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

Section 1 Overview of FDI and Transnational Corporations in Service Industry FDI of service industry Transnational corporations in service industry

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

Know some basic facts about FDI of service industry :  Foreign direct investment scale in service industry  Regional differences of FDI in service industry  Industrial characteristics of FDI in service industry  Liberalization of FDI in service industry

According to a survey, FDI received by service industry of developed countries was only 23.7% in 1970 but up to 48.4% in The World Investment Report 2004 released during 2001 and 2002 direct investment flow in global service industry amounted to US$500 million, about two- thirds of global gross FDI flow in that year.

Portion of the Direct Foregn Investment Inflow 外国直接投资流入 量份额（ % ） Developed economics 发达经济体 Developing Economics 发展中经济体

Portion of the Direct Foregn Investment Outflow 外国直接投资流出 量份额（ % ）

developed countries dominate over transnational direct investment and several developing countries and regions are rapidly developed in absorbing foreign direct investment. USA, the EU

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

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

Review of traditional FDI theory

1). Theory of monopolistic advantage 2). Theory of product life cycle(PLC) 3). Theory of marginal industry expansion 4). Theory of investment-induced factor combination

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

Ownership-special advantages Locational-choice advantage Internalization advantages

5.3 Organizational forms of transnational corporations in service industry Non-equity cooperation （非股权合作 形式）

Franchise For example: McDonald ’ s, KFC and Watson ’ s

Equity cooperation （股权合作形式） new establishment and mergers- acquisitions,

The advantages and disadvantages of equity and non-equity cooperation

1) equity cooperation has disadvantage in relative big cost of direct investment but has advantage in realization of internalized transaction of intangible assets through sharing information and resources inside transnational corporation system so as to minimize market failure caused by information asymmetry, address difficult pricing of brand and management in non- equity cooperation, avoid losses due to secrets disclosure and make for realization of ownership interest of investor

2) non-equity arrangement has a certain period, investor creates potential rivals when imparting his experience and technology while the subsidiaries generated by equity investment belong to transnational corporation and take unified actions under its global strategy, causing no huge threat to investor.

5.4. Effects of FDI and transnational corporations in service industry

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