Universiti Utara Malaysia
The Eminent Management University
COB – COLLEGE OF BUSINESS
Master of Business Administration (MBA) Programme
GROUP PRESENTATION:
CHAPTER 7: FOREIGN DIRECT INVESTMENT
BFMA6043 INTERNATIONAL BUSINESS
Present by
For
GROUP B
ER SHEAU JIA
Matric No. : 803734
SUZANNA A. KOH
Matric No. : 000000
TAN YONG SOON
Matric No. : 804571
URSULA GLADYS JONGIJI
Matric No. : 803739
DR. MOHD SOBRI BIN DON @ A. WAHAB
CHAPTER 7: FOREIGN DIRECT INVESTMENT
INTRODUCTION
FDI IN THE
WORLD
ECONOMY
MAJOR ISSUES
THEORIES OF FDI
CONCLUSION
POLITICAL
IDEOLOGY AND
FDI
BENEFITS AND
COSTS OF FDI
GOVERNMENT
POLICY
INSTRUMENT
Introduction
Inflow
Outflow
Greenfield Investment
Flow of FDI
Types
Forms
M&A
Stock of FDI
FDI?
a firm invests directly in new facilities
to produce and/or market in
a foreign country
FDI - in the world economy
TRENDS
2009
FDI Outflows 1982 – 2009 ($ billions)
Source: UNCTAD – World Investment Report, 2010
FDI - in the world economy
TRENDS
National Regulatory Changes 1982 – 2009 (%)
Source: UNCTAD – World Investment Report, 2010
FDI - in the world economy
DIRECTION
FDI Inflows by Region 1982 – 2009 ($ billions)
Source: UNCTAD – World Investment Report, 2010
FDI - in the world economy
DIRECTION
Top Host Economies for FDI in 2010 – 2010
Source: UNCTAD – World Investment Report, 2010
FDI - in the world economy
DIRECTION
Gross Fixed Capital Formation 1992 – 2007 (%)
Source: UNCTAD – World Investment Report, 2010
FDI - in the world economy
SOURCE
Global FDI Outflows
2008 – 2009
Source: UNCTAD –
World Investment Report, 2010
FDI - in the world economy
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
FDI - in the world economy
M & A / GREENFIELD INVESTMENT
M & A and Greenfield Projects 2005 – 2010 (May)
Source: UNCTAD – World Investment Report, 2010
FDI - in the world economy
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?
RADICAL
VIEW
PRAGMATIC
NATIONALIS
M
FREE
MARKET
VIEW
hostile………………………………………………………………………
non-interventionist
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
capitalistimperialist home
countries
Cont/….Political
Ideology & FDI
• 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
Cont/….Political
Ideology & FDI
• 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
Government Policy Instrument
Home Country
Policies -
Host Country
Policies
Government Policy Instruments
& FDI
• 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.
Government Policy Instruments
& 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.
Conclusion
1
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
2
Host Country Benefits
-Resource transfer effect
- Increase employment
-Balance –of- payments
effects
* Import substitution
* Source of export increase
Conclusion
1
Home Country Costs
-Adverse balance-of-payment
effects
* Initial capital outflow followed
by capital inflow + profits
-Substitution for domestic
production
- Employment decreased locally.
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
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.