) Spillover effect 2) Introversive effect