1. Foreign Direct Investment 7 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

2. 7 - 2 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Foreign Direct Investment (FDI)  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

3. 7 - 3 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Yearly FDI Inflows Source: Based on World Investment Report (Geneva, Switzerland: UNCTAD), various years.

4. 7 - 4 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Reasons for FDI Growth Increasing globalization International mergers and acquisitions

5. 7 - 5 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Value of Cross-Border M&As Source: Based on World Investment Report (Geneva, Switzerland: UNCTAD), various years.

6. 7 - 6 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Worldwide FDI Flows World FDI inflows  Developed (57%), developing (37%)  European Union: 30% of world FDI Developing nations  China: 6.4% of world FDI  All of Africa: 5.2% of world FDI 82,000 multinationals with 810,000 affiliates

7. 7 - 7 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 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 Source: Raymond Vernon and Louis T. Wells, Jr., The Economic Environment of International Business, 5 th ed. (Upper Saddle River, N.J.: Prentice Hall, 1991), p. 85.

8. 7 - 8 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Market Imperfections (Internalization)  Trade barriers (e.g., tariffs)  Unique advantage (e.g., special knowledge) A company undertakes FDI to internalize a transaction that is made inefficient because of a market imperfection

9. 7 - 9 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 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)

10. 7 - 10 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 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

11. 7 - 11 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Management Issues I Control Purchase-or-build

12. 7 - 12 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Management Issues II Production costs Customer knowledge

13. 7 - 13 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Management Issues III Following rivals Following clients

14. 7 - 14 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 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 The import and export of goods and services, income receipts on assets abroad, and income payments on foreign assets inside the country The purchase or sale of assets (including assets such as property and shares of common stock in a company)

15. 7 - 15 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall U.S. Balance of Payments

16. 7 - 16 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Host Intervention in FDI Balance of Payments + Balance of Payments + FDI may generate exports Initial FDI boosts economy FDI may decrease imports

17. 7 - 17 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Host Intervention in FDI Obtain resources and benefits + Obtain resources and benefits + Access technology Access management skills Create employment

18. 7 - 18 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Home Intervention in FDI + Improves competitiveness + Offshore ‘sunset’ industries – Remove national resources – Eliminate export markets – Eliminate domestic jobs

19. 7 - 19 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Host Promotion Methods Financial incentives ■ Low or waived taxes ■ Low-interest loans Infrastructure benefits ■ Better seaports, roads, and telecom networks

20. 7 - 20 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Host Restriction Methods Ownership restrictions ■ Prohibit investment in industries or businesses Performance demands ■ Local content requirements ■ Export targets ■ Technology transfers

21. 7 - 21 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 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

22. 7 - 22 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Home Restriction Methods Higher taxes on foreign income Sanctions that prohibit investing