International Business

1
International Business

• Chapter Eleven
• Government Attitudes toward Foreign Direct
  Investment

2
Buy-versus-Build Decision

• Reasons for Buying
• Avoiding start-up problems
• More finance options available
• Capital infusion from home country
• Local financing
• Exchange of stock
• Adding no further capacity in the market
• Reasons for Building
• No desired company is available for acquisition
• Acquisition will carry over problems
• Local financing may be easier to obtain

3
Advantages of Foreign Direct Investment

• Monopoly Advantages before Direct Investment
• Companies with unique advantages (inimitable
  competencies)
• Advantages after Direct Investment
• Companies with foreign investment tend to
• Be more profitable
• Have more stable sales and earnings
• Makes companies more successful at home
• Strategy of Direct Investment in the
  Internationalization Process
• Initially follows an export strategy
• Less true for subsequent ventures

4
Investors Advantage

• Foreign direct investment is correlated with
  profitability.
• Why?
• Create supremacy over similar companies in
  countries of interest (monopoly)
• Sell more efficiently
• Foreign currency may have a high buying power
• May be able to borrow capital at a lower interest
  rate than companies from other countries
• Get to know markets, resource sources better

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5
Direct Investment Patterns

• Country of Origin
• Almost all ownership is by companies from
  industrial countries
• LDC ownership is increasing
• Location
• Industrial countries due to
• Biggest markets
• Lowest perceived risk
• Least discrimination toward foreign companies
• Economic Sector
• Highest growth in Services

6
Direct Investment Patterns
Table 8.2
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7
Flow of FDI
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8
FDI in Developed Countries

• Most FDI is from developed countries TO developed
  countries
• Markets are larger in developed countries
• Political turmoil in emerging economies has
  discouraged investors
• Developed countries are committed to liberalizing
  direct investments among members
• Taxes
• Access to local capital
• Government procurement

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9
Example International Business Strategy and the
Political Legal Environment

• U.S.-Japanese Auto Trade Revisited
• When facing import competition, companies can
• Try to get protection
• Seek other market niches
• Make domestic output competitive
• Move abroad
• Approaches to the International Environment
• What kind of companies have the most to lose from
  protectionism? Big or small? Diversified or not?

10

• But FDI in developing countries is growing
  rapidly
• especially China
• also India, Southeast Asia

11
Stakeholders in FDI

• Stockholders
• Employees
• Customers
• Society inthe receiving country
• Often goalsof these stakeholders conflict

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12
Government Involvement in FDI

• Developed countries
• Deregulated markets
• Privatized national enterprises
• Liberalized private ownership
• Encouraged regional cooperation
• With this environment FDI flows surged from 202
  billion in 1990 to 1.3 trillion in 2000

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13
Cause-Effect Issues in FDI in developing (poor)
countries

• Inequitable income distribution
• Political corruption
• Environment debasement
• Social deprivation

• Higher tax revenues
• Employment
• Innovation
• Exports

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14
Major Strengths that MNEs Bring

• Investment
• Increased productivity
• Technology
• RD
• New capital equipment
• Trade
• Export expansion
• Lower-cost imports

• Human Resources
• Training
• Employment
• Managerial skills
• Environment
• Access to clean technologies
• Pollution-abatement skills
• Company-wide standards

15
FDI and Balance-of-Payments Effects

• Countries that run trade deficits want to
  compensate by attracting an influx of capital
• Foreign aid
• Loans
• Foreign investment (FDI)
• Foreign direct investment improves balance of
  payments, at least in the short run
• BUT the investor will send profits home
• Nations fear FDI will hurt balance-of-payments
  more than it helps in the long run

16
Home-Country Losses

• Displaces jobs
• Technology transferred abroad
• Loss of output
• Loss of exports
• Decrease local RD undertakings

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17
Home-Country Gains

• Lower prices
• Increase in demand for skilled-labor
• More optimum use of production factors
• Upgrading of resource quality
• Higher product demand
• Ability to observe foreign competitive conditions

18
General Conclusions

• The pros and cons of foreign direct investment
  are like those of trade, only more so
• Offers the opportunity to greatly improve
  economies
• Can disrupt the cultural and economic fabric of
  the receiving nation

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