Lecture International business - Chapter 7: Foreign direct investment

In this chapter, you will explore foreign direct investment. You will also: Learn about worldwide patterns of foreign direct investment flows and the theories that attempt to explain them; understand important management issues in the foreign direct investment decision; and examine why governments intervene in the flow of foreign direct investment and the methods they use.

7 Foreign Direct  Investment Copyright © 2014 Pearson Education, Inc Chapter Objectives • Describe worldwide patterns of foreign direct investment (FDI) and reasons for those patterns • Describe each of the theories that attempt to explain why FDI occurs • Discuss the important management issues in the FDI decision • Explain why governments intervene in the free flow of FDI • Discuss the policy instruments that governments use to promote and restrict FDI Copyright © 2014 Pearson Education, Inc 7-2 Volkswagen • Produces million cars a year • Modular production strategy Special protection in Germany Copyright â 2014 Pearson Education, Inc 7-3 Foreign Direct Investment (FDI)  Purchase of physical assets or significant amount of ownership of a company in another country in order to gain some measure of management control  By contrast, portfolio investment does not involve obtaining a degree of control in a company Copyright © 2014 Pearson Education, Inc 7-4 Yearly FDI Inflows Source: Based on World Investment Report (Geneva, Switzerland: UNCTAD), various years Copyright © 2014 Pearson Education, Inc 7-5 Reasons for FDI Growth Increasing globalization International mergers and acquisitions Copyright © 2014 Pearson Education, Inc 7-6 Value of Cross­Border M&As Source: Based on World Investment Report (Geneva, Switzerland: UNCTAD), various years Copyright © 2014 Pearson Education, Inc 7-7 Worldwide FDI Flows       World FDI inflows  Developed (49%), developing (45%)  European Union: 28% of world FDI 82,000 multinationals     Developing nations  China and India attract most FDI  All of Africa: 2.8% of world FDI Copyright © 2014 Pearson Education, Inc with 810,000 affiliates 7-8 Discussion Question What is the difference between foreign direct investment and portfolio investment? Copyright © 2014 Pearson Education, Inc 7-9 Answer to Discussion Question Foreign direct investment is the purchase of physical assets or a significant amount of the ownership of a company in another country to gain a measure of management control Portfolio investment does not involve obtaining a degree of control in a company Copyright © 2014 Pearson Education, Inc - 10 Management Issues III Following clients Copyright © 2014 Pearson Education, Inc Following rivals - 19 Balance of Payments National accounting system that records all payments to entities in other countries and all receipts coming into the nation Current account Capital account The import and export of goods and services, income receipts on assets abroad, and income payments on foreign assets inside the country The purchase or sale of assets (including assets such as property and shares of common stock in a company) Copyright © 2014 Pearson Education, Inc - 20 U.S. Balance of Payments Copyright © 2014 Pearson Education, Inc - 21 Discussion Question What we mean by a country’s balance of payments and what is its usefulness? Copyright © 2014 Pearson Education, Inc - 22 Answer to Discussion Question A country’s balance of payments is a national accounting system that records all payments to entities in other countries and all receipts coming into the nation The system helps monitor a country’s flows of goods, services, income, and asset transfers between itself and other nations The balance of payments position sends warning signals about trade deficits with other nations Copyright © 2014 Pearson Education, Inc - 23 Host Intervention I Initial FDI boosts economy Balance of Payments + FDI may decrease imports FDI may generate exports Copyright © 2014 Pearson Education, Inc - 24 Host Intervention II Access technology Obtain resources and benefits Access management skills + Create employment Copyright © 2014 Pearson Education, Inc - 25 Home Intervention – Remove national resources – Eliminate export markets – Eliminate domestic jobs + Improve competitiveness + Eliminate low-wage jobs Copyright © 2014 Pearson Education, Inc - 26 Host Promotion Methods Financial incentives ■ Low or waived taxes ■ Low-interest loans Infrastructure benefits ■ Better seaports, roads, and telecom networks Copyright © 2014 Pearson Education, Inc - 27 Host Restriction Methods Ownership restrictions ■ Prohibit investment in industries or businesses Performance demands ■ Local content requirements ■ Export targets ■ Technology transfers Copyright © 2014 Pearson Education, Inc - 28 Home Promotion Methods Insurance on assets abroad Loans and loan guarantees Tax breaks on profits earned abroad Copyright © 2014 Pearson Education, Inc Special tax treaties  Persuade other nations to accept FDI - 29 Home Restriction Methods Higher taxes on foreign income Sanctions that prohibit investing Copyright © 2014 Pearson Education, Inc - 30 Discussion Question A host government may encourage an initial FDI because the inflow can its balanceof-payments position a Level b Lower c Boost Copyright © 2014 Pearson Education, Inc - 31 Answer to Discussion Question A host government may encourage an initial FDI because the inflow can its balanceof-payments position a Level b Lower c Boost Copyright © 2014 Pearson Education, Inc - 32 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher Printed in the United States of America Copyright © 2014 Pearson Education, Inc - 33 ... 7-8 Discussion Question What is the difference between foreign direct investment and portfolio investment? Copyright © 2014 Pearson Education, Inc 7-9 Answer to Discussion Question Foreign direct. .. for investment a Internalization b First-mover c Life-cycle Copyright © 2014 Pearson Education, Inc - 16 Management Issues I Control Copyright © 2014 Pearson Education, Inc Purchase-or-build -. .. Copyright © 2014 Pearson Education, Inc - 10 International Product Life Cycle A company begins by exporting its product and later undertakes foreign direct investment as a product moves through