DBA-Lecture-7 FDI by liwenting

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									                      DBA-Lecture-6
                          FDI
•WHAT IS FDI
•WHY IS FDI IMPORTANT
•IS FDI BENEFICIAL FOR DEVELOPING COUNTRIES?
•TRENDS IN FDI
•THE REASON FOR GROWTH
•THEORIES OF FDI
•FDI WHEN AND WHY?
•FDI AND RISK
•HORIZONTAL AND VERTICAL FDI
•POLITICAL IDEOLOGY AND FDI
•GOVERNMENT POLICY INSTRUMENTS AND FDI
                       WHAT IS FDI?

• Company acquiring or merging with a firm in a different
  country
• A firm creating a ‘Greenfield’ operation in a different
  country
• A firm creating a subsidiary in a different country
• Direct investment in foreign-based production or
  marketing activities with substantial managerial
  involvement
• As a result
   – The firm has significant control of its foreign operation
   – Firm can affect managerial decisions of the foreign
     operation
            WHY IS FDI IMPORTANT?

• Firms want a presence in foreign markets
• Firms want control over growth of these
  foreign markets
  – To gain first mover advantages
  – To ward off competitors
  – To determine locations, advertising and other
    related strategic decisions in the firm’s
    interest
IS FDI BENEFICIAL FOR DEVELOPING COUNTRIES?

    YES                        NO
Multinational            “…Multinationals
Corporations: “…the      are not interest in
more thoroughly
these companies          development at
penetrate the markets    all,only in making
of the third world…the   bigger profits by
sooner poverty will      ensuring that the
retreat…” (Economist     poor stay poor.”
2001)                    (Economist 2001)
        WHY DO COMPANIES ENGAGE IN FDI?


• Strategic Behavior: Can raise entry barriers or shut
  out new competitors, or circumvent barriers
  established by companies already doing business in
  the foreign country.

• Market Imperfections: Need to overcome lack of
  know-how or the firm must invest in specialized
  assets whose value depends on inputs provided by a
  foreign supplier.
                          TRENDS IN FDI
• Flow and stock increased in the last 20 years
• In spite of decline of trade barriers, FDI has grown more rapidly than
  world trade because
   – Businesses fear protectionist pressures
   – FDI is seen a a way of circumventing trade barriers
   – Dramatic political and economic changes in many parts of the
      world
   – Globalization of the world economy has raised the vision of firms
      who now see the entire world as their market
   2001-2002
• The value of FDI slumped almost 60 percent in 2001-2002
   – Slowdown in world economy
   – Heightened geopolitical uncertainty since September 11, 2001
   – Bursting of the stock market bubble in the US
                                     FDI`S INFLOW AND OUTFLOW


    1,600,000
    1,400,000
millions of dollars




    1,200,000
    1,000,000
                      800,000
                      600,000
                      400,000
                      200,000
                           0
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                                                     FDI inflows (millions of dollars)
                                                     FDI outflows (millions of dollars)
                   THE REASON FOR GROWTH
•      The upward trends (both inflows and outflows) is due to several
       factors such as:
    a.    The increasing number of countries investing and receiving
          FDI

            i.     Countries continue to liberalize FDI regime.
            ii.    Enterprises seek to become more international.
            iii.   Many countries depended on FDI as a source of
                   capital-investment.
            iv.    FDI circumvents potential future trade barriers.*
            v.     Dramatic political and economic changes occurring in
                   developing countries*

    b.   The increasing number of cross border M&A
                       THEORIES OF FDI
1.   MAIN STREAM THEORIS 91900-2000)
2.   THE ECLICTIC PARADIGM (DUNNING, 1988)
3.   MACROLEVEL THEORIES OF INTERNATIONAL PRODUCTION
     a) International Trade Theory of FDI
     b) The Radical Theories of International production
     i) The Dependency School
     ii) The Internalisation of Capital School
     c) Recent ecological-economic perspective on Trade and
     Investment
4. MICRO LEVEL THEORIES OF INTERNATIONAL PRODUCTION
     i) The Global Reach school (Barnet and Muller)
     ii) Internalisation Theory-Cross border hierarchical transaction.
     Unanswered Hymer question-why FDI is preferable to arm length
     transaction
               FDI WHEN AND WHY?

• Transportation costs are high
• Market Imperfections (Internalization Theory)
   – Impediments to the free flow of products between
     nations
   – Impediments to the sale of know-how
• Follow the lead of a competitor - strategic rivalry
• Product Life Cycle - however, does not explain
  when it is profitable to invest abroad
• Location specific advantages (natural resources)
                        FDI AND RISK
• FDI is expensive and risky compared to
  exporting or
• licensing:
  – Costs of establishing facilities.
  – Problems with doing business in a different culture.
• Horizontal FDI: FDI in the same industry as the
  firm operates at home.
  – Factors to consider:
     •   Transportation Costs.
     •   Market Imperfections.
     •   Following Competitors.
     •   Strategic Competitors
     •   Location Advantages.
    HORIZONTAL FDI & FACTORS CONSIDERATION
• Transportation Costs: High/low value to weight impacts
  costs.
• Market Imperfections (Internalization Theory): Factors that inhibit
  markets from working perfectly. This includes (1) governments
  impeding the free flow of products between nations, and (2)
  impediments to the sale of know-how.
• Strategic Behavior: Concentrated industries (oligopoly) tend to
  mimic each other’s moves. Where there is multipoint competition,
  competing firms match each other’s moves to keep the competitor in
  check.
• The Product Life Cycle: Suggests that foreign market demand
  leads to FDI, probably not true and therefore is not a good predictor
  of FDI.

• Location-Specific Advantages: Advantages that arise from using
  resource endowments or assets tied to a particular location
  (Dunning - eclectic paradigm
                VERTICAL FDI


• Two forms:
  – Backward: Providing inputs (raw materials,
    parts) for a firm’s domestic production
    processes.
  – Forward: An industry abroad sells the outputs
    of the firm’s domestic production processes.
       POLITICAL IDEOLOGY AND FDI



• RADICAL
• PRAGMATIC NATIONALISM
• FREE MARKET
                       RADICAL VIEW
• Marxist roots.
   – An instrument of imperialist domination.
   – Exploit host country for the benefit of the MNE.
   – Keeps less developed countries relatively backward and
      dependent on capitalist nations for investment, jobs, and
      technology.
• Influential from 1945 to the 80s.
   – Eastern Europe, China, Cuba, some African countries, Iran,
      and India.
• Failure.
   – Collapse of Communism.
   – Poor economic performance.
   – Strong economic performance of countries embracing
      capitalism.
            PRAGMATIC NATIONALISM

• View FDI as having both benefits and
  costs.
• Governments tend toward FDI when
  benefits versus costs are high.
  – Aggressively court FDI that has national
    interest ramifications, typically through tax
    breaks or grants.
    • Technology.
    • Employment.
    • Balance of payment benefits.
              FREE MARKET VIEW

• Roots in Smith and Ricardo.
• International production should be
  distributed among countries according to
  the theory of competitive advantage.
• Positive changes in laws and growth of
  bilateral agreements attest to strength of
  free market view.
• However, all governments, to some
  degree, intervene in the free market.
  GOVERNMENT POLICY INSTRUMENTS AND FDI
                 HOME COUNTRY POLICIES


Encourage Outward FDI        Restricting Outward FDI
   Government backed           Limit capital outflows.
   risk insurance.             Use tax code to
   Government loans.           encourage companies
   Eliminate double            to stay home.
   taxation.                   Prohibitions against
   Political persuasion to     investing in certain
   relax restrictions on       countries (Cuba, Libya,
   inbound FDI.                Iran).
  GOVERNMENT POLICY INSTRUMENTS AND FDI

                HOST COUNTRY POLICIES


Encourage Inward FDI     Restricting Inward FDI
   Offer investment         Ownership restraints.
   incentives.                    Excluded from specific
       Tax                        fields.
       concessions.                    National security.
       Low-interest                    Competition.
       loans.                     Restrictions on amount of
       Grant/subsidies            ownership.
       .                    Performance requirements.
   Attempt to attract             Local content.
   investment away                Technology transfer.
   from other                     Local participation in
   countries.                     management

								
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