1. Foreign Direct Investment6
Chapter
Foreign Direct Investment

2. Opening case-Starbucks
Starbucks’ strategy
Coffee house setting, blended coffees
Superior customer service
Attention to hiring, training, and compensation
Motivation of employees
Used nation-specific strategies
Britain
Japan
Thailand
Korea

3. What is foreign direct investment
Company acquiring or merging with a firm in a different country
A firm creating a ‘Greenfield’ operation in a different country
A firm creating a subsidiary in a different country
As a result
The firm has significant control of its foreign operation
Firm can affect managerial decisions of the foreign operation

4. FDI - Flow versus stock
FDI occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country
Flow: Amount of FDI over a period of time (one year)
Stock: Total accumulated value of foreign owned assets at a given point in time
FDI is not the investment by individuals, firms or public bodies in foreign financial instruments

5. Why is FDI important ? Firms want a presence in foreign markets
Firms want control over growth of these foreign markets
To gain first mover advantages
To ward off competitors
To determine locations, advertising and other related strategic decisions in the firm’s interest

6. Trends in FDI Flow and stock increased in the last 20 years
In spite of decline of trade barriers, FDI has grown more rapidly than world trade because
Businesses fear protectionist pressures
FDI is seen a a way of circumventing trade barriers
Dramatic political and economic changes in many parts of the world
Globalization of the world economy has raised the vision of firms who now see the entire world as their market

7. FDI outflows,
Fig 6.1

8. Growth in world exports
Fig 6.2
World GDP and FDI (index = 100 in 1990)

9. FDI flows by region
Fig: 6.3

10. Inward FDI flows
Fig: 6.4
As a percentage of gross fixed capital formation, 2000

11. FDI outflows by select country 1998-2001
Fig: 6.5

12. Form Of FDI: Greenfield versus acquisitions
Green field operation:
Mostly in developing nations
Mergers and acquisitions:
Quicker to execute.
Foreign firms have valuable strategic assets
Believe they can increase the efficiency of the acquired firm
More prevalent in developed nations

13. FDI trends:
The value of FDI slumped almost 60 percent in
Slowdown in world economy
Heightened geopolitical uncertainty since September 11, 2001
Bursting of the stock market bubble in the US

14. Impediments to the sale of know-how
Risk giving away know-how to competitors
Licensing implies low control over foreign entity
Impediments to the sale of know how
Know-how not amenable to licensing

15. Two forms of FDI Horizontal Direct Investment
FDI in the same industry abroad as company operates at home.
Vertical direct investment
Backward - investments into industry that provides inputs into a firm’s domestic production (typically extractive industries)
Forward - investment in an industry that utilizes the outputs from a firm’s domestic production (typically sales and distribution)

16. FDI when and why? Transportation costs are high
Market Imperfections (Internalization Theory)
Impediments to the free flow of products between nations
Impediments to the sale of know-how
Follow the lead of a competitor - strategic rivalry
Product Life Cycle - however, does not explain when it is profitable to invest abroad
Location specific advantages (natural resources)

17. VDI, when and why? Market power Market imperfections
create entry barriers
erode entry barriers
Market imperfections
Impediments to the sale of know-how
Investments in specialized assets

18. Decision framework Low No High Horizontal FDI Yes Yes Horizontal FDI
How high are transportation costs and tariffs?
Export No
High
Horizontal FDI
Is know-how amenable to licensing?
Yes
Yes
Horizontal FDI
Is tight control over foreign operation required? No No
Horizontal FDI
Can know-how be protected by licensing contract?
Yes
Then license