Session Topic 6 - BUSE608

8/13/2019 Session Topic 6 - BUSE608

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Topic 6:FDI:

Home and Host Country Perspective

BUSE 608

International Business

KAAU, 2011-12


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Learning outcomes

Understand the terms, forms and trends of FDI

Analyse the pros and cons of FDI for home and host

countrys perspective

Understand how countries (host) negotiate with MNCs to

attract FDI

Theoretical and explanations of FDI policies adopted by

host countries

FDI: is it good or bad for the country?


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Daimler 5

Netherlands -10

Daimler -5

Netherlands 0

Daimler -15

Netherlands -25

Subsidise

Keep plant open

Close plant

Dont

Subsidise

An exercise:


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Foreign Direct Investment (FDI)

Definition

An investment in a foreign operation which results in: managerialparticipation and effective control

The setting up of a new overseas operation (GFI) or as a form of

international inter-firm co-operation that involves a significantequity stake in, or effective management control of, host countryenterprise

Significant??? Effective control???

Minimum 10% equity participation

The traditional route to growth for most MNCs


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Export Acquisitions

Licensing JVs

Wholly-ownedsubsidiary

Franchising

Partly-ownedsubsidiary

Routes:

Green-field, acquisition, JVs, ISA (customer base, govtregulations, economies of scale, market potentials, protection of

technologic know-how, etc.)FDI

PI

Equity participation

FDI and IMES


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FDI Terms

Flow of FDI, outflow and inflow of FDI, Stock of FDI, Host/Home

country, Foreign subsidiary, MNCs

Philips

N.V

Philips

Malaysia

Bhd.

MNE

FDI

Home Country

Host Country

SubsidiaryParent firm


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Types of FDI

Horizontal FDI

Vertical FDI (Backward vertical FDI, Forwardvertical FDI)

Conglomerate FDI

BVfdi

FVfdiShowrooms

After sale services

Supplier

Industry

Other Industries

Hfdi



FDI growth (1982-2000)

0

100

200

300

400

500

600

700

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

-

200

400

600

800

1 000

1 200

1 400

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

World

Developed

countries

Developing countries

Central and Eastern Euro e

Exports

FDI

0

50

100

150

200

250

1995 1996 1997 1998 1999 2000 2001 2002

Developing countries

Asia and the Pacific

Latin America/Caribbean

China

AfricaLDCs

$ billions

Source: UNCTAD, World Investment Report 2003. FDI Policies for Development:

National and International Perspectives

18

18

25

26

29

31

40

63

120

154

0 20 40 60 80 100 120

Hong Kong, China

Spain

Germany

Netherlands

Canada

Japan

United Kingdom

France

United States

Luxembourg



Inward FDI stock



Multinational companies (MNCs)

A MNC is a firm that owns and manages production

facilities in three or more countries

The US is by far the largest homecountry of MNCs as well as

the largest hostcountry of foreign MNCs.

Theoretical explanations

Practical/strategic explanations



MNCs structure (Philips, 2002)



Access to markets

Limits to export potential Nature of the product/service, government regulations, customer

demands, change in relative costs

Market considerations

Size/growth of market, following customers, followingcompetitors

BUT

Market access restrictions

Licensing requirements Outright prohibitions >> military industries, mass media, air and

land transport, banking and finance, telecommunication



Access to factors of production

Labour

Cost

Productivity

Technology/knowledge/skills

Capital, Raw materials

BUT

Performance requirements >> technology transfer to local

partners, exports, employments, local contents



Host countries perspective

MNCs

Developed

Countries

Developing

Countries

Mostly from

developed countries

Mostly American,

British and Japanese

80%

20%

0%100%



Costs & benefits of FDI to hosts

Resource

transfer

Competition and

economic growth

Balance of

payment

Employment



Main theoretical views

The Radical View MNCs seen as instruments of imperialist domination, exploiting

developing countries to the exclusive benefit of their homecountries, so againstFDI.

The Free Market MNCs seen as instrument of dispersing production of goods

and services to the most efficient locations around the world,so forFDI

Pragmatic Nationalism

MNCs seen as bringing benefits and cost, with encouragementoffered to FDI perceived to offer significant gains to the hostcountry, so forFDI but with conditions


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Spillovers:

Locals benefit from the presence of MNCs without paying the full price

Several possible channels:

Demonstration effects. copying MNCs

Training of employees who may leave the MNCs for jobs in local firms

Forward and backward linkages

MNC entry may stimulate competition, efficiency, and development

MNCs often enter industries where entry barriers for local firms are high

BUT. spillovers are not automatic. Efforts are determined by the local

environment

Technological capability and labour skills, level of competition, trade

policy


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MNC negotiation with Host countriesThe context of negotiationthe Four Cs

CommonInterests

NegotiationProcess

Criteria

ConflictingInterests

Compromise

Establishing newplant in Mexico

IBM: profits + 100ownership

Govt:employment,technology transfer,BOP

Proportion ofposts procuredlocally, no ofjobs created,proportion ofoutput exported

Reaching a

decision whichbenefit bothparties


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Determinants of bargaining power

Bargaining power of Firm

High Low

Firms time horizon Long Short

Value placed by host government

on investment High Low

Comparable alternatives open to firm Many Few

Bargaining power of the Govt


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Summary

When a company makes more than 30% investment in foreign

operations, it is said to have made FDI Trends show that FDI has increased tremendously in

comparison to other foreign market entry strategies

In order to get maximum advantages from FDI, countries have

to negotiate with MNCs on the basis of what they can offer Countries often compete to attract FDI by offering numerous

incentives to MNCs

The overall view is that FDI is good for the country, if it is

controlled properly


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Reading list

This lecture is based on Hill, Chapter 8

Additional readings: Waldkirch, A. 2003. Vertical FDI? A Host Country Perspective.Oregon

University working paper series.

Mattooy, A., Olarreagaz, M., and Saggix, K. 2002. Mode of foreign entry,technology transfer, and FDI policy.University seminar paper.

Related Case Study:

FDI in South Africa


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Session Topic 6 - BUSE608

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