Professional Documents
Culture Documents
• Investment and services are, along with trade, the main issues in
international economic negotiations. More than trade, FDI leads to a blurring
of the boundary between domestic and foreign, raising issues of regulation,
legal system and intellectual property rights.
200
400
600
800
1,000
1,200
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
Countries
Developed
1995
1996
1997
World FDI Inflows
1998
1999
2000
Countries
Developing
2001
2002
2003
2004
2005
Developed Country FDI and Mergers and
Acquisitions (M&A)
1,200
1,000
FDI
800
Billion US Dollars
600
400
200 efinition
Data D 2002
M&A Change
s
0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Developed Country FDI
• Both developed and developing country FDI are
of interest, but they show different things.
• Developed country FDI: countries tend to have
similar “inward” and “outward” stocks. Balanced,
diversified, not big net creditors or debtors (in
FDI only).
• Multinational corporations invest first in the
“Triad regions” (EU, NA, Japan), and
subsequently go global.
Developing Countries FDI and M&A
!
ent
400 r
iffe
D
350 is
c ale FDI
a lS
tic
300
e r
V
250
Billion US Dollars
200
150
M&A
100
50
0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Developing Country FDI
• Associated with net flow from developed
to developing countries.
300 US
250
Billion US Dollars
200
150
100
China
50
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Policy toward Foreign Direct
Investment (FDI)
• After the debt crisis of the 1980s,
developing countries became much more
favorable to FDI. It seemed to promise:
– Capital
– Transfer of technology, management skills.
– Marketing channels
– Less volatility: long-term commitment
reinforced by less mobile assets.
» Let’s pick up on the volatility issue…..
Overall, Private
Capital Flows
Have Been
Extremely
Volatile:
Particularly
those to
Developing
Countries
Total Resource Flows to
Developing Countries have
Recovered Since 2002
IC: Global Driving Forces
• Advances in information technology and supply chain
management.
• Liberalization of trade and investment regime; WTO
rules move toward investment
– TRIMS (Trade-related Investment Measures),
– TRIPS (Agreement on Trade-related Intellectual
Property Rights)
– GATS (General Agreement on Trade in Services)
• Privatization.
• Collapse of Communism and opening of Eastern
Europe, USSR and China.
One Result of Systemic Change:
• An increasing share of FDI is in service sectors.
– Services have accounted for two-thirds of total FDI
inflows recently. Of the accumulated stock of FDI,
60% is in services ($4 trillion).
– Finance and trade the largest components, but
electricity, telecom, and business services are
growing rapidly. (Natural resources have rebounded
since 2005.)
• The US is the biggest source and the biggest
destination. What other countries are large
hosts of FDI?
Largest FDI Host Countries ($ Billion, end-2005)
EU (includes intra-EU) 4,499 UK 817
US 1,626 France 601
Hong Kong 533 Germany 502
Canada 357 Netherlands 463
China 318
Australia 211
Mexico 210
Brazil 201
Singapore 187
Switzerland 172
Russia 132
Bermuda 102
Japan 101
Chile 74
South Africa 69
British Virgin Islands 67
Korea 63 Source: UNCTAD, WIR 2006
Thailand 56
Argentina 55
Malaysia 48
India 45
To Summarize: FDI Country
Patterns
• Rapid sustained increase in FDI flows, peaking
in 2000 at over $1.4 trillion, dropping to half that
in 2003, before recovering strongly.
• US the largest source of FDI ($2.1 trillion
outward stock 2005 and the largest recipient ($1.6
trillion inward stock 2005).
• Developed countries used to account for over
90% of outflows, now it is over 80%, since more
LDC investment is emerging.
• Developed countries also account for about 60%
of inflows in recent years.
Summarizing Country Patterns
(cont.): Japan is the Outlier
• In late 1980s, Japan was largest source of
outgoing FDI, but its share has fallen since
1991. Back in 1990, when Japan was already
the world’s largest source country, its stock of
inward FDI was still less than $10 billion in 1990,
when it was the world’s large source country.
• Japan’s stock of inward FDI was still only $50
billion in 2000. Liberalization since the late
1990s has been significant, but still lags other
developed countries.
• UK $817 billion inward stock ($1.24 trillion
outward stock), rapid growth of intra-European
investment.
II. FDI: The Microeconomic
Perspective
• A New Actor: The trans-national firm. The
investment decision is made by a firm,
based on its own interest.
• Firms have choices:
– Which activities they perform.
– Where they locate those activities.
– How the activities should be linked together.
• Why do firms incur the extra cost of
operating at a distance across borders in
unfamiliar markets?
Firms invest across borders
because they see an opportunity to
increase profit.
At a minimum, that means bringing together
two considerations:
1. A firm-specific competitive advantage
(sometimes called an “ownership”
advantage);
2. A location-specific advantage for the host
country.
Firm-specific competitive
advantage:
Sustainable competitive advantage, or “core
competence.” Not readily copied.
• Tangible or intangible firm-specific assets.
• Examples:
– Technology.
• Proprietary technologies
• Sustained R&D spending, maintaining a lead.
– Brand: Consumer recognition, defended with
advertising, packaging, and incremental product
innovation as well as quality control.
– Logistics and inventory management.
– Etc.
(Also called “ownership advantages”)
Location-specific advantage
• Market access.
– Size: High per capita income and large population.
– Being close to customers and circumventing trade barriers: investing “under”
tariff walls. ?
• Policy reform
– Liberalizing entry (sectoral, ownership, local-content and indigenization
restrictions)
– Privatization
– Incentives; taxes.
– Dependable and transparent legal system (but how well does China fit?)
• Access to Resources
• Low factor costs (abundant factor endowments):
– Low labor costs.…
• …but productivity matters (unit labor costs).
– Countries with natural resources
• Oil, mining, and plantation agriculture.
– Specific resources, such as research and development (R&D) capability.
How do companies decide which
locations are most advantageous,
given their firm-specific competitive
advantages?
• To get a sense of the range of firm
strategies, let’s use the concept of the
value chain.
Research Value Chain
Product Design (Generic Version)
Core Components
Sourcing
Assembly A sequence of
Distribution related activities, or
Marketing functions, all of
Retailing which add value to
Service the final product or
Final service
Market
A Corporate Strategy Perspective
• Identify specifically the areas in which the
corporation has firm-specific assets, where it has
unique capabilities that create competitive
advantage.
• Focus on those “core businesses”.
• Leverage those capabilities by expanding
geographically.
• Spin-off non-core businesses.
• Maintain control as architects of the value chain:
cross-border networks of FDI, long-term
cooperation, and contracting dominated by lead
firms, the major multinationals.
Value Chain
(Specific Version)
Research
Product Design
Core Components
Sourcing
Assembly
Distribution
Marketing Concentrate on those
links where you have
Retailing
sustainable competitive
Service advantage and global
Final competitiveness;
Market outsource everything
else.
Multi-national Firms create Global
Production Networks (GPNs)
• They seek to structure these networks to their
advantage—they serve as architects of the
networks.
• There is a complex interaction between the
activities in which the firm specializes, and the
related locational decisions.
• Locate activities in areas where they can be
performed at lowest cost.
• Access specific resources and capabilities
world-wide.
Services as well as Manufacturing:
Outsourcing to India
• Technical support
• Financial Services
• Catalog order-taking.
• Legal services (patent applications, divorce
papers, legal research). 200,000 Indians graduate from
law school annually (about 5X US); outsourcing has created about
12,000 law jobs worldwide, most of them in India.
• Accounting
• Research.
• All back-office business services.
New Technology Infrastructure
• Broadband connections (undersea cable, etc.)
• Cheap and ubiquitous computers
• Software to communicate, search, and
disaggregate business processes.