2 FDA Then main sections Introduction FDI in the world Economy Theories of FDIPolitical Ideology and FDIBenefits and Cost of FDIGovt Policy Instruments and FDI
3 IntroductionFDI when a firm invests directly in a foreign country leading to a multinational enterprise.Two forms of FDI:Greenfield investmental_Report_FDI%20_SAUDI_ARABIA.pdf2. Acquiring or merging with a firm in the foreign country.See Telephonica case study
4 Foreign Direct Investment in the World Economy section number one Key concepts:The Flow of FDI: the amount of the FDI undertaken over a year.The Stock of FDI: the total accumulated value of foreign owned assets at a given time.Outflows of FDI: the flow of FDI out of the country.Inflows of FDI: the flow of FDI into a country
5 Foreign Direct Investment in the World Economy Trends in FDIThe direction of FDIThe source of FDIThe form of FDIThe shift to services
6 Trends in FDIOutflow of FDI from $25 billion in 1975 to 1.4 trillion in 2000.2007 = 1.8 trillion dollars2008 = 1.4 trillion.2011 = 1.66 trillion an increase by 16%See 12/finance htmSee figure 1.7.The global stock of FDI exceeded $15 trillion by 2007.
7 The directions of FDIThe direction from developed to developed countries.$232billion in 2008 inward investment to the USAEU reached 604 billion in 2007.UK and France 323 and 272 respectively.FDI into developing nations has increased to reach 27.4 billion. Don't forget the emerging economies, China for exampleChina attracted 60 billion of FDI in 2004 to hit 92 billion in 2008.Gross fixed capital formation is an important indicator see figure 7.4
8 Source of FDIUSA since WWll up to 2000UK, France, Germany and Japan.
9 The form of FDI Acquisitions Vs Greenfield Investments. Acquisitions account for more than Greenfields up to percentLess in developing countries of about one- third is in the form of cross-border mergers and acquisitions. There are fewer firms to acquire in developing nations.Maybe you have to start from scratch- Greenfield investments
10 The form of FDIWhy to acquire vs undertake greenfield investments?
11 The Shift to ServicesServices account for about more than 70% of the GDPThe shift to services is driven by many factors 1- including the shift from goods to services.2-Services can not be traded internationally because of they are inseparable3-Regime liberalization in services – telecommunication and power4- the internet based global telecommunications networks has allowed some services to relocate some of their value creation activities to different nations- Proctor and Gample shifting its back office accounting function to the Philippines.
12 Theories of FDI section number two Why FDI? Maybe it is more risky and expensive. Why not exporting and Licensing? What are their limitations?
13 Theories of FDI Limitations of exporting Transportation costs and trade barriersLimitations of licensingThe risk of giving away valuable technological know how to a foreign potential competitor. Be careful of losing your secret formula.Lost control over important functions like manufacturing, marketing and strategy.The licensee might not be able to do it right affecting the firm’s competitive advantage.Culture can not be licensed! Check Toyota example page 242. culture is immitigable
14 Theories of FDIThe pattern of FDI or FDI pattern: firms in the same industry for example tend to undertake FDI at around the same time and towards certain locations. Theories that explain the pattern that we observe in FDI flows: 1-Strategic behaviour: One theory is based on the idea that FDI is based on strategic rivalry between firms
15 Theories of FDI 1-Strategic behaviour: One theory is based on the idea that FDI is based on strategic rivalry between firmsExample is the rivalry in oligopolistic industriesAn oligopoly: like 4 firms control 80% of domestic market. Imitation is high in prices and DFI
16 Theories of FDIUsing Multipoint competition: when two or more companies encounter each other in different regional markets, national markets, or industries. Playing like chess, matching each other moves in different markets to try to get advantage one over the other.The case of Kodak and FujiBurger King Following McDonald’s
17 Theories of FDIThe product life cycle is not very clear in terms of why firms use FDI not other forms like exporting or licensing! So shift to theEclectic Paradigm is a very interesting one:location-specific advantages for FDI including resource endowments or assetsSo it is:Location specific assets + firm’s own capabilities = FDI
18 Eclectic ParadigmLook at the example of Silicon Valley – good example- on top of page 245.The location specific advantage in Silicon Valley is KNOWLEDGE in computer and semiconductor industries attracting computer companies from all over the world to DFI there.Also oil companies.
19 Political Ideology and FDI (section number three) 1- the Radical view against FDI lead by Marxist political theory.2- the Free Market View – Adam Smith and David Ricardo views theories.3- Pragmatic Nationalism – the case of Al-Hassan City in Jordan.Japan weights benefits against costs of FDI- IBM and Texas instruments.Nissan, Toyota, and Honda are now operating in the UK by offering tax breaks and subsidies. The shift now is from the radical approach to the free market approach.
20 Benefits and costs of FDI section four Host-country benefitsResource-transfer Effects-like capital, technology, and management resources and training managers and job creation- THE KNOW-HOW.Balance of payments effects; avoiding trade deficit. China exports reached $969 Billion in 2006 due to the presence of foreign multinationals that invested heavily in China during the 1990.
21 Benefits and costs of FDI section four Effects on competition and economic growthThis improves prices, quality and economic prosperity, R&D., productivity.
22 Benefits and costs of FDI section four Host-country costs:Adverse effects on competitionAdverse effects on the balance of paymentsNational sovereignty and autonomyHome country benefits: home country balance of payments, employment and skill developmentHome country costs-balance of payments and employment
23 Govt Policy instruments and FDI section number five Home country policiesHost country policies
24 Home country policies Encouraging outward FDI Restricting outward FDI The first one: encouraging outward FDI:1- insurance2- elimination of double taxationUsing political influence to relax restriction, barriers and rules. The Case of toys “R” Us in Japan
25 Home country policies The second policy is restricting outward FDI 1- to limit capital outflows for protecting the country balance of payments2- to create jobs at home3- for political reasons. Ex Iran.
26 Host country policies Encouraging inward FDI Tax concessions, low interest loans, and grantsFrance and UK compete for inward FDI from Toyota in 1995.Restricting inward FDIIn ownership restraints and performance requirements. For example Inward FDI in Natural resources like water, cement and potash and other mineralsNational security issues
27 Restricting inward FDI Ownership restraints is also based on a belief that local owners can help to maximize the resource transfer and employment benefits.International institutions and FDILiberalization page 256.
28 Chapter summary and guidelines You need to:Know the differences between Greenfield investments Vs acquisitions.FDI keywords like flow of FDI...etc.View links related to FDI in these slides.Have a general knowledge about trends in FDI, direction, and sources of FDI.The shift to servicesKnow the theories of FDI including the internalization theory, strategic behaviour, multipoint competition.
29 Chapter summary and guidelines More important is the eclectic paradigm-In The political ideology page 245 look at the 3 views.Benefits and cost of FDI – the main elements only like 2-3 benefits and costs of each. andthe same thing for govt policy instruments.Case studies (opening and closing).Good luck to you.