1. International Business Management (MS34B)
Foreign Direct Investment and Location Attractiveness
Facilitator: Densil A. Williams
MS34B, UWI Mona, Department of Management Studies

2. MS34B, UWI Mona, Department of Management Studies
Contents
Motivations for FDI
Types of FDI
Attracting FDI to a Host country
Developing Countries Response to Competitive FDI Market
Concluding Remarks
MS34B, UWI Mona, Department of Management Studies

3. MS34B, UWI Mona, Department of Management Studies
Motivations for FDI
FDI provides an important source of inflows to a country in order to improve its BOP position and aid in better financial management.
This is the reason for countries craving to get as much FDI as possible.
But, why do investors chose FDI over other methods that can be used to enter a non-domestic market?
FDI theories will help us to analyse this issue.
MS34B, UWI Mona, Department of Management Studies

4. MS34B, UWI Mona, Department of Management Studies
Motivations for FDI
Theories of Foreign Direct Investment
Monopolistic Advantage:
FDI occurs because the investing firm possesses superior ownership advantages compared to local investors.
Internalisation:
Foreign Direct Investment takes place as firms seek to internalise (or bring in-house) the cross-border market for an intangible asset (technology, marketing expertise, management skills) or a required input (raw materials, labour)
MS34B, UWI Mona, Department of Management Studies

5. MS34B, UWI Mona, Department of Management Studies
Motivations for FDI
Theories of Foreign Direct Investment
Dunning’s Eclectic (OLI) Framework
Foreign direct investment takes place as a result of the existence of a set of ownership advantages on the part of the investing firm (Ownership advantages – O) which it seeks to take advantage of through its internal market rather than an arms-length market (Internalisation Activity – I), in countries which have particular locational advantages in relation to the particular investment transaction (Locational Advantages – L)
MS34B, UWI Mona, Department of Management Studies

6. MS34B, UWI Mona, Department of Management Studies
Motivations for FDI
Theories of Foreign Direct Investment
Product Cycle Theory
FDI flows to developing countries in more mature stages of a product’s life cycle, because production cost considerations outweigh proximity to innovating market.
MS34B, UWI Mona, Department of Management Studies

7. MS34B, UWI Mona, Department of Management Studies
Types of FDIs
Resource-Seeking: MNC invests to acquire specific resource at lower cost.
Market-Seeking: MNC invests to supply goods and services to country.
Efficiency-Seeking/Export-Oriented: MNC invests to produce, at lower cost, for global or regional markets. N.B. Depends heavily on types of global production chain i.e. buyer driven or producer driven
Strategic Asset-Seeking: MNC seeks to acquire the assets of foreign companies to promote long-term strategic objectives.
MS34B, UWI Mona, Department of Management Studies

8. Attracting FDI to a Host Country
Government attitude towards FDI has become increasingly positive due to the integration of world markets.
This has resulted in almost all governments aggressively promoting their economy as an attractive location for direct investment.
MS34B, UWI Mona, Department of Management Studies

9. Attracting FDI to a Host Country
Factors critical for attracting FDI
Country Factor
Negotiation Factor
Specific concession
MS34B, UWI Mona, Department of Management Studies

10. Attracting FDI to a Host Country
Country Factors
Political and Social Stability
Macro-economic stability
Economic openness and liberalization
Receptive investment environment
MS34B, UWI Mona, Department of Management Studies

11. Attracting FDI to a Host Country
Negotiation Tactics
Unified Response – country’s leader to the man on the shop floor must sing with one voice
- High level officials must be included in the meetings as frequently as possible
Presidential or Priministerial involvement is critical
Speed- respond to the needs of the investor quickly e.g. data needs, site selection etc.
Refusals to take kick-backs and engage in shady deals
MS34B, UWI Mona, Department of Management Studies

12. Attracting FDI to a Host Country
Specific Concession
Financial Incentives (tax exemption)
Infrastructure (both private and public partnership is used to build infrastructure)
Education (both investors and host government invest in education sector to provide the relevant training)
MS34B, UWI Mona, Department of Management Studies

13. Attracting FDI to a Host Country
FDI attraction is not an effortless task. The market is becoming increasingly more aggressive and as such, promotional strategies are showing signs of convergence
Countries have to transform their promotional efforts
Promotional efforts should be both selective and functional
MS34B, UWI Mona, Department of Management Studies

14. Attracting FDI to a Host Country
Selective- interventions aimed at attracting specific foreign firms
Functional- improve the overall investment climate so that local investors in the economy are attracted to the business environment
All investors need to get “most favoured foreigner” treatment
MS34B, UWI Mona, Department of Management Studies

15. Developing Countries Response to Competitive FDI Market
Facing competition for FDI and diminishing FDI inflows, developing countries have continued the process of FDI liberalisation, 236 of 248 regulatory changes in 70 countries identified in UNCTAD in 2002, were in the direction of facilitating FDI- a similar ratio to the 95% of the 1,641 policy changes in the direction of greater investment liberality.
Financial incentives and bidding wars for FDI have increased, while IPA have mushroomed, devoting resources to targeting “greenfield” investment, mounting after-care services for existing investors and shifting the orientation of host economies from “red tape to red carpet”.
MS34B, UWI Mona, Department of Management Studies

16. Developing Countries Response to Competitive FDI Market
FDI from developing economies have risen in both absolute and relative terms The value of FDI among developing countries increased from US$ 2bill in 1985 to US$60bill in BRIC countries accounted for significant increase in FDI from emerging economies Most of this FDI was a result of south-south flow
MS34B, UWI Mona, Department of Management Studies

17. Developing Countries Response to Competitive FDI Market
Examples of FDIs from Emerging Economics
Brazil – PetroBras
Russia- VimpelCom
India - Tata, Bharti Airtel
China - Haier
Other emerging economies FDIs
Malaysia- Petronias
Korea- Daewoo
Taiwan- Acer
South Africa- Sappi
MS34B, UWI Mona, Department of Management Studies

18. MS34B, UWI Mona, Department of Management Studies
Concluding Remarks
Firms generally engage in FDI when they have a unique advantage and want to exploit it without loosing control over proprietary information to others.
FDIs however, serve an important role in helping countries (especially developing countries) to improve their national financial management and overall growth and competitiveness landscape
MS34B, UWI Mona, Department of Management Studies

19. MS34B, UWI Mona, Department of Management Studies
Concluding Remarks
As such, today, more governments have a positive view of FDI and are aggressively promoting their economies as attractive locations for hosting such investments.
This has led to a need for more selective and functional approaches to attraction programmes compared to the mostly selective approach that was prevalent in almost all economies before the last two decades.
MS34B, UWI Mona, Department of Management Studies