1. INTERNATIONAL BUSINESS CHAPTER VII FOREIGN DIRECT INVESTMENT

2. Learning Objectives
Describe the worldwide patterns of foreign direct investment (FDI) and the reasons for these patterns.
Describe each of the theories that attempt to explain why foreign direct investment occurs.
Discuss the important management issues in the foreign direct investment decision.
Explain why governments intervene in the free flow of foreign direct investment.
Discuss the policy instruments that governments use to promote and restrict foreign direct investment.

3. FOREIGN DIRECT INVESTMENT
PORTFOLIO INVESTMENT
The purchase of physical assets or a significant amount of the ownership (stock) of a company in another country to gain a measure of management control.
Investment that does not involve obtaining a degree of control in a company.

4. I. PATTERNS OF FOREIGN DIRECT INVESTMENT
Ups and Downs of Foreign Direct Investment
Worldwide Flows of FDI

5. 1.1 Ups and Downs of Foreign Direct Investment (FDI)
Globalization
Mergers and Acquisitions
Role of Entrepreneurs and Small Businesses

6. 1.1.1 Ups and Downs of Foreign Direct Investment (FDI)
Globalization
Companies were trying to export their products to markets around the world  Wave of FDI
Another wave of FDI flows into low-cost newly industrialized & emerging nations worldwide.

7. 1.1.2 Ups and Downs of Foreign Direct Investment (FDI)
Mergers and Acquisitions
The number of Mergers and Acquisitions and their exploding values also underlie long-term growth in FDI

8. 1.1.2 Ups and Down of Foreign Direct Investment
Mergers and Acquisitions
Many cross-border merger and acquisitions deals are driven by the desire of companies to do any or all of the following:
Get a foothold in a new geographic market
Increase a firm’s global competitiveness
Fill gaps in companies’ product lines in a global industry
Reduce costs in areas such as research and development, production, or distribution

9. 1.1.3 Ups and Down of Foreign Direct Investment
Role of Entrepreneurs and Small Businesses
these companies are engaged in FDI

10. 1.2 Worldwide Flows of FDI Developed countries account for around 70%
Developing countries account for 30%

11. II. EXPLAINATIONS FOR FOREIGN DIRECT INVESTMENT
International Product Life Cycle
Market Imperfections (Internalization)
Eclectic Theory
Market Power

12. II.1 International Product Life Cycle
Theory stating that a company will begin by exporting its product and later undertake foreign direct investment as a product moves through its life cycle

13. II.2 Market Imperfection (Internalization)
Theory stating that when an imperfection in the market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and thereby remove the imperfection

14. II.2 Market Imperfection (Internalization)
Trade Barriers
One common market imperfection in international business, such as Tariffs
Specialized Knowledge
The unique competitive advantage of company sometimes consists of Specialized Knowledge

15. II.3 Eclectic theory Eclectic theory
Theory stating that firms undertake foreign direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment

16. II.5 Market power
Market power
Theory stating that a firm tries to establish a dominant market presence in an industry by undertaking foreign direct investment

17. II.5 Market power Vertical integration
Extension of company activities into stages of production that provide a firm’s inputs ( backward integration ) or absorb its output ( forward integration )

18. III. MANAGEMENT ISSUES IN THE FDI DECISION
Control
Purchase- or- Build Decision
Production Costs
Customer Knowledge
Following Clients
Following Rivals

19. III.1 Control
Control
Partnership Requirements
Benefits of Cooperation

20. III.1.1 Partnership Requirements
Because of the importance of control
Many companies have strict policies regarding how
much ownership they will take in firms in other nations

21. III.1.2 Benefits of Cooperation
Have seen greater harmony between governments
and international companies
Governments of many developing and newly
industrialized countries have come to realize the
benefits of investment by multinationals.

22. III.2 Purchase-or- Build Decision
Whether to purchase an existing business or to build a subsidiary abroad from the ground up- call a greenfield investment.

23. III.3 Production costs Rationalized Production
System of production in which each of a product’s components is produced where the cost of producing that component is lowest
Cost of Research and development
lead multinationals to engage in cross-border alliances and acquisitions.

24. III.4 Customer Knowledge
The behavior of buyers is an important issue in the decision of whether to undertake FDI
A local presence can help companies gain valuable knowledge about customers that could not be obtained in the home market.

25. III.5 Following Clients
Firms engage in FDI when doing so puts them close to firms for which they act as a suppliers
This practice of “following clients” can be expected in industries in which many component parts are obtained from suppliers with whom a manufacturer has a close working relationship.

26. III.6 Following Rivals
Many firms believe that choosing not to make a move parallel to that of the “first mover” might result in being shut out of a potentially lucrative market.

27. IV. GOVERNMENT INTERVENTION IN FDI
Balance of Payments
Reasons for intervention by the host country
Reasons for intervention by the home country

28. IV.1 Balance of Payments
Balance of Payments
A national accounting systems that records all payments to entities in other countries and all receipts coming into the nation

29. IV.1 Balance of Payments Current account
National account that records transactions involving the import and export of goods and services, income receipt on assets abroad, and income payment on foreign assets inside the country

30. IV.1 Balance of Payments Current account surplus
When a country exports more goods and services and receives more income from abroad than it imports and pays abroad

31. IV.1 Balance of Payments Current account deficit
When a country imports more goods and services and pays more abroad than it exports and receives from abroad

32. IV.1 Balance of Payments Capital account
A national account that records transactions involving the purchase or sale of assets

33. IV.2 Reasons for Intervention by the Host Country
Balance of Payments
FDI inflows are recorded as additions to the balance of payments
Local production
Exports  host country’s balance of payment
Obtain Resources and Benefits
Access to technology
Management skills and employment.

34. IV.3 Reasons for Intervention by the Home Country
Investing in other nations sends resources out of the home country
Outgoing FDI may ultimately damage a nation’s Balance of Payments by taking the place of its exports
Jobs resulting from outgoing investments may replace jobs at home

35. IV.3 Reasons for Intervention by the Home Country…
Outward FDI can increase long term competitiveness
Nations may encourage FDI in industries that they have determined to be “sunset” industries.

36. V. GOVERNMENT POLICY INSTRUMENTS & FDI
Host Countries: Restriction
Host Countries: Promotion
Home Countries: Restriction
Home Countries: Promotion

37. V.1 Host Countries: Restriction
Host countries have a variety of methods to restrict incoming FDI
Ownership restriction
Performance demands

38. V.1 Host Countries: Restriction
Ownership restriction
Government can impose ownership restrictions that prohibit nondomestic companies from investing in certain industries.
Performance demands
Influence how international companies operate in the host nation

39. V.2 Host Countries: Promotion
Financial incentive
Lower tax rates
Offers to waive taxes on local profits for a period of time extending as far out as five years or more
Infrastructure improvements
Better seaports suitable, improved roads, increased
telecommunications systems.

40. V.3 Home Countries: Restriction
Impose differential tax rates
That charge income from earning abroad at a higher rate than domestic earning
Impose outright sanctions
That prohibit domestic firms from making investment in certain nations.

41. V.4 Home Countries: Promotion
Offer insurance to cover the risks of investment abroad
Grant loans to firms wishing to increase their investment abroad
Offer tax breaks on profits earned abroad or negotiate special tax treaties
Apply political pressure on other nations to get them to relax their restrictions on inbound investment.

42. THE END