Foreign Direct Investments Flashcards
Definition of FDI
Purchase of physical asset or significant amount of ownership of a company in another country to gain some measure of management control
In contrast, portfolio investment does not involve obtaining a degree of control in an company.
Why companies undertake FDI - Market Imperfection
To internalize a transaction that is being made inefficient by market imperfection
Why companies undertake FDI - Eclectic Theory
- Ownership advantage
- Location advantage
- Internationalization advantage - overcome market imperfections
Why companies undertake FDI - Market Power
Establish a dominant presence in an industry > Better dictate loss of outputs and price of outputs > Greater profits
FDI Management Issues - Control
- Activities in the local market
- Common marketing activities in both markets
- Common selling price in both markets
- Complete ownership not equals control
- Local laws may require company to hire local managers
- Goods produced in the local facility be exported for non-compete reasons
FDI Management Issues - Control (Partnership requirements)
- Governments require shared ownership
- -To shield workers from exploitation
- -Prevent industries from domination by international firms
- MNCS adjust and adapt to shared ownership for market access
FDI Management Issues - Control (Benefits of co-operation)
- Governments may relax restrictive policies
- Lower unemployment, increased tax revenues
FDI Management Issues - Purchase or Build Decision
Purchase:
-existing plant, equipment, brand, personnel, goodwill
-risks is obsolete equipment, poor labour relation, bad debts, unsuitable location
Build:
Greenfield investment
-Need to obtain permits, financing, hire local personnel
FDI Management Issues - Production Costs
- May be favourable today but never a constant
- Rationalized production
- -A system of production in which each of a product’s components is produced where the cost of purchasing the component is lowest
- -All components are then brought together at one central location for assembly
- -Work stoppage in one country can bring production to a standstill
- Cross-border alliances and acquisitions in R&D for more competitive costs and access to high quality scientific and technical human capital
FDI Management Issues - Customer Knowledge
-Local market presence helps companies gain knowledge about customer preferences and facilitates product customization
FDI Management Issues - Following Clients
- Component suppliers follow strategic customers to overseas location
- Supply chain clustering within close geographic proximity
FDI Management Issues - Following Rivals
- Follow the leader, usually industries with limited number of players
- -Opportunity to make financial gains
- -Minimize risk (do as the leader does)
- Each market can only sustain certain number of rivals
Why governments intervene in FDI? - Balance of payments
National accounting system that records all payments to entities in other countries and all receipts coming into the nation
Why governments intervene in FDI? - Hosts
Basically to Control Balance of Payments and Obtain Resources/Benefits
Control Balance of Payments
-Initial FDI by MNC increase BOP in host country
-DECREASE IMPORT DEMAND
Local content requirements on MNC
–Give local companies opportunity to become suppliers to the production operation
–Help reduce imports
–Increase BOP
-GENERATE EXPORTS
Exports by MNC production operation increases BOP
Control Balance of Payments
- Repatriation of profits by MNC
- -Capital outflows deplete foreign exchange reserves of host countries
- -Reduce balance of payments of host country
- -Host nation may prohibit the MNC from removing profits to its home country
- Host country may conserve their foreign exchange reserves while MNC reinvest their earnings
- -Improves the competitiveness of local producers
- +BOP of host country
Obtain Resources and Benefits
- Access to technology
- -Increase productivity and competitiveness of a nation
- Management skills and employment
- -Former communist nations and developing economies lack management skills to succeed in the global economy
- -FDI attracts foreign talent to come into host country and train locals
- -Improve the international competiveness of domestic companies
Why Home Country intervenes in FDI?
Bad:
-It removes resources from the nation, eliminate an export market, and might eliminate domestic job
Good:
-Improves nation competitiveness, can offshore sunset Industry
Bad points of home country intervening in FDI
-Removes resources from home nation, eliminate export markets, but
Everything just +BOP from repatriated profits -_-
-Eliminate domestic jobs
-Jobs resulting from outgoing investments may replace jobs at home but can be offset if additional exports are needed to the support activity overseas
Good points of home country intervening in FDI
- Improve national competitiveness
- -Conduct business in the most favorable location anywhere in the world
- -Continuously improve their performance relative to competitors
- -Derive technological advantage from alliances formed with other companies
- Offshore sunset industries
- -Those that use outdated and obsolete technologies or employ low-skilled workers
- -Opportunity to retrain workers
Host Promotion Methods
- Financial incentives
- Infrastructure Improvements
Host Promotion Methods - Financial Incentives
- Insurance of assets abroad
- Loans and guarantees
- Special tax treaties
- Tax breaks on profits earned abroad
Host Restriction Methods
-Prohibit investment in certain industries or increase local content requirements, technology transfers or export targets
