International Business: The Challenges of Globalization PDF

# International Business: The Challenges of Globalization - Tenth Edition, Global Edition ## Chapter 8: Foreign Direct Investment - **Foreign direct investment (FDI)**: Purchase of physical assets or a significant amount of the ownership (stock) of a company in another country to gain a measure of...

# International Business: The Challenges of Globalization - Tenth Edition, Global Edition ## Chapter 8: Foreign Direct Investment - **Foreign direct investment (FDI)**: Purchase of physical assets or a significant amount of the ownership (stock) of a company in another country to gain a measure of management control. - **Portfolio investment**: Investment that does not involve obtaining a degree of control in a company. ### The Nature of Foreign Direct Investment: Forms - **Greenfield investment**: Purchase of land in another country and construction of new facilities or an entire subsidiary from the ground up. - **Merger or acquisition**: Get a foothold in a new geographic market; increase a firm's global competitiveness; fill gaps in companies' product lines in a global industry; reduce costs of research and development, production, distribution, and so forth. ### The Nature of Foreign Direct Investment: Worldwide Flows A common way to measure foreign direct investment is to calculate the FDI that flows into all countries over a one-year period. ### The Nature of Foreign Direct Investment: Recipients and Sources - Historically, developed nations have been the biggest recipients of FDI. - But, in 2014, for the first time ever, developing countries attracted a greater amount of FDI than developed countries, accounting for around 55 percent of the world total. - China was the main recipient of FDI in 2020 among developing nations. - Developed nations are also the sources of most FDI. ### Theories of Foreign Direct Investment: International Product Life Cycle - **International product life cycle**: Theory stating that a company begins by exporting its product and later undertakes foreign direct investment as the product moves through its life cycle. - New product stage - Maturing product stage - Standardized product stage ### Theories of Foreign Direct Investment: Market Imperfections - **Market imperfections**: Theory stating that when an imperfection in the market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and thereby remove the imperfection. - Types of market imperfections: - Trade barriers - Specialized knowledge ### Theories of Foreign Direct Investment: Eclectic Theory - **Eclectic theory**: Theory stating that firms undertake foreign direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment. - Location advantage - Ownership advantage - Internationalization advantage ### Theories of Foreign Direct Investment: Market Theory - **Market power**: Theory stating that a firm tries to establish a dominant market presence in an industry by undertaking foreign direct investment. - **Vertical integration**: Extension of company activities into stages of production that provide a firm's inputs (backward integration) or that absorb its output (forward integration). ### Management Issues and Foreign Direct Investment: Control - Complete ownership does not guarantee control. - Partnership requirements: - Company policies - IBM - Benefits of cooperation: - Overly strict requirements by governments could scare off investors ### Management Issues and Foreign Direct Investment: Purchase-or-Build Decision - A merger with or acquisition of an ongoing business provides the facilities, equipment, and personnel needed to operate. - Cemex in Spain - When there is a lack of suitable facilities or if retrofitting existing operations is too costly or complicated a greenfield investment makes sense. - GM in Poland ### Management Issues and Foreign Direct Investment: Production Costs - **Rationalized production**: System of production in which each of a product's components is produced where the cost of producing that component is lowest. - Apple - Risk of work stoppages. - Cost of research and development. - Soaring cost of developing new technologies is leading multinational corporations to engage in cross-border alliances and acquisitions. - Sanofi ### Management Issues and Foreign Direct Investment: Customer Knowledge The behavior of customers is frequently an important issue in the decision of whether to undertake FDI. - A local presence can help companies gain valuable knowledge about buyers that could not be obtained from the home market. - Some countries have quality reputations in certain product categories. - Because of these perceptions, it can be profitable for a firm to produce its product in the country with the quality reputation, even if the company is based in another country. ### Management Issues and Foreign Direct Investment: Following Clients - Companies commonly engage in FDI when their clients have invested abroad. - Common in industries in which producers supply component parts to customers with whom they have close working relationships. - Tesla gigafactories ### Management Issues and Foreign Direct Investment: Following Rivals - FDI decisions frequently resemble a follow-the-leader scenario in industries that have a limited number of large firms. - Choosing to not make a move similar to that of a first mover might result in being shut out of a potentially lucrative market. ### Why Governments Intervene in FDI: Intervention by the Host Country - Reasons for intervention by the host country: - Control the balance of payments. - Technology, skills, and employment: - Can create formidable future competitors ### Why Governments Intervene in FDI: Intervention by the Home Country - Reasons for intervention by the home country: - Influence balance of payments: - Investing in other nations sends resources out of the home country and lowers investment at home. - Protect jobs: - An outgoing investment might be opposed by a home nation if it is expected to cause domestic job losses. - Improve competitiveness: - Encouraging national champions to invest abroad and compete on a global scale can improve a nation's long-term competitiveness. ### Government Policy Instruments and FDI: Host Countries – Promotion - Financial incentives: - Low or waived taxes - Low-interest loans - Infrastructure improvements: - Better seaports, roads, and telecom networks. ### Government Policy Instruments and FDI: Host Countries – Restriction - Ownership restrictions: Typically apply to businesses in cultural industries and companies vital to national security. - Performance demands: Influence how companies operate in the host nation. ### Government Policy Instruments and FDI: Home Countries – Promotion - To encourage outbound foreign direct investment, home-country governments can do any of the following: - Offer insurance - Grant loans - Offer tax breaks - Apply political pressure ### Government Policy Instruments and FDI: Home Countries – Restriction - To limit the effects of outbound FDI on the national economy, home governments may exercise either of the following two options: - Impose differential tax rates - Impose outright sanctions