1. BU669 Session 2 Negotiating FDI Relationships & Offshoring

2. Foreign Direct Investment Growing importance – growth in capital flow > growth in flow of goods & services Inter-company product flows account for significant share of countries exports & imports Developed to developing countries MNE still drive a lot of the action Stakeholders – governments, MNE, local companies Simulation – window into the dynamics

3. Players in Negotiations 3 Multinationals – Megatronics, Eurodata, Tanaka 1 Government– China – but local governments as well 2 local companies – Majestic, Shanghai Information Age Technologies

4. Issues For Individual Players MNCs – China? Type & size of Plant? Local Companies – Enter industry? Alone or Partner? Plant type & size? Government – Industry structure & ownership to allow? Incentives? Economic development?

5. Issues Between MNCs & Local Companies License, subcontract, JV, other? Ownership %s Mg’t responsibilities & Control Technology transfer Local market or export Size & Type of plant Transfer pricing – imports/exports

6. Issues Between MNCs & Government Plant size & type Location Infrastructure development & support Number of manufacturers allowed Tariff protection Foreign ownership allowed Technology transfer conditions Pricing regulations Export and local content requirements Tax & financial incentives Repatriation of profits

7. Contributions of MNEs 11-9

8. Issues Between Local Companies & Governments Incentives & Special consideration Degree of support with MNCs Number of manufacturers Tariff Protection Tax, financial & export incentives Plant location

9. Issues Between Local Companies Cooperate or compete If cooperate – independent or joint operations?

10. Issues Between Governments Cooperate or compete? Free Trade?

11. Part Two Off-shoring

12. Canadian Industry Punching Out – Stronger Dollar and Low-cost Alternatives are sending Jobs Offshore – G&M Jan23, 2004 Nortel – 1500 jobs Levis Strauss & Company – 1200 jobs Bauer Nike Hockey – 321 jobs Camco (refrigerators & stoves) – 800 jobs Roots – 200 jobs Swift Denim – 600 jobs International - Multi-foods – 135 jobs Canam Manac (truck trailers) – 245 jobs

13. Is Your Job Next? By 2015 – roughly 3.3 million U.S. business processing jobs will have moved offshore U.S. service jobs lost to offshoring will increase at a rate of 30% to 40% over next five years Software developers - $60/hr in U.S. vs $6/hr in India

14. Is offshoring a good thing or not? For Canada?

15. Offshoring’s Value to India Benefit per $1 of U.S. off-shore Spending in 2002 Offshoring Sector Labour 0.10 Profits 0.10 Local Suppliers 0.09 Government Taxes Central 0.03 State 0.01 Net Benefit $0.33

19. Example: Call Centre in India

21. Foreign Direct Investment’s Effect on Developing countries

22. Competition Boosts Productivity

23. Exploding the Myths of Offshoring – Mckinsey June 2004 Benefits to NA Corporate savings Deal for consumers Additional exports Repatriated profits Productivity & new jobs??? Challenge – address those displaced in the transition

24. Don’t Blame Trade for US Job Losses – Mckinsey 2005 2.85 mil manufacturing jobs lost in US during 2000-2003 Why? 11% or 314,000 due to trade – offshore imports Real contributor – weak domestic demand, rapid productivity growth, dollar’s strength which hurt exports Solutions – stimulate domestic demand, cut deficit,push countries with artificially cheap currencies to appreciate against the US$, trade- adjustment-assistance programs

25. Another Concern – Innovation Blowback Wal-Mart stores imports from China – 1% of GDP – company is helping Chinese manufacturers target shoppers in US & Europe Citigroups Chinese M&A unit – outbound deals make up lion share of its pipeline Western companies serving low-income customers in emerging markets are using that experience to address needs of value segments in developed markets

26. Product & Process Innovation to Address Broader Emerging Market Needs Production-driven modularity – process networks – e.g., motorcycles Customer-driven modularity – Cummins engines/generators Process-driven services – Aravind Eye Care System in India Key message to Westerners – if you are participating in the mass-market segment of emerging economies, you are not developing the capabilities you will need to compete at home

27. Summary FDI importance & impact Stakeholders involved & perspectives Negotiations & Deal Structuring Off-shoring – strategic fit, economic impact – micro & macro Next Day – China seminars