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

2. Readings
World Investment Report Overview. pp
The OLI Paradigm.

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
Three primary costs of FDI concern to host countries are: adverse effects on competition, adverse effects on the balance of payments; and a loss of national sovereignty and autonomy.

12. Political Ideology and FDI
Radical
View
Pragmatic
Nationalism
Free
Market
Historically, ideology toward FDI has ranged from a dogmatic radical stance that is hostile to all FDI at one extreme to an adherence to the noninterventionist principle of free market economics at the other. Between these two extremes is an approach that might be called pragmatic nationalism.

13. Marxist view: MNE’s exploit less-developed host countries
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. By the end of the 1980s radical view was in retreat
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-seeking investments:
Green-field investments,
Brown-field investments,
Mergers & acquisitions.

19. Motivations of foreign direct investments
Efficiency-seeking investments:
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 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.

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