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INTERNATIONAL BUSINESS. CHAPTER VII FOREIGN DIRECT INVESTMENT. 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. - PowerPoint PPT Presentation
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CHAPTER VIIFOREIGN DIRECT INVESTMENT
INTERNATIONAL BUSINESS
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Learning ObjectivesDescribe 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.
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FOREIGN DIRECT 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.
PORTFOLIO INVESTMENT
Investment that does
not involve obtaining a
degree of control in a
company.
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I. PATTERNS OF FOREIGN DIRECT INVESTMENT
Ups and Downs of Foreign Direct Investment
Worldwide Flows of FDI
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1.1 Ups and Downs of Foreign Direct Investment (FDI)
Globalization
Mergers and Acquisitions
Role of Entrepreneurs and Small Businesses
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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.
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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
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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
1.1.2 Ups and Down of Foreign Direct Investment
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Role of Entrepreneurs and Small
Businesses
these companies are engaged in FDI
1.1.3 Ups and Down of Foreign Direct Investment
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Developed countries account for around
70%
Developing countries account for 30%
1.2 Worldwide Flows of FDI
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II. EXPLAINATIONS FOR FOREIGN DIRECT INVESTMENT
International Product Life Cycle
Market Imperfections (Internalization)
Eclectic Theory
Market Power
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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
II.1 International Product Life Cycle
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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
II.2 Market Imperfection (Internalization)
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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
II.2 Market Imperfection (Internalization)
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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
II.3 Eclectic theory
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Market power
Theory stating that a firm tries to establish a
dominant market presence in an industry by
undertaking foreign direct investment
II.5 Market power
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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 )
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III. MANAGEMENT ISSUES IN THE FDI DECISION
Control
Purchase- or- Build Decision
Production Costs
Customer Knowledge
Following Clients
Following Rivals
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III.1 Control
Control
Partnership Requirements
Benefits of Cooperation
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III.1.1 Partnership Requirements
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
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III.1.2 Benefits of Cooperation
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.
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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.
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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.
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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.
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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.
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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.
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IV. GOVERNMENT INTERVENTION IN FDI
Balance of Payments
Reasons for intervention by the host country
Reasons for intervention by the home country
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Balance of Payments
A national accounting systems that
records all payments to entities in other
countries and all receipts coming into the
nation
IV.1 Balance of Payments
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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
IV.1 Balance of Payments
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Current account surplus
When a country exports more goods and
services and receives more income from
abroad than it imports and pays abroad
IV.1 Balance of Payments
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Current account deficit
When a country imports more goods
and services and pays more abroad
than it exports and receives from
abroad
IV.1 Balance of Payments
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Capital account
A national account that records
transactions involving the purchase or
sale of assets
IV.1 Balance of Payments
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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.
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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
IV.3 Reasons for Intervention by the Home Country
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Outward FDI can increase long term
competitiveness
Nations may encourage FDI in industries
that they have determined to be
“sunset” industries.
IV.3 Reasons for Intervention by the Home Country…
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V. GOVERNMENT POLICY INSTRUMENTS & FDI
Host Countries: Restriction
Host Countries: Promotion
Home Countries: Restriction
Home Countries: Promotion
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V.1 Host Countries: Restriction
Host countries have a variety of methods to
restrict incoming FDI
Ownership restriction
Performance demands
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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
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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.
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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.
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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.
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THE END
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