1. Universiti Utara Malaysia
The Eminent Management University
COB – COLLEGE OF BUSINESS
Master of Business Administration (MBA) Programme
GROUP PRESENTATION: CHAPTER 7: FOREIGN DIRECT INVESTMENT BFMA6043 INTERNATIONAL BUSINESS
Present by
GROUP B
ER SHEAU JIA
Matric No. :
SUZANNA A. KOH
Matric No. :
TAN YONG SOON
Matric No. :
URSULA GLADYS JONGIJI
Matric No. :
For
DR. MOHD SOBRI BIN A. WAHAB

2. CHAPTER 7: FOREIGN DIRECT INVESTMENT
INTRODUCTION
FDI IN THE WORLD ECONOMY
MAJOR ISSUES
THEORIES OF FDI
POLITICAL IDEOLOGY AND FDI
BENEFITS AND COSTS OF FDI
GOVERNMENT POLICY INSTRUMENT
CONCLUSION

3. a firm invests directly in new facilities to produce and/or market in
Introduction
Inflow
Outflow
Greenfield Investment
Flow of FDI
Types
Forms
Stock of FDI
M & A
FDI?
a firm invests directly in new facilities to produce and/or market in
a foreign country

4. FDI - in the world economy
TRENDS
FDI Outflows 1982 – 2009 ($ billions)
2009
Source: UNCTAD – World Investment Report, 2010

5. FDI - in the world economy
TRENDS
National Regulatory Changes 1982 – 2009 (%)
Source: UNCTAD – World Investment Report, 2010

6. FDI - in the world economy
DIRECTION
FDI Inflows by Region 1982 – 2009 ($ billions)
Source: UNCTAD – World Investment Report, 2010

7. FDI - in the world economy
DIRECTION
Top Host Economies for FDI in 2010 – 2010
Source: UNCTAD – World Investment Report, 2010

8. FDI - in the world economy
DIRECTION
Gross Fixed Capital Formation 1992 – 2007 (%)
Source: UNCTAD – World Investment Report, 2010

9. World Investment Report, 2010
FDI - in the world economy
SOURCE
Global FDI Outflows
2008 – 2009
Source: UNCTAD –
World Investment Report, 2010

10. M & A / GREENFIELD INVESTMENT
FDI - in the world economy
M & A / GREENFIELD INVESTMENT
Most cross-border investment is in the form of mergers and acquisitions rather than greenfield investments
Firms prefer to acquire existing assets because
mergers and acquisitions are quicker to execute
it is easier and perhaps less risky for a firm to acquire than build them from zero
firms believe that they can increase the efficiency of an acquired unit by transferring capital, technology, or management skills

11. FDI - in the world economy
M & A / GREENFIELD INVESTMENT
M & A and Greenfield Projects 2005 – 2010 (May)
Source: UNCTAD – World Investment Report, 2010

12. FDI - in the world economy
FDI IN SERVICES
FDI is shifting away from extractive industries and manufacturing, and towards services
The shift to services is being driven by
the general move in many developed countries toward services
the fact that many services need to be produced where they are consumed
a liberalization of policies governing FDI in services
the rise of Internet-based global telecommunications networks

13. Theories of Foreign Direct Investment (FDI)
3 approaches:
Pattern of FDI
Why FDI?
Eclectic Paradigm
(eclectic means choosing or accepting from various sources) (paradigm means example or model) (British Economist-John Dunning) 13

14. 1. Why FDI?
Exporting - producing goods at home and then shipping them to the receiving country for sale
exports can be limited by transportation costs and trade barriers
FDI may be a response to actual or threatened trade barriers such as import tariffs or quotas
Licensing - granting a foreign entity the right to produce and sell the firm’s product in return for a royalty fee on every unit that the foreign entity sells
(Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce and/or market in a foreign country)
Why do firms make investments in other countries? Why don’t firms just export or sign a licensing agreement with a foreign company if they want to sell their products in other markets?
We’ve alluded to some of the reasons already, but let’s explore some of the theories that help us understand FDI.
We’ll begin with looking more closely at some of the limitations of exporting and licensing, but first, let’s go over a couple of definitions.
Remember that exporting involves producing goods at home and then shipping to the receiving country for sale.
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 that the foreign entity sells.
While exporting may seem to be an obvious way to expand into foreign markets, it’s not always possible.
Imagine trying to export cement for example! The Management Focus in your text describes how one cement company, Cemex, made its decisions to invest in foreign markets.
Even smaller things like soft drinks can be expensive to ship over long distances, and even if products are easy to ship like computer software, firms may run into trade barriers that make this strategy less attractive.
Japanese auto producers for example, found that it was easier to set up shop in the U.S. than to deal with the protectionist threats made by the U.S. government in the 1980s and 1990s.
Like exporting, licensing isn’t always attractive to companies. 14

15. Cont…..Why FDI?
Internalization theory (aka market imperfections theory) suggests that licensing has three major drawbacks compared to FDI
firm could give away valuable technological know-how to a potential foreign competitor
does not give a firm the control over manufacturing, marketing, and strategy in the foreign country
the firm’s competitive advantage may be based on its management, marketing, and manufacturing capabilities
Internalization theory suggests that licensing isn’t appropriate for three main reasons.
First, licensing may result in a firm’s giving away valuable technological know-how to a potential foreign competitor.
RCA found this out the hard way. RCA licensed its cutting edge color TV technology to Sony and Matsushita in the 1960s only to find that they copied the technology and used it to compete against RCA in the U.S. market.
So, instead of expanding successfully into Japan, RCA became a minor player in its own market!
A second problem with licensing is that it doesn’t give a firm the tight control over manufacturing, marketing, and strategy that may be required to be successful in a foreign market. For example, the firm doesn’t have the ability to set prices, or market aggressively, and so on. Instead, it’s at the mercy of the licensee.
Finally, if a firm’s competitive advantage is based on management, marketing, or manufacturing capabilities rather than its product, licensing is probably not attractive. Much of Toyota’s competitive advantage for example, lies in its superior process of designing, engineering, manufacturing, and selling cars.
Toyota can’t just license that know-how out to another firm because the skills are embedded in its organizational culture! This efficiency is critical to Toyota’s success. 15

16. 2. Patterns of FDI
Why do firms in the same industry undertake FDI at about the same time and the same locations?
F.T. Knickerbocker - FDI flows are a reflection of strategic rivalry between firms in the global marketplace
multipoint competition -when two or more enterprises encounter each other in different regional markets, national markets, or industries ( i.e. Kodak and Fuji)
Raymond Vernon - firms undertake FDI at particular stages in the life cycle of a product (i.e. Xerox)
Why do firms in the same industry often make investments at about the same time, and tend to direct their investments toward certain locations?
One theory to explain these patterns is based on the idea that FDI flows reflect strategic rivalry between firms.
Knickerbocker explored the relationship between FDI and rivalry in oligopolistic industries, or industries that are composed of a limited number of large firms.
These industries are unique because what one company does can have an immediate effect on the other firms, forcing them to take similar actions.
Take the airline industry for example. If one airline cuts prices on certain routes, you see other airlines quickly make similar changes.
In an international context, recall that after Honda made its successful investment in the U.S., Toyota and Nissan both followed.
Knickerbocker’s theory can also be used to embrace the idea of multipoint competition which occurs when two or more companies encounter each other in different markets. Firms will try to match each others’ moves as a way of keeping each other in check.
Kodak and Fuji play this game. If Kodak enters a market, so will Fuji. By doing so, Fuji can make sure that Kodak doesn’t gain a dominant position in the market that it could then use to gain advantage elsewhere.
What Knockerbocker didn’t explain though, was why the first firm in an oligopoly decided to invest rather than export. This question was addressed by other researchers.
Vernon for example, tried to explain FDI in the context of the product life cycle. You might remember his theory from Chapter 5. It suggested that firms will change their strategy as a product moves through its life cycle.
One component of his theory was that firms would invest in other developed countries when local demand justified local production, and that later when the product was standardized and sold mainly on price, production would shift to a lesser developed location to take advantage of low cost labor. (Xerox introduced photocopier in the U.S. and then set-up production facilities in Japan and U.K. to serve those markets.)
But like Knickerbocker, Vernon could explain why investment took place, but not why investment was preferable to exporting. 16

17. 3. Eclectic Paradigm
Why is it profitable for firms to undertake FDI rather than continuing to export from home base, or licensing a foreign firm?
According to Dunning’s eclectic paradigm- it is important to consider
location-specific advantages - that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets (i.e. world oil companies)
externalities - knowledge spillovers that occur when companies in the same industry locate in the same area (i.e. silicon valley)
(eclectic means choosing or accepting from various sources) (paradigm means example or model) (British Economist-John Dunning)
Why, for example, should a firm produce in another country just because demand has grown? Why not continue to export, or perhaps license a local firm to produce the product?
John Dunning tried to fill in these gaps in our understanding with his eclectic theory. Dunning suggested that in addition to the various factors we’ve already discussed, there must be location specific factors and externalities that make FDI preferable.
Location specific advantages refer to the advantages that come from using resources or assets that are tied to a specific location or that a firm finds valuable to combine with its own unique assets. (this explains the FDI undertaken by many of the worlds oil companies, investing where oil is located in order to combine their technological & managerial capabilities with the valuable location-specific resources.) (another example is valuable human resources, such as low-cost, highly skilled labour)
Externalities are knowledge spill-overs that occur when companies from the same industry locate in the same area.
So, firms that want to take advantage of low cost labor, have to go to where the low cost labor is located. Firms that want to take advantage of natural resources like oil have to go to where the oil is located. Firms that want to take advantage of the knowledge base in the design and manufacture of computers and semiconductors have to go to Silicon Valley. ( European, Japanese, South Korean & Taiwanese computers and semiconductor firms are investing in Silicon valley region because they wish to benefit from the externalities that arise there)
So, Dunning’s theory is important because it explains how location specific factors affect FDI flows. 17

18. Political Ideology & FDI
How does a government attitude affect FDI?
hostile………………………………………………………………………non-interventionist
RADICAL VIEW
PRAGMATIC NATIONALISM
FREE MARKET VIEW
(Radical means fundamental/drastic or holding extremist view)
(Pragmatic means treating things from a practical point of view)
(Nationalism means patriotic feelings)
How does a government’s attitude affect FDI?
You can think of ideology toward FDI as being on a continuum where at one end is the radical view that’s hostile to all FDI, and at the other end is the noninterventionist principle of free market economies. In between these two extremes is pragmatic nationalism. 18

19. Cont/….Political Ideology & FDI
The Radical View
- the multi-national enterprise (MNE) is an instrument of imperialist domination and a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries
Let’s start with the radical view, which as you might guess, traces its roots to Marxist political and economic theory.
This perspective argues that the MNE is an instrument of imperialist domination and a means of exploiting host countries for the benefit of their capitalist-imperialist home countries.
In other words, people taking this perspective believe that the MNE will fill all important jobs with home country citizens, and so control key technology leaving the host nation dependent on the capitalist country for investment, jobs, and technology.
This perspective was very influential in the world from about 1945 until the 1980s and the collapse of communism.
Since, then the radical stance has been in retreat as people see that the countries that embraced capitalism rather than the radical ideology have been far more successful economically. 19

20. Cont/….Political Ideology & FDI
The Free Market View
- international production should be distributed among countries according to the theory of comparative advantage
embraced by advanced and developing nations including the United States, Britain, Chile, and Hong Kong
At the other end of the continuum remember, is the free market perspective which argues that international production should be distributed among countries according to the theory of comparative advantage. So, of course it traces its roots to Adam Smith and David Ricardo.
This perspective suggests that countries specialize in the production of the goods they can produce most efficiently and trade for everything else. It then follows, that FDI will actually increase the overall efficiency of the global economy.
So, if Ford moves the assembly of some of its cars to Mexico to take advantage of cheaper labor costs, Ford is not only freeing up resources in the U.S. which could then be used in activities in which the U.S. has a comparative advantage, Ford’s also transferring technology, skills, and capital to Mexico. Both countries gain!
While no country has fully adopted the pure free market stance, this ideology has been embraced by many developed and developing nations like the U.S., Hong Kong, and Chile. 20

21. Cont/….Political Ideology & FDI
Pragmatic Nationalism
- FDI has both benefits (inflows of capital, technology, skills and jobs) and costs (repatriation of profits to the home country and a negative balance of payments effect)
FDI should be allowed only if the benefits outweigh the costs
Recently, there has been a strong shift toward the free market stance creating
a surge in FDI worldwide
an increase in the volume of FDI in countries with newly liberalized regimes
(Pragmatic means treating things from a practical point of view) (Nationalism means patriotic feelings)
In the middle of the continuum is pragmatic nationalism which argues that FDI has both benefits and costs.
Benefits include things like inflows of capital, technology, skills, and jobs, while costs include the repatriation of profits and negative balance of payments effects.
Pragmatic nationalism suggests that FDI should only be allowed if the benefits outweigh the costs.
We’ve seen a shift toward the free market stance in recent years, and you already know of course that along with that shift there’s been a surge in FDI.
Keep in mind though, that FDI is still viewed with hostility in some countries and in some situations.
As the Management Focus in your text outlines, the U.S. recently rejected an effort by DP World to invest in U.S. ports. 21

22. BENEFITS & COSTS OF FDI

23. HOST COUNTRY BENEFITS Resource Transfer Effects Employment Effects
Balance-of-payments Effects
Effects On Competition And Economic Growth

24. 1. RESOURCE TRANSFER EFFECTS
Resources Transferred:
CAPITALS
TECHNOLOGY
R & D
MANAGEMENT SKILLS
Improve production process & products, effeciencies

25. 2. EMPLOYMENT EFFECTS Create job opportunities direct & indirectly
In the case of ACQUISITION, initially employment reduces during restructuring period but later grow faster than the domestic rivals
Because better wage rates & employment qualities are provided

26. 3. BALANCE-OF-PAYMENTS EFFECTS
BALANCE-OF-PAYMENT ACCOUNTS: Track both its payment & receipts from other countries
CURRENT ACCOUNT: Tracks the exports & import of goods & services
Govt. prefers current account surplus (export>import) than current account deficits (import>export) and dislike to see the assets falling into foreign hands.

27. FDI can help to improve when:
FDI is a substitute for imports
MNE uses a foreign subsidiary to export (i.e. by generating inward FDI)

28. 4. EFFECTS ON COMPETITION & ECONOMIC GROWTH
Greenfield investment: Increase competition, productivity growth, product & process innovations, stimulate capital investment
Looking at the impact on domestic markets, especially important in services, since exporting is often nit an option for services

29. HOST COUNTRY COSTS Adverse Effects on Competition
Adverse Effects on the Balance of Payments
National Sovereignty & Autonomy

30. 1. ADVERSE EFFECTS ON COMPETITION
Possible to drive indigenous companies put of business & allow MNE to monopolize the market
Acquisitions: Doesn’t show result in a net increase in the no. of players in the market. Therefore, competition effect = neutral
Authorities have to control

31. 2. ADVERSE EFFECTS ON THE BALANCE-OF-PAYMENTS
Outflows of earnings to home country
Foreign subsidiaries import a substantial input fro abroad
Resulted: A debit on the current account of the host country’s balance of payments

32. 3. NATIONAL SOVEREIGNTY AND AUTONOMY
Loss of economic independence
When decisions made by MNE who has no real commitment to the host country might affect host country
Host country’s government das no real control with that

33. HOME COUNRTY BENEFITS
Inward flow of foreign earnings benefits balance of payments account
Outward FDI arise from employment effects
Home country MNEs learn valuable skills from its exposure to foreign markets

34. HOME COUNTRY COSTS The home country’s balance of payments can suffer
from the initial capital outflow required to finance the FDI
if the purpose of the FDI is to serve the home market from a low cost labor location
if the FDI is a substitute for direct exports
Employment may also be negatively affected if the FDI is a substitute for domestic production
Eg. Toyota

35. OFFSHORE PRODUCTION FDI undertaken to serve the home market
Stimulate economic growth by freeing home country resources to concentrate on activities when the home country has a competitive advantage
Benefits if prices fall as a result of FDI

36. Government Policy Instruments & FDI
Home Country Policies -
Host Country Policies

37. Government Policy Instruments & FDI
Home Country Policies
Encourage Outward FDI
- Risk reduction policies (financing, insurance, tax incentives)
Restricting Outward FDI
Limit capital outflows, manipulate tax rules
or prohibit FDI.

38. Government Policy Instruments & FDI
Host Country Policies
Encourage Inward FDI
Investment incentives
Job creation incentives
Restricting Inward FDI
- Ownership extent restrictions (to safeguard host country’s interest) and performance requirement.

39. Conclusion 1 2 Host Country Benefits Home Country Benefits
Resource transfer effect
Increase employment
Balance –of- payments
effects
* Import substitution
* Source of export increase
Home Country Benefits
Improvement in balance of payments from foreign earnings
* Import substitution
* Source of export increase
Increase employment from outward FDI.
Resource/skills transfer

40. Conclusion 1 2 Home Country Costs Host Country Costs
Adverse effect of Balance-of-payment
* Capital inflow followed capital outflow + profits.
Perceived loss of national sovereignty.
* Loss of economic independence
Home Country Costs
Adverse balance-of-payment effects
* Initial capital outflow followed by capital inflow + profits
-Substitution for domestic production
- Employment decreased locally.

41. Conclusion
FDI brings lots of benefits to both home countries or host countries. FDI transfers not only economic/ financial resources, but also knowledge/expertise and managerial know-how from home countries to host countries and vice versa.