1. © The McGraw Hill Companies, Inc., 2000 Foreign Direct Investment Chapter 6

2. © The McGraw Hill Companies, Inc., 2000 Electrolux Group Sales by Region 6-1

3. © The McGraw Hill Companies, Inc., 2000 Foreign Direct Investment  FDI occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country.  FDI is not the investment by individuals, firms or public bodies in foreign financial instruments. 6-2

4. © The McGraw Hill Companies, Inc., 2000 What is FDI?  A company buying 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.  Also:  The firm has significant control of its foreign operation.  Firm can affect managerial decisions of the foreign operation. 6-3

5. © The McGraw Hill Companies, Inc., 2000 Flow vs Stock of FDI  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. 6-4

6. © The McGraw Hill Companies, Inc., 2000 FDI Outflows 1982-1998 6-5 Figure 6.1

7. © The McGraw Hill Companies, Inc., 2000 Growth of FDI, World Trade and World Output 6-6 Figure 6.2

8. © The McGraw Hill Companies, Inc., 2000 Why is FDI Growing More Rapidly Than WT or WO?  Can circumvent future trade barriers.  World political and economic change.  Democratization of markets.  Globalization of world markets. 6-7

9. © The McGraw Hill Companies, Inc., 2000 Increase in the Number of Bilateral Trade Treaties 6-8

10. © The McGraw Hill Companies, Inc., 2000 FDI Inflows 1991 - 1997 6-9 Figure 6.3

11. © The McGraw Hill Companies, Inc., 2000 Investment in China Second Largest Recipient of FDI After US 6-10

12. © The McGraw Hill Companies, Inc., 2000 Changing Face of China’s Foreign Investment Source: WSJ, June 11, 1998 6-11

13. © The McGraw Hill Companies, Inc., 2000 Gross Fixed Capital Formation  A summary of the total amount of capital invested in factories, stores office buildings, and the like.  All things being equal, the greater the capital investment in an economy, the more favorable its future growth prospects are likely to be. 6-12

14. © The McGraw Hill Companies, Inc., 2000 Inward FDI Flows as a Percentage of Gross Fixed Capital Formation 6-13 Figure 6.4

15. © The McGraw Hill Companies, Inc., 2000 FDI Inflow for Selected Countries 1995 % 6-14

16. © The McGraw Hill Companies, Inc., 2000 FDI Outflows 1991 - 1997 6-15 Figure 6.5

17. Impediments to the Sale of Know-how Impediments to the sale of know how Risk giving away know-how to competitors Licensing implies low control over foreign entity Know-how not amenable to licensing © The McGraw Hill Companies, Inc., 1999 6-16

18. © The McGraw Hill Companies, Inc., 2000 Two Forms of FDI  Horizontal Direct Investment  Vertical Direct Investment 6-17

19. © The McGraw Hill Companies, Inc., 2000 Horizontal Direct Investment  FDI in the same industry abroad as company operates at home. 6-18

20. © The McGraw Hill Companies, Inc., 2000 HDI, When and Why?  Transportation too costly?  Most cited: 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’s profitable to invest abroad.  Location specific advantages (natural resources). 6-19

21. © The McGraw Hill Companies, Inc., 2000 Wal-Mart International 6-20

22. © The McGraw Hill Companies, Inc., 2000 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). 6-21

23. © The McGraw Hill Companies, Inc., 2000 VDI, When and Why?  Market power?  create entry barriers.  erode entry barriers.  Market imperfections.  Impediments to the sale of know-how.  Investments in specialized assets. 6-22

24. A Decision Framework How high are transportation costs and tariffs? Is know-how amenable to licensing? Is tight control over foreign operation required? Can know-how be protected by licensing contract? Then license Export Horizontal FDI No High Yes Low No Yes No © The McGraw Hill Companies, Inc., 2000 6-23 Figure 6.6