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Ch. 7 FOREIGN DIRECT INVESTMENT

Ch. 7 FOREIGN DIRECT INVESTMENT. By Wild, Wild, Han. I. VW: UNTOUCHABLE A. VOLKSWAGEN GROUP Audi, Bentley, Lamborghini, Rolls-Royce, Seat, Skoda, VW 43 production facilities, 5 M cars, 150 countries 12% world market B. GERMAN CHANCELLOR GERHARD SCHRODER

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Ch. 7 FOREIGN DIRECT INVESTMENT

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  1. Ch. 7 FOREIGN DIRECT INVESTMENT By Wild, Wild, Han

  2. I. VW: UNTOUCHABLE • A. VOLKSWAGEN GROUP • Audi, Bentley, Lamborghini, Rolls-Royce, Seat, Skoda, VW • 43 production facilities, 5 M cars, 150 countries • 12% world market • B. GERMAN CHANCELLORGERHARD SCHRODER • As governor of state, also served on board of VW • As Chancellor, will protect VWfrom EU action • Lex VW: government protectsit from takeover

  3. II. PATTERNS OF FOREIGN DIREC T INVESTMENT • A. GROWTH OF FOREIGN DIRECT INVESTMENT • FDI: ownership and control of assets in foreign country • Indirect foreign investment: ownership without control • Globalization • Wave of increasing trade barriers led to FDI in 1980’s • 1990’s: lowered barriers led to rational production • Globalization is leading to increased FDI • Mergers and acquisitions • Foothold in new market • Increase competitiveness • Fill gaps in product line • Reduce costs

  4. B. WORLDWIDE FLOWS OF FDI • 75% of FDI are in developed economies = $1 T • FDI to developing countries = $240 B • Worlds poorest nations attracted 0.3% of FDI inflows • EU, US, and Japan = 70% of FDI inflows, 82% outflows • US: worlds largest receiver of FDI = $281 B • EU = FDI inflows $627 B • Developing nations in Asia inflows $143 B • China FDI inflows $41 B • Africa FDI inflows 1% of world • Latin American and Caribbeaninflows $86 B • Central and Eastern Europe inflows $27 B

  5. III. EXPLANATIONS FOR FDI • A. INTERNATIONAL PRODUCT LIFE CYCLE • Production grows in home country • Spreads to cheaper productionlocations • Not supported by research • B. MARKET IMPERFECTIONS (INTERNATIONALIZATION) • Conduct business in another countryto remove market imperfection • Trade barriers create imperfections • Specialized knowledge can lead to FDI

  6. C. ECLECTIC THEORY • Location advantage: advantage of specific location • Ownership advantage: due to special asset, brand recognition • Internalization advantage: internalize business activity • D. MARKET POWER • Firm tries to establish dominant position in market • Vertical integration • Extension backward or forward • Can help achieve market dominance • IV. MANAGEMENT ISSUES INTHE FDI DECISION • A. PARTNERSHIP REQUIREMENTS • Sometimes governments want to shield themselves from domination by large MNC

  7. Governments now recognize benefits of FDI • Employment • Tax revenues • Training • Technology • Governments and MNCs need to work together • B. PURCHASE OR BUILD DECISION • Greenfield investment: make when not available to buy • Buy when available and can remodel • C. PRODUCTION COSTS • Wage rates only part of total labor costs • Rationalized production • Produce where it makes sense • Maquiladoras • Get R&D from all over, firms large and small

  8. D. CUSTOMER KNOWLEDGE • Consumer tastes vary • Develop global reputation • E. FOLLOWING CLIENTS • F. FOLLOWING RIVALS • V. GOVERNMENT INTERVENTION IN FDI • A. BALANCE OF PAYMENTS • Records all foreign payments and receipts • Current account • Merchandise account: exports and imports • Services account: export and import of services

  9. Income receipts: income earned on US assets abroad • Income payments: payments to entities in other countries • Current account surplus: exports more than imports • Current account deficit: exports less than imports • Capital account • Purchase or sale of assets over borders • Plant and equipment, stock • B. REASONS FOR INTERVENTION BY THE HOST COUNTRY • Control balance of payments • Likes inflows of FDI • Don’t like outflow of foreignprofits to home country • Obtain resources and benefits • Access to technology • Management skills and employment

  10. C. REASONS FOR INTERVENTION BY THE HOME COUNTRY • FDI sends resources out of country • May take place of countries’ exports • Outgoing FDI may replace jobs athome • Reasons to promote outgoing FDI • Increase LT competitiveness • Support sunset industries: outdated technology at home • VI. GOVERNMENT POLICY INSTRUMENTS AND FDI • A. HOST COUNTRIES: RESTRICTION • Ownership restrictions • Performance demands: local content

  11. B. HOST COUNTRIES: PROMOTION • Financial incentives: tax incentives, low interest loans • Infrastructure improvements • C. HOME COUNTRIES: RESTRICTION • Differential tax rates: higher rate on foreign earnings • Sanctions that prohibit FDI • D. HOME COUNTRIES: PROMOTION • Insurance to cover risk of FDI • Grant loans to firms • Tax breaks on profits earnedabroad • Political pressure on other nationstorelax restrictions on FDI

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