global business environment
DESCRIPTION
Global Business Environment. Economic environment: capital movement, FDI. 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. - PowerPoint PPT PresentationTRANSCRIPT
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
International movements of capital
1. Types of capital movements:– Official flows (grants)– International borrowings and lendings
2. Portfolio investments
3. Foreign direct investments
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
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?
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.
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:
1. 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.
Internalisation
2. 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.
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
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
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
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
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
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
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 breaksSubsidies
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
Motivations of foreign direct investments
Resource-seeking investments:– Row materials, energy, natural resources,– Low-cost labour,– Low-cost human capital.
Market-seeking investments:– Green-field investments,– Brown-field investments,– Mergers & acquisitions.
Efficiency-seeking investments:– Factor proportions,– Differentiation of products,– Economy of scales.
Strategic-advantage-seeking investments:– Long-term advantage of acquisition.
Motivations of foreign direct investments
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.)
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).
Main specificities of strategic alliances:– Basic autonomy of the partners remain,– Long-term,– Mutually advantageous co-operation,– Resources make available for one another,– Integration of specific functions.
Strategic alliances
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.
Advantages and disadvantages for recipient countries