Module 3: Foreign Direct Investment PDF

INTERNATIONAL BUSINESS Stock of FDI – the total accumulated value of foreign-owned assets at a given time. AND TRADE Outfl...

INTERNATIONAL BUSINESS Stock of FDI – the total accumulated value of foreign-owned assets at a given time. AND TRADE Outflows of FDI – the flow of FDI out of a MODULE 3: FOREIGN DIRECT INVESTMENT country, that is, firm undertaking direct investment in foreign countries. LESSON 1: FOREIGN DIRECT INVESTMENT Inflows of FDI – the flow of FDI into a country, International trade and foreign direct investment (FDI) are that is, foreign firms undertaking direct the two most important international economic activities investment in the local country. integrating the world economy. With the increase in Foreign portfolio investment (Foreign Indirect Investment) mobility of factors of production across countries, FDI has – is investment by individuals, firms or public bodies become an integral part of firms’ strategy to expand (government or non-profit organizations) in foreign international business. financial instruments such as government bonds, corporate In simple terms, FDI means acquiring ownership in an bonds, mutual funds and foreign stocks. overseas business entity. Foreign direct investment occurs FDI is the investment in real or physical assets such as when an investor based in one country (the home country) factories and facilities, whereas portfolio investment is the acquires an asset in another country (the host country) with investment in financial assets comprising stocks, bonds and the intent to manage it. other form of debt denominated in terms of a foreign Foreign direct investment (FDI) occurs when firm invest country’s national currency. directly in production or other facilities in a foreign country FDI involves control over foreign production or operations over which it has effective control. undertaken by the multinational enterprise (MNE) but Companies can enter foreign market through portfolio investment does not. exporting or FDI Portfolio Theory – describes the behavior of individuals or Exporting is relatively low-risk and simple vehicle firms administering large amounts of financial assets in with which to enter a foreign market because it search of highest possible risk-adjusted net return. does not involve actual presence in the target market. Financial Risk – the variability of rate of return on an asset While lower in risk, exporting does not enable over-time. the firm to maintain control over foreign TYPES OF FDI production and operations nor benefit from opportunities available only through actual On the Basis of Direction of Investment presence in a foreign market, which FDI permits. 1. Inward FDI Manufacturing FDI requires an establishment of Foreign firms taking control over domestic production facilities abroad – example: Coca-Cola assets. had built bottling facilities in about 200 countries Involves a foreign entity either investing in or in 2001, whereas service FDI requires either: purchasing the goods of a local company. Service building facilities – examples: Walt 2. Outward FDI Disney built Disney Land Europe in 1992, on Domestic firms investing overseas and taking Establishing an investment foothold via capital control over foreign assets. contribution and building of office facilities – A business strategy where a domestic firm example: Citigroup in 1997 acquired Confia, expands its operations to a foreign country which owns 300 branches in Mexico providing either by acquisition or expansion of an banking and financial services. existing foreign facility. Foreign Subsidiaries – overseas units or entities created as By Target a result of FDA. 1. Horizontal FDI Host Country – the country in which a foreign subsidiary Occurs when the MNE enters a foreign country operates. to produce the same product(s) produced at home or offer the same service that is done at Flow of FDI – the amount of FDI undertaken over a given home. time period. It represents a geographical diversification of the MN's established domestic product line. BSBAIM | LEESHEN BAUTISTA  Example: most Japanese MNBES begin their Looking for resources at a lower real cost international expansion with horizontal investment because they believe that this 2. Market seeking approach enables them to share experience, Direct investment overseas with sizeable resources and knowledge already developed at market and growth in order to protect existing home, thus reducing risk. Toyota assembling markets, counteract competitors, and to cars in both Japan and UK. preclude rivals from gaining new markets. Secure market shares and sales growth in Conglomerate FDI target foreign market. The activity of FDI abroad to manufacture products not manufactured by the parent 3. Efficiency seeking company at home. Direct investment overseas so as to improve Example: Hong Kong MNEs often set up foreign efficiency and or seek advantages of process subsidiaries or acquire local firms in mainland specialization or product rationalization China to manufacture goods that are unrelated Seeks to establish efficient structure through to the parent company's product portfolio. useful factors, culture, policies or market The main purpose is to seize emerging opportunities and capitalize on their 4. Strategic asset seeking - seeks to acquire assets in established business and personal networks foreign firms that promote corporate long-term with mainland that western MNE' do not have. objectives On the Basis of Sector 2. Vertical FDI Overseas investment so as either to provide 1. Industrial FDI - Investment by a foreign firm in the inputs for the firm's domestic operations or manufacturing sector. sell its domestic output abroad. 2. Non-industrial FDI - Investment by a foreign firm in Occurs when the MNE enters a foreign country the services sector. to produce intermediate goods that provide By entry mode input into a company's domestic operation or in other subsidiaries' production process. Entry Mode - The manner in which a firm chooses to enter a foreign market through FDI Backward vertical integration 1. International franchising Direct investment aimed at providing inputs for a firm's production processes. 2. Branches Where the international integration moves back towards raw materials. 3. Contractual alliances Example: offshore extractive investments in 4. Equity joint venture petroleum and minerals Toyota acquiring a tire manufacturer 5. Wholly foreign-owned subsidiaries Forward vertical integration Specific invest approach to be used to establish or realize the chosen entry mode: Direct investment overseas aimed to sell the output of a firm's domestic production 1. Greenfield investment - It is the idea of building a processes. facility on a green field such as farmland or a forest Where the FDI takes the firm nearer to the Example: - building a brand-new facility market. Example: the establishment of an assembly 2. Merger and acquisition plant or a sales branch overseas Toyota Merger is a combination of two companies to acquiring a car distributorship in America form a new company. Cross-border merger By Motive Acquisition is the purchase of one company by 1. Resource seeking another company in which a new company is Direct investment overseas so as to gain formed privileged access to resources vis- a-vis Cross-border acquisitions competitor BSBAIM | LEESHEN BAUTISTA  3. Sharing or utilizing existing facilities BENEFITS OF FDI TO HOST COUNTRIES LESSON 2: BENEFITS GAINED FROM FDI 1. Access to superior technology. 2. Increased competition. How MNES Benefit from FDI 3. Increase in domestic investment. 1. Enhancing efficiency from location advantages 4. Bridging host countries' foreign exchange gaps. 5. Improve foreign exchange position of the Location advantage - the benefit arising from a host country. country's comparative advantage accrued to foreign direct 6. Employment generation and increase in investors. production. 7. Help in capital formation by bringing fresh Determinants of location choices: capital. Labor cost differentials 8. Helps in transfer of new technology and Transportation costs management skills. Tariff and non-tariff barriers 9. Increase tax revenue. Government policies - example: taxes affecting DISADVANTAGES OF FDI investment in a host country 1. Domestic companies fear that they may lose 2. Improving performance from structural ownership discrepancies 2. Small companies fear that they may not be able to compete with world class large companies Structural discrepancies - the differences in industry 3. Foreign companies invest more in machinery structure attributes, example profitability, growth potential and intellectual property that in wages of the and competition, between home and host country local people 3. Increasing return from ownership advantage 4. Government has less control over the functioning of such companies as they usually Ownership advantage work as wholly owned subsidiary of an overseas company. - the benefits derived from the proprietary knowledge, resources or assets possessed only by the owner (the MNE). THE IMPACT OF FDI ON THE HOST (RECIPIENT) COUNTRY - The possession of intangible assets (reputation, brand image, and unique distribution channels), the proprietary 1. Employment – Job shifts to the host country is one knowledge (technological expertise, organizational skills of the benefits of FDI to that country. Some more and international experience) confers on their foreign desirable jobs like product design, basic research, owner's competitive advantages applied research, and product development may be retained in the MNE's country of origin. - Core competencies - skills within a firm that competitors cannot easily match or imitate. 2. FDI Impact on Domestic Enterprise - FDI expands the market domain in which an MNE - FDI could adversely affect domestic capitalizes on its core competencies, thus generating more enterprises. MNE superiority is sometimes income from existing resources, capabilities or knowledge rooted in favorable treatments (lower taxation rates or tax break) offered by host 4. Ensuring growth from organizational learning governments but not accorded to local firms. - Organizational learning is a key building block Thus, local firms may be institutionally and major source of competitive advantage. discriminated against, resulting in lesser competition in the industry. - Sustainable competitive advantages are only possible when firms continuously reinvest in - MNEs are powerful competitors to local building new resources or upgrading existing businesses. However, depending on the resources. business environment of the host country, local companies may be able to learn from the - FDI provides learning opportunities through techniques employed by the MNE and become exposure to new markets, new practices, new more globally competitive. ideas, new culture, and even new competition. BSBAIM | LEESHEN BAUTISTA  NEGATIVE IMPACTS OF FDI 1. Market Monopoly. 2. Crowding-out and unemployment effects. 3. Technology dependence. 4. Profit outflow. 5. Corruption. 6. National security. Sources and References: https://www.slideshare.net/slideshow/foreig n-direct-investment-66476722/66476722 https://www.scribd.com/presentation/48424 4902/chapter-12-foreign-direct-investment- ppt BSBAIM | LEESHEN BAUTISTA