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International Business
Prepared By
Manu Melwin Joy
Assistant ProfessorIlahia School of Management Studies
Kerala, India.
Phone – 9744551114Mail – [email protected]
Kindly restrict the use of slides for personal purpose.Please seek permission to reproduce the same in public forms and presentations.
International Investment
• There are two main categories
of international investment—
portfolio investment and
foreign direct investment.
International Investment
Direct Investment Portfolio Investment
Wholly Owned
Subsidiary
Joint Venture
Acquisition Investment in
GDR, ADR etc
Investment in
FII
Portfolio investment• Portfolio investment refers to the
investment in a company’s stocks,
bonds, or assets, but not for the
purpose of controlling or directing
the firm’s operations or
management. Typically, investors in
this category are looking for a
financial rate of return as well as
diversifying investment risk through
multiple markets.
Foreign direct investment (FDI)• Foreign direct investment (FDI) refers to
an investment in or the acquisition of
foreign assets with the intent to control
and manage them. Companies can make
an FDI in several ways, including
purchasing the assets of a foreign
company; investing in the company or in
new property, plants, or equipment; or
participating in a joint venture with a
foreign company, which typically involves
an investment of capital or know-how.
FDI is primarily a long-term strategy.
Factors affecting International Investment
• Cost - Is it cheaper to produce in
the local market than elsewhere?
• Logistics - Is it cheaper to produce
locally if the transportation costs
are significant?
• Market - Has the company
identified a significant local market?
• Natural resources - Is the company
interested in obtaining access to
local resources or commodities?
Factors affecting International Investment• Know-how - Does the company want
access to local technology orbusiness process knowledge?
• Customers and competitors - Doesthe company’s clients or competitorsoperate in the country?
• Policy - Are there local incentives(cash and noncash) for investing inone country versus another?
• Ease - Is it relatively straightforwardto invest and/or set up operations inthe country, or is there anothercountry in which setup might beeasier?
Factors affecting International Investment
• Culture - Is the workforce or laborpool already skilled for thecompany’s needs or will extensivetraining be required?
• Impact - How will this investmentimpact the company’s revenue andprofitability?
• Expatriation of funds - Can thecompany easily take profits out ofthe country, or are there localrestrictions?
• Exit - Can the company easily andorderly exit from a local investment,or are local laws and regulationscumbersome and expensive.
Theories of international Investment
1. Theory of capital movement.
2. Market Imperfections theory.
3. Internalization theory.
4. Appropriability theory.
5. Location specific advantage theory.
6. International product life cycle theory.
7. Eclectic Theory.
Theory of capital movement
The earliest theoricians,who assumed, in theclassical tradition, theexistence of a perfectlycompetitive market,considering foreigninvestments as a form offactor movement to takeadvantage of differentialprofit.
Market Imperfections theory
According to this theory,FDI occurs largely inoligopolistic industriesrather than in industriesoperating under nearperfect competition.
Internalization theory
According to this theory,FDI results from thedecision of a firm tointernalize a superiorknowledge.
Appropriability theory
According to this theory, afirm should be able toappropriate the benefitsresulting from atechnology it hasgenerated.
Location specific advantage theory
According to this theory, athe FDI is pulled by certainlocation specificadvantages. (Labor costs,Govt Policy etc)
International product life cycle theory
According to this theory, aproduction of a productshifts to differentcategories of countriesthrough the differentstages of the product lifecycle.
