Chapter

Foreign Direct Investment

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Opening case-Starbucks

Starbucks strategy

Coffee house setting, blended coffees

Attention to hiring, training, and compensation Motivation of employees Britain Japan Thailand Korea
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Superior customer service

Used nation-specific strategies

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What is foreign direct investment

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
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FDI - Flow versus stock

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
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Why is FDI important ?

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

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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 a 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
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FDI outflows, 1982-2002

Fig 6.1

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Growth in world exports

Fig 6.2

World GDP and FDI 1990-2001 (index = 100 in 1990)

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FDI flows by region

Fig: 6.3

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Inward FDI flows

Fig: 6.4

As a percentage of gross fixed capital formation, 2000

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FDI outflows by select country 1998-2001

Fig: 6.5

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Form Of FDI: Greenfield versus acquisitions

Green field operation:

Mergers and acquisitions:

Mostly in developing nations

Quicker to execute. Foreign firms have valuable strategic assets Believe they can increase the efficiency of the acquired firm

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More prevalent in developed nations

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FDI trends: 2001-2002

The value of FDI slumped almost 60 percent in 2001-2002

Slowdown in world economy Heightened geopolitical uncertainty since September 11, 2001 Bursting of the stock market bubble in the US

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Impediments to the sale of know-how

Risk giving away know-how to competitors Impediments to the sale of know how Licensing implies low control over foreign entity Know-how not amenable to licensing

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Two forms of FDI

Horizontal Direct Investment

FDI in the same industry abroad as company operates at home. 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)
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Vertical direct investment

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FDI when and why?

Transportation costs are high Market Imperfections (Internalization Theory)

Impediments to the free flow of products between nations Impediments to the sale of know-how

Follow the lead of a competitor - strategic rivalry Product Life Cycle - however, does not explain when it is profitable to invest abroad Location specific advantages (natural resources)
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VDI, when and why?

Market power

create entry barriers erode entry barriers Impediments to the sale of know-how Investments in specialized assets

Market imperfections

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Decision framework
How high are transportation costs and tariffs?

Low No

Export

High
Is know-how amenable to licensing?

Horizontal FDI

Yes
Is tight control over foreign operation required?

Yes

Horizontal FDI

No
Can know-how be protected by licensing contract?

No

Horizontal FDI

Yes
Then license
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