MT220 Professor Charles A. Fail, M.B.A., Ph.D. 1

Instructor Contact Information Home/ Office Phone: Cell Phone: AIM: charlesfail Office Hours: Wednesday: 7-8 P.M. Thursday: 8-9 P.M. Eastern Kaplan Technical Support: (option 0) You don’t need to wait until office hours to contact me! I check my several times a day and I welcome your telephone calls! If you have a question, don’t wait! Ask immediately.

 Complete the Reading - Unit Overview and Chapter 7 On the Reading Page  Respond to the Discussion On the Discussion Board – FDI Factors and Telefonica  Complete the Assignment - You are working for a Japanese company that sells earthen ware and currently has a manufacturing facility in China. As the analyst, you will write a one page memo regarding the attractiveness of an alternative country manufacturing site based on the potential ROI.

Modern Trade Theory: Porter’s Diamond – asserts that 4 broad characteristics influence the competitive environment within a country: 1. Factor Endowments – Things existing within a country that allow it to compete within a particular industry (skilled workforce, plants, etc.) 2. Demand Conditions – The demand within a particular country for a particular product or service.

Modern Trade Theory: (Continued) 3. Relating and Supporting Industries – The existence or lack of supplier and other supporting industries within a particular country. 4. Firm Strategy, Structure, and Rivalry – The conditions within a particular country that govern how businesses are created, organized, and operated, and how businesses compete with each other within a particular country.

 Governments use the following 7tools to affect trade: 1. Tariffs – Taxes imposed on imports or exports. 2. Subsidies – Government payments to a domestic producer (to produce or not produce) 3. Import Quotas – A regulatory restriction on the specific quantity of a product that may be imported into a country.

4. Voluntary Export Restraint – A voluntary restraint imposed on exports usually at the request of the importing nation. Government to government. 5. Local Content Requirements – A requirement that some specific percentage of a product sold within a country be produced domestically. 6. Administrative Policies – Administrative “barriers” designed to make it difficult for imports to enter the country. 7. Antidumping Policies – Rules designed to punish foreign businesses that sell their products within a country at prices below their costs to produce that product.

 In Unit 5 we will examine Foreign Direct Investment (FDI) in which one country’s business makes a direct investment in a business in another country. We will investigate the conditions within countries that may make them more or less attractive for direct foreign investment.

 FDI: Occurs when a business invests directly in facilities to produce or market a product in a foreign country (Hill, 2009).  Greenfield investments – establishing a new operation in a foreign country (Hill, 2009)  Flow of FDI – amount of FDI for a year (Hill, 2009)  Stock of FDI – total accumulated value of foreign- owned assets at a given time (Hill, 2009)  Outflows of FDI – The flow of FDI out of a country (Hill, 2009)  Inflows of FDI – The flow of FDI into a country (Hill, 2009)

Stock of FDI – Accumulated value of foreign- owned assets at some period of time. At least 10% foreign ownership Flow of FDI- Amount of FDI undertaken in a year. Inflow FDI – Flow of FDI coming into a country Outflow FDI – Flow of FDI out of a country.

During the past 10 years, FDI in the US has employed between 5-6 million US workers. FDI has supported 2 million manufacturing jobs in the US FDI firms pay wages 30% higher than non-FDI jobs. FDI fluctuates widely with the US business cycle: Stock of direct foreign investment - at home: $2.581 trillion (31 December 2010 est.) $2.41 trillion (31 December 2009 est.) Currently, 84% of US FDI came from 8 countries: Switzerland, the United Kingdom, Japan, France, Germany, Luxembourg, the Netherlands, and Canada. Source: US Dept. of Commerce and States/FDI_Statistics /

 Stock of direct foreign investment - abroad: $3.597 trillion (31 December 2010 est.) $3.367 trillion (31 December 2009 est.) States/FDI_Statistics/  Question: How much difference between Inflow and Outflow?

 Advantages ◦ Maintain control of technological know-how ◦ Control over operations ◦ Not amenable to licensing  Disadvantages ◦ Expensive – cost of establishing the facility ◦ Risky – dealing with different cultures ◦ May make costly mistakes

 Gives away technical know-how to potential competitors  Loses control over manufacturing, marketing, and strategy  Lose of competitive advantage from it’s management, marketing, and manufacturing capabilities

 Radical view – imperial domination, taking everything from the host country and return nothing  Free market view – production should be based on comparative advantage.  Pragmatic nationalism – FDI has costs and benefits ◦ Benefits to host country – capital, skills, technology, and jobs ◦ Costs to host country – profits go back, may import parts

Globally, there is a marked trend upwards in FDI worldwide.  Question? Why do you think this trend is upward?

 Encouraging outward FDI ◦ Government backed insurance programs ◦ Special funds or banks to support developing countries ◦ Eliminated double taxation on foreign income ◦ Encouraged host countries to relax formal restrictions  Restricting outward FDI ◦ Limit capital outflows (country’s balance of payments) ◦ Using tax laws to encourage domestic investment ◦ Formal and informal restrictions on FDI

 Encouraging Inward FDI ◦ Providing incentives to companies  Tax breaks  Low-interest loans  Grants  Subsidies  Restricting Inward FDI ◦ Ownership restraints  Firms restricted from certain activities – national security/competition  Use of joint ventures ◦ Performance requirements  Maximize benefits and minimize costs.

Firms where FDI is likely to NOT be a good option: a.High tech industries where protecting firm-specific expertise is important. b. Global oligopolies which need to maintain tight control for competitive reasons. c. Industries under tight cost pressure which require tight control to distribute operations to the lowest cost locations.  Why do these discourage FDI? Example: Bio-tech or Boeing/Airbus

The theory of FDI: Firms where FDI IS likely to be a good option: a.Firms in industries where licensing is more common and profitable. b. Firms in low-tech, fragmented industries.  Why do these encourage FDI? Example: McDonalds

U. S. Foreign Direct Investment Source: U.S. Department of Commerce

Question: As an investor or business person, what do these different rates of return tell you?

Over the last 25 years:  The accounting rate of return on FDI inflow investments into the United States has averaged 4.3%  The accounting rate of return on FDI outflow investments from the United States has averaged 12.1 % Source: Harvard Business School

Remember, This is not just about U.S. jobs directly being lost to overseas manufacturing. It is also about a competition for each dollar of U.S. business investment! Each dollar a U.S. business invests overseas is a dollar that it cannot invest in the United States!

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