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Opening case-Starbucks
Starbucks strategy
Some Go Bad
Company acquiring or merging with a firm in a different country A firm creating a Greenfield operation in a different country A firm creating a subsidiary in a different country As a result
The firm has significant control of its foreign operation Firm can affect managerial decisions of the foreign operation
FDI occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country
Flow: Amount of FDI over a period of time (one year) Stock: Total accumulated value of foreign owned assets at a given point in time
FDI is not the investment by individuals, firms or public bodies in foreign financial instruments
Answers How We Go In Firms want a presence in foreign markets Firms want control over growth of these foreign markets
To gain first mover advantages To ward off competitors To determine locations, advertising and other related strategic decisions in the firms interest
Trends in FDI
Flow and stock increased in the last 20 years In spite of decline of trade barriers, FDI has grown more rapidly than world trade because
Businesses fear protectionist pressures FDI is seen as a way of circumventing trade barriers Dramatic political and economic changes in many parts of the world Globalization of the world economy has raised the vision of firms who now see the entire world as their market
Preferred Method (70%80%) Quicker to execute. Foreign firms have valuable strategic assets Believe they can increase the efficiency of the acquired firm
Enhance EPS
Forms of FDI
Cement, Coke, etc Look at component that Transportation is of total landed costs
Impediments to the free flow of products between nations Impediments to the sale of know-how (licence)
Follow the lead of a competitor - strategic rivalry Location specific advantages (natural resources)
Vertical FDI
Backward - investments into industry that provides inputs into a firms domestic production (typically extractive industries) Forward - investment in an industry that utilizes the outputs from a firms domestic production (typically sales and distribution)
V- FDI Why
Strategic Behaviour
By vertically integrating, you can shut out new competitors out of an industry
Other Impediments
Decision framework
How high are transportation costs and tariffs?
Low No
Export
High
Is know-how amenable to licensing?
Yes
Is tight control over foreign operation required?
Horizontal FDI
No
Can know-how be protected by licensing contract?
No
Horizontal FDI
Yes
Then license