International Business
(6)
Huang Huiping
Economic School.Whut
6. Foreign Direct
Investment(FDI)
FDI in the world Economy:
- Growth, direction,source, and form of FDI
 The theory of FDI
- Why FDI?
- The pattern of FDI
 Cost and benefit of FDI
 Government policy instrument and FDI
 Implications
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Opening case study:
Starbucks’ FDI
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Why didn’t Starbuck just simply export the
coffee products?
Why did Starbuck initially decide to license
its format in Japan? What is licensing?
What are the advantages and
disadvantages of licensing?
After that ,what made Starbuck set up a
joint venture with a local retailer, Sazaby ?
Is FDI expensive and risky? Why or why not?
Was it a green-field investment or an
acquisition ?
Some concepts
Foreign Direct Investment (FDI):
Direct Investment in business
operations in a foreign country.
 Multinational Enterprises (MNE): A
firm that owns business operations in
more than one country.
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6.1 Why FDI ?
6.1.1 Limitation of exporting
- Transportation cost
to choose what kind of product to be the
exporting goods?
- Trade barriers
6.1.2 Limitation of licensing
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Giving away the valuable technology know-how to a
potential foreign competitor
Losing tight control over manufacturing, marketing, and
strategy in a foreign country that may be required to
maximize its profitability
The core competitiveness is based not so much on its
products as on the management, marketing, and
manufacturing capabilities, some of them are not
amenable to licensing.
Toyota: “lean production”
6.2 Forms of FDI
Green-field investment
establish a new operation in a foreign country.
 Acquisition: acquiring or merging an existing firm in a
foreign country.
 Is Acquisition better than Green-field investment ?
see “management focus”
- quicker
- easier,less risky
- more efficient
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6.3 The pattern of FDI (1)
-------6.3.1 Strategic Behavior
Strategic Behavior theory focus on relationship between FDI
and rivalry in oligopolistic industries
FDI flows are a reflection of strategic rivalry between firms
in the global market.
------ F.T. Knickerbocker
- Oligopoly: is an industry compose of a limited number of
large forms .(4 firms, 80% market)
- Imitative behavior : a critical competitive feature of this
Oligopoly is interdependence of the major players.
- Multipoint competition:arises when two or more enterprises
encounter each other in different regional
markets ,national markets or industry.
6.3 The pattern of FDI(2)
---- 6.3.2 Product Life Cycle(Raymond Vernon)
Firms undertake FDI at particular stages of its
PLC.
 They invest in other advanced country when
local demand grows large enough to support
local production.
 They subsequently shift production to
developing countries when product
satandardization and market stature give rise to
price competition and cost pressures.
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The product cycle model
Quantity
Stage 1
Stage 2
Stage 3
Stage 4
Stage 5
(New
product)
(Product
growth)
(product (product (abdicate
maturity) decline) market)
import
consumption
export
production
export
production
consumption
Innovating
country
imitating
country
import
0
A
B
C
D
Time
6.3 The pattern of FDI(3)
-----6.3.3 Eclectic Paradigm(John Dunning)
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Three advantages model
- Property-specific advantages: a firm’s own unique assets
- Internalizing-specific advantages:
using a firm’s own unique assets to produce products
- location-specific advantages
advantages that arise from using resources endowment or assets
that are tied to a particular foreign location and that a firm finds
valuable to combine with its own unique assets.
Three advantages model
Property advantages
Property advantages
Licensing trade
Goods exporting
Internalizing advantages
Property advantages
Internalizing advantages
Location-specific advantages
FD I
Three advantages model
 When
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it is difficult to license a firm’s
unique capability of marketing,
management and know-how, a firm
needs to undertake FDI
Natural resources and FDI
Human resources and FDI
Externalities (tech spillover) and FDI
6.4 Costs and benefits of FDI
--------6.4.1 Host countries effects
Benefits
- Resource transfer effects( Capital, technology, Knowhow)
- Employment effects (increase/decrease/adjust)
- Balance-of- Payments effects (substitute of some
imports, exporting)
- effects on competition and economic growth
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Costs
- Adverse effects on Competition (monopolize market,
injure infant industry)
- Adverse effects on the Balance of Payment effects
- loss some economic independence?
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6.4 Cost and benefits of FDI
------6.4.2 Home countries effects
 Benefits
- inward flow of foreign earning to current account of
home country’s balance of payment
- jobs: create the demand for home-country’s export of
capital equipment,intermediate goods, complimentary
products.
- learning effects: reverse resource-transfer effect.
 Costs
- Balance-of-payments: outwards FDI ;
- employment
6.5 Policies Instruments and FDI
------6.5.1 Home country policies
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Encouraging Outward FDI
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government-back insurance (nationalization ,war losses,unable
to transfer profit home)
Government loan
Preferential taxation: eliminate double taxes.
Adding political pressure to host country
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Restricting Outward FDI
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- limit capital outflows for Balance-of-payment
- encourage investment at home.
- political reasons
6.5 Policies Instruments and FDI
-----6.5.1 Host country policies
 Encouraging Inward
- tax concession
- Low interest loan
- Grants or subsidies
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FDI
Restricting Inward FDI
ownership restrain (excluded in special field)
Performance requirement(local content,
export, technology transfer, top management
restrain)
6.6 Implications
Location implications
------Dunning’s theory: The eclectic paradim
 When do we need to do FDI?
------A decision framework
 Government Policy
- Government’s attitude toward FDI is an important
variable in decision about the location.
- Negotiation between MNEs and host government-----bargaining power depends on 3 factors
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Assignments
Read chap 7,8,9, try to explain the
business implications of Economic
Integration and Monetary Systems in
these chapters.
 Prepare Chap 10
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