Chapter 7 slides

Report
7
Foreign Direct
Investment
Copyright © 2014 Pearson Education, Inc.
Chapter Objectives
• Describe worldwide patterns of foreign direct investment
(FDI) and reasons for those patterns
• Describe each of the theories that attempt to explain why
FDI occurs
• Discuss the important management issues in the FDI
decision
• Explain why governments intervene in the free flow of FDI
• Discuss the policy instruments that governments use to
promote and restrict FDI
Copyright © 2014 Pearson Education, Inc.
7-2
Volkswagen
• Produces 8 million cars a year
• Modular production strategy
• Special protection in Germany
Copyright © 2014 Pearson Education, Inc.
7-3
Foreign Direct Investment (FDI)
 Purchase of physical assets or
significant amount of ownership
of a company in another country
in order to gain some measure of
management control
 By contrast, portfolio investment
does not involve obtaining a
degree of control in a company
Copyright © 2014 Pearson Education, Inc.
7-4
Yearly FDI Inflows
Source: Based on World Investment Report (Geneva, Switzerland: UNCTAD), various years.
Copyright © 2014 Pearson Education, Inc.
7-5
Reasons for FDI Growth
Increasing
globalization
International mergers
and acquisitions
Copyright © 2014 Pearson Education, Inc.
7-6
Value of Cross-Border M&As
Source: Based on World Investment Report (Geneva, Switzerland: UNCTAD), various years.
Copyright © 2014 Pearson Education, Inc.
7-7
Worldwide FDI Flows
World FDI inflows

Developed (49%), developing (45%)

European Union: 28% of world FDI
82,000 multinationals
Developing nations

China and India attract most FDI

All of Africa: 2.8% of world FDI
Copyright © 2014 Pearson Education, Inc.
with
810,000 affiliates
7-8
Discussion Question
What is the
difference between
foreign direct
investment and
portfolio
investment?
Copyright © 2014 Pearson Education, Inc.
7-9
Answer to Discussion Question
Foreign direct investment is the
purchase of physical assets or a
significant amount of the
ownership of a company in
another country to gain a
measure of management
control.
Portfolio investment does not
involve obtaining a degree of
control in a company.
Copyright © 2014 Pearson Education, Inc.
7 - 10
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
Source: Raymond Vernon and Louis T. Wells, Jr., The Economic Environment of International Business, 5th ed. (Upper Saddle River, N.J.: Prentice Hall, 1991), p.
85.
Copyright © 2014 Pearson Education, Inc.
7 - 11
Market Imperfections
(Internalization)
A company undertakes FDI to
internalize a transaction that
is made inefficient because of
a market imperfection
 Trade barriers
(e.g., tariffs)
 Unique advantage
(e.g., special knowledge)
Copyright © 2014 Pearson Education, Inc.
7 - 12
Eclectic Theory
FDI when location, ownership, and internalization
advantages combine to make a location appealing
Location
advantage
Ownership
advantage
Internalization
advantage
(optimal location)
(special asset)
(efficiency)
Copyright © 2014 Pearson Education, Inc.
7 - 13
Market Power
FDI used 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 outputs (forward integration)
Copyright © 2014 Pearson Education, Inc.
7 - 14
Discussion Question
The eclectic theory says
that firms undertake FDI
when location, ownership,
and __________
advantages combine to
make a location appealing
for investment.
a. Internalization
b. First-mover
c. Life-cycle
Copyright © 2014 Pearson Education, Inc.
7 - 15
Answer to Discussion Question
The eclectic theory says
that firms undertake FDI
when location, ownership,
and __________
advantages combine to
make a location appealing
for investment.
a. Internalization
b. First-mover
c. Life-cycle
Copyright © 2014 Pearson Education, Inc.
7 - 16
Management Issues I
Control
Copyright © 2014 Pearson Education, Inc.
Purchase-or-build
7 - 17
Management Issues II
Production
costs
Customer
knowledge
Source: LIU JIN/Newscom
Copyright © 2014 Pearson Education, Inc.
7 - 18
Management Issues III
Following clients
Copyright © 2014 Pearson Education, Inc.
Following rivals
7 - 19
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
The import and export of
goods and services,
income receipts on
assets abroad, and
income payments on
foreign assets inside the
country
The purchase or sale of
assets (including assets
such as property and
shares of common stock
in a company)
Copyright © 2014 Pearson Education, Inc.
7 - 20
U.S. Balance of Payments
Copyright © 2014 Pearson Education, Inc.
7 - 21
Discussion Question
What do we mean
by a country’s
balance of
payments and
what is its
usefulness?
Copyright © 2014 Pearson Education, Inc.
7 - 22
Answer to Discussion Question
A country’s balance of payments is
a national accounting system that
records all payments to entities in
other countries and all receipts
coming into the nation.
The system helps monitor a
country’s flows of goods, services,
income, and asset transfers
between itself and other nations.
The balance of payments position
sends warning signals about trade
deficits with other nations.
Copyright © 2014 Pearson Education, Inc.
7 - 23
Host Intervention I
Initial FDI boosts economy
Balance of Payments
+
FDI may decrease imports
FDI may generate exports
Copyright © 2014 Pearson Education, Inc.
7 - 24
Host Intervention II
Access technology
Obtain resources
and benefits
Access management skills
+
Create employment
Copyright © 2014 Pearson Education, Inc.
7 - 25
Home Intervention
– Remove national resources
– Eliminate export markets
– Eliminate domestic jobs
+ Improve competitiveness
+ Eliminate low-wage jobs
Copyright © 2014 Pearson Education, Inc.
7 - 26
Host Promotion Methods
Financial incentives
■ Low or waived taxes
■ Low-interest loans
Infrastructure benefits
■ Better seaports, roads,
and telecom networks
Copyright © 2014 Pearson Education, Inc.
7 - 27
Host Restriction Methods
Ownership restrictions
■ Prohibit investment in
industries or businesses
Performance demands
■ Local content requirements
■ Export targets
■ Technology transfers
Copyright © 2014 Pearson Education, Inc.
7 - 28
Home Promotion Methods
Insurance on
assets abroad
Loans and loan
guarantees
Tax breaks on profits
earned abroad
Copyright © 2014 Pearson Education, Inc.
Special tax
treaties
Persuade other nations
to accept FDI
7 - 29
Home Restriction Methods
Higher taxes on
foreign income
Sanctions that
prohibit investing
Copyright © 2014 Pearson Education, Inc.
7 - 30
Discussion Question
A host government may
encourage an initial FDI
because the inflow can
__________ its balanceof-payments position.
a. Level
b. Lower
c. Boost
Copyright © 2014 Pearson Education, Inc.
7 - 31
Answer to Discussion Question
A host government may
encourage an initial FDI
because the inflow can
__________ its balanceof-payments position.
a. Level
b. Lower
c. Boost
Copyright © 2014 Pearson Education, Inc.
7 - 32
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
Copyright © 2014 Pearson Education, Inc.
7 - 33

similar documents