Global Business Environment

1. Global Business Environment Economic environment: capital movement, FDI

2. Readings World Investment Report 2009. Overview. pp. 4-22. http://www.unctad.org/en/docs/wir2009overview_en.pdf The OLI Paradigm. http://www.investmentsandincome.com/investments/oli-paradigm.html

3. International movements of capital • Types of capital movements: • Official flows (grants) • International borrowings and lendings • Portfolio investments • Foreign direct investments

4. FDI Foreign direct investment refers to investment in which a firm in one country directly controls or owns a subsidiary in another. If a foreign company invests in at least 10% of the stock in a subsidiary, the two firms are typically classified as a multinational corporation. • 10% or more of ownership in stock is deemed to be sufficient for direct control of business operations. • In addition, international borrowing and lending sometimes occurs between a parent company and its subsidiary

5. Location and internalization Why are multinational corporations created and why do they undertake direct foreign investment? • Location: why is a good produced in two countries rather than in one country and then exported to the second country? • Internalization: why is production in different locations done by one firm rather that by separate firms?

6. Location Why production occurs in separate location is often determined by • the location of necessary factors of production: • mining occurs where minerals are; • labor intensive production occurs where relatively large pools of labor live. • transportation costs and other barriers to trade may also influence the location of production. • These factors also influence the pattern of trade.

7. Internalisation Internalization occurs because it is more profitable to conduct transactions and production within a single organization than in separate organizations. Reasons for this include: • Technology transfers: transfer of knowledge or another form of technology may be easier within a single organization than through a market transaction between separate organizations. • Patent or property rights may be weak or non-existent. • Knowledge may not be easily packaged and sold.

8. Internalisation • Vertical integration involves consolidation of different stages of a production process. • Vertical integration would involve consolidation of one firm that produces a good that is used as an input for another firm. • This may be more efficient than having production operated by separate firms. • For example, having farms and flour mills consolidate into one organization to make flour may be more efficient that have farms and flour mills as separate organizations.

9. Trends in FDI • Flow and stock increased in the last 20 years • In spite of decline of trade barriers, FDI has grown more rapidly than world trade because • Businesses fear protectionist pressures • FDI is seen a a way of circumventing trade barriers • Dramatic political and economic changes in many parts of the world • Globalization of the world economy has raised the vision of firms who now see the entire world as their market

10. The Direction of FDI • Historically, most FDI has been directed at the developed nations of the world as firms based in advanced countries invested in other markets • The US has been the favorite target for FDI inflows • While developed nations still account for the largest share of FDI inflows, FDI into developing nations has increased • Most recent inflows into developing nations have been targeted at the emerging economies of South, East, and Southeast Asia

11. Costs of FDI to Host Countries • Adverse effects on competition • Adverse effects on the balance of payments • After the initial capital inflow there is normally a subsequent outflow of earnings • Foreign subsidiaries could import a substantial number of inputs • National sovereignty and autonomy • Some host governments worry that FDI is accompanied by some loss of economic independence resulting in the host country’s economy being controlled by a foreign corporation

12. Political Ideology and FDI Radical View Pragmatic Nationalism Free Market

13. The Radical View • Marxist view: MNE’s exploit less-developed host countries • Extract profits • Give nothing of value in exchange • Instrument of domination, not development • Keep less-developed countries relatively backward and dependent on capitalist nations for investment, jobs, and technology

14. The Radical View • By the end of the 1980s radical view was in retreat • Collapse of communism • Bad economic performance of countries that embraced the radical view • Strong economic performance of countries who embraced capitalism rather than the radical view

15. The Free Market View • Nations specialize in goods and services that they can produce most efficiently • Resource transfers benefit and strengthen the host country • Positive changes in laws and growth of bilateral agreements attest to strength of free market view • All countries impose some restrictions on FDI

16. Pragmatic Nationalism • FDI has 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

17. Regional development implications of FDI • Post Communist Eastern Europe, e.g. Czech Republic, Slovenia • Foreign direct investment (FDI) has been accorded a central role in the post-communist economic transformation of Central and Eastern Europe. • Regional effects of FDI in Central Europe (Czech Republic, Hungary, Poland and Slovakia) in the 1990s. • Defining FDI’s role in regional economic transformations • Intensification of uneven development • Development of a Dual Economy • Failure to develop linkages with local and regional economies • Contribution to increased regional economic instability

18. Motivations of foreign direct investments • Resource-seeking investments: • Row materials, energy, natural resources, • Low-cost labour, • Low-cost human capital. • Market-seekinginvestments: • Green-field investments, • Brown-field investments, • Mergers & acquisitions.

19. Motivations of foreign direct investments • Efficiency-seekinginvestments: • Factor proportions, • Differentiation of products, • Economy of scales. • Strategic-advantage-seeking investments: • Long-term advantage of acquisition.

20. Main sources of advantages of multinational firms • Ownership-specific advantages • Location-specific advantage • Internalization (technology transfer, vertical integration) = OLI paradigm (Dunning) • Dunning: productivity of US firms in UK in the 1950’s – US firms in the UK are more productive than UK firms (because of best managerial skills, know-how, etc.)

21. Vernon’s Product Life Cycle (PLC) theory Phases: home production; export; export of capital; foreign production. • Porter – strategic management • Three groups of international enterprises • Exporting domestic enterprise, • Multi-domestic enterprise (management in every country, negligible central co-ordination) • Global enterprise (centrally co-ordinated).

22. Strategic alliances Main specificities ofstrategic alliances: • Basic autonomy of the partners remain, • Long-term, • Mutually advantageous co-operation, • Resources make available for one another, • Integration of specific functions.

23. Advantages and disadvantages for recipient countries Advantages: • Increase of financial resources, • Foreign trade sufficit, • Positive effect on employment (both direct and indirect), • Technology transfer, • Import of know-how, • Better structure of foreign relations, • Diminution of risks.

24. Advantages and disadvantages for recipient countries Disadvantages • Less economic autonomy, • Technological dependence, • Local resources in foreign control, • Increasing foreign involvement, • Undesired structural changes, • Increasing risks (profit), • Bad structure of foreign relations.