environment of the international manager · 06/07/2012 · 07/06/2012 3 primary foreign direct...

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INTERNATIONAL BUSINESS

ENVIRONMENT

TOPIC 4

Foreign Direct Investment and

Collaborative Arrangements

INTRODUCTION

CAUTION!

07/06/2012 International Business Environment - JG DITTER 2

SLIDES ARE NOT ENOUGH TO FULLY GRASP THE

CLASS CONTENTS

YOU ARE ADVISED TO:

Take notes and participate during the class

Read reference textbooks and other materials as

recommended

Thoroughly prepare the assignments

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Today's topics


1. Foreign direct investment: basics

2. Foreign direct investment: economic analysis

3. Political economy of foreign direct investment

4. Collaborative arrangements / non equity modes of international business

Foreign direct investment: a definition


Definition

Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce and/or market in a foreign country

Greenfield investment

Establishment of a wholly new operation in a foreign country

Brownfield investment

Acquisitions or mergers with existing firms in the foreign country

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Primary foreign direct investment motives


Market seeking New or larger markets

Export substitution Transport costs, trade barriers

Resource seeking Natural resources, workforce,

technology, brand

Export complementarities Optimization and control of value

chain (vertical integration), diversification of risk

STRATEGIC RIVALRY

RISK MANA-GEMENT

FDI vs. international trade: the "4Ts"


http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/fourtstrade.html



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Foreign direct investment and market access

Foreign direct investment (export of capital) will

prevail over exports in case of …

Actual or threatened trade barriers

High transportation costs


H-O-S model

New trade theory

Foreign direct investment and the product life-cycle


A company will begin by exporting its product and later undertake foreign direct investment as the product moves through its life cycle

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Foreign direct investment and market power

FOREIGN DIRECT INVESTMENT

Control over outputs

(forward integration)

Control over inputs

(backward integration)


Vertical integration strategy (suppliers, clients)

Foreign direct investment and strategic rivalry

OLIGOPOLISTIC INDUSTRIES

Firms will try to match each others’ moves as a way of keeping each

other in check

(multipoint competition)

What one firm does has an immediate effect on its competitors, forcing them to take similar actions

(herd / mimetic behaviour)


Firms will try to be first on markets in order to raise obstacles to entry

(1st mover advantage)

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Dunning's "eclectic" (OLI) paradigm


• Response to – actual or threatened – trade barriers

• Control of foreign business activity (firms try to reduce transaction costs and internally capture the advantages of foreign asset ownership)

Internalisation

• Taking advantage from resource endowments (capital, labour, natural resources) or assets (incl. location externalities, subsidies, technologies) that are tied to a particular location

Location

• Firms endowed with a distinctive competitive advantage (technology, brand, economies of scale, …) making up for market entry costs will try to take advantage of large number of markets

Ownership

http://www.investmentsandincome.com/investments/oli-paradigm.html

Dunning's "eclectic" (OLI) paradigm (ctd)


http://harmkuiper.wordpress.com/2011/03/08/eclectic-approach-john-dunning/

http://www.economist.com/economics-a-to-z/t

http://www.economist.com/economics-a-to-z/e












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The Geely-Volvo case


A Chinese company is buying Volvo from Ford for £1.2bn, making it China's biggest purchase of an overseas carmaker and one of its largest foreign investments. The acquisition of the loss-making Swedish unit by Zhejiang Geely Holding Group underscores China's arrival as a force in the global car industry, as well as flagging up its ambition to become a big player on the world business stage.

The deal could help Geely realise the dream of its founder, Li Shufu, to become a big international carmaker. Even though Ford has done its best to ring-fence its intellectual property, Volvo has plenty of its own, especially in the critical area of safety, to which Geely will have access and which will lend credibility to its cars as its range expands in both scope and scale. It will also learn from Volvo about how to run a global supply chain and an international dealer network.

But Mr Li believes that Volvo too will benefit. Most important, it will realise its potential in China, the world's biggest and fastest-growing vehicle market. Fifteen years ago Volvo outsold Audi in China, but these days the German premium brand's sales in the country dwarf Volvo's, which were only 22,000 cars last year. He also thinks that away from Ford and the Premier Automotive Group that used to house its upmarket brands, Volvo will have freedom to go into market segments that were previously closed to it because they were occupied by models from Jaguar, Land Rover or Ford itself.

Government attitudes towards FDI

Pragmatic nationalism

FDI is favoured if its benefits prevail over its costs

Laissez-faire

Comparative advantage shapes

the distribution of international production

Radical criticism

FDI is blamed as an instrument of economic domination


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The pragmatic view: FDI benefits and costs (host country)

BENEFITS

Capital inflow (balance of payments)

Contribution to domestic GDP and employment

Contribution to economic and social change

Positive externalities (e.g. technology transfers)

COSTS

Retribution of investment (current account balance)

Dependency on foreign decision-makers

Loss of sovereignty and autonomy

Competition to local corporations

07/06/2012 15 International Business Environment - JG DITTER

Cadbury's case: fear for jobs


Cadbury will accept defeat in its battle to stay independent today by recommending a £12bn takeover from US rival Kraft that threatens to reignite a fierce debate about the vulnerability of British industry. The 186-year-old chocolate maker decided to throw in

the towel late last night after a large foreign shareholder joined hedge funds in indicating it would accept an improved offer from Kraft […]

The confectionery giant joins a list of British industrial names to have fallen to foreign takeovers in similar circumstances in recent years. More than 50 leading companies have gone, including BAA, Boots, Cazenove, Corus, ICI, Jaguar Land Rover, P&O, Pilkington and

Scottish Power. Until now Cadbury had fought a public campaign to preserve its independence, attracting support from Lord Mandelson, the business secretary, who

warned Kraft to expect "huge opposition" from the government if it wanted to make a "fast buck" by buying Cadbury. […]

Cadbury unions have warned that up to 30,000 jobs would be put at risk by the deal as Kraft would be weighed down by some £22bn in debt. Kraft has a record of aggressive cost-cutting, and the union Unite said that between 2004 and 2008 it shed 19,000 jobs

and closed 35 sites to help reduce its debt.

The Guardian, Tuesday 19 January 2010

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The pragmatic view: FDI benefits and costs (home country)

BENEFITS

Investment income (repatriation of earnings)

Contribution to domestic GDP and employment

Contribution to economic and social change

Positive externalities

COSTS

Capital outflow (balance of payments)

Job losses (relocations)

Trade deficit (export substitution, import generation)


Measures affecting foreign direct investment

Fiscal measures

(taxes, tax breaks)

Structural measures

(e.g. infrastructure)

Legal measures

(regulations)

Financial measures

(funding, loans, loan guarantees)


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Measures affecting foreign direct investment: examples

FDI Promotion FDI Restriction

Host country

Tax breaks

Low interest loans

Infrastructure improvement

Ownership restrictions

Local contents requirements

Technology transfer requirements

Home country

Tax breaks

Loans, insurance and guarantees

Political pressure on host country government

Differential tax rates

Sanctions


Radical measures …


Argentina’s president, Cristina Fernández de Kirchner, announced on Monday that the government would seize a majority stake in YPF, the nation’s largest oil company.

Under Mrs. Kirchner’s plan, which she announced on national television, Argentina’s government would take a 51 percent controlling stake in YPF, which is now majority-owned by a Spanish energy company, Repsol YPF. Of that new stake, Argentina’s central government would get 51 percent and the country’s provinces 49 percent. The plan is part of a bill submitted to Argentina’s Congress that is widely expected to be approved.

Mrs. Kirchner quickly ousted Sebastián Eskenazi as YPF’s chief executive, naming two top aides, Julio de Vido and Axel Kicillof, to run the company.

The expropriation would reassert state control over an important pillar of Argentina’s economy, but it has already increased diplomatic tensions with Spain and the European Union.

http://www.nytimes.com/2012/04/17/business/global/argentine-president-to-nationalize-oil-company.html?ref=repsolypf&pagewanted=all














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Beyond FDI: collaborative arrangements


Equity modes

Joint ventures

Equity alliances

Non equity modes

Licensing

Franchising

Management contracts

Turnkey operations

Pros and cons of collaborative arrangements


Rationale

• Access to location specific assets

• Geographical diversification

• Overcome governmental constraints (e.g. barriers to trade and FDI restraints)

• Minimize exposure to risky environments

Shortcomings

• Lack of control over manufacturing, marketing, and strategy required for realizing experience curve and location economies

• Limits a firm's ability to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another

• Proprietary (or intangible) assets could be lost

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The technology transfer issue …


In what many international executives see as a warning for other industries, European, Japanese and North American

companies have spent years “transferring”, or selling, high-speed rail technology to state-backed Chinese partners in

exchange for market access [through joint-ventures] – only to be rewarded with shrinking market share in China as a result of

state policies that favour local industry.

Now these companies find their high-speed technology has been “digested” – defined by the government as a multistep

process of buying foreign technology, innovating on that existing platform then selling it under a domestic brand – by

former Chinese partners. Furthermore, the foreigners find themselves competing head-to-head for tenders all over the

world with Chinese companies selling digested high-speed technology at discount prices, often with cheap state bank

financing thrown in. http://www.ft.com/cms/s/0/2b843e4c-c745-11df-aeb1-00144feab49a.html#axzz1VUN6BZjM

Assignment: managerial implications

Business strategy

The decision whether and where to invest abroad will depend on a variety of factors and expected

advantages

Government policy

Host governments’ attitude toward FDI is an important variable in decisions about

where to make a foreign direct investment


http://www.ft.com/cms/s/0/2b843e4c-c745-11df-aeb1-00144feab49a.html









environment of the international manager · 06/07/2012 · 07/06/2012 3 primary foreign direct...

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