© The McGraw Hill Companies, Inc., 2000 Foreign Direct Investment Chapter 6.
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Transcript of © The McGraw Hill Companies, Inc., 2000 Foreign Direct Investment Chapter 6.
© The McGraw Hill Companies, Inc., 2000
Foreign Direct Investment
Chapter 6
© The McGraw Hill Companies, Inc., 2000
Electrolux Group Sales by Region
6-1
© The McGraw Hill Companies, Inc., 2000
Foreign Direct Investment
FDI occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country.
FDI is not the investment by individuals, firms or public bodies in foreign financial instruments.
6-2
© The McGraw Hill Companies, Inc., 2000
What is FDI? A company buying a firm in a different country. A firm creating a ‘greenfield’ operation in a
different country A firm creating a subsidiary in a different
country. Also:
The firm has significant control of its foreign operation.
Firm can affect managerial decisions of the foreign operation.
6-3
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Flow vs Stock of FDI
Flow: Amount of FDI over a period of time (one year).
Stock: Total accumulated value of foreign owned assets at a given point in time.
6-4
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FDI Outflows1982-1998
0
50
100
150
200
250
300
350
400
450
82-86
87-91
92 93 94 95 96 97 98
$ Billions
6-5
Figure 6.1
© The McGraw Hill Companies, Inc., 2000
Growth of FDI, World Trade and World Output
0
200
400
600
800
1000
1200
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98
FDIWorld TradeWorld Output
6-6
Figure 6.2
© The McGraw Hill Companies, Inc., 2000
Why is FDI Growing More Rapidly Than WT or WO?
Can circumvent future trade barriers. World political and economic change.
Democratization of markets.
Globalization of world markets.
6-7
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Increase in the Number of Bilateral Trade Treaties
0
200
400
600
800
1000
1200
1400
1993 1995 1998
TreatiesCountries
6-8
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FDI Inflows1991 - 1997
0
50
100
150
200
250
1991 1992 1993 1994 1995 1996 1997
Dev. CrtyDvlg. CtryUSAChina
6-9
Figure 6.3
© The McGraw Hill Companies, Inc., 2000
Investment in China
Japan TaiwanUS
Other
Hong KongHong KongOtherUSJapanTaiwan
Second Largest Recipient of FDI After US6-10
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Changing Face of China’s Foreign Investment
0
5
10
15
20
25
88 90 92 94 96 97
Joint VentureWholly Owned
Source: WSJ, June 11, 1998 6-11
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Gross Fixed Capital Formation
A summary of the total amount of capital invested in factories, stores office buildings, and the like.
All things being equal, the greater the capital investment in an economy, the more favorable its future growth prospects are likely to be.
6-12
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Inward FDI Flows as a Percentage of Gross Fixed Capital Formation
0
5
10
15
20
25
30
85-90 91 92 93 94 95
WorldDev. CtryDvlg. CtryMexicoChina
6-13
Figure 6.4
© The McGraw Hill Companies, Inc., 2000
FDI Inflow for Selected Countries1995
0
5
10
15
20
25
30
35
40
45
1995
UKSwedenAustraliaJapanS. Korea
%
6-14
© The McGraw Hill Companies, Inc., 2000
FDI Outflows1991 - 1997
0
20
40
60
80
100
120
91 92 93 94 95 96 97
Dev. CtryUSAUKJPNGERFR
6-15
Figure 6.5
Impediments to the Sale of Know-how
Impediments to the sale of know
how
Risk giving away know-
how to competitors
Licensing implies low control over
foreign entityKnow-how not amenable to
licensing
© The McGraw Hill Companies, Inc., 1999 6-16
© The McGraw Hill Companies, Inc., 2000
Two Forms of FDI
Horizontal Direct Investment Vertical Direct Investment
6-17
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Horizontal Direct Investment
FDI in the same industry abroad as company operates at home.
6-18
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HDI, When and Why?
Transportation too costly? Most cited: Market Imperfections (Internalization
Theory). Impediments to the free flow of products between nations. Impediments to the sale of know-how.
Follow the lead of a competitor - strategic rivalry. Product Life Cycle - however, does not explain when it’s
profitable to invest abroad.
Location specific advantages (natural resources).
6-19
© The McGraw Hill Companies, Inc., 2000
Wal-Mart International
INTERNATIONAL DISCOUNT STORES SUPERCENTERS SAM'S CLUBArgentina 0 6 3Brazil 0 5 3Canada 144 0 0Mexico 347 27 28Puerto Rico 9 0 5China 0 2 1Germany 0 21 0
International Totals: 500 61 40
6-20
© The McGraw Hill Companies, Inc., 2000
Vertical Direct Investment
Backward - investments into industry that provides inputs into a firm’s domestic production (typically extractive industries).
Forward - investment in an industry that utilizes the outputs from a firm’s domestic production (typically sales and distribution).
6-21
© The McGraw Hill Companies, Inc., 2000
VDI, When and Why?
Market power? create entry barriers. erode entry barriers.
Market imperfections. Impediments to the sale of know-how. Investments in specialized assets.
6-22
A Decision FrameworkHow high are How high are
transportation costs transportation costs and tariffs?and tariffs?
Is know-how amenable Is know-how amenable to licensing?to licensing?
Is tight control over foreign Is tight control over foreign operation required?operation required?
Can know-how be protected Can know-how be protected by licensing contractby licensing contract??
Then licenseThen license
ExportExport
Horizontal FDIHorizontal FDI
Horizontal FDIHorizontal FDI
Horizontal FDIHorizontal FDI
No
High
Yes
Yes
Low
No
Yes
No
© The McGraw Hill Companies, Inc., 2000 6-23
Figure 6.6
