Global Business Environment
Economic environment:
capital movement, FDI
Readings
World Investment Report 2009. Overview. pp. 4-22.
http://www.unctad.org/en/docs/wir2009overview_en.pdf
The OLI Paradigm.
http://www.investmentsandincome.com/investments/oliparadigm.html
International movements of capital
1.
Types of capital movements:
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2.
3.
Official flows (grants)
International borrowings and lendings
Portfolio investments
Foreign direct investments
FDI
Foreign direct investment refers to investment in
which a firm in one country directly controls or owns a
subsidiary in another.
If a foreign company invests in at least 10% of the
stock in a subsidiary, the two firms are typically
classified as a multinational corporation.
–
10% or more of ownership in stock is deemed to be
sufficient for direct control of business operations.
–
In addition, international borrowing and lending sometimes
occurs between a parent company and its subsidiary
Location and internalization
Why are multinational corporations created and
why do they undertake direct foreign
investment?
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Location: why is a good produced in two
countries rather than in one country and then
exported to the second country?
–
Internalization: why is production in different
locations done by one firm rather that by
separate firms?
Location
Why production occurs in separate location is
often determined by
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the location of necessary factors of production:
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mining occurs where minerals are;
labor intensive production occurs where relatively large
pools of labor live.
transportation costs and other barriers to trade
may also influence the location of production.
These factors also influence the pattern of trade.
Internalisation
Internalization occurs because it is more profitable to
conduct transactions and production within a single
organization than in separate organizations. Reasons
for this include:
1.
Technology transfers: transfer of knowledge or another form
of technology may be easier within a single organization than
through a market transaction between separate organizations.
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Patent or property rights may be weak or non-existent.
Knowledge may not be easily packaged and sold.
Internalisation
2.
Vertical integration involves consolidation of
different stages of a production process.
–
Vertical integration would involve consolidation of one
firm that produces a good that is used as an input for
another firm.
–
This may be more efficient than having production
operated by separate firms.
–
For example, having farms and flour mills
consolidate into one organization to make flour may be
more efficient that have farms and flour mills as
separate organizations.
Trends in FDI
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Flow and stock increased in the last 20 years
In spite of decline of trade barriers, FDI has grown
more rapidly than world trade because
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Businesses fear protectionist pressures
FDI is seen a a way of circumventing trade barriers
Dramatic political and economic changes in many parts
of the world
Globalization of the world economy has raised the vision of
firms who now see the entire world as their market
The Direction of FDI

Historically, most FDI has been directed at the
developed nations of the world as firms based in
advanced countries invested in other markets
–
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The US has been the favorite target for FDI
inflows
While developed nations still account for the
largest share of FDI inflows, FDI into
developing nations has increased
–
Most recent inflows into developing nations have
been targeted at the emerging economies of
South, East, and Southeast Asia
Costs of FDI to Host Countries

Adverse effects on competition

Adverse effects on the balance of payments
– After the initial capital inflow there is normally a
subsequent outflow of earnings
– Foreign subsidiaries could import a substantial
number of inputs

National sovereignty and autonomy
– Some host governments worry that FDI is
accompanied by some loss of economic
independence resulting in the host country’s economy
being controlled by a foreign corporation
Political Ideology and FDI
Radical
View
Pragmatic
Nationalism
Free
Market
The Radical View

Marxist view: MNE’s exploit lessdeveloped host countries
Extract profits
– Give nothing of value in exchange
– Instrument of domination, not development
– Keep less-developed countries relatively
backward and dependent on capitalist
nations for investment, jobs, and technology
–
The Radical View

By the end of the 1980s radical view
was in retreat
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Collapse of communism
Bad economic performance of countries that
embraced the radical view
Strong economic performance of countries who
embraced capitalism rather than the radical view
The Free Market View
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Nations specialize in goods and services that they
can produce most efficiently
Resource transfers benefit and strengthen the host
country
Positive changes in laws and growth of bilateral
agreements attest to strength of free market view
All countries impose some restrictions on FDI
Pragmatic Nationalism
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FDI has benefits and costs
Allow FDI if benefits outweigh costs
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–
Block FDI that harms indigenous industry
Court FDI that is in national interest
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Tax breaks
Subsidies
Regional development
implications of FDI
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Post Communist Eastern Europe, e.g. Czech Republic, Slovenia

Foreign direct investment (FDI) has been accorded a central role
in the post-communist economic transformation of Central and
Eastern Europe.

Regional effects of FDI in Central Europe (Czech Republic,
Hungary, Poland and Slovakia) in the 1990s.

Defining FDI’s role in regional economic transformations
– Intensification of uneven development
– Development of a Dual Economy
– Failure to develop linkages with local and regional
economies
– Contribution to increased regional economic instability
Motivations of foreign direct
investments
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Resource-seeking investments:
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Row materials, energy, natural resources,
Low-cost labour,
Low-cost human capital.
Market-seeking investments:
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Green-field investments,
Brown-field investments,
Mergers & acquisitions.
Motivations of foreign direct
investments
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Efficiency-seeking investments:
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Factor proportions,
Differentiation of products,
Economy of scales.
Strategic-advantage-seeking investments:
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Long-term advantage of acquisition.
Main sources of advantages of
multinational firms
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Ownership-specific advantages
Location-specific advantage
Internalization (technology transfer, vertical
integration)
= OLI paradigm (Dunning)
Dunning: productivity of US firms in UK in the
1950’s – US firms in the UK are more
productive than UK firms (because of best
managerial skills, know-how, etc.)
Vernon’s Product Life Cycle (PLC)
theory
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Phases: home production; export; export of
capital; foreign production.
Porter – strategic management
Three groups of international enterprises
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Exporting domestic enterprise,
Multi-domestic enterprise (management in every
country, negligible central co-ordination)
Global enterprise (centrally co-ordinated).
Strategic alliances
Main specificities of strategic alliances:
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Basic autonomy of the partners remain,
Long-term,
Mutually advantageous co-operation,
Resources make available for one another,
Integration of specific functions.
Advantages and disadvantages for
recipient countries
Advantages:
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Increase of financial resources,
Foreign trade sufficit,
Positive effect on employment (both direct and
indirect),
Technology transfer,
Import of know-how,
Better structure of foreign relations,
Diminution of risks.
Advantages and disadvantages for
recipient countries
Disadvantages
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Less economic autonomy,
Technological dependence,
Local resources in foreign control,
Increasing foreign involvement,
Undesired structural changes,
Increasing risks (profit),
Bad structure of foreign relations.