International Business

1. International Business Wendy Jeffus Harvard Summer School

2. Introduction • Video: The Politics of Trade in Steel • “Foreign Direct Investment: Dubai” • Case Study: Starbucks’ Foreign Direct Investment • Case Study: Cemex’s Foreign Direct Investment • Chapter 7: Foreign Direct Investment • Friday’s Section Harvard Hall 201 1:00-3:30pm • This week Midterm Review • Next week is July 4th (no section on Friday)

3. United Arab Emirates

4. Dubai – Past & Present 1991 2005

5. Dubai – Burj al-Arab

6. Dubai – Palm and the World

7. Dubai – Burj Dubai

8. Dubai – Dubailand Ski Dome

9. Case Assignments • Starbuck’s: FDI • Overview • Define Starbuck’s FDI Strategies. (Discuss) • Discuss the value and costs that Starbuck’s FDI brings the host/home countries? • Cemex’s: FDI • Answer questions at the end of the case. • Present a 5-10min (timed) assessment of the case (answer case questions) • All group members must participate.

10. Wendy Jeffus Harvard Summer School Chapter 7: Foreign Direct Investment

11. What is the definition of FDI? • Foreign Direct Investment is cross-border investment of greater than 10% (portfolio investment is less than 10% often in the form of stock and bonds). • The flow of FDI refers to the amount of FDI undertaken over a given time period • The stock of FDI refers to the total accumulated value of foreign owned assts at a given time • The outflows of FDI refer to the flow of FDI out of a country • The inflows of FDI refers to the flow of FDI into a country

12. Which Country?

13. Which Country?

14. FDI Outflow (1998-2003) Numbers are in $US billions (See Figure 7.4)

15. Global Companies

16. Where to Invest? • Theory versus Practice • The decision to invest abroad is often a stage in the firm’s development process. • Eventually the firm experiences a stimulus from the external environment, which leads it to consider production abroad. • Some important external stimuli are: • An outside proposal, from a quality source • Fear of losing a market • The “bandwagon” effect • Strong competition from abroad in the home market

17. The Eclectic Paradigm • John Dunning (1988) • The Eclectic Paradigm (or OLI Paradigm) is an attempt to create an overall framework to explain why MNEs choose FDI rather than serve foreign markets through alternative models such as licensing, joint ventures, strategic alliances, management contracts, and exporting. • “O” owner-specific (competitive advantage in the home market that can be transferred abroad) • “L” location-specific (specific characteristics of the foreign market allow the firm to exploit its competitive advantage) • “I” internalization (maintenance of its competitive position by attempting to control the entire value chain in its industry)

18. Location Advantage: Location specific factors. These are external to the firm including factor endowment, transportation cost, government regulation, and infrastructure factors. Ownership Advantage: Firm specific factors including: technology, patent, process, name recognition, and other core competencies. Internationalization: Cost advantage from vertical and horizontal integration, due to transaction cost caused by market failure OLI Eclectic Paradigm (O-L-I) France has government support for its wine industry. The Japanese auto industry transfers it’s perception of quality Microsoft transfers it’s technology from home, abroad

19. Forms of FDI • Greenfield operations: • Usually only when an appropriate target is unavailable. • Mergers and acquisitions: • Quicker to execute • Acquire valuable strategic assets • Believe in the ability to increase the efficiency of the acquired firm.

20. A Key Point • Mergers are marriages between firms. • They can be dysfunctional, unequal, unfair, and can result in expensive break-ups. • To have a successful merger • 1) chose your partner wisely • 2) communicate goals • 3) have a good lawyer.

21. Failed “Mergers” • DaimlerChrysler formed in 1998 • Mercedes-Benz manufacturer Daimler-Benz merged with Chrysler Corporation. • DaimlerChrysler “gave up” in May 2007 • Selling Chrysler to Cerberus Capital Management (a PE firm based in NY) • The de-merged German company will adopt the name Daimler AG • The US company, Chrysler Holdings, will be privately held.

22. Who’s “the Boss” • BP/Amoco Merged in 1998 • A popular joke in Amoco hallways goes: What’s the British pronunciation of BP Amoco? BP – the Amoco is silent. • BP was a giant family of small businesses • London, glass walls, “peer groups,” and hard targets. • Amoco operated under a classic pyramid with heavy internal bureaucracy. • Chicago, closed doors, “aspirations,” strategic planning counsels, and strict policies • They even spelled organization and labor differently!

23. Market Imperfections • Market imperfections are factors that inhibit markets from working perfectly • Regulations • Tariffs • Quotas • Transportation costs • Management experience • Lower labor costs Toyota (Japan) Decision to invest in the US due in part to quotas on imports. In addition, believed “lean production” was hard to replicate. Dell (U.S.) call centers in India IBM & Microsoft (U.S.) have software development in India P&G (U.S.) moved some of its back-office accounting to the Philippines

24. Foreign Direct Investment • Horizontal FDI - investment in the same industry • Cemex (Mexico’s largest cement manufacturer acquired RMC (cement firm in Britain) • Vertical FDI – • Backward Vertical “upstream” - investment in inputs (i.e. suppliers). • Popular in oil, bauxite, & mining industries • Forward Vertical “downstream” investment in outputs (i.e. customers) • Volkswagen bought dealers in the US

25. Licensing • Licensing is basically selling “know-how” (i.e. technology, brand, etc.)

26. Licensing vs. FDI • Choose FDI when… • Need to protect know-how • RCA licensed its color TV technology to Matsushita and Sony (oops). • Want tight control • Kodak wants its Japanese subsidiary to keep Fuji busy. • Think others can’t replicate your competitive advantage. • Toyota thinks foreign companies don’t get it. Photo source: Company websites

27. Franchising • Franchising is the service industry’s version of licensing. • McDonald’s chooses franchising because… • Fast-food can’t be exported • Economizes on costs and risks of foreign business • Brand is easier to protect (than technology, for example) • Control can be communicated through contracts and company visits.

28. Decision Making Grid For FDI

29. Political Ideology First, No Country has adopted the Radical or Free Market views in their pure forms Radical View Pragmatic Nationalism Free Market FDI benefits both countries “Come on In” MNEs are instruments of imperialist domination U.S. U.K. Cuba Venezuela Iran

30. Pragmatic Nationalism • The pragmatic nationalist view is that FDI has both benefits and costs • Allow FDI if benefits outweigh costs • Block FDI that harms indigenous industry • Court FDI that is in national interest • Tax breaks • Subsidies

31. Aberdeenshire is a predominantly rural area in the north east of Scotland. Population: 236,300 Salary: Average gross weekly earnings are £484.90. This is £18.80 lower than the Scottish average and £121.40 lower than in Aberdeen. Unemployment: 1.0%. This is lower than the average rates for Aberdeen City (1.6%), Scotland (2.8%) and the UK (2.6%). Traditionally, it has been economically dependent upon agriculture, fishing, forestry and related processing industries. Within the last 35 years, the emergence of the oil and gas industry and the development of the service sector have broadened Aberdeenshire’s economic base, leading to rapid population growth. Aberdeenshire, Scotland https://www.cia.gov/library/publications/the-world-factbook/geos/uk.html Latest figures (2006) Source: http://www.aberdeenshire.gov.uk/statistics/area/aberdeenshire_profile2007.pdf

32. Aberdeenshire, Scotland • Menie Estate, close to the North Sea near Balmedie. X Source: http://www.aberdeenshire.gov.uk/statistics/area/aberdeenshire_profile2007.pdf; http://www.meniehouse.com/find.asp; http://news.bbc.co.uk/1/hi/scotland/4862982.stm

33. “I have never seen such an unspoilt and dramatic sea side landscape and the location makes it perfect for our development.” Donald Trump March 2006 - The US billionaire announced plans to build a new world class golfing centre in Aberdeenshire. The centre will include two championship courses, a hotel and a holiday home complex. Mr Trump, speaking on his website, said: "I have been actively looking for links land in Europe for the past few years. "Of course my preference was Scotland over any other country because I am half Scottish - my mother, Mary MacLeod, is from Stornoway. "When I saw this piece of land I was overwhelmed by the imposing dunes and rugged Aberdeenshire coastline. I knew that this was the perfect site for Trump International, Scotland. Donald Trump http://news.bbc.co.uk/1/hi/scotland/4862982.stm

34. June 10, 2008 – “Donald Trump visited his mother's childhood home yesterday on the Scottish Isle of Lewis, a pilgrimage that lasted as little as 97 seconds or as much as two minutes, according to the Guardian and the Glasgow Herald, respectively.””*** Trump in Scotland *http://news.bbc.co.uk/1/hi/scotland/4862982.stm **http://news.scotsman.com/uk/Golf-plans-threaten-change-of.4200208.jp ***http://www.portfolio.com/views/blogs/daily-brief/2008/06/10/the-donald-gets-a-scottish-cheer Photo source: http://www.nydailynews.com/news/us_world/2008/06/10/2008-06-10_donald_trump_vows_love_for_scotland_as_h-1.html

35. Benefits to the host country Economic Development “The development could bring £150m to the local economy over the next decade, creating 400 jobs.” First Minister Jack McConnell* "This is an unbelievable tourism opportunity for the region and, with Royal Deeside and castle and whisky trails on the doorstep, the overall visitor package will be tremendous.” Ian Dunlop, area director for Visit Scotland* Costs to the host country Environmental Concerns “will effectively destroy the "jewel in the crown" of Britain's shifting sand dune systems…the main championship course at Menie would involve "biblical amounts" of sand being moved at a protected site of "national" environmental importance.” Dr Jim Hansom, expert on coastal research** Note: Trump rejected an alternative golf course design that environmental groups claimed would allow him to go ahead with his project without destroying the protected dune system at the Menie Estate.**** Heritage "We are approaching it in a co-operative manner, it has huge potential for the area and we recognise that, but we must protect the heritage.“ Scottish National Heritage (SNH) Grampian area manager Ron MacDonald* FDI in Scotland *http://news.bbc.co.uk/1/hi/scotland/4862982.stm **http://news.scotsman.com/uk/Golf-plans-threaten-change-of.4200208.jp ****http://www.cogolf.ca/news.php?readmore=242 Sand dunes in the area are designated to be of “Special Scientific Interest (SSSI)”

36. Don’t Comb Over Here We Don't Want You Hair Opposition • Michael Forbes owns 23 acres on the Scottish cast that Donald Trump wants and he’s offered $790K for the property. • Forbes said no. Forbes noted, “[Trump] seems to think everything is for sale." • A British businessman offered to pay more than $1.5 million for the land just to stand in Trump's way. Locals armed with signs that read "We Don't Want You Hair" and "Don't Comb Over Here," questioned why it took so long for Trump to finally visit his mum's childhood home.*** http://www.washingtonpost.com/wp-dyn/content/article/2007/12/06/AR2007120602387.html ***http://www.portfolio.com/views/blogs/daily-brief/2008/06/10/the-donald-gets-a-scottish-cheer

37. Support • Magnus Linklater is backing Donald Trump. • He’s “backing his big ideas, his big ego, his big private jet, and his big hairstyle” Linklater wants Trump “to win the argument for his £1 billion golf course, along with the 1,000 houses he is planning, and the five-star hotel, to be called, [he has] no doubt, Castle Trump.” Linklater says “I like the size, the scale, the sheer unadorned vulgarity of it all.” • Opposition falls into two categories: innate suspicion of wealth and deep-dyed hostility to anything that threatens the environment. • Three acronyms “strike terror into the heart of any developer” Scottish National Heritage (SNH), Royal Society for the Protection of Birds (RSPB) and Site of Special Scientific Interests (SSSI). The three miles that Mr. Trump would like to commandeer constitute but a tiny and deserted percentage of the total (sand dunes). Since he took an interest, however, (they are) no longer just sands, they are described as “unspoilt dune ecosystems”, or “mobile dune vegetation”, the “crown jewels” of “our most precious habitat”… “I like thinking big,” Mr. Trump says. “If you're going to be thinking anything, you might as well think big.” Love him or loathe him, you cannot fault him on consistency. - Magnus Linklater http://www.timesonline.co.uk/tol/comment/columnists/magnus_linklater/article4106593.ece; http://www.timesonline.co.uk/tol/comment/columnists/magnus_linklater/

38. December 2007 - When local government officials rejected the project last week, Trump threatened to walk away -- perhaps to go over to Northern Ireland (County Antrim), where government ministers said they would welcome his big-bucks development.+ As Trump was meeting in New York this week with the Rev. Ian Paisley, head of the government of Northern Ireland, the Scottish government took control of Trump's application.+ County Antrim Scottish leader Alex Salmond, whose constituency includes the proposed development, issued a statement saying Trump's plan "raises issues of importance" that require consideration at his level.+ “It looks like Trump is already working on his next book title - How To Get Away With Building Whatever You Like. Step one: pick a small, impressionable country for your development, one with a slight inferiority complex that's keen to strut its stuff on the world stage. Step two: play it off against another small, impressionable country with a slight inferiority complex that's keen to strut its stuff on the world stage. Step three: threaten it with the stick of losing potential revenue and world renown for a glittering top-drawer development. Step four: dangle lots of carrots, or sweeteners, that cast you in a suitably philanthropic light. Step five: sit back and let local worthies fight your corner for you.” Joanna Blythman on Doanald Trump++ Bargaining Chips: County Antrium & the Lewis Castle +http://www.washingtonpost.com/wp-dyn/content/article/2007/12/06/AR2007120602387.html ++http://www.sundayherald.com/oped/opinion/display.var.2326505.0.pulling_the_tartan_down_over_our_eyes.php Photo Source: http://upload.wikimedia.org/wikipedia/commons/thumb/b/bb/Scotland_Lewis_Stornoway_castle.jpg/800px-Scotland_Lewis_Stornoway_castle.jpg

39. Donald Trump Jack Nicklaus X √ Nicklaus in Scotland • June 20 A MASSIVE project that will put the North-east on the world golfing map was given the green light yesterday by Aberdeenshire Council's infrastructure services committee. • But, sadly for Donald Trump, it wasn't his development. • Rather, it was a £40 million residential and leisure development that will have as its centrepiece a flagship course designed by Jack Nicklaus. Including the restoration of Ury House, the B-listed derelict Elizabethan-style mansion at the centre of the estate. • While controversy has raged over Mr Trump's insistence that his main championship course should be sited in a protected site of scientific interest, the Nicklaus course development at the Ury estate on the outskirts of Stonehaven has gone quietly through the various stages of the planning process. • The go-ahead was also welcomed by prominent business leaders in the North-east. • Jennifer Craw, the regional operations director for Scottish Enterprise, said "Internationally renowned backers like Jack Nicklaus, with their household names and reputations, have the kudos to draw visitors from all over the world to our region." • Richard Milne, the director of FM Developments, said: "Our redevelopment of Ury Estate also represents enabling development in its purest form, with the proceeds from housing directly funding the renovation of historic Ury House.... Our vision for Ury Estate will benefit not only the Stonehaven community, but the region's economy to the tune of tens of millions of pounds." • Geoff Runcie, the chief executive of Aberdeen and Grampian Chamber of Commerce, said: "Along with the related renovation of Ury House and the addition of new rural housing, this development will bring a new tourism and leisure dimension to the Stonehaven area." http://news.scotsman.com/scotland/Goahead-for-massive-golf-resort.4205726.jp; Photo Ury House wikipedia.org

40. Benefits to Host Country Supply of capital and other resources Technology Management Employment BOP (Balance of Payments) Capital inflow, import substitution & subsequent exports Competition Increase in consumer choice, lowers prices Costs to Host Country Loss of national sovereignty Foreign parent has no commitment to host country Fear of monopoly power BOP Import of inputs from abroad Outflow of foreign subsidiary's earnings Foreign Direct Investment (Host)

41. Benefits to Home Country BOP Inflow of foreign earnings Employment effects Foreign subsidiaries create demand for home-country exports Reverse-resource transfer effect Foreign subsidiary learns skills abroad and transfers knowledge home Costs to Home Country BOP Initial capital outflow Export substitution Export of jobs abroad Foreign Direct Investment (Home)

42. Encourage Outward FDI Government backed insurance programs Capital assistance Tax incentives Political pressure Example: Japan responded to political pressure from the U.S. in the ’80s and relaxed informal barriers Discourage Outward FDI Limit capital outflows Tax incentives to invest at home Example: Britain once taxed foreign earnings higher than domestic earnings. Prohibit national firms from investing in certain countries U.S. discourages investment in Cuba & Iran Policies and FDI (Home) http://www2.toysrus.co.jp/truj/english/index.html

43. Encourage Inward FDI Tax concessions Low interest loans Grants/subsidies Discourage Inward FDI Ownership restraints Prohibited operating in certain fields Require that a significant proportion of the equity be owned by local investors Performance Restraints Local Content Hiring Exports Policies and FDI (Host)

44. The Negotiation Process • The negotiation process has been characterized as occurring within the context of “the four Cs” • Common interests • Conflicting interests • Compromise • Criteria

45. Negotiation & Bargaining Power • The outcome of any negotiated agreement depends on the relative bargaining power of both parties • Bargaining power depends on three factors • The value each side places on what the other has to offer • The number of comparable alternatives available to each side • Each party’s time horizon

46. Resource for your Final Project • http://www.fdi.net/country/

47. Stuff to this weekend… • Friday’s Section Harvard Hall 201 1:00-3:30pm • This week Midterm Review • Next week is July 4th (no section on Friday) http://www.faneuilhallmarketplace.com/ http://www.marinabaybeachclub.com/