FOREIGN DIRECT INVESTMENT

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FOREIGN DIRECT INVESTMENT
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• Case Bridgestone Tire Company

• Increasing oligopolization of the Tire Industry
• New tires demand high-tech innovations, expensive
  Only few tire companies can afford, the ones with
  high sales volume
• Bridgestone Tire Company is the worlds largest
  manufacturer of rubber products
• Exports started to increase as foreign consumers
  wanted Bridgestone replacement s on the Japanese
  cars they had Purchased (original equipment market

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• Establishing manufacturing presence overseas,
  vital for the future growth of Bridgestone
• In 1988 Bridgestone bought Firestones tire
  operations. Firestone supplied 40 of Fords
  needs, 21 of GMs.
• Why should Bridgestone manufacture automobile
  tires in the U.S.?
• 1) .government-imposed restrictions on tire
  imports
• 2) Action taken against imports of Japanese
  vehicles
• 3) Japanese costs went up in relation to U.S.
  costs
• 4) High-transport costs for tires, which are
  bulky relative to their value
• Why buy Firestone rather than starting up a new
  facility?
• 1) expectation of overcapacity in the industry

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• I - Introduction

• Foreign Direct Investment is now more important
  than trade as a vehicle of international
  transactions.
• Once a firm undertakes FDI it become a
  multinational enterprise
• Overseas production facilities comprise a large
  and increasingly vital part of international
  companies global strategies
• Why is FDI growing at faster rates than trade?

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• Fear among business firms of protectionist
  measures
• Consumer imposed restrictions, product image
• Driven by the dramatic political and economic
  changes
• Market Liberalization strategies
• Globalization trends
• Important to have production facilities close to
  customer

Mini Multinationals The globalization of world
markets has been accompanied by the rapid growth
of FDI by small and medium size firms.
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• II - THE MEANING OF FOREIGN DIRECT INVESTMENT

Control
For direct investment to take place, control must
follow the investment. Ownership of a minimum of
10 or 25 of the voting stock in a foreign
enterprise allows the investment to be considered
direct. However, government interference, and
lack of control over inputs may exert influence
on the company.
The Concern about Control
Many critics are concerned that the national
interest of the host country will not be best
served if a multinational company makes decision
from afar.
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Investor Concern
Control is of paramount importance who are
reluctant to transfer resources such as patents,
trademarks, management know-how. Desire to deny
rivals access to competitive resources is
referred to as the appropriability theory.
Acquired technology can be used to competitive
advantage. Ex transistor technology Control
through self-handling of operations (internal to
the organization), rather than through contracts
with other companies, is often called
internalization.
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Methods of Acquisition
Instead of capital movements an investor may
transfer other types of assets. Ex managers,
cost control systems, technology, know-how.
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III - THE RELATIONSHIP OF TRADE AND FACTOR
MOBILITY
The Trade and Factor Mobility
Direct investment usually involves the movement
of various types of production factors as
investors infuse capital, technology, personnel,
raw materials, or components into their operating
facility abroad. Production factors move
internationally. Factor movement is an
alternative to trade that may or may not be a
more efficient allocation of resources.
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Substitution
When the factor proportions vary widely among
countries, pressures exist for the most abundant
factors to move to countries with greater
scarcity, where they can command a better
return Capital/labour ratios Capital/land
ratios Capital moves globally more easily than
does labour. Technology in the form of more
efficient machinery is more mobile than labour
is. Thus, differences in labour productivity
and costs explain much of the movement of trade
and direct investment.
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Complementarity of Trade and Direct Investment
Companies usually send substantial exports to
their foreign facilities. FDI usually is not a
substitute for exporting. About a third of
world trade is intra-firm trade Many of the
exports from parent to subsidiary would not occur
if overseas investment did not exist. In these
cases, factor movements stimulate trade rather
than substituting for it.
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IV - MOTIVATIONS FOR FDI AS AN ALTERNATIVE OR
SUPPLEMENT TO TRADE
A - Market Expansion Investments versus Trade
Transportation When the cost of transportation
is added to production costs, some products
become impractical to ship over greater
distances. Ex tires, soft drinks. Horizontal
Expansion When companies invest abroad to
produce basically the same products that they
produce at home. Lack of Domestic Capacity As
long as a company has excess capacity at its
home-country plant (s) it may be able to compete
effectively export markets despite high transport
costs.
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Scale Economies If the product is highly
standardized or undifferentiated form those of
competitors, the cost per unit is apt to drop
significantly as output increases. Ex ball
bearings, alumina, semiconductor wafers. And they
can overcome transportation costs. Products that
are more differentiatedbenefit less by scale
economies. For these types of products, transport
costs may dictate smaller plants to serve
national or regional markets. Market
Imperfections (Internalization Theory) The
market imperfections approach to FDI is typically
referred to as internalization theory
a) Trade Restrictions tariffs and non-tariff
barriers act as an enticement for making foreign
direct investment. Removing trade restrictions
among a regional group of countries also may
attract direct investment.
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b) Technological Know-How enables a company to
build a better product, can enable a company to
improve its production process vis-à-vis
competitors. Ex Toyotas production process c)
Marketing know-how can enable a company to
better position its products in the marketplace
vis-à-vis competitors. Ex Kellogs d) Management
Know-how with regard to factors such as
organizational structure, human relations,
control systems, planning systems, enable a
company to manage its assets more efficiently
than competitors.
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Country-of-Origin Effects fear that service and
replacement parts for imported products will be
difficult to obtain. Nationalism buy locally
produce goods Product Image manufacturing in a
country that has lower-status image for a
particular product. Delivery Risk just-in-time
manufacturing systems (JIT) Changes in
Comparative Costs dynamic process.
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B - Resource-Acquisition Investments
Resource acquisition imply a need to import from
abroad, FDI is a supplement rather than an
alternative to trade. Vertical Integration
control of the different stages (value chain) as
a product moves from raw materials through
production to its final distribution. As
products and their marketing become more
complicated, there is a greater need to combine
resources that are located in more than one
country. Great interdependence among inputs and a
strong need to establish tight relationships in
order to ensure that production and marketing
continue to flow. Gain voice in the management
of one of the foreign operations by investing in
it. Increasing barriers to entry
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Rationalized Production producing different
components and parts in different parts of the
world to take advantage of varying costs of
labour, capital, and raw materials. Access to
Production Factors a company may establish a
presence in a country to improve its access to
knowledge and other resources. Product Life
Cycle New products are produced mainly in
industrial countries, mature produces are more
likely to be produced in LDCs. Governmental
Investment Incentives countries frequently
encourage direct investment inflows by offering
tax concessions or a wide array of other
subsidies.
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C - Diversification-Oriented Investments
Companies may pursue international business, at
least partially, to minimize cyclical swings in
sales and profits and to reduce the dependence on
a few customers or suppliers.
D - Competitive Risk Minimization
Following Customers the indirect exporters
commonly follow their customers when those
customers make direct investments. Preventing
Competitors Advantage oligopolistic competition
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E - Political Moves
Since the passing of colonialism, some countries
continued to pursue many of the old colonial aims
by encouraging their domestically based companies
to control vital sectors in the economies of
LDCs.
F - Buy-versus- Build Decision
Acquisition avoiding start-up problems, easier
financing, adding no further capacity in the
market. Build no desired company is available
for acquisition acquisition is harder to
finance acquisition will carry over problems.
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G - Advantages of Foreign Direct Investment
Are multinationals profitable because they are
multinational or multinational because they are
profitable? Very successful domestic companies
are most likely to commit resources to
FDI. Monopoly Advantage Companies perceive that
they hold some supremacy over similar companies
in the countries into which they go. The
advantage results from a foreign companys
ownership of some resources that is unavailable
at the same price or terms to the local
company. Cost of borrowing capital from
different countries currency oscillations
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V - DIRECT INVESTMENT PATTERNS
Biggest growth in FDI has occurred in recent
years. During the 1980s, flows of FDI grew at
about three times the rate of world
exports. Country of Origin 90 of all direct
investment, coming from developed countries
Mini-Multinationals FDI flowing into the U.S.
Location of Investment the major recipients of
FDI are industrial countries, which received 83
of the worlds between 1986 and 1990, and about
85 in 1995.
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Interest in Developed Markets political
instability in LDCs, more investment have been
market-seeking, more liberal FDI
environment. Economic Sector of Investment Over
time the portion of FDI accounted for in the raw
materials sectors that includes mining, smelting,
and petroleum has declined. The portion in
manufacturing, especially resource-based
production grew steadily from the 1920s to the
early 1970s FDI in the service sector
(especially banking and finance) grew rapidly, as
did FDI in technology-intensive manufacturing.
COUNTERVAILING FORCES