International Business (6) Huang Huiping Economic School.Whut

6. Foreign Direct Investment(FDI) FDI in the world Economy: - Growth, direction,source, and form of FDI The theory of FDI - Why FDI? - The pattern of FDI Cost and benefit of FDI Government policy instrument and FDI Implications

Opening case study: Starbucks’ FDI Why didn’t Starbuck just simply export the coffee products? Why did Starbuck initially decide to license its format in Japan? What is licensing? What are the advantages and disadvantages of licensing? After that ,what made Starbuck set up a joint venture with a local retailer, Sazaby ? Is FDI expensive and risky? Why or why not? Was it a green-field investment or an acquisition ?

Some concepts Foreign Direct Investment (FDI): Direct Investment in business operations in a foreign country. Multinational Enterprises (MNE): A firm that owns business operations in more than one country.

6.1 Why FDI ? 6.1.1 Limitation of exporting - Transportation cost to choose what kind of product to be the exporting goods? - Trade barriers

6.1.2 Limitation of licensing Giving away the valuable technology know-how to a potential foreign competitor Losing tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability The core competitiveness is based not so much on its products as on the management, marketing, and manufacturing capabilities, some of them are not amenable to licensing. Toyota: “lean production”

6.2 Forms of FDI Green-field investment establish a new operation in a foreign country. Acquisition: acquiring or merging an existing firm in a foreign country. Is Acquisition better than Green-field investment ? see “management focus” - quicker - easier,less risky - more efficient

6.3 The pattern of FDI (1) -------6.3.1 Strategic Behavior Strategic Behavior theory focus on relationship between FDI and rivalry in oligopolistic industries FDI flows are a reflection of strategic rivalry between firms in the global market. ------ F.T. Knickerbocker Oligopoly: is an industry compose of a limited number of large forms .(4 firms, 80% market) Imitative behavior : a critical competitive feature of this Oligopoly is interdependence of the major players. Multipoint competition:arises when two or more enterprises encounter each other in different regional markets ,national markets or industry.

6. 3 The pattern of FDI(2) ---- 6. 3 6.3 The pattern of FDI(2) ---- 6.3.2 Product Life Cycle(Raymond Vernon) Firms undertake FDI at particular stages of its PLC. They invest in other advanced country when local demand grows large enough to support local production. They subsequently shift production to developing countries when product satandardization and market stature give rise to price competition and cost pressures.

The product cycle model Time Quantity A B C D Stage 1 (New product) Stage 2 (Product growth) Stage 3 (product maturity) Stage 4 (product decline) Stage 5 (abdicate market) import export consumption Innovating country production export production imitating country consumption import

6.3 The pattern of FDI(3) -----6.3.3 Eclectic Paradigm(John Dunning) Three advantages model - Property-specific advantages: a firm’s own unique assets Internalizing-specific advantages: using a firm’s own unique assets to produce products - location-specific advantages advantages that arise from using resources endowment or assets that are tied to a particular foreign location and that a firm finds valuable to combine with its own unique assets.

Three advantages model Property advantages Licensing trade Property advantages Goods exporting Internalizing advantages Property advantages F D I Internalizing advantages Location-specific advantages

Three advantages model When it is difficult to license a firm’s unique capability of marketing, management and know-how, a firm needs to undertake FDI Natural resources and FDI Human resources and FDI Externalities (tech spillover) and FDI

6.4 Costs and benefits of FDI --------6.4.1 Host countries effects - Resource transfer effects( Capital, technology, Know-how) - Employment effects (increase/decrease/adjust) - Balance-of- Payments effects (substitute of some imports, exporting) - effects on competition and economic growth Costs - Adverse effects on Competition (monopolize market, injure infant industry) - Adverse effects on the Balance of Payment effects - loss some economic independence?

6.4 Cost and benefits of FDI ------6.4.2 Home countries effects - inward flow of foreign earning to current account of home country’s balance of payment - jobs: create the demand for home-country’s export of capital equipment,intermediate goods, complimentary products. - learning effects: reverse resource-transfer effect. Costs - Balance-of-payments: outwards FDI ; - employment

6.5 Policies Instruments and FDI ------6.5.1 Home country policies Encouraging Outward FDI government-back insurance (nationalization ,war losses,unable to transfer profit home) Government loan Preferential taxation: eliminate double taxes. Adding political pressure to host country Restricting Outward FDI - limit capital outflows for Balance-of-payment - encourage investment at home. - political reasons

6.5 Policies Instruments and FDI -----6.5.1 Host country policies Encouraging Inward FDI tax concession Low interest loan Grants or subsidies Restricting Inward FDI ownership restrain (excluded in special field) Performance requirement(local content, export, technology transfer, top management restrain)

6.6 Implications Location implications ------Dunning’s theory: The eclectic paradim When do we need to do FDI? ------A decision framework Government Policy Government’s attitude toward FDI is an important variable in decision about the location. Negotiation between MNEs and host government------bargaining power depends on 3 factors

Assignments Read chap 7,8,9, try to explain the business implications of Economic Integration and Monetary Systems in these chapters. Prepare Chap 10