Global Business Environment: Chapter 8
Global Business Environment: Chapter 8 INTB3080
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This 3 page Class Notes was uploaded by Madison Morman on Saturday March 5, 2016. The Class Notes belongs to INTB3080 at University of Cincinnati taught by Dr. Ratee Apana in Spring 2016. Since its upload, it has received 30 views. For similar materials see Global Environment of Business in International Business at University of Cincinnati.
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Date Created: 03/05/16
Chapter 8 Foreign Direct Investment: Occurs when a firm invests directly in facilities to produce/market a product in a foreign country • Flow: Amount of FDI over a period of time (one year) • Stock: Total accumulated value of foreign owned assets at certain point Trend of FDI • Flow & stock increase • Growth is more rapid than world trade: o FDI is a way avoiding trade barriers o Big political and economical changes o Globalization has made firms view the world as their market Types of FDI 1. Acquiring or merging with a firm in a different country 2. Creating a “Greenfield” operation-‐ Have to set it up from the ground up 3. Creating a subsidiary in a different country Greenfield Vs. Acquisitions Greenfield-‐ mostly in developing nations, takes a long time Mergers and Acquisitions-‐ Quicker to execute, firms have strategic assets, and believe they can increase efficiency of acquired firm. Importance of FDI • Firms want a presence and control of growth in foreign markets • Want First-‐Mover advantage to scare off competitors • Service Sector (can’t trade internationally) = 72%// Developing = 52% Benefits for FDI Host Countries Resource-‐transfer Effect: Capital, Technology, and Management Employment Effect: Direct and indirect Balance-‐of-‐Payments Effect: Current account-‐surplus & Capital Account (increases competition and growth) Costs for FDI Host Countries • It can drive out competitors/prevent their development • The profits are transported out of country • Parts imported for assembly hurt trade balance Current Account Deficit: Occurs when imports are greater than exports Current Account Surplus: Occurs when exports are greater than imports Capital Account Records: Transactions that involve the purchase or sale of assets Home Country FDI Benefits • Improves balance of payments for inward flow foreign earnings • Increased knowledge from operating in a foreign environment • Frees up employees and resources for higher value actions Costs for Home Country • Initial capital outflow • MNC foreign subsidiary to sell back to home market • Uses foreign subsidiary as a substitute for direct exports • Potential loss of jobs Two Forms of FDI 1. Greenfield investment: Involves the establishment of a new operation in a foreign country. 2. Acquiring or merging with an existing firm in the foreign country. Horizontal Direct Investment: FDI in same industry abroad as company operates at home Vertical Direct Investment • Backward: Investments into industry that provides inputs into a firm’s domestic production (extractive industries) • Forward: Investment in an industry that utilizes the outputs from a firm’s domestic production (sales and distribution) How to Decide Which Market to Enter: • Favorable markets • Competition • Timing of Entry • Scale of Entry Best Way to Enter Foreign Market: 1. Exporting 2. Trunkey projects 3. Licensing 4. Franchising 5. Joint ventures 6. Wholly owned subsidiaries Cemex-‐ Invests directly in other countries rather than exporting because: • They wanted to reduce their reliance on Mexican construction market • Big demand in developing countries for cement • Cemex believed it understood the needs of construction businesses in developing nations better than multinationals • Believed they could create big value by acquiring inefficient cement companies in other markets and transferring its skills in customer service, marketing, IT, and production management to those units. Limits of Exporting: Transportation costs and trade barriers Three Limits of Licensing: 1. May result in a firm’s giving away valuable technological know how to a potential foreign competitor. 2. Doesn’t give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability. 3. When the firm’s competitive advantage is based not as much on its products as on the management, marketing, and manufacturing capabilities; these capabilities are often not amenable to licensing. Employment Effects • FDI brings jobs that wouldn’t otherwise be created • Direct: Hiring host-‐country citizens • Indirect: Jobs created by local suppliers, and increased spending employees of the multinational enterprise Balance of Payments Effects: • Host country benefits from initial capital inflow when MNC makes business • Host country benefits if FDI substitutes for imports of goods and services • Host country benefits when MNC uses its foreign subsidiary to export to other countries Political Ideology on FDI Radical View: Marxist theory that argues that the multinational enterprise is an instrument of imperialist domination; MNE is a tool to exploit host countries. Free Market View: -‐Adam Smith & David Ricardo-‐ argues international production should be distributed among countries according to the theory of comparative advantage -‐Countries should specialize in production of goods and services they are most efficient and export the rest Pragmatic Nationalism: Argues FDI has both benefits such as inflows of capital, technology, skills and jobs – and costs such as repatriation of profits to the home country and a negative balance of payments effect. • FDI should only be allowed if the benefits outweigh the costs