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BU669 Session 2
Negotiating FDI Relationships & Offshoring
Foreign Direct Investment
• Growing importance – growth in capital flow > growth in flow of goods & services
• Inter-company product flows account for significant share of countries exports & imports
• Developed to developing countries• MNE still drive a lot of the action• Stakeholders – governments, MNE, local
companies• Simulation – window into the dynamics
Players in Negotiations
• 3 Multinationals – Megatronics, Eurodata, Tanaka
• 1 Government– China – but local governments as well
• 2 local companies – Majestic, Shanghai Information Age Technologies
Issues For Individual Players
• MNCs – China? Type & size of Plant?
• Local Companies – Enter industry? Alone or Partner? Plant type & size?
• Government – Industry structure & ownership to allow? Incentives? Economic development?
Issues Between MNCs & Local Companies
• License, subcontract, JV, other?
• Ownership %s
• Mg’t responsibilities & Control
• Technology transfer
• Local market or export
• Size & Type of plant
• Transfer pricing – imports/exports
Issues Between MNCs & Government
• Plant size & type• Location• Infrastructure development & support• Number of manufacturers allowed• Tariff protection• Foreign ownership allowed• Technology transfer conditions• Pricing regulations• Export and local content requirements• Tax & financial incentives• Repatriation of profits
Contributions of MNEs
11-9
Issues Between Local Companies & Governments
• Incentives & Special consideration
• Degree of support with MNCs
• Number of manufacturers
• Tariff Protection
• Tax, financial & export incentives
• Plant location
Issues Between Local Companies
• Cooperate or compete
• If cooperate – independent or joint operations?
Issues Between Governments
• Cooperate or compete?
• Free Trade?
Part Two
Off-shoring
Canadian Industry Punching Out – Stronger Dollar and Low-cost Alternatives are sending
Jobs Offshore – G&M Jan23, 2004• Nortel – 1500 jobs• Levis Strauss & Company – 1200 jobs• Bauer Nike Hockey – 321 jobs• Camco (refrigerators & stoves) – 800 jobs• Roots – 200 jobs• Swift Denim – 600 jobs• International - Multi-foods – 135 jobs• Canam Manac (truck trailers) – 245 jobs
Is Your Job Next?
• By 2015 – roughly 3.3 million U.S. business processing jobs will have moved offshore
• U.S. service jobs lost to offshoring will increase at a rate of 30% to 40% over next five years
• Software developers - $60/hr in U.S. vs $6/hr in India
Is offshoring a good thing or not? For Canada?
Offshoring’s Value to India
Benefit per $1 of U.S. off-shore Spending in 2002• Offshoring Sector Labour 0.10
Profits 0.10• Local Suppliers 0.09• Government Taxes Central 0.03
State 0.01• Net Benefit $0.33
Example: Call Centre in India
Foreign Direct Investment’s Effect on Developing countries
Competition Boosts Productivity
Exploding the Myths of Offshoring – Mckinsey June 2004
Benefits to NA• Corporate savings• Deal for consumers• Additional exports• Repatriated profits• Productivity & new jobs???• Challenge – address those displaced in the
transition
Don’t Blame Trade for US Job Losses – Mckinsey 2005
• 2.85 mil manufacturing jobs lost in US during 2000-2003 Why?
• 11% or 314,000 due to trade – offshore imports• Real contributor – weak domestic demand, rapid
productivity growth, dollar’s strength which hurt exports
• Solutions – stimulate domestic demand, cut deficit,push countries with artificially cheap currencies to appreciate against the US$, trade-adjustment-assistance programs
Another Concern – Innovation Blowback
• Wal-Mart stores imports from China – 1% of GDP – company is helping Chinese manufacturers target shoppers in US & Europe
• Citigroups Chinese M&A unit – outbound deals make up lion share of its pipeline
• Western companies serving low-income customers in emerging markets are using that experience to address needs of value segments in developed markets
Product & Process Innovation to Address Broader Emerging Market Needs
• Production-driven modularity – process networks – e.g., motorcycles
• Customer-driven modularity – Cummins engines/generators
• Process-driven services – Aravind Eye Care System in India
• Key message to Westerners – if you are participating in the mass-market segment of emerging economies, you are not developing the capabilities you will need to compete at home
Summary
• FDI importance & impact
• Stakeholders involved & perspectives
• Negotiations & Deal Structuring
• Off-shoring – strategic fit, economic impact – micro & macro
• Next Day – China seminars