International Business Management (MS34B)

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Presentation transcript:

International Business Management (MS34B) Foreign Direct Investment and Location Attractiveness Facilitator: Densil A. Williams MS34B, UWI Mona, Department of Management Studies

MS34B, UWI Mona, Department of Management Studies Contents Motivations for FDI Types of FDI Attracting FDI to a Host country Developing Countries Response to Competitive FDI Market Concluding Remarks MS34B, UWI Mona, Department of Management Studies

MS34B, UWI Mona, Department of Management Studies Motivations for FDI FDI provides an important source of inflows to a country in order to improve its BOP position and aid in better financial management. This is the reason for countries craving to get as much FDI as possible. But, why do investors chose FDI over other methods that can be used to enter a non-domestic market? FDI theories will help us to analyse this issue. MS34B, UWI Mona, Department of Management Studies

MS34B, UWI Mona, Department of Management Studies Motivations for FDI Theories of Foreign Direct Investment Monopolistic Advantage: FDI occurs because the investing firm possesses superior ownership advantages compared to local investors. Internalisation: Foreign Direct Investment takes place as firms seek to internalise (or bring in-house) the cross-border market for an intangible asset (technology, marketing expertise, management skills) or a required input (raw materials, labour) MS34B, UWI Mona, Department of Management Studies

MS34B, UWI Mona, Department of Management Studies Motivations for FDI Theories of Foreign Direct Investment Dunning’s Eclectic (OLI) Framework Foreign direct investment takes place as a result of the existence of a set of ownership advantages on the part of the investing firm (Ownership advantages – O) which it seeks to take advantage of through its internal market rather than an arms-length market (Internalisation Activity – I), in countries which have particular locational advantages in relation to the particular investment transaction (Locational Advantages – L) MS34B, UWI Mona, Department of Management Studies

MS34B, UWI Mona, Department of Management Studies Motivations for FDI Theories of Foreign Direct Investment Product Cycle Theory FDI flows to developing countries in more mature stages of a product’s life cycle, because production cost considerations outweigh proximity to innovating market. MS34B, UWI Mona, Department of Management Studies

MS34B, UWI Mona, Department of Management Studies Types of FDIs Resource-Seeking: MNC invests to acquire specific resource at lower cost. Market-Seeking: MNC invests to supply goods and services to country. Efficiency-Seeking/Export-Oriented: MNC invests to produce, at lower cost, for global or regional markets. N.B. Depends heavily on types of global production chain i.e. buyer driven or producer driven Strategic Asset-Seeking: MNC seeks to acquire the assets of foreign companies to promote long-term strategic objectives. MS34B, UWI Mona, Department of Management Studies

Attracting FDI to a Host Country Government attitude towards FDI has become increasingly positive due to the integration of world markets. This has resulted in almost all governments aggressively promoting their economy as an attractive location for direct investment. MS34B, UWI Mona, Department of Management Studies

Attracting FDI to a Host Country Factors critical for attracting FDI Country Factor Negotiation Factor Specific concession MS34B, UWI Mona, Department of Management Studies

Attracting FDI to a Host Country Country Factors Political and Social Stability Macro-economic stability Economic openness and liberalization Receptive investment environment MS34B, UWI Mona, Department of Management Studies

Attracting FDI to a Host Country Negotiation Tactics Unified Response – country’s leader to the man on the shop floor must sing with one voice - High level officials must be included in the meetings as frequently as possible Presidential or Priministerial involvement is critical Speed- respond to the needs of the investor quickly e.g. data needs, site selection etc. Refusals to take kick-backs and engage in shady deals MS34B, UWI Mona, Department of Management Studies

Attracting FDI to a Host Country Specific Concession Financial Incentives (tax exemption) Infrastructure (both private and public partnership is used to build infrastructure) Education (both investors and host government invest in education sector to provide the relevant training) MS34B, UWI Mona, Department of Management Studies

Attracting FDI to a Host Country FDI attraction is not an effortless task. The market is becoming increasingly more aggressive and as such, promotional strategies are showing signs of convergence Countries have to transform their promotional efforts Promotional efforts should be both selective and functional MS34B, UWI Mona, Department of Management Studies

Attracting FDI to a Host Country Selective- interventions aimed at attracting specific foreign firms Functional- improve the overall investment climate so that local investors in the economy are attracted to the business environment All investors need to get “most favoured foreigner” treatment MS34B, UWI Mona, Department of Management Studies

Developing Countries Response to Competitive FDI Market Facing competition for FDI and diminishing FDI inflows, developing countries have continued the process of FDI liberalisation, 236 of 248 regulatory changes in 70 countries identified in UNCTAD in 2002, were in the direction of facilitating FDI- a similar ratio to the 95% of the 1,641 policy changes in the direction of greater investment liberality. Financial incentives and bidding wars for FDI have increased, while IPA have mushroomed, devoting resources to targeting “greenfield” investment, mounting after-care services for existing investors and shifting the orientation of host economies from “red tape to red carpet”. MS34B, UWI Mona, Department of Management Studies

Developing Countries Response to Competitive FDI Market FDI from developing economies have risen in both absolute and relative terms The value of FDI among developing countries increased from US$ 2bill in 1985 to US$60bill in 2004 BRIC countries accounted for significant increase in FDI from emerging economies Most of this FDI was a result of south-south flow MS34B, UWI Mona, Department of Management Studies

Developing Countries Response to Competitive FDI Market Examples of FDIs from Emerging Economics Brazil – PetroBras Russia- VimpelCom India - Tata, Bharti Airtel China - Haier Other emerging economies FDIs Malaysia- Petronias Korea- Daewoo Taiwan- Acer South Africa- Sappi MS34B, UWI Mona, Department of Management Studies

MS34B, UWI Mona, Department of Management Studies Concluding Remarks Firms generally engage in FDI when they have a unique advantage and want to exploit it without loosing control over proprietary information to others. FDIs however, serve an important role in helping countries (especially developing countries) to improve their national financial management and overall growth and competitiveness landscape MS34B, UWI Mona, Department of Management Studies

MS34B, UWI Mona, Department of Management Studies Concluding Remarks As such, today, more governments have a positive view of FDI and are aggressively promoting their economies as attractive locations for hosting such investments. This has led to a need for more selective and functional approaches to attraction programmes compared to the mostly selective approach that was prevalent in almost all economies before the last two decades. MS34B, UWI Mona, Department of Management Studies