group presentation: chapter 7: foreign direct investment bfma6043 international business universiti...

GROUP PRESENTATION: CHAPTER 7: FOREIGN DIRECT INVESTMENT

BFMA6043 INTERNATIONAL BUSINESS

Universiti Utara MalaysiaThe Eminent Management University

For

DR. MOHD SOBRI BIN DON @ A. WAHAB

COB – COLLEGE OF BUSINESS

Master of Business Administration (MBA) Programme

Present by

GROUP B

ER SHEAU JIAMatric No. : 803734

SUZANNA A. KOHMatric No. : 000000

TAN YONG SOONMatric No. : 804571

URSULA GLADYS JONGIJIMatric No. : 803739

INTRODUCTION

CHAPTER 7: FOREIGN DIRECT INVESTMENT

FDI IN THE WORLD

ECONOMY

MAJOR ISSUES

THEORIES OF FDI POLITICAL IDEOLOGY AND

FDI

BENEFITS AND COSTS OF FDI

GOVERNMENT POLICY

INSTRUMENT

CONCLUSION

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Introduction

FDI?

a firm invests directly in new facilities to produce and/or market in

a foreign country

Forms

Greenfield Investment

M & A

Types

Flow of FDI

Stock of FDI

Inflow Outflow


FDI - in the world economy

2009

TRENDS

FDI Outflows 1982 – 2009 ($ billions)

Source: UNCTAD – World Investment Report, 2010



TRENDS

National Regulatory Changes 1982 – 2009 (%)




DIRECTION

FDI Inflows by Region 1982 – 2009 ($ billions)




DIRECTION

Top Host Economies for FDI in 2010 – 2010




DIRECTION

Gross Fixed Capital Formation 1992 – 2007 (%)




SOURCE

Global FDI Outflows

2008 – 2009




M & A / GREENFIELD INVESTMENT

Most cross-border investment is in the form of mergers and acquisitions rather than greenfield investments

Firms prefer to acquire existing assets because – mergers and acquisitions are quicker to execute – it is easier and perhaps less risky for a firm to acquire

than build them from zero– firms believe that they can increase the efficiency of

an acquired unit by transferring capital, technology, or management skills



M & A / GREENFIELD INVESTMENT

M & A and Greenfield Projects 2005 – 2010 (May)




FDI IN SERVICES

FDI is shifting away from extractive industries and manufacturing, and towards services

The shift to services is being driven by– the general move in many developed countries

toward services– the fact that many services need to be produced

where they are consumed– a liberalization of policies governing FDI in services– the rise of Internet-based global telecommunications

networks


Theories of Foreign Direct Investment (FDI)

3 approaches:

Why FDI?

Pattern of FDI

Eclectic Paradig

m


1. Why FDI?

1. Exporting - producing goods at home and then shipping them to the receiving country for sale

– exports can be limited by transportation costs and trade barriers

– FDI may be a response to actual or threatened trade barriers such as import tariffs or quotas

2. 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 sells


Cont…..Why FDI?• Internalization theory (aka market

imperfections theory) suggests that licensing has three major drawbacks compared to FDI

– firm could give away valuable technological know-how to a potential foreign competitor

– does not give a firm the control over manufacturing, marketing, and strategy in the foreign country

– the firm’s competitive advantage may be based on its management, marketing, and manufacturing capabilities


2. Patterns of FDI

• Why do firms in the same industry undertake FDI at about the same time and the same locations?

• F.T. Knickerbocker - FDI flows are a reflection of strategic rivalry between firms in the global marketplace– multipoint competition -when two or more

enterprises encounter each other in different regional markets, national markets, or industries ( i.e. Kodak and Fuji)

• Raymond Vernon - firms undertake FDI at particular stages in the life cycle of a product (i.e. Xerox)


3. Eclectic Paradigm

• Why is it profitable for firms to undertake FDI rather than continuing to export from home base, or licensing a foreign firm?

• According to Dunning’s eclectic paradigm- it is important to consider– location-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 (i.e. world oil companies)

– externalities - knowledge spillovers that occur when companies in the same industry locate in the same area (i.e. silicon valley)


Political Ideology & FDI

• How does a government attitude affect FDI?

hostile………………………………………………………………………non-interventionist

RADICAL VIEW

PRAGMATIC NATIONALISM

FREE MARKET

VIEW


Cont/….Political Ideology & FDI

• The Radical View

- the multi-national enterprise (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 advantage

• embraced by advanced and developing nations including the United States, Britain, Chile, and Hong Kong



• Pragmatic 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)• FDI should be allowed only if the benefits outweigh

the costs

• Recently, there has been a strong shift toward the free market stance creating– a surge in FDI worldwide – an increase in the volume of FDI in countries with

newly liberalized regimes


BENEFITS & COSTS OF FDI


HOST COUNTRY BENEFITS

• Resource Transfer Effects

• Employment Effects

• Balance-of-payments Effects

• Effects On Competition And Economic Growth


1. RESOURCE TRANSFER EFFECTS

• Resources Transferred:

CAPITALS

TECHNOLOGY

R & D

MANAGEMENT SKILLS

• Improve production process & products, effeciencies


2. EMPLOYMENT EFFECTS

• Create job opportunities direct & indirectly

• In the case of ACQUISITION, initially employment reduces during restructuring period but later grow faster than the domestic rivals

• Because better wage rates & employment qualities are provided


3. BALANCE-OF-PAYMENTS EFFECTS

• BALANCE-OF-PAYMENT ACCOUNTS: Track both its payment & receipts from other countries

• CURRENT ACCOUNT: Tracks the exports & import of goods & services

• Govt. prefers current account surplus (export>import) than current account deficits (import>export) and dislike to see the assets falling into foreign hands.


• FDI can help to improve when:– FDI is a substitute for imports– MNE uses a foreign subsidiary to export (i.e.

by generating inward FDI)


4. EFFECTS ON COMPETITION & ECONOMIC

GROWTH• Greenfield investment: Increase

competition, productivity growth, product & process innovations, stimulate capital investment

• Looking at the impact on domestic markets, especially important in services, since exporting is often nit an option for services


HOST COUNTRY COSTS

• Adverse Effects on Competition

• Adverse Effects on the Balance of Payments

• National Sovereignty & Autonomy


1. ADVERSE EFFECTS ON COMPETITION

• Possible to drive indigenous companies put of business & allow MNE to monopolize the market

• Acquisitions: Doesn’t show result in a net increase in the no. of players in the market. Therefore, competition effect = neutral

• Authorities have to control


2. ADVERSE EFFECTS ON THE BALANCE-OF-PAYMENTS

• Outflows of earnings to home country

• Foreign subsidiaries import a substantial input fro abroad

• Resulted: A debit on the current account of the host country’s balance of payments


3. NATIONAL SOVEREIGNTY AND AUTONOMY

• Loss of economic independence

• When decisions made by MNE who has no real commitment to the host country might affect host country

• Host country’s government das no real control with that


HOME COUNRTY BENEFITS

• Inward flow of foreign earnings benefits balance of payments account

• Outward FDI arise from employment effects

• Home country MNEs learn valuable skills from its exposure to foreign markets


HOME COUNTRY COSTS

• The home country’s balance of payments can suffer– from the initial capital outflow required to

finance the FDI– if the purpose of the FDI is to serve the home

market from a low cost labor location– if the FDI is a substitute for direct exports

• Employment may also be negatively affected if the FDI is a substitute for domestic production

• Eg. Toyota


OFFSHORE PRODUCTION

• FDI undertaken to serve the home market

• Stimulate economic growth by freeing home country resources to concentrate on activities when the home country has a competitive advantage

• Benefits if prices fall as a result of FDI


Government Policy Instruments & FDI

Home Country Policies -

Government Policy Instrument

Host Country Policies


• Home Country Policies – Encourage Outward FDI

- Risk reduction policies (financing, insurance, tax incentives)

– Restricting Outward FDI - Limit capital outflows, manipulate tax rules

or prohibit FDI.


• Host Country Policies

– Encourage Inward FDI

- Investment incentives

- Job creation incentives

– Restricting Inward FDI

- Ownership extent restrictions (to safeguard host country’s interest) and performance requirement.

Conclusion1 2

Host Country Benefits-Resource transfer effect- Increase employment-Balance –of- payments effects * Import substitution * Source of export increase

Home Country Benefits-Improvement in balance of payments from foreign earnings* Import substitution* Source of export increase-Increase employment from outward FDI. -Resource/skills transfer

Conclusion1 2

Host Country Costs-Adverse effect of Balance-of-payment * Capital inflow followed capital outflow + profits.-Perceived loss of national sovereignty. * Loss of economic independence

Home Country Costs-Adverse balance-of-payment effects* Initial capital outflow followed by capital inflow + profits -Substitution for domestic production- Employment decreased locally.

Conclusion

• FDI brings lots of benefits to both home countries or host countries. FDI transfers not only economic/ financial resources, but also knowledge/expertise and managerial know-how from home countries to host countries and vice versa.

group presentation: chapter 7: foreign direct investment bfma6043 international business universiti...

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