Bài giảng International Business - Chapter 8: Foreign Direct Investment

International Business 9eBy Charles W.L. HillMcGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter 8Foreign Direct Investment What Is FDI?Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce and/or market in a foreign countrythe firm becomes a multinational enterpriseFDI can be in the form of greenfield investments - the establishment of a wholly new operation in a foreign countryacquisitions or mergers with existing firms in the foreign countryMost cross-border investment is in the form of mergers and acquisitions rather than greenfield investmentsWhy Do Firms Choose Acquisition Versus Greenfield Investments?Firms prefer to acquire existing assets because mergers and acquisitions are quicker to execute than greenfield investmentsit is easier and perhaps less risky for a firm to acquire desired assets than build them from the ground upfirms believe that they can increase the efficiency of an acquired unit by transferring capital, technology, or management skillsWhat Are The Patterns Of FDI?The flow of FDI - the amount of FDI undertaken over a given time period outflows of FDI are the flows of FDI out of a countryinflows of FDI are the flows of FDI into a countryThe stock of FDI - the total accumulated value of foreign-owned assets at a given time Both the flow and stock of FDI have increased over the last 30 yearsWhat Are The Patterns Of FDI?FDI Outflows 1982-2010 ($ billions) What Are The Patterns Of FDI?FDI Inflows by Region 1995-2010 ($ billion) What Are The Patterns Of FDI?The growth of FDI is a result ofA fear of protectionismwant to circumvent trade barriersPolitical and economic changesderegulation, privatization, fewer restrictions on FDINew bilateral investment treatiesdesigned to facilitate investment The globalization of the world economymany companies now view the world as their marketneed to be closer to their customers What Is The Source Of FDI?Cumulative FDI Outflows 1998-2010 ($ billions) Why Choose FDI?Question: Why choose FDI not exporting or licensing?Exporting - producing goods at home and then shipping them to the receiving country for sale Licensing - granting a foreign entity the right to produce and sell the firm’s product in return for a royalty fee on every unit that the foreign entity sellsinternalization theory (aka market imperfections theory)Knickerbocker - FDI flows are a reflection of strategic rivalry between firms in the global marketplacemultipoint competitionVernon - firms undertake FDI at particular stages in the life cycle of a productWhy Choose FDI?Dunning’s eclectic paradigm - it is important to considerlocation-specific advantages - that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets externalities - knowledge spillovers that occur when companies in the same industry locate in the same area What Are The Theoretical Approaches To FDI?The radical view - the MNE is an instrument of imperialist domination and a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries The free market view - international production should be distributed among countries according to the theory of comparative advantagePragmatic nationalism - FDI has both benefits (inflows of capital, technology, skills and jobs) and costs (repatriation of profits to the home country and a negative balance of payments effect)What Does FDI Mean For The Host Country?Benefits of inward FDI for a host country Resource transfer effectsEmployment effectsBalance of payments effectsEffects on competition and economic growthCosts of inward FDI for a host countryAdverse effects on competition within the host nation Adverse effects on the balance of paymentsPerceived loss of national sovereignty and autonomyWhat Does FDI Mean For The Home Country?Benefits of FDI for the home country includeThe positive effect on the capital account from the inward flow of foreign earningsThe employment effects that arise from outward FDI The gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home countryCosts of FDI for the home country includeThe negative effect on the balance of payments Employment may also be negatively affected if the FDI is a substitute for domestic productionHow Does Government Influence FDI?Governments can encourage outward FDIgovernment-backed insurance programs to cover major types of foreign investment riskGovernments can restrict outward FDIlimit capital outflows, manipulate tax rules, or outright prohibit FDIGovernments can encourage inward FDIoffer incentives to foreign firms to invest in their countriesGovernments can restrict inward FDIuse ownership restraints and performance requirements What Does FDI Mean For Managers?Managers need to consider what trade theory implies about FDI, and the link between government policy and FDIThe direction of FDI can be explained through the location-specific advantages argument associated with John DunningA host government’s attitude toward FDI is an important variable in decisions about where to locate foreign production facilities and where to make a foreign direct investmentWhat Does FDI Mean For Managers?A Decision Framework