Ing. Tomáš Dudáš, PhD.. Structure of the presentation FDI theories – introduciton and main...
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Transcript of Ing. Tomáš Dudáš, PhD.. Structure of the presentation FDI theories – introduciton and main...
Ing. Tomáš Dudáš, PhD.
Structure of the presentationFDI theories – introduciton and main questions
FDI theories on macro level
Development theories of FDI
FDI theories on micro level
Eclectic FDI theory (OLI theory)
The basic questions of FDI theories (6W+H)Who? (is the investor)
What? (kind of FDI)
Why? (are we investing)
Where? (is the FDI going)
When? (do we invest)
How? (the mode of entry)
FDI theories on macro levelCapital market theory
One of the oldest theories of FDI (60s)FDI is determined by interest rates
Dynamic macroeconomic FDI theoryFDI are a long term function of TNC strategiesThe timing of the investment depends on the
changes in the macroeconomic environment„hysteresis effect“
FDI theories on macro levelFDI theory based on exchange rates
Analyses the relationship of FDI flows and exchange rate changes
FDI as a tool of exchange rate risk reduction
FDI theory based on economic geographyExplores the factors influencing the creation of
international production clustersInnovation as a determinant of FDI – „Greta
Garbo effect“
FDI theories on macro levelGravity approach to FDI
The closer two countries are (geographically, economically, culturally ...) the higher will be the FDI flows between these countries
FDI theories based on istitutional analysisExplores the importance of the institutional
framework on the FDI flowsPolitical stability – key factor
Life cycle theoryRaymond Vernon – 1966
It can be used to analyse the relationship of product life cycle and possible FDI flowsFDI can be seen mostly in the phases of
maturity and decline
The conclusions of this theory are questionable nowadays
Japanese FDI theoriesWere initially developed in the 70s of the last
century
Main representant – Terumoto Ozawa
He analysed the relationship of FDI, competitiveness and economic development based on the ideas of Michael Porter
He identified three main phases of development when he analysed the waves of FDI inflow and outflow from a country
Japanese FDI theoriesI. phase of economic growth
The country is underdeveloped and is targeted by foreign companies wanting to use its potential advantages (especially low labour costs)
Almost no outgoing FDI
II. Phase of economic growthNew FDI is drawn by the growing internal
markets and by the growing standards of livingOutgoing FDI are motivated by the raising labour
costs
Japanese FDI theoriesIII. Phase of economic growth
The competitivness of the country is based on innovation
The incoming and outgoing FDI are motivated by market factors and technological factors
Five Stage Theory - John Dunning
Stage 1Low incoming FDI, but foreign companies are
beginning to discover the advantages of the countryNo outgoing FDI – no specific advantages owned by
the domestic firms
Stage 2Growing incoming FDI do the advantages of the
country - especially the low labour costsThe standards of living are rising which is drawing
more foreign companies to the countryStill low outgoing FDI
Five Stage Theory - John DunningStage 3
Still strong incoming FDI, but their nature is changing due to the rising wages
The outgoing FDI are taking off as domestic companies are getting stronger and develop their competitive advantages
Stage 4Strong outgoing FDI seeking advantages
abroad (low labour costs)
Five Stage Theory - John Dunning
Stage 5Investment decisions are based on the
strategies of TNCsThe flows of outgoing and incoming FDI come
into equilibrium
Incoming and outgoing FDI in China Incoming and outgoing FDI in China between 2001-2004between 2001-2004
-10000
0
10000
20000
30000
40000
50000
60000
70000
2001 2002 2003 2004
FDI inflowFDI outflow
Incoming and outgoing FDI in South Korea between 2001-2004Incoming and outgoing FDI in South Korea between 2001-2004
0
1000
2000
3000
4000
5000
6000
7000
8000
2001 2002 2003 2004
FDI inflowFDI outflow
Incoming and outgoing FDI in Japan Incoming and outgoing FDI in Japan between 2001-2004between 2001-2004
0
5000
10000
15000
20000
25000
30000
35000
40000
2001 2002 2003 2004
FDI inflowFDI outflow
FDI theories on micro levelExistence of firm specific advantages (Hymer)
Access to raw materialsEconomies of scaleIntangible assets such as trade names, patents,
superior management etcReduced transaction costs when replacing an arm's
length transaction in the market by an internal firm transaction
FDI and oligopolistic marketsIn oligopolistic markets the companies follow the
actions of the market leaderMutual threats – game theory
FDI theories on micro levelTheory of internalisation
Due to market imperfections, there may be several reasons why a firm wants to make use of its monopolistic advantage itself (or organise an activity itself)
Buckley and Casson (influenced by Coase), suggested that a firm overcomes market imperfections by creating its own market - internalisation
he theory of internalisation was long regarded as a theory of why FDI occurs
By internalising across national boundaries, a firm becomes multinational
Eclectic FDI theory – John DunningJohn Dunning attempts to integrate a variety
of strands of thinking
He draws partly on macroeconomic theory and trade, as well as microeconomic theory and firm behavior (industrial economics)
O = Ownership advantages
Some firms have a firm specific capital known as knowledge capital: Human capital (managers), patents, technologies, brand, reputation…
This capital can be replicated in different countries without losing its value, and easily transferred within the firm without high transaction costs
L – Localization advantagesProducing close to final consumers or
downstream customers
Saving transport costs
Obtaining cheap inputs
Jumping trade barriers
Provide services (for most services production and delivery have to be contemporaneous)
OLI approach - conclusionsThe eclectic, or OLI paradigm, suggests that
the greater the O and I advantages possessed by firms and the more the L advantages of creating, acquiring (or augmenting) and exploiting these advantages from a location outside its home country, the more FDI will be undertaken
Where firms possess substantial O and I advantages but the L advantages favor the home country, then domestic investment will be preferred to FDI and foreign markets will be supplies by exports
I – internalization advantagesWhy don't a firm just sign a contract with a
subcontractor (external agent) in a foreign country?
Because contracting out is risky: it implies transferring the specific capital outside the firm and revealing the proprietary information (e.g. how to use the technology or the patent).
Problem:If the agent interrupts the contract it can use the
technology to compete with the mother companyIn the case of brands/reputation: if the agent
damages the brand reputation
25
4 types of FDI derived from OLI theory
The typology of FDI was developed by Jere Behrman to explain the different objectives of FDI:Resource seeking FDIMarket seeking FDIEfficiency seeking (global sourcing FDI)Strategic asset/capabilities seeking FDI
26
Resource seeking FDITo seek and secure natural resources
e.g. minerals, raw materials, or lower labor costs for the investing company
For example, a German company opening a plant in Slovakia to produce and re-export to Germany
27
Market seeking FDITo identify and exploit new markets for
the firms` finished productsUnique possibility for some type of
services for which production and distribution have to be contemporaneous (telecom, water supply, energy supply)
Automotive TNCs have invested heavily in China
28
Efficiency seeking FDITo restructure its existing investments so as
to achieve an efficient allocation of international economic activity of the firmsInternational specialization whereby firms seek to
benefit from differences in product and factor prices and to diversify risk
Global sourcing – resource saving and improved efficiency by rationalizing the structure of their global activities. Undertaken primarily by network based MNCs with global sourcing operations.
29
Strategic asset/capabilities seeking FDIMNCs pursue strategic operations through the
purchase of existing firms and/or assets in order to protect O specific advantages in order to sustain or advance its global competitive positionAcquisition of key established local firmsAcquisition of local capabilities including R&D,
knowledge and human capitalAcquisition of market knowledgePre empting market entrance by competitorsPre empting the acquisition by local firms by
competitors