Hill_GBT12e_Ch08_PPT_accessible.pptx Foreign direct investment

Editor's Notes

• #4: By 2019 JCB was generating £4.1 billion in annual sales, almost half of which came from India. In addition to strong demand in India, JCB’s Indian factories were also now exporting to 93 other countries. India had become the jewel in the crown for JCB. Sources: P. Marsh, “Partnerships Feel the Indian Heat,” Financial Times, June 22, 2006, p. 11; P. Marsh, “JCB Targets Asia to Spread Production,” Financial Times, March 16, 2005, p. 26; D. Jones, “Profits Jump at JCB,” Daily Post, June 20, 2006, p. 21; R. Bentley, “Still Optimistic about Asia,” Asian Business Review, October 1, 1999, p. 1; “JCB Launches India-Specific Heavy Duty Crane,” The Hindu, October 18, 2008; Michael Pooler, “JCB Piles Up Big Profits despite Dwindling Global Markets,” Financial Times, July 12, 2016; Malyaban Ghosh, “JCB India Revenues Rise,” Livemint.com, April 16, 2018; M. Pooler, “JCB Warns That India’s Banking Crisis Is Hurting Demand,” Financial Times, September 2, 2019.
• #5: While much FDI takes the form of greenfield ventures—building up subsidiaries from scratch—acquisitions and joint ventures with well-established foreign entities are also important vehicles for foreign direct investment.
• #6: LO 8-1 Recognize current trends regarding foreign direct investment (FDI) in the world economy.
• #7: Despite the pullback since 2007, since 1990 the flow of FDI has accelerated faster than the growth in world trade and world output. For example, between 1990 and 2018, the total flow of FDI from all countries increased around sixfold, while world trade by value grew fourfold and world output by around 60 percent.
• #8: The average yearly outflow of FDI increased from $250 billion in 1990 to a peak of $2.2 trillion in 2007, before slipping back to around $1.4 trillion by 2019.
• #9: The United States has been an attractive target for FDI because of its large and wealthy domestic markets, its dynamic and stable economy, a favorable political environment, and the openness of the country to FDI. Investors include firms based in Great Britain, Japan, Germany, Holland, and France. Inward investment into the United States remained high during the 2000s and stood at $255 billion in 2019. The developed nations of Europe have also been recipients of significant FDI inflows, principally from the United States and other European nations. In 2019, inward investment into Europe was $274 billion. The United Kingdom and France have historically been the largest recipients of inward FDI.
• #10: Most recent inflows into developing nations have been targeted at the emerging economies of Southeast Asia.
• #11: The largest source countries—the United States, United Kingdom, Japan, France, Germany, and the Netherlands—also predominate in rankings of the world’s largest multinationals. Chinese firms invested around $46 billion in the United States in 2016, and another $30 billion in 2017, up very little prior to 2010. In 2018 and 2019, however, Chinese investment in the U.S. slumped to around $5 billion as the ongoing trade conflict between the two nations soured relations.
• #13: In the case of developing nations, only about one-third or less of FDI is in the form of cross-border mergers and acquisitions. The lower percentage of mergers and acquisitions may simply reflect the fact that there are fewer target firms to acquire in developing nations.
• #14: LO 8-2 Explain the different theories of FDI. Eclectic paradigm is the argument that combining location-specific assets or resource endowments and the firm’s own unique assets often requires FDI; it requires the firm to establish production facilities where those foreign assets or resource endowments are located.
• #15: FDI is expensive because a firm must bear the costs of establishing production facilities in a foreign country or of acquiring a foreign enterprise. FDI is risky because of the problems associated with doing business in a different culture where the rules of the game may be very different. Relative to indigenous firms, there is a greater probability that a foreign firm undertaking FDI in a country for the first time will make costly mistakes due to its ignorance.
• #16: Often, the desire to reduce the threat that trade barriers might be imposed is enough to justify foreign direct investment as an alternative to exporting.
• #17: All of this suggests that when one or more of the following conditions holds, markets fail as a mechanism for selling know-how and FDI is more profitable than licensing: (1) when the firm has valuable know-how that cannot be adequately protected by a licensing contract, (2) when the firm needs tight control over a foreign entity to maximize its market share and earnings in that country, and (3) when a firm’s skills and know-how are not amenable to licensing.
• #18: Gaining technology, productive assets, market share, brand equity, distribution systems, and the like through FDI by purchasing the assets of an established company can all speed up market entry, improve production in the firm’s home base, and facilitate the transfer of technology from the acquired company to the acquiring company.
• #19: Although Knickerbocker’s theory and its extensions can help explain imitative FDI behavior by firms in oligopolistic industries, it does not explain why the first firm in an oligopoly decides to undertake FDI rather than to export or license. Internalization theory addresses this phenomenon.
• #20: Dunning’s theory, therefore, seems to be a useful addition to those outlined previously because it helps explain how location factors affect the direction of FDI.
• #21: Dunning’s theory has implications that go beyond basic resources such as minerals and labor. Consider Silicon Valley, which is the world center for the computer and semiconductor industry. Many of the world’s major computer and semiconductor companies—such as Apple Computer, Hewlett-Packard, Oracle, Google, and Intel—are located close to each other in the Silicon Valley region of California. As a result, much of the cutting-edge research and product development in computers and semiconductors occurs there. According to Dunning’s arguments, knowledge being generated in Silicon Valley with regard to the design and manufacture of computers and semiconductors is available nowhere else in the world.
• #22: LO 8-3 Understand how political ideology shapes a government's attitudes toward FDI.
• #23: The radical view traces its roots to Marxist political and economic theory. Radical writers argue that the multinational enterprise (MNE) is an instrument of imperialist domination. They see the MNE as a tool for exploiting host countries to the exclusive benefit of their capitalist–imperialist home countries. They argue that MNEs extract profits from the host country and take them to their home country, giving nothing of value to the host country in exchange.
• #24: The free market view traces its roots to classical economics and the trade theories of Adam Smith and David Ricardo.
• #25: Countries adopting a pragmatic stance pursue policies designed to maximize the national benefits and minimize the national costs. According to this view, FDI should be allowed so long as the benefits outweigh the costs. Japan offers an example of pragmatic nationalism.
• #26: In some developed nations, there is increasing evidence of hostile reactions to inward FDI as well. In Europe in 2006, there was a hostile political reaction to the attempted takeover of Europe’s largest steel company, Arcelor, by Mittal Steel, a global company controlled by the Indian entrepreneur Lakshmi Mittal. In mid-2005, China National Offshore Oil Company withdrew a takeover bid for Unocal of the United States after highly negative reaction in Congress about the proposed takeover of a “strategic asset” by a Chinese company.
• #27: LO 8-4 Describe the benefits and costs of FDI to home and host countries. Foreign management skills acquired through FDI may also produce important benefits for the host country. Foreign managers trained in the latest management techniques can often help improve the efficiency of operations in the host country, whether those operations are acquired or greenfield developments.
• #28: A current account deficit, or trade deficit as it is often called, arises when a country is importing more goods and services than it is exporting. Governments typically prefer to see a current account surplus rather than a deficit.
• #29: FDI’s impact on competition in domestic markets may be particularly important in the case of services, such as telecommunications, retailing, and many financial services, where exporting is often not an option because the service has to be produced where it is delivered.
• #30: In general, while FDI in the form of greenfield investments should increase competition, it is less clear that this is the case when the FDI takes the form of acquisition of an established enterprise in the host nation.
• #31: One criticism leveled against Japanese-owned auto assembly operations in the United States, for example, is that they tend to import many component parts from Japan. Because of this, the favorable impact of this FDI on the current account of the U.S. balance-of-payments position may not be as great as initially supposed. The Japanese auto companies responded to these criticisms by pledging to purchase 75 percent of their component parts from U.S.-based manufacturers (but not necessarily U.S.-owned manufacturers).
• #32: Political scientist Robert Reich has noted that such concerns are the product of outmoded thinking because they fail to account for the growing interdependence of the world economy. In a world in which firms from all advanced nations are increasingly investing in each other’s markets, it is not possible for one country to hold another to “economic ransom” without hurting itself.
• #33: Through its exposure to a foreign market, an MNE can learn about superior management techniques and superior product and process technologies. These resources can then be transferred back to the home country, contributing to the home country’s economic growth rate.
• #34: One objection frequently raised by U.S. labor leaders to the free trade pact among the United States, Mexico, and Canada (see Chapter 9) is that the United States would lose hundreds of thousands of jobs as U.S. firms invest in Mexico to take advantage of cheaper labor and then export back to the United States.
• #35: When assessing the costs and benefits of FDI to the home country, keep in mind the lessons of international trade theory. International trade theory tells us that home-country concerns about the negative economic effects of offshore production may be misplaced.
• #36: LO 8-5 Explain the range of policy instruments that governments use to influence FDI. In response to direct U.S. pressure, Japan relaxed many of its formal restrictions on inward FDI. In response to further U.S. pressure, Japan relaxed its informal barriers to inward FDI. One beneficiary of this trend was Toys “R” Us, which, after five years of intensive lobbying by company and U.S. government officials, opened its first retail stores in Japan in December 1991. By 2012, Toys “R” Us had more than 170 stores in Japan, and its Japanese operation, in which Toys “R” Us retained a controlling stake, had a listing on the Japanese stock market. Interestingly, although Toys “R” Us ceased operations in the United States in 2017 due to bankruptcy, it continues to operate in Japan and as of 2019 has around 130 stores there.
• #37: Countries sometimes prohibit national firms from investing in certain countries for political reasons. Such restrictions can be formal or informal. For example, formal U.S. rules prohibited U.S. firms from investing in countries such as Cuba and Iran, whose political ideology and actions are judged to be contrary to U.S. interests. Similarly, during the 1980s, informal pressure was applied to dissuade U.S. firms from investing in South Africa. In this case, the objective was to pressure South Africa to change its apartheid laws, which happened during the early 1990s.
• #38: Host countries adopt policies designed both to restrict and to encourage inward FDI. As noted earlier in this chapter, political ideology has determined the type and scope of these policies in the past.
• #39: Host governments use a wide range of controls to restrict FDI in one way or another. The two most common are ownership restraints and performance requirements.
• #40: The WTO has had less success trying to initiate talks aimed at establishing a universal set of rules designed to promote the liberalization of FDI. Led by Malaysia and India, developing nations have so far rejected efforts by the WTO to start such discussions.
• #41: LO 8-6 Identify the implications for managers of the theory and government policies associated with FDI.
• #42: Finally, it should be noted that the product life-cycle theory and Knickerbocker’s theory of FDI tend to be less useful from a business perspective. The problem with these two theories is that they are descriptive rather than analytical. They do a good job of describing the historical evolution of FDI, but they do a relatively poor job of identifying the factors that influence the relative profitability of FDI, licensing, and exporting. Indeed, the issue of licensing as an alternative to FDI is ignored by both these theories.
• #43: Although licensing may work, it is not an attractive option when one or more of the following conditions exist: (1) the firm has valuable know-how that cannot be adequately protected by a licensing contract, (2) the firm needs tight control over a foreign entity to maximize its market share and earnings in that country, and (3) a firm’s skills and capabilities are not amenable to licensing. Figure 8.4 presents these considerations as a decision tree.
• #44: A host government’s attitude toward FDI is important in decisions about where to locate foreign production facilities and where to make a foreign direct investment.