1. Chapter 7 Foreign Direct Investment

2. International Business 4e
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
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International Business 4e

3. 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
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International Business 4e

4. Growth of World FDI vs. GDP
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International Business 4e

5. International mergers
Reasons for FDI Growth
Increasing
globalization
International mergers
and acquisitions
Entrepreneurship
and small firms
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International Business 4e

6. Value of Cross-Border M&As
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International Business 4e

7. International Business 4e
Worldwide FDI Flows
World FDI inflows
Developed (58%), developing (36%)
European Union: 33% of world FDI
70,000 multinationals
Developing nations
China: 9% of world FDI
All of Africa: 3% of world FDI
with
690,000 affiliates
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International Business 4e

8. 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
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9. 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)
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International Business 4e

10. International Business 4e
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)
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International Business 4e

11. International Business 4e
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 out-puts (forward integration)
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International Business 4e

12. 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
rivals
clients
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International Business 4e

13. International Business 4e
Balance of Payments
National accounting system that records all payments to entities in other countries and all receipts coming into the nation
Current account
Capital 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
Records transactions involving the purchase or sale of assets (including assets such as property and shares of common stock in a company)
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International Business 4e

14. Why Host Intervenes in FDI
Initial FDI boosts economy
Balance of Payments +
FDI may decrease import demand
FDI may generate exports
Access technology
Obtain resources
and benefits +
Access management skills
Create employment
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International Business 4e

15. 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
FDI
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International Business 4e

16. Host Promotion Methods
Financial incentives
Low or waived taxes
Low-interest loans
Infrastructure improvements
Improved seaports, roads,
telecommunications networks
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International Business 4e

17. Host Restriction Methods
Ownership restrictions
Prohibit investment in certain industries or businesses
Performance demands
Local content reqmnt.
Technology transfers
Export targets
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International Business 4e

18. 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
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International Business 4e

19. Home Restriction Methods
Higher tax rates on
foreign income
Sanctions on
specific nations
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International Business 4e

20. International Business 4e
Chapter Review
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, 2008
International Business 4e