Tài chính doanh nghiệp - Chapter 4: Foreign direct investment: practice and theory

Chapter 4: Foreign Direct Investment: Practice and TheoryFDI OutflowsFDI InflowsFDI Outward stockSectoral trends GeographictrendsThe Trojan Horse?TOPIC PLAN:Determinants 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; InternalisationForeign 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”) Average annual growth rate,World FDI Outflows, Exports of Goods & Services, GDPFlow vs. Stock of FDIFlow: Amount of FDI over a period of time (one year).Stock: Total accumulated value of foreign owned assets at a given point in time.Other 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 overseas.Mergers=the combining of two or more firmsAcquisition/take-over of an existing operationM&As vs. Greenfield InvestmentsAt the time of entry and in the short termM&As may involve smaller benefits orlarger negative impacts from the perspective ofhost-country developmentfinancial resources do not always add to stockLess likely to transfer new technologies and skillsdoes not generate employment (possible lay-offs)can increase concentration and lessen competitionHowever, in the long term many differences diminish or disappearM&As vs. Greenfield InvestmentsUNCTAD’s World Investment Report 2000 concludes 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 roleM&As vs. Greenfield InvestmentsUNCTAD’s World Investment Report 2000 concludes 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 roleDeterminants of Foreign Direct InvestmentTrade restrictions (the “Trojan horse").Cost/profitability factorsInvestment climateMarketing factorsTrade restrictions(the “Trojan horse").Barriers to tradePreference of local customers for local products. Cost/profitability FactorsCheaper production costs(labour, materials)Cheaper infrastructure(electricity, telecom)Lower rental costs (commercial, residential)Expected higher profits.Desire to be near source of supply.Investment ClimateGovernment attitude toward foreign investment (e.g. incentives)Political stabilityLimitations on ownershipCurrency exchange regulationsStability of foreign exchangeTax structure Geographic Distribution of FDI Outflows,1983-2000,% of totalThe Top 10 sources of Outward FDI in 2000, % of world totalGeographic Distribution of FDI Inflows,1981-2000,% of total worldShares of leading 5 economies in inward FDI stock in 1980,2000Sectoral Distribution of FDI Inward Stock, 1988, 1999Developing CountriesSector 1988 1999Primary 13.7 5.4Secondary 65.0 54.5Tertiary 20.7 37.3Unspecified 6.8 2.8Developed CountriesSector 1988 1999Primary 10.3 5.7Secondary 39.4 36.4Tertiary 46.9 55.5Unspecified 3.4 2.4 FDI benefits/costs to Host countriesBenefits:CapitalTechnologyManagementEmploymentExports Current Account(?)CostsAdverse effects on competitionAdverse effects on the Balance of PaymentsConcerns about national sovereigntyFDI benefits to Home countriesImproves balance of payments Positive employment effectsExport demand can create jobs.Increased knowledge from operating in a foreign environment.Benefits the consumer through better products and lower prices.FDI 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 market.MNE uses foreign subsidiary as a substitute for direct exports (loss of export earnings).Potential “export” of jobs.FDI 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 countryFDI is not only a source of capital but also of new technology, managerial skills and marketing networks.Exports of foreign affiliates as % of total exports in the primary & secondary sector -Various years-Foreign Direct Investment TheoriesThe Global Horizons TheoryThe International Product CycleThe Internalisation TheoryThe Global Horizons TheoryInternal forces :The influence of a high executiveThe need to market a new technology//productFinding use for old equipment.The observed need for a larger market.Mergers/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) Fig.4.4:International Product Cycle 12345678910111213141513456789101112131415123456789101112131415Innovating country (e.g. US, Japan)Other Industrial countriesDeveloping CountriesTime Stages of Production DevelopmentNew ProductStandardized ProductMaturing ProductQuantityproductionconsumption2ImportsExportsImportsExportsExportsImportsThe 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 marketsMNE-An institution designed to create and exploit internal markets.