1. Foreign Direct Investment
Chapter 8

2. Definition of FDI
FDI occurs when a firm invests directly in facilities to produce and/or market a foreign product.
A foreign direct investment (FDI) is a controlling ownership in a business enterprise in one country by an entity based in another country.

3. FDI in Bangladesh

4. FDI in Bangladesh Source: BOI Bangladesh

5. Foreign Direct Investment (FDI)
Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI. Eg-Telecommunication companies.
Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host count. Eg- GAP International sourcing, IKEA. It occurs when a multinational decides to acquire or build an operation that either fulfills the role of a supplier (backward vertical FDI) or the role of a distributor (forward vertical FDI).

6. FDI In The World Economy
Stock of FDI- The total accumulated value of foreign- owned assets at a given time .
The flow of FDI refers to the amount of FDI undertaken over a given time period (normally a year.)
Outflows of FDI
Inflow of FDI

11. Trends in FDI in the World Economy
Global foreign direct investment (FDI) inflows fell by 18% from $1.65 trillion in 2011 to $1.35 trillion in 2012,
 Global FDI outflows fell by 17% to $1.4 trillion, down from $1.7 trillion in 2011.
The Direction of FDI
The BRICS countries continue to be important outward investors. The sharp decline of FDI flows from developed countries, FDI flows from developing economies rose slightly in 2012, amounting to $426 billion.
 Among developing regions, FDI outflows from Africa nearly tripled, flows from Asia remained unchanged from their 2011 level, and those from Latin America and the Caribbean declined slightly. Asian countries remained the largest source of FDI in the developing world, accounting for almost three-quarters of the group’s total.

12. The Form of FDI: Acquisitions versus Greenfield
Wholly–owned subsidiary
Adopted when needing substantial control
Through Greenfield- the establishment of a wholly new operation in a foreign country. acquisitions/mergers- acquiring or merging with a with an existing firm in a foreign country. Minority, majority and full outright stake stake.
Joint venture
Jointly owned by two or more independent firm
Preferred for an initial entry into a foreign market; often the only form of FDI in certain markets

13. The Form of FDI: Acquisitions versus Greenfield
1. M & A are quicker to execute. Acquiring ready–made international network of subsidiaries.
2. Acquire existing assets: brand name, local knowledge, distribution network, customer relationships, production systems, patents etc. (also reducing risk).
3. Potential for efficiency gains by transferring capital, technology or management skills.

14. FDI is more profitable than licensing:
When the firm has valuable know-how that can not be protected by a licensing contract;
When the firm needs tight control over a foreign entity to maximize its market share and earnings in that country;
When a firm’s skills and know-how are not amenable to licensing.

15. Foreign Direct Investment
Why Foreign Direct Investment
Exporting : involves producing goods at home and then shipping them to the receiving country for sale.
Transportation costs (low value-to-weight ratio).
Trade barriers : tariffs and quotas.
Licensing : involves granting a foreign entity the right to produce and sell the firm’s product in return for a royalty fee on every unit sold.
Internalization Theory:
Giving away valuable technological knowhow
Does not give tight control over manufacturing, marketing and strategy
Other capabilities to manufacture the products (e.g. management, marketing and manufacturing capabilities) are not transferrable

16. Toyota’s Ways
1) long-term philosophy, (2) the right process will produce the right results, (3) add value to the organization by developing your people, and (4) continuously solving root problems drives organizational learning.
1) overproduction; (2) waiting, time on hand; (3) unnecessary transport or conveyance; (4) overprocessing or incorrect processing; (5) excess inventory; (6) motion; and (7) defects.

17. Strategic Behavior- The theory expounded by F. T
Strategic Behavior- The theory expounded by F.T. Knickerbockers explain FDI is based on the idea that FDI flows are reflection of strategic rivalry between firms in the global market place.
Multipoint competitions arises when two or more enterprises encounter each other in different regional markets, national markets or industries. The idea is to ensure that the rival does not gain a commanding position in one market and then use the profit generated to there to subsidize competitive attacks in other markets.

18. Oligopoly- An industry composed of limited number of large firms which are highly interdependent. Players of these industries imitate each other FDI.
Four music companies control 80% of the market - Universal Music Group, Sony Music Entertainment, Warner Music Group and EMI Group
Six major book publishers - Random House, Pearson, Hachette, HarperCollins, Simon & Schuster and Holtzbrinck
Four breakfast cereal manufacturers - Kellogg, General Mills, Post and Quaker
Two major producers in the beer industry - Anheuser-Busch and MillerCoors
Two major providers in the healthcare insurance market - Anthem and Kaiser Permanente

19. Product Life cycle theory- Firms invest in foreign country when demand in that country will support local production and they do invest in low-cost location when cost pressure become intense.
John Dunning’s Eclectic Paradigm
Location- specific advantages- The advantages that arise from using resource endowments or assets that are tied to a particular foreign location and that a firms finds valuable to combine with its own unique assets.
Externalities/ spill over:

21. Political Ideology and Foreign Direct Investment The Radical View The Free Market View Pragmatic Nationalism Shifting Ideology

22. Costs and Benefits of FDI for Developing Countries
The transfer of technology to individual firms and technological spillover to the wider economy
Increased productive efficiency due to the competition from multinational subsidiaries
Improvement in the quality of the factors of production including management in other firms and not just the host firm
Benefits to the balance of payments through the inflow of investment funds
Increase in exports

23. Increases in savings and investment, hence, faster growth of output and employment. Customers may benefit from both lower prices of goods and the introduction of new or better quality goods and
Gains in employee training, in the course of opening the new businesses, which contributes to human capital development in the host country
Costs
One possible negative effects of FDI is on the balance of payments due to an increase in the import of inputs by subsidiaries and to payments of dividends and royalties abroad
FDI could also discourage the development of technical knowhow by and in local firms and to the detriment of the growth of domestic producers and the national economy
Other factors on the cost side are social costs in the form of unemployment when FDI which is relatively capital intensive, causes the more labor intensive local firms to close down

24. Host Country Benefits/ Costs
Resource Transfer Effects (capital, technology and management resources)
Employment Effects (Direct and Indirect)
Balance of Payment Effects (Substitutes imports; foreign subsidiary is used to export to other countries)
Effect on Competition and Economic Growth
Costs
Adverse Effects on Competition (M& A> monopoly)
Adverse Effects on the Balance of Payments (earnings outflow, importing of inputs)
National Sovereignty and Autonomy

25. Home Country Benefits and Costs
Inward flow of foreign earnings
Employment effects arising from demand for home- country exports
Learning valuable skills from its exposure to foreign markets
Cost
Initial capital outflow to finance the FDI
Deficit balance of payments if the purpose of Foreign investment is to serve the home market from a low cost production location.
Reduction in home country’s employment.

26. Government policy instruments and FDI Home country policies
Encouraging outward FDI
(for example, government backed insurance programs, special funds or
loans to firms wishing to invest in developing countries, elimination of
double taxation and home country’s political influence on host countries) eg- Toys “R” us at Japan
Restricting Outward FDI
(for example, limiting capital outflows out of concern for country’s balance of payments, manipulation of tax laws; i.e. British policies of higher tax on foreign earnings and prohibiting national firms from investing in certain countries; US rules prohibited US firms to invest in Cuba and Iran)

27. Host country policies Encouraging inward FDI
(for example, incentives like tax concessions, new state spending on infrastructure and low interest loans) Eg- British and French Government competed to offer Toyota to invest)
Restricting inward FDI
(for example owner restraints and performance requirements)
Owner restraints
(for example, foreign companies are excluded from specific fields, foreign ownership is permitted through a significant proportion of the equity has to be locally owned) Eg- Tobacco in Sweden; Media in India; Airlines in USA)

28. (Ownership restraints seem to based on the belief that local owners can help maximize the resource transfer and employment benefits of FDI for the host country) Performance requirements (for example, controls over the behavior of MNEs local subsidiary) (the use of local content, exports, technology transfer and local participation in top management)

29. Decision Framework
How High Transportation cost & Tariffs? - Low Export High Is Know-how amenable to licensing?  No FDI Yes Is Tight control over foreign competition required? -> Yes-> FDI No Can know-how be protected by licensing contract? -> No FDI License