Download - Foreign Direct Investment 7 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
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Foreign Direct Investment Foreign Direct Investment (FDI)(FDI)
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
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Yearly FDI InflowsYearly FDI Inflows
Source: Based on World Investment Report (Geneva, Switzerland: UNCTAD), various years.
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Reasons for FDI GrowthReasons for FDI Growth
Increasingglobalization
International mergersand acquisitions
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Value of Cross-Border M&AsValue of Cross-Border M&As
Source: Based on World Investment Report (Geneva, Switzerland: UNCTAD), various years.
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Worldwide FDI FlowsWorldwide FDI Flows
World FDI inflows
Developed (57%), developing (37%)
European Union: 30% of world FDI
Developing nations
China: 6.4% of world FDI
All of Africa: 5.2% of world FDI
82,000 multinationals
with810,000 affiliates
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International Product Life International Product Life CycleCycle
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.
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Market Imperfections Market Imperfections (Internalization)(Internalization)
Trade barriers(e.g., tariffs)
Unique advantage(e.g., special
knowledge)
A company undertakes FDI to internalize a transaction that is made inefficient because of a market imperfection
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Eclectic TheoryEclectic Theory
A firm undertakes FDI when location, ownership, and internalization advantages combine to make a location appealing
Locationadvantage
(optimal location)
Ownershipadvantage(special asset)
Internalizationadvantage
(efficiency)
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Market PowerMarket Power
A firm undertakes FDI to establish a dominant presence in an industry
Vertical integrationExtends company’s activitiesinto stages of production that provide its inputs (backward integration) or absorb its out-puts (forward integration)
Market power= Greater profits
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Management Issues IManagement Issues I
Control Purchase-or-build
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Management Issues IIManagement Issues II
Productioncosts
Customerknowledge
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Management Issues IIIManagement Issues III
Following rivals
Following clients
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Balance of PaymentsBalance of Payments
Capital accountCapital accountCurrent accountCurrent account
National accounting system that records all payments to entities in other countries and all receipts coming into the nation
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)
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U.S. Balance of PaymentsU.S. Balance of Payments
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Host Intervention in FDIHost Intervention in FDI
Balance of Payments+
Balance of Payments+
FDI may generate exportsFDI may generate exports
Initial FDI boosts economyInitial FDI boosts economy
FDI may decrease importsFDI may decrease imports
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Host Intervention in FDIHost Intervention in FDI
Obtain resourcesand benefits
+
Obtain resourcesand benefits
+
Access technologyAccess technology
Access management skillsAccess management skills
Create employmentCreate employment
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Home Intervention in FDIHome Intervention in FDI
+ Improves competitiveness+ Offshore ‘sunset’ industries
– Remove national resources– Eliminate export markets– Eliminate domestic jobs
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Host Promotion MethodsHost Promotion Methods
Financial incentives■ Low or waived taxes■ Low-interest loans
Infrastructure benefits■ Better seaports, roads,
and telecom networks
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Host Restriction MethodsHost Restriction Methods
Ownership restrictions■ Prohibit investment in industries or businesses
Performance demands■ Local content requirements■ Export targets■ Technology transfers
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Home Promotion MethodsHome Promotion Methods
Insurance on assets abroad
Loans and loan guarantees
Tax breaks on profits earned abroad
Special tax treaties
Persuade other nations to accept FDI