Tài chính doanh nghiệp - Chapter 04: Foreign direct investment: practice and theory

An investment involving management control of a resident entity in one economy (the host country), by an enterprise in another economy (the home country). FDI involves a long-term relationship reflecting an investor’s lasting interest in a foreign entity. The investor (the parent firm) and the foreign entity/asset (the ‘affiliate’— ‘subsidiary’.

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Chapter 4 Foreign direct investment: practice and theory1Lecture planDeterminants of Foreign Direct Investment(FDI)FDI conceptsFDI outflows/FDI inflowsoutward & inward FDI stock mergers and acquisitionsSectoral distribution of FDITheories of FDI: global horizons; the international product cycle; internalisation2Foreign direct investment (FDI)An investment involving management control of a resident entity in one economy (the host country), by an enterprise in another economy (the home country).FDI involves a long-term relationship reflecting an investor’s lasting interest in a foreign entity. The investor (the parent firm) and the foreign entity/asset (the ‘affiliate’— ‘subsidiary’. 3 Average annual growth rate,World FDI outflows, exports of goods and services, GDP, 1986–90, 1991–95, 1996–00, 2001–03, % p.a. Source: adapted from UNCTAD 20044 FDI ConceptsFlow: amount of FDI over a period of time (one year)Stock: total accumulated value of foreign owned assets at a given point in time.5Other FDI conceptsFDI flows (outflows, inflows)FDI stock (outward, inward)‘Greenfield’ investment = new investment made up by setting up a new affiliate overseasCross border M & As (mergers and acquisitions) = acquisition of more than 10% equity share of an existing operation overseasmergers = the combining of two or more firmsacquisition = take-over of an existing operation6M & As vs greenfield investmentsAt the time of entry and in the short term M & As may involve smaller benefits or larger negative impacts from the perspective of host-country development.Financial resources do not always add to stock.Less likely to transfer new technologies and skills.Does not generate employment (possible lay-offs).Can increase concentration and lessen competition.However, in the long term many differences diminish or disappear.7M & As vs greenfield investments cont.UNCTAD’s World Investment Report 2000 concluded that, under normal circumstances, greenfield FDI is more useful, in terms of its developmental impact, to host countries than cross-border M & As.However, under exceptional circumstances (e.g. economic crisis) cross-border M & As can play a useful role.8Determinants of foreign direct investmentTrade restrictions – the ‘Trojan horse’Cost/profitability factorsInvestment climateMarketing factors9Trade restrictions: the ‘Trojan’ horse’)Barriers to tradePreference of local customers for local products10Cost/profitability factorsCheaper production costs (labour, materials)Cheaper infrastructure (electricity, telecom)Lower rental costs (commercial, residential)Expected higher profitsDesire to be near source of supply11Investment climateGovernment attitude toward foreign investment (e.g. incentives)Political stabilityLimitations on ownershipCurrency exchange regulationsStability of foreign exchangeTax structure 12Geographic distribution of FDI outflows, 1983–2003, % of world outflowsYearDevelopedEconomies (%)DevelopingEconomies (%)Central and Eastern Europe (%) 1983–198795.05.00.011988–199293.07.00.021998–200092.96.8 0.32001–200392.07.2 0.8Source: adapted from UNCTAD’s World Investment Reports, 1995–200113Top 10 sources of outward FDI in 2001–03, % of world totalSource: adapted from UNCTAD, World Development Report 200414Geographic distribution of FDI inflows,1983–2003,% of world inflowsYearDevelopedEconomies (%)DevelopingEconomies (%)Central and Eastern Europe (%) 1983–198774.026.0 0.041988–199282.717.10.21998–200076.321.42.32001–200369.526.73.8Source: adapted from UNCTAD’s World Investment Report, 1994 and 200115Shares (%) of leading 11 economies in world inward FDI stock in 2003Source: adapted from UNCTAD, World Development Report 200416Sectoral distribution of FDI inward stock, 1990, 2002DevelopedCountries (%)DevelopingCountries (%)C. & EasternEurope (%)Sector1990a2002a1990a2002a1990a2002aPrimary sector10 6 7 7 3Manu-facturing4132463839Services4962475558a. or latest year available Source: adapted from UNCTAD, World Investment Report 200417FDI benefits/costs to host countriesBenefitscapitaltechnologymanagementemploymentexports current account (?)Costsadverse effects on competitionadverse effects on the balance of paymentsconcerns about national sovereignty18FDI benefits to home countriesImproves balance of payments Positive employment effectsexport demand can create jobsIncreased knowledge from operating in a foreign environmentBenefits the consumer through better products and lower prices19FDI costs to home countriesNegative effect on balance of payments initial capital outflow (offset by subsequent inflows)Multinational Enterprise (MNE) uses foreign subsidiary to sell back to home marketMNE uses foreign subsidiary as a substitute for direct exports (loss of export earnings)Potential ‘export’ of jobs20FDI and international tradeThe relationship between trade and FDI in a given product is characterised by a sequential process of internationalisation, e.g. trade to FDI or FDI to trade. Subsidiaries source goods and services from parent companies and can do exports from the host country.FDI is not only a source of capital but also of new technology, managerial skills and marketing networks.21Exports of foreign affiliates as % of total exports in primary and secondary sectors Various years22Foreign direct investment theoriesThe global horizons theoryThe international product cycleThe internalisation theory23 The global horizons theory Internal forces influence of a high executiveneed to market a new technology//productfinding use for old equipment.observed need for a larger marketmergers/acquisitions (e.g. BHP–Utah International) External forcesinfluence of customersinitiative of foreign governmentforeign expansion of a competitordramatic event (e.g. formation of a free-trade area)24International product cycle 12345678910111213141513456789101112131415123456789101112131415Innovating country (e.g. US, Japan)Other industrial countriesDeveloping countriesTime Stages of Production DevelopmentNew ProductStandardised ProductMaturing ProductQuantityproductionconsumption2ImportsExportsImportsExportsExportsImportsSource: Fig. 4.4254-25The internalisation theoryInternalisation: the extension of ownership by a firm to cover new markets,new sources of materials and new stages of the production process.Horizontal/vertical integrationMNE accomplishes an international transfer of factors,services and goods more efficiently than external markets.MNE: an institution designed to create and exploit internal markets.26