Foreign Direct Investment Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

International Business 5e Chapter Chapter Preview 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

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 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

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter Growth of World FDI vs. GDP

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter Reasons for FDI Growth Increasingglobalization International mergers and acquisitions Entrepreneurship and small firms

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter Value of Cross-Border M&As

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter Worldwide FDI Flows World FDI inflows  Developed (65%), developing (29%)  European Union: 40% of world FDI Developing nations  China: 5% of world FDI  All of Africa: 3% of world FDI 70,000 multinationals with 690,000 affiliates

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 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

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter Market Imperfections (Internalization)  Trade barriers (e.g., tariffs)  Specialized knowledge (e.g., managerial ability) Company undertakes FDI to internalize a transaction that is being made inefficient by a market imperfection

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter Eclectic Theory A firm undertakes FDI when location, ownership, and internalization advantages combine to make a location appealing Location advantage (optimal location) Ownership advantage (special asset) Internalization advantage (efficiency)

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter Market Power A firm undertakes FDI to establish a dominant presence in an industry Vertical integration Extends company’s activities into stages of production that provide its inputs (backward integration) or absorb its out- puts (forward integration) Market power = Greater profits

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter Management Issues and FDI Control Control Partnership requirements Benefits of cooperation Control Control Partnership requirements Benefits of cooperationPurchase-or-builddecisionPurchase-or-builddecision Production costs Production costs Rationalized production Cost of R&D Production costs Production costs Rationalized production Cost of R&DCustomerknowledgeCustomerknowledge FollowingrivalsFollowingrivalsFollowingclientsFollowingclients

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter Balance of Payments Capital accountCurrent account National accounting system that records all payments to entities in other countries and all receipts coming into the nation 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)

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter Why Host Intervenes in FDI Balance of Payments + Balance of Payments + FDI may generate exports Initial FDI boosts economy Obtain resources and benefits + Obtain resources and benefits + Access technology Access management skills Create employment FDI may decrease import demand

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter Why Home Intervenes in FDI – Removes resources from the nation – Can eliminate an export market – Might eliminate domestic jobs + May improve national competitiveness + Can offshore ‘sunset’ industries FDI

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter Host Promotion Methods Financial incentives Low or waived taxes Low interest loans Financial incentives Low or waived taxes Low interest loans Infrastructure improvements Infrastructure improvements Improved seaports, roads, telecommunications networks Infrastructure improvements Infrastructure improvements Improved seaports, roads, telecommunications networks

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter Host Restriction Methods Ownership restrictions Prohibit investment in certain industries or businesses Ownership restrictions Prohibit investment in certain industries or businesses Performance demands Local content reqts. Technology transfers Export targets Performance demands Local content reqts. Technology transfers Export targets

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter Home 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

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter Home Restriction Methods Higher tax rates on foreign income Sanctions on specific nations

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter Chapter Review 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

Foreign Direct Investment Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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