FDI impact onFDI impact on development strategies ... fileI O e ie of the ca se effects and...

FDI impact onFDI impact on development

strategies: territories

& investors

Med Academy: Intro to FDI IssuesIntro to FDI Issues

Marseille, January 2009

Structure of the presentation

I. Overview of the cause, effects, and benefits of foreign direct investment (FDI): A. Why and how firms go international? B. Local development: opening up to FDI, a calculated risk C. Case study: FDI in the tourism sector

II. Picky investors vs. picky territories: How canII. Picky investors vs. picky territories: How can investors and host territories be partners for mutual growth? A Overview of site-selection process : beyond the matrix? A. Overview of site selection process : beyond the matrix? B. Brief intro to project qualification: FDI at all costs?

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I O e ie of the ca se effects and benefitsI. Overview of the cause, effects, and benefits of FDI

A. Why and how firms go international? B. Local development: opening up to FDI, a

calculated risk C. Case study: FDI in the tourism sector


What do we mean by FDI?

Any investment, which implies a lasting interest and control by a y , p g yforeign investor in an enterprise resident in another economy

The foreign share (interest) has to be greater than 10% Investment in physical assets Investment in physical assets

Plant, equipment in a foreign country Greenfield or brownfield investment

Equity investments (purchase of shares incl M&A investments ) Equity investments (purchase of shares, incl. M&A investments ) Equity capital (acquisition of a subsidiary or production facility, joint

venture) Reinvested earnings – in proportion to direct equity participation Reinvested earnings in proportion to direct equity participation Intra-company loans- borrowing and lending of funds between direct

investors and affiliated companies

Non-equity forms of investments

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Non equity forms of investments Licensing, franchising, concessions etc.

A Why do companies go international?

0 0.5 1 1.5 2 2.5 3 3.5 4

A. Why do companies go international?

Motivations Access to local markets

Increase world market shares

for going international

(0 = low Acquire strategic assets

Restructure on a world basis

4= high)

Lower production costs

Overcome trade barriers

Get access to local resources

Sustain exports from home c.

So ce


Improve business environt.Source: Unctad

Corporate strategy: why firms moveCorporate strategy: why firms move4 main types of FDI projects

[Dunning, J.H. 1993. Multinational Enterprises and the Global Economy. Wokingham: Addison-Wesley]

Asset Market S ki

Resource S ki

Efficiency

[ g p y g y]

Seeking Projects

Seeking Projects

Seeking Projects

Seeking Projects

High techMedical devicesHorticulture inChina: 1 33 bn


High tech sourcing

Medical devices (ASEAN market)

Horticulture in Columbia

China: 1.33 bn customers

Detailed Motives for InvestmentDetailed Motives for Investment

Market Access (commercial, cultural barriers)Subcontractors following customers overseas

Market Seekingg

New markets (limited or mature home mkt, growth relay in emerging mkts)

Efficiency SeekingRationalised / integrated operations

(regionally/globally) C b d d t / i li tiCross-border product / process specialisation

Resource/Asset SeekingNatural resources Natural resources

(raw materials, agricultural products)(raw materials, agricultural products)LowLow--cost / specialised labourcost / specialised labour

AcquisitionsAcquisitions alliances for strategic assetsalliances for strategic assets


AcquisitionsAcquisitions--alliances for strategic assetsalliances for strategic assets& technologies& technologies

Corporate strategy: how firms moveCorporate strategy: how firms move

The Internationalisation process p Process by which a company expands abroad Depending on company features (SME vs TNC), targeted

markets (unfamiliar/protected markets) and sectorsmarkets (unfamiliar/protected markets) and sectors (services vs industry)

Can be: d l ( t i t li i t ) gradual (exports via agents, licensing, etc) more direct (permanent productive FDI)

Determinants of internalisation process (quantitative p (q/ qualitative) :

nature / complexity –strategic value of th b i i d t


the business processes carried out overseas degree of control

I t ti li ti C t lInternationalisation – Control

Degree of

Control

100%-owned subsidiaryMajority share in JV

50/50 JVMi i h i JVMinority share in JV

Ressources concessionLicence

Management contract

Turnkey contract

Management contract

Technical service contract

Degree of internationalisationImport/export

Turnkey contract


Source : Mucchielli, Johanson-Vahlne

I t ti li ti F tiInternationalisation – Fonction

Strategic

Head-Quarters(geogr./activity)

R&DStrategic valueof business processes

Conception - DesignProduction – Transformation

Administration – Shared-servicesprocesses carried out overseas

C stome Attention Cent e Technical S ppo t

Administration Shared services

Packaging– AssemblyLogistics – Warehousing

Degree of Internationalisation

Commercial bureau

Customer Attention Centre - Technical Support


Degree of Internationalisation

Modes of investment

C ti Creation greenfield vs. brownfield

Acq isition Acquisition Healthy targets vs. endangered ones (often non-

efficient state-owned companies, etc)efficient state owned companies, etc)

Partnerships Direct ownership : joint-venture Direct ownership : joint venture non-equity : technological, industrial, commercial


GreenfieldGreenfield Pros:

Good integration of Cons:

Time management: Good integration of the new unit into the existing productive system of the foreign

Time management: preparation studies, implementationsystem of the foreign

investor (technologies, capacities products)

implementation period

Size of financial and h mancapacities, products)

Good cultural integration into the

th

and human comitments

Uncertainty mother company regarding market

reaction


AcquisitionAcquisition Pros:

Greater flexibility Cons:

Weight of the Greater flexibility Shorter

implementation

Weight of the target company’s historyp

period: acquisition of productive and commercial assets

Social costs Cultural

i tibilit ithcommercial assets immediately operationnal

incompatibility with the mother company’s corporate DNA


PartnershipPartnership Pros:

Limited risks / limited Cons:

Compatibility of Limited risks / limited commitment (capital, management, human

Compatibility of assets, corporate DNAs, and

ressources) Synergies with

complementary

personnalities of the managers

Medium-long termcomplementary assets of the partner

Medium-long term compatibility of the partners’ respective

istrategies


B. Opening up to FDI, a risk worth taking

Why is FDI so important to host territories?Many benefits but also many risks

How to maximise local spillovers? IPIs want to target and attract investments in line

with the overall development strategywith the overall development strategy IPIs can increase the impact [linkages] of FDI by

cooperating with other policy-making p g p y gorganisations to make sure that FDI policies contribute to local sustainable development


Intro: why is FDI so important?Intro: why is FDI so important? FDI = jobs, taxes, capital inflows and balance of payments (BOP)

issues, but also… A major driver for change in emerging economiesA major driver for change in emerging economies

Better jobs (training, qualification, salary, benefits) Transfers of technology (licensing, JV, circulation of know-how) Catalyst for policy changes at Government level

120125130Example of

foreign companies in

100105110115

pFrance: better citizens… 30% of jobs

95100

Salary percapita

Value addedper capita

Investment percapita

in industry 36% of investments 40% of


capita per capita capitaBase 100: all French companies. Source: SESSI

40% of exports

P t ti l b fit f FDI iPotential benefits of FDI: review

Injection of fresh capital into local economic circuitb d l l b d Not to be overestimated: local savings sometimes abundant,

non-equity form of FDI can be fruitfull too (licensing, franchising)

Employment= most common benefit associated with Employment= most common benefit associated with FDI, most political also. New employment = additional income & spending power. Quality rather than quantity: number of jobs created may be Q y q y j y

less important than the types of jobs created. Improved labor skills:

on-the-job training by foreign firms new organizational and management skills, potentially

transferred to other companies/activities when employees change jobs/ set up businesses.


P t ti l b fit 2Potential benefits - 2

Tax Revenue : FDI = larger local tax base. personal income taxes (new jobs created), even when

complete tax relief (investment incentives) temporarily granted

A booster for local competitiveness: domestic A booster for local competitiveness: domestic investment, innovation, efficiency: Local companies gain access to international distribution

channels, become suppliers to TNCs, respond to competition , pp , p pfrom FDI.

FDI raises quality levels of local production and delivery reliability.

Intro of new products and services locally which increases Intro of new products and services locally, which increases competition in previously protected/ monopolised sectors

FDI as a way to increase export levels and foreign exchange earnings


Potential collateral damages

Increased imports : components, textiles (labour-intensive assembly activities for

ex))

Offshore industries: poor integration to local economy

Privatisations: substantial job losses in short/medium term

Increased local competition: Increased local competition: non-efficient domestic companies might suffer


Integrating FDI into development strategies

FDI can help governments achieve their general economic development goals. Identify and attract specific FDI projects with important local

illspillovers

Gov/ IPI must take steps to increase economic impact FDI projects General policy-making: investment in infrastructure, human capital,

etc Land planning: using FDI to promote decentralised growth (special

incentives/ free zones)incentives/ free zones) Industrial policies: enhanced backward linkages through upgrading

programmes aimed at increasing the proportion of inputs from local suppliers


pp

Wh t li k ?What are linkages? Upstream linkages

Infrastructure Infrastructure Raw materials Utilities Industrial inputs (suppliers subcontractors) Industrial inputs (suppliers, subcontractors) Intangibles (R&D, patents, trade marks etc.)

Downstream linkagesd d ( ld l l d Intermediate goods & services (e. g. sold to local industries,

franchisees etc.) Final goods & services (supplied to end-users)

Li k l i hi i li d b Linkages are cross-relationships materialised between inter-dependent industries or activities In their best mutual interest


In the medium term

A moving realityA moving reality A snapshot: the matrix of inter-sectoral exchanges (ISE)

Supplier Energy Steel Glass Rubber Electronics Auto-SupplierClient

Energy Steel Glass Rubber Electronics Automotive

…

Automotive 50 70 20 15 35 10Pharmaceutics 5 3 10 15 20 5

Sh h h f t l l bb t t i

Pharmaceutics 5 3 10 15 20 5IT industry 10 5 3 5 30 7…

Shows how much of steel, or glass, or rubber content is used in automotive industry (in value) Or in turn, how much of automotive industry is used in other

sectors (chemicals or car rental)sectors (chemicals or car rental) This reality is often rapidly changing: e. g. cars are now made

of microchips or aluminium ISE is used to compute the multiplier of a project at a


ISE is used to compute the multiplier of a project at a given time in a given economy

Beyond physical linkagesBeyond physical linkages…

In modern economies, the development process is not only a matter of physical equipment and productiononly a matter of physical equipment and production… where sector A input is made of such amount of sector B output

…but is also the result of a complex process of cross-relationships between all sorts of individuals andrelationships between all sorts of individuals and companies sharing, in a facilitating environment : Ideas, concepts, culture Know how technologies R&D achievements Know-how, technologies, R&D achievements Motivation for risk and enterprise

Countries and IPAs may play a role in this delicate «polymerisation» process by:«polymerisation» process, by: Supplying adequate infrastructure (e. g. incubators) Paying attention to the local « neural system » (links university-

companies workforce training outsourcing possibilities after-


companies, workforce training, outsourcing possibilities, after-care « clubs », mobilisation of talents, critical mass aspects etc.)

C Case study: FDI into Med tourismC. Case study: FDI into Med tourism

Brainstorming/debate (15’) Brainstorming/debate (15 ) What are foreign investors in tourism looking for? What are the pre-requisite conditions for winning FDI p q g

projects in tourism? Infrastructures, human ressources, etc.

What benefits can FDI projects in tourism bring to: What benefits can FDI projects in tourism bring to: Macro-economic issues: balance of payments, unemployment, etc. Sectoral issues: upgrading of local offer, etc. Local development issues: local suppliers, etc.

What are the risks and costs of such foreign projects? Social & environmental impact endogenous vs exogenous


Social & environmental impact, endogenous vs. exogenous development, etc

II. Picky investors vs. picky territories

How can investors and host territories be partners for mutual growth?

A O i f i l i b d h A. Overview of site-selection process : beyond the matrix?

B Brief intro to project qualification: FDI at all B. Brief intro to project qualification: FDI at all costs?

C. Case study: compare 2 FDI projects in terms of local spillovers/linkages


II.A. Overview of site selection methodsII.A. Overview of site selection methods

1. Strategic Decision and Project Parameters

2. Long list of potential locations

3. Short list of potential locations

4. Preferred Location

5. Negotiation and due diligence


Investment!

Quantitative factors of localisationQuantitative factors of localisation Business environment / strategy :

General environnement: business environment, legal and tax et framework

Sectoral environment: logistics (industrial/commercial) Sectoral environment: logistics (industrial/commercial),existing economic-industrial fabric, utilities (costs/quality)

Human ressources General perception of the country/ life standards

Depending on the mode of investment:Depending on the mode of investment: greenfield : industrial parks, availability of utilities,

incentives


Typical Site Selection Matrix1 W i hti C t X Y C t Y1. Weighting Country X Your

CountryCountry Y

Market Dimension

Size of Domestic MarketSize of Domestic Market

Size of Regional Markets

Size of Market Country Serves

Market Accessibility

Manpower Availability

Production

Data Processing / Administrative

Engineers / Skilled Production

Management & Executiveg

R&D

Training provision

Linguistic Skills


Linguistic Skills

Skills assessment

Typical Site Selection Matrix2. Weighting Country X Your Country Yg g y

Countryy

Unemployment rate

Unionized labor %

Workforce demographics

% completing secondary school

W ki l tiWorking population

Return on Investment

Political and Economic Stability

Corporation tax

Incentives and Training Assistance

Enterprise Zones – special incentivesp o p a

European Loans

Inflation rate


Bank rate

Currency stability


Countryy

Labor Costs and On-costs by group

Production

Data Processing / Admin

Engineers / Skilled production

ManagementManagement

Executive

R&D

Fringe benefits and on-costs

Expatriate / Foreign National Costs

Personal tax

Cost of Living

Property

Sit t / (h t )


Site cost / acre (hectare)

Production space


Countryy

Cost to build / sq.m.

Cost to rent / sq.m

Office Space

Cost to build / sq.m.

Cost to rent / sq mCost to rent / sq.m

Property Tax / sq.m

Provision for off-balance sheet funding

Investment Climate

Credible ranking i.e. – World Bank; OECD; the Economist Intelligence Unit

Compliance with Acquis Communautaire (body of EU laws)

Investment rating

Efficacy of legal / judicial system


Efficacy of legal / judicial system

Perceived corruption

Typical Site Selection Matrix

5. Weighting Country X Your Country

Country Y

Productivity

Output per employee

Productivity benchmarked with Germany

GDP / capitaGDP / capita

Gross value added per employee (foreign companies)

Gross value added per employee (domesticGross value added per employee (domestic companies)

Productivity growth / trends

Customs Regime

Inward Processing relief

Treatment of imported capital goods

EU compliance tariff regime


EU compliance – tariff regime

Efficiency of customs clearance

Typical Site Selection Matrix6. Weighting Country X Your Country Y6. Weighting Country X Your

CountryCountry Y

Established Infrastructure

Subcontracting

Component supply chain

Effective just-in-time techniques

E t bli h d li d l tEstablished supplier development programs

Distribution network

Education / Research & DevelopmentEducation / Research & Development

Universities / capita

Graduate output / capita

I.T related graduate output and trends

Engineering graduate output

Pharmaceutical / Life Sciences graduate output


Academic achievements & interface

Typical Site Selection Matrix7 W i hti C t X Y C t Y7. Weighting Country X Your

CountryCountry Y

Utilities

Electricity cost / kw hourElectricity cost / kw hour

Electricity supply reliability

Water cost / cu. m

Gas cost / cu. m

Transport

Air freight frequency and cost

Road

Rail

Typical cost to ship standard container to GermanyTypical cost to ship standard container to Germany

Telecommunications

Degree of liberalization


Degree of liberalization

% Digitalization


Countryy

Telecom continued

% mobile penetration

Main lines / 100 inhabitants

Internet use as % of population

Connection to major European backbone routesConnection to major European backbone routes

Business telephone costs – Standard unit Germany + 100

International private circuits – monthly costs €

Project Management

One-stop-show - IPA

Quality of Life

Quality of housing; international schools; health care & amenities


care & amenities

Cost of living / net disposable income

Beyond the matrix?Beyond the matrix?

A realistic view on the site-selection decision process: R ti P ti h t i f l Reactive vs. Pro-active approach: opportunism vs. careful

strategic planning

Internal stimuli: Excess/ lack of productive capacities Competitive advantage (innovation)...

External stimuli: Maket opportunities, unsollicitated orders from foreign

customers Internationalisation of competition, penetration of foreign

competitors into home markets (defensive FDI), overseas expansion of domestic competitors


Changes in the legal framework

A psychological approach of internationalisationA psychological approach of internationalisation

Stimuli are a necessary but not sufficient condition…

Importance of management attitude:

Elements connected to the decision-maker professional background :T i i f i l t k dTraining, professionnal trackrecordInternational business experience

Elements connected to the decision-maker Elements connected to the decision maker personnal backgroundPersonnality, value system, individual tastes, ambitions


Business and personnal contacts, travels, personnal history

II B Int o to p oject q alification FDI at allII.B. Intro to project qualification: FDI at all costs?

Why evaluating projects? Overview of evaluation criteria, depending on the

stakeholderstakeholder


Why evaluating projects?Why evaluating projects?

Injection of public capital (justifying a close look) Fiscal aids Fiscal aids Infrastructure Buildings etc.

Need to specify effort necessary to capture them Need to specify effort necessary to capture them All projects are not necessarily good Some may be out of (reasonable) reach Resources are scarce and must be allocated to the best projects Resources are scarce and must be allocated to the best projects

Need to select sustainable /viable /efficient projects Dedicate efforts to projects deemed to last A id i k l l l t Avoid premium seekers, loosers, low value generators

National interest Strategic sector or cluster, predator risk etc.


Preference to projects with strong local linkages

l hVarious evaluation approaches

Financiers Project vs. No project (or optimum project size) Financial appraisal (tangible flows, closed system)

Public authorities Authorisation of /support to [the project X] Or: Project 1 vs. Project 2 vs. Project 3 (ranking) Economic appraisal (tangibles + externalities, system Economic appraisal (tangibles externalities, system

enlarged to the sectors effected by the project) IPIs

Project supporters, not censors. Must evaluate: Project supporters, not censors. Must evaluate:Project interest (investment volume, jobs created, sector

enhancement)Preparation stage (concept /studies /Board approval…)


Preparation stage (concept /studies /Board approval…)Probability to get it (mobile project?) and effort tuning

Project qualificationProject qualification Strategic interest of the project

For the investor For the country

Project stage (feasibility, financing, implementation) Estimated timetable (decision date main deadlines) Estimated timetable (decision date, main deadlines) Subjective elements influencing the decision

ProbabilityOf ff ti l h f th j t Of an effective launch of the project

To get the project for the country /the site Possible doubts and questions on the project (economic

feasibilit technolog isk f agilit of the mothe companfeasibility, technology risk, fragility of the mother company, investor’s track records etc.)

Proposed attitude for the IPA ll l h ( f) l h ( bl ff


stop, or yellow light (go if), or green light (reasonable effort to be done to get the project)

Effort in project qualification: the contract review

Materiality & credibility of the project Materiality & credibility of the project Due diligence & project economics (is it viable, serious?) Estimating the probability of winning Ti l (d i i h d l ) Timescale (decision schedule) Non-economic considerations Allocating IPA effort reasonably

f ff Content of an offer Clear specifications from prospectors Local vs. national elements Fixed vs. variable elements Electronic vs. paper offers Need for synthesis in case of offers on multiple sites


y p How to add value to an offer?

Data to be collected on the projectData to be collected on the project1. Project objectives (market share, potential clients)2. Type of investment (greenfield, extension, partnership) 3. Production considered4. Transfer of specific technologies5. Job creation (production, logistics /commercial, admin.)(p , g / , )6. Global economic impact (spillovers, linkages etc.)7. Amount of investment, funding (and self-financing share)8. Structure and ownership considered 8 St uctu e a d o e s p co s de ed9. Timing (decision date, investment date, start date)10. Decision process (status? who decides?)11. Geographical flexibility (mobile project?) and competitors11. Geographical flexibility (mobile project?) and competitors12. Localisation strategy (main criteria, priorities, needs)13. Specific needs (labour, training, land, buildings, sub-contracting,

utilities, infrastructure and services, R&D…)


utilities, infrastructure and services, R&D…)14. Aids and support sought

Thank u / To contact us

[Credits: ANIMA experts, Laurent Sansoucy RichardLaurent Sansoucy, Richard Banks, FIAS’ FDI Promotion

Centre ]

Invest and develop business p

in the Mediterranean


FDI impact onFDI impact on development strategies ... fileI O e ie of the ca se effects and...

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