Chapter 7 Foreign Direct Investment

1. Chapter 7 Foreign Direct Investment

2. Characterize global FDI flows and patterns Discuss each theory that tries to explain FDI Identify important management issues in the FDI decision Explain why home and host nations intervene in FDI flows List the methods that nations use to promote and restrict FDI Chapter Preview International Business 4e

3. Foreign Direct Investment • Purchase of physical assets or significant amount of ownership of a company in another country to gain some measure of management control • By contrast, portfolio investment does not involve obtaining a degree of control in a company International Business 4e

4. Growth of World FDI vs. GDP International Business 4e

5. Increasing globalization International mergers and acquisitions Entrepreneurship and small firms Reasons for FDI Growth International Business 4e

6. Value of Cross-Border M&As International Business 4e

7. Worldwide FDI Flows • World FDI inflows • Developed (58%), developing (36%) • European Union: 33% of world FDI 70,000 multinationals • Developing nations • China: 9% of world FDI • All of Africa: 3% of world FDI with 690,000 affiliates International Business 4e

8. 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 International Business 4e

9. Trade barriers (e.g., tariffs) Specialized knowledge (e.g., managerial ability) Market Imperfections (Internalization) Company undertakes FDI to internalize a transaction that is being made inefficient by a market imperfection International Business 4e

10. Eclectic Theory A firm undertakes FDI when location, ownership, and internalization advantages combine to make a location appealing • Ownership • advantage • (special asset) • Location • advantage • (optimal location) • Internalization • advantage • (efficiency) International Business 4e

11. A firm undertakes FDI to establish a dominant presence in an industry Market Power Market power = Greater profits • Vertical integration • Extends company’s activities • into stages of production that provide its inputs (backward integration) or absorb its out-puts (forward integration) International Business 4e

12. Control • Partnership requirements • Benefits of cooperation Purchase-or-build decision • Production costs • Rationalized production • Cost of R&D Customer knowledge Following clients Following rivals Management Issues and FDI International Business 4e

13. 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 Records transactions involving the import and export of goods and services, income receipts on assets abroad, and income payments on foreign assets inside the country Records transactions involving the purchase or sale of assets (including assets such as property and shares of common stock in a company) International Business 4e

14. Why Host Intervenes in FDI Initial FDI boosts economy Balance of Payments + FDI may decrease import demand FDI may generate exports Access technology Obtain resources and benefits + Access management skills Create employment International Business 4e

15. Removes resources from the nation Can eliminate an export market Might eliminate domestic jobs May improve national competitiveness Can offshore ‘sunset’ industries Why Home Intervenes in FDI FDI International Business 4e

16. Host Promotion Methods • Financial incentives • Low or waived taxes • Low-interest loans • Infrastructure improvements • Improved seaports, roads, • telecommunications networks International Business 4e

17. Host Restriction Methods • Ownership restrictions • Prohibit investment in certain industries or businesses • Performance demands • Local content reqmnt. • Technology transfers • Export targets International Business 4e

18. Home Promotion Methods Insurance on assets abroad Loans and loan guarantees Special tax treaties Tax breaks on profits earned abroad Persuade other nations to accept FDI International Business 4e

19. Home Restriction Methods Higher tax rates on foreign income Sanctions on specific nations International Business 4e

20. Characterize global FDI flows and patterns Discuss each theory that tries to explain FDI Identify important management issues in the FDI decision Explain why home and host nations intervene in FDI flows List the methods that nations use to promote and restrict FDI Chapter Review International Business 4e