moffett ppt lect ch17

8/2/2019 Moffett PPT Lect Ch17

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Copyright 2009 Pearson Prentice Hall. All rights reserved.

Chapter 17Foreign DirectInvestmentTheory andStrategy


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Copyright 2009 Pearson Prentice Hall. All rights reserved. 17-2

Foreign Direct InvestmentTheory & Strategy: Learning Objectives

Demonstrate how key competitive advantages supportMNEs strategy to originate and sustain foreign directinvestment

Show how the OLI paradigm provides a theoreticalfoundation for the globalization process

Identify factors and forces that must be considered inthe determination of where MNEs invest


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Foreign Direct InvestmentTheory & Strategy: Learning Objectives

Illustrate the managerial and competitive

dimensions of the alternative methods for

foreign investment Identify the strategies used by MNEs originating

in developing countries to compete in global

markets


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Sustaining & Transferring

Competitive Advantage

In deciding whether to invest abroad, management mustfirst determine whether the firm has a sustainablecompetitive advantage that enables it to compete

effectively in the home market In order to sustain a competitive advantage it must be:

Firm-specific

Transferable

Powerful enough to compensate the firm for the extradifficulties of operating abroad


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Sustaining & Transferring

Competitive Advantage

Some of the competitive advantages enjoyed byMNEs are:

Economies of scale and scope

Managerial and marketing expertise

Advanced technology

Financial strength

Differentiated productsCompetitiveness of the their home market


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Exhibit 17.1

Determinants of National CompetitiveAdvantage: Porters Diamond


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The OLI Paradigm &

Internationalization

The OLI Paradigm (Buckley & Casson, 1976; Dunning1977) is an attempt to create an overall framework toexplain why MNEs choose FDI rather than serve

foreign markets through alternative modes such aslicensing, joint ventures, strategic alliances,management contracts and exporting

The paradigm states that a firm must first have some

competitive advantage in its home market - O orowner-specificwhich can be transferred abroad


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The OLI Paradigm & Internalization

The firm must also be attracted by specific

characteristics of the foreign marketL orlocation

specificwhich will allow the firm to exploit its

competitive advantages in that market

Third,the firm will maintain its competitive position by

attempting to control the entire value-chain in its

industryI orinternalization This leads to FDI rather than licensing or outsourcing


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The OLI Paradigm & Internalization

Financial strategies are directly related to the

OLI Paradigm in explaining FDI

Strategies can be proactive , controlled inadvance by the management team

Strategies can also be reactive, depend on

discovering market imperfections


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Exhibit 17.2 Finance-Specific Factors andthe OLI Paradigm: X indicates a connection

between FDI and finance-specific strategies


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Where to Invest

Two related behavioral theories behind FDI that aremost popular are

Behavioral approach to FDI

International network theory

Behavioral ApproachObservation that firms tendedto invest first in countries that were not too far fromtheir country in psychic terms

This included cultural, legal, and institutional environmentssimilar to their own


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Where to Invest

International network theoryAs MNEs grow they

eventually become a network, or nodes that operate

either in a centralized hierarchy or a decentralized one

Each subsidiary competes for funds from the parent

It is also a member of an international network based on its

industry

The firm becomes a transnational firm, one that is owned by a

coalition of investors located in different countries


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How to Invest Abroad: Modes

of FDI

Exporting vs. production abroad

Advantages of exporting are

None of the unique risks facing FDI, joint ventures,

strategic alliances and licensing Political risks are minimal

Agency costs and evaluating foreign units are avoided

Disadvantages are

Firm is not able to internalize and exploit its

advantages

Risks losing market to imitators and global

competitors


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of FDI

Licensing/management contracts versus control ofassets abroad

Licensing is a popular method for domestic firms to profit

from foreign markets without the need to commit sizablefunds

Disadvantages of licensing are

License fees are likely lower than FDI profits although ROI may behigher

Possible loss of quality control Establishment of potential competitor

Possible improvement of technology by local license which thenenters firms original home market


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of FDI

Possible loss of opportunity to enter licensees market with FDI later

Risk that technology will be stolen

High agency costs

Management contracts are similar to licensing insofar as theyprovide for some cash flow from foreign source without

significant investment or exposure

These contracts lessen political risk because the repatriation

of managers is easy


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of FDI

Joint ventures versus wholly owned subsidiary

Ajoint venture is a shared ownership in a foreign business

This is a viable strategy if the MNE finds the right local

partner

Some advantages include

The local partner understands the market

The local partner can provide competent management at all levels

Some host countries require that foreign firms share ownership withlocal partner


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of FDI


Advantages of joint ventures

The local partners contacts & reputation enhance accessto host countrys capital markets

The local partner may possess technology that is

appropriate for the local environment

The public image of a firm that is partially locally ownedmay improve its position


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of FDI


Disadvantages of joint ventures

Political risk is increased if wrong partner is chosen

Local and foreign partners have divergent views on strategy andfinancing issues

Transfer pricing creates potential for conflict of interest

Financial disclosure between local partner and firm

Ability of a firm to rationalize production on a worldwide basis if that

would put local partner at disadvantage

Valuation of equity shares is difficult


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of FDI

Greenfield investment versus acquisition

A greenfield investmentis establishing a facility starting

from the ground up

Usually require extended periods of physical construction andorganizational development

Here, a cross-border acquisition may be better because the

physical assets already exist, shorter time frame and financing

exposure However, problems with integration, paying too much for acquisition,

post-merger management, and realization of synergies all exist


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of FDI

Strategic alliances can take several different forms

First is an exchange of ownership between

two firms

It can be a defensive strategy against a takeover

In addition to exchanging shares, a separate joint venture can

be developed

Another level of cooperation may be a joint marketing or

servicing agreement


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Exhibit 17.3 The FDI Sequence: ForeignPresence and Foreign Investment


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Strategies Employed by Emerging

Market MNEs

Taking brands global

Engineering to innovation

Leverage natural resources

Export successful business model

Acquire offshore assets

Target a market niche


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Exhibit 17.4 Emerging MarketMultinationals and Their Global Strategies


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Summary of Learning Objectives

In order to invest abroad a firm must have a sustainablecompetitive advantage in the home market. This mustbe strong enough and transferable to overcome the

disadvantages of operating abroad Competitive advantages stem from economies of scale

and scope, managerial and marketing expertise,differentiated products, and competitiveness of the

home market The OLI Paradigm is attempt to create an overall

framework to explain why MNEs choose FDI ratherthan serve foreign markets through other methods


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Finance-specific strategies are directly related tothe OLI Paradigm, including both proactive andreactive strategies

The decision about where to invest is influencedby economic and behavioral factors

Psychic distance plays a role in determining the

sequence of FDI


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Most international firms can be viewed from a networkperspective. The parent firm and each of thesubsidiaries are members of the network

Exporting avoids political risk but not foreign exchangerisk. It requires the least up-front investment but itmight eventually have lost those markets to competition

Alternative modes of FDI exist, such as joint ventures,

strategic alliances, licensing, management contracts,and traditional exporting


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Licensing enables a firm to profit from foreign markets

without a major up-front investment,however

disadvantages include limited returns, possible loss of

quality control, and potential to establish futurecompetitor

The success of a joint venture depends primarily on the

right partner. For this reason a number of issues relatedto possible conflicts in decision making exist


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Copyright 2009 Pearson Prentice Hall All rights reserved 17-29


Six major strategies used by emerging market MNEsare:

Taking brands global

Engineering to innovation Leverage natural resources

Export successful business model

Acquire offshore assets

Target a market niche

moffett ppt lect ch17

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