1. Welcome to AB 220 Global Business Unit 5 Foreign Direct Investments Bill Okrepkie WOkrepkie@kaplan.edu bokrepkie@rap.midco.net AIM - WSOkrepkie (605) 342-1689 (h) (605) 390-0466 ©

2. Agenda Welcome everyone Admin Review unit 4 Discuss Unit 5 Conclusion of Seminar

3. Hi everyone and I hope you all are having a great week and weekend!

4. Are there any questions so far in the class or any questions I missed?

5. Unit 4: Trade and Investment

6. Complete the Reading - Chapters 5 and 6 on the Reading Page Respond to the Discussion on the Discussion Board Complete the Assignment on the Assignment Page Take the Quiz on the Quiz Page How good is your Geography? Play the practice quiz games Check out Extra! Extra! Take the vocabulary self review (ungraded

7. Unit 4: Unit Outcomes Understand why nations trade with each other Be familiar with the different theories explaining trade flows between nations Be familiar with the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries Understand how subsidies and tariffs effect trade 7

8. Objectives, cont. Free Trade: A situation where government does not interfere with its citizens buying or selling with another others in another country. -The text states, “Some economists believe that unrestricted free trade between nations will raise the economic welfare of countries that participate in a free trade system”. Classical trade theories (Adam Smith, David Ricardo, etc. outline a world where trade is determined by the particular factors of production possessed within different countries. The implication is that a country will tend to produce those things that it can produce most efficiently and import from elsewhere those things that it can’t.

9. Little Economics Comparative advantage The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors. Absolute advantage The ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources.

10. Modern Trade Theory: Porter’s Diamond – asserts that 4 broad characteristics influence the competitive environment within a country: 1.Factor Endowments – Things existing within a country that allow it to compete within a particular industry (skilled workforce, plants, etc.) 2. Demand Conditions – The demand within a particular country for a particular product or service.

11. Modern Trade Theory: (Continued) 3. Relating and Supporting Industries – The existence or lack of supplier and other supporting industries within a particular country. 4. Firm Strategy, Structure, and Rivalry – The conditions within a particular country that govern how businesses are created, organized, and operated, and how businesses compete with each other within a particular country.

12. Governments use the following 7 tools to affect trade: 1.Tariffs – Taxes imposed on imports or exports. - Who are the winners and who are the losers? 2. Subsidies – Government payments to a domestic producer (to produce or not produce) 3. Import Quotas – A regulatory restriction on the specific quantity of a product that may be imported into a country. Governmental Trade Policies:

13. 4. Voluntary Export Restraint – A voluntary restraint imposed on exports usually at the request of the importing nation. Government to government. 5. Local Content Requirements – A requirement that some specific percentage of a product sold within a country be produced domestically. 6. Administrative Policies – Administrative “barriers” designed to make it difficult for imports to enter the country. 7. Antidumping Policies – Rules designed to punish foreign businesses that sell their products within a country at prices below their costs to produce that product. Governmental Trade Policies: Continued

14. For Government Intervention Protecting jobs and industries National security Retaliation Protecting consumers Protecting human rights Furthering foreign policy objectives Protecting infant industries Strategic trade policy

15. World Trade Organization (WTO) GATT Rules – applies to trade in manufactured goods and commodities, services and intellectual property; later…. Reduce tariffs. Global police Expanding trade agreements What do you think about child labor? Environmental issues?

16. Discuss the statement that mercantilism is a bankrupt theory that has no place in the modern world. Include in your response whether you think China is pursuing a mercantilist policy or not. Discussion

17. Assignment Eliminate Subsidies and Keep Tariffs Read the case in your text on pages 234-235. Answer the following questions after reviewing your chapter reading: especially p. 205 and p. 215-217. 1. In this case you just read, if you had the power to eliminate subsidies and keep import tariffs concerning cotton, would you do it? Why or why not? Would you consider this an ethical stance, why or why not? 2. Regarding your answer to question #1, what would be the impact on the U.S. and on other producing countries? 3. What are the pros and cons of free trade and globalization of production?

18. Any Questions?

19. Unit 5 Foreign Direct Investment

20. After completing this unit you should be able to: Consider how political ideology shapes a government’s attitude toward FDI Discuss some of the criteria for making an FDI decision in business Analyze how geography and trade agreements affect FDI Use Global Time Zone knowledge in a business setting

21. To Do List Complete the Reading - Unit Overview and Chapter 7 On the Reading Page Respond to the Discussion 40 Points On the Discussion Board Complete the Assignment 60 Points On the Assignment Page Check out Extra!Extra!

22. A few definitions FDI: Occurs when a business invests directly in facilities to produce or market a product in a foreign country (Hill, 2009). Greenfield investments – establishing a new operation in a foreign country (Hill, 2009) Flow of FDI – amount of FDI for a year (Hill, 2009) Stock of FDI – total accumulated value of foreign-owned assets at a given time (Hill, 2009) Outflows of FDI – The flow of FDI out of a country (Hill, 2009) Inflows of FDI – The flow of FDI in a country (Hill, 2009)

23. Globally, there is a marked trend upwards in FDI worldwide. Question? Why do you think this trend is upward?

24. Sources of FDI US UK Netherlands Germany Japan France China ?????

25. Inflows of FDI into China Foreign Investment in China Climbs 15% on Consumer Demand May 17 (Bloomberg, May 16, 2011) -- Foreign direct investment in China climbed 15 percent in April as companies including Starbucks Corp. and Walt Disney Co. expand to tap rising incomes in the world’s fastest-growing major economy. Investment rose to $8.5 billion, the Ministry of Commerce said in a statement in Beijing today. The increase compared with a 33 percent gain in March. For the first four months, the total was $38.8 billion, a gain of 26 percent.

26. China’s Outflow of FDI Total capital outflow from China into overseas non- financial sectors may equal the inflow into this country in 2015, Fan Chunyong, secretary-general of the China Industrial Overseas Development and Planning Association (CIODPA) predicted on Tuesday. In the first seven months of this year, China's non- financial outbound foreign direct investment (FDI) amounted to $26.75 billion, according to data from the Ministry of Commerce, which gave no year-on-year comparisons. Over the same time period, the country's FDI inflow reached $58.35 billion, an increase of 20.65 percent from a year earlier. (ChinaDaily, May 2011)

27. Theories of FDI Why firms use FDI to enter a foreign market Why firms favor certain locations Eclectic paradigm – locating production facilities using location-specific assets or resources.

28. Why FDI Advantages - Maintain control of technological know-how - Control over operations - Not amenable to licensing Disadvantages - Expensive – cost of establishing the facility - Risky – dealing with different cultures - May make costly mistakes

29. Problems with Licensing Gives away technical know-how to potential competitors Loses control over manufacturing, marketing, and strategy Lose of competitive advantage from it’s management, marketing, and manufacturing capabilities

30. Political Ideology and FDI Radical view – imperial domination, taking everything from the host country and return nothing Free market view – production should be based on comparative advantage. Pragmatic nationalism – FDI has costs and benefits -Benefits to host country – capital, skills, technology, and jobs -Costs to host country – profits go back, may import parts

31. Host country benefits Inbound of capital, technology, management expertise Brings jobs to host country Economic growth

32. Host Countries Costs Adverse effects on competition Adverse effects on balance of payments National sovereignty and autonomy

33. Home-country benefits Increase balance of payments Increase employment from demand for home-country exports Increase experience from working with host country

34. Home-country Costs Balance of payments and employment -Initial capital outflow -May be a problems with balance of payments from using a low-cost production host country Substitute for domestic production Offshore production to serve the home market

35. Government policies

36. Home-Country Policies Encouraging outward FDI -Government backed insurance programs -Special funds or banks to support developing countries -Eliminated double taxation on foreign income -Encouraged host countries to relax formal restrictions Restricting outward FDI -Limit capital outflows (country’s balance of payments) -Using tax laws to encourage domestic investment -Formal and informal restrictions on FDI

37. Host-Country Policies Encouraging Inward FDI -Providing incentives to companies -Tax breaks -Low-interest loans -Grants -Subsidies Restricting Inward FDI -Ownership restraints -Firms restricted from certain activities – national security/competition -Use of joint ventures -Performance requirements -Maximize benefits and minimize costs.

38. Any Questions?

39. Discussion Question In 2004, inward FDI accounted for some 24 percent of gross fixed capital formations in Ireland, but only 0.6 percent in Japan. What do you think explains this difference in FDI inflows into the two countries? Does political ideology influence FDI, if so how? Does their geographical location have anything to do with this phenomenon? Explain. Then read the case on Starbucks p. 270-271 in your text and then comment on why they abandoned their initial strategy of licensing their format to foreign operators. Please respond to the discussion questions by following the Discussion guidelines in the syllabus.

40. Assignment - One Page Memo You are working for a Japanese company that sells earthen ware and currently has a manufacturing facility in China. As the analyst, you will write a one page memo regarding the attractiveness of an alternative country manufacturing site based on the potential ROI. Remember to address all checklist items in the PDF below. For details on your assignment click the Assignment button below. Submit your completed assignment via the Dropbox. For details on using the Dropbox please click the Academic Tools tab above, then Dropbox Guide.

41. Any Questions?

42. It looks like the hour is up. I hope this session was valuable to you and I look forward to seeing you in our next seminar. Have a great week and weekend and see you next Thursday and in the discussion board.