CH 7 BUSI1701
CH 7 BUSI1701
CH 7 BUSI1701
7: FDI’s
forms of FDI’s:
Mergers and acquisitions: acquisitions of, or mergers with, an existing firm in a foreign
country
Forms of Acquisitions:
➢ Minority: 10-49%
➢ Majority: 50-99%
➢ Full outright stake: 100%
Mergers & Acquisitions (M&As)
Most cross-border investments tend to be M&As rather than greenfield investments. Why
Mergers and Acquisitions?
➢ M&As tend to be quicker to execute than greenfield investments
➢ It is usually easier and more efficient to acquire assets than build them from the
ground up
➢ Firms believe they can increase the efficiency of acquired assets
by transferring capital, technology, or management skills
The flow of FDI: The amount of FDI undertaken over a given period, usually a year.
The stock of FDI: The total accumulated value of foreign-owned assets at a given time.
Patterns of FDI
Over the past 30 years, FDI has increased substantially.
Why?
➢ Firms fear the threat of protectionism and use FDI to overcome trade barriers.
➢ Changes in the economic and political systems of many countries internationally
have created new markets for investment.
➢ FDI allows for closer proximity to international consumers, access to new
technologies, factor endowments, cheap labour, affordable resources, and more efficient
production.
Why Choose FDI? This question is significant considering the number of FDI alternatives
available and the comparatively higher expenses and risks associated with FDI.
Limitations of Exporting
➢ Transportation costs and trade barriers constrain exporting. When transportation costs are
combined with production costs, shipping some products over a considerable distance
becomes unprofitable. Exporting: Manufacturing goods and services domestically, afterwards
selling them to consumers and vendors in foreign countries.
Ex. Products with a low-value-to-weight ratio (cement, soft drinks) are typically
produced domestically, while products with a high-value-to-weight ratio (smartphones,
computer software) are typically produced according to the most efficient
manufacturing locations. This is because transport costs are usually a minor
component of total landed costs in products with a high-value-to-weight ratio.
Licensing: A business agreement between two companies in which the licensor gives the
licensee permission to manufacture a good or service in return for a specified payment.
Ex. In the late 1990s, Starbucks opened stores in China, Singapore, Thailand, New
Zealand, South Korea, and Malaysia. In Asia, Starbucks’ most common strategy was to license
its format to a local operator in return for initial licensing fees and royalties on
Limitations of Licensing
Licensing has 3 significant drawbacks as a strategy for developing foreign market opportunities.
1. Licensing may result in a firm given valuable technological know-how
to a potential foreign competitor.
2. Licensing does not give a firm tight control over manufacturing,
marketing and strategy.
3. The problem with licensing arises when the firm’s competitive
advantage is based on the products management, marketing and
manufacturing rather than the product itself.
How Political Ideology Affects FDI
Government policy toward FDI has typically been driven by political ideology. Historically,
ideology toward FDI has ranged from a radical stance that is hostile to all to the non-
interventionist principle of free market economics.
Radical stance:
➢ Argues that multinational enterprises (MNEs) are instruments of imperial domination.
➢ Views MNEs as a tool for exploiting host countries.
➢ Argues that MNEs extract profits from host countries, returning profits to home countries.
Since the end of the 1980s, the radical stance has become less common due to the collapse of
communism in Eastern Europe, the generally poor performance of economically restricted
countries and the strong performance of developing countries that have embraced free market
economics (i.e., Singapore).
FDI increases the balance of payments in the source country because of the inward flow of
foreign earnings.
Increases also occur when foreign subsidiaries create demand for source country exports of
capital equipment, intermediate goods, and complementary products.
FDI allows firms to learn valuable skills in the host nation that can then be transferred back to
the home country and different subsidiaries internationally.
Ex. The American Firms General Motors and Ford invested in Isuzu and Mazda, two
Japanese automobile companies, to learn about their production process.
FDI increases employment when the foreign subsidiary creates demand for home country
exports.
Ex. A Renault-Nissan plant opens in America. Each automobile requires key inputs
from Japan. Therefore, employment increases in Japan to meet the demand to export
critical inputs to America.
When FDI is in the form of a greenfield investment, competition will increase in the local
market. This benefits consumers by driving down prices and offering a more comprehensive
array of options on the market.
More local competition also increases productivity and innovation. As a result,
economic growth occurs.
Ex. In South Korea, FDI by large Western discount stores such as Wal-Mart, Costco,
and Tesco have encouraged indigenous discounter stores to improve the efficiency of
their operations. As a result, South Korean consumers benefited from lower prices and
more excellent choices.
How can the Government Encourage FDI?
Home Country?
➢ Government-backed insurance programs to cover the primary forms of risks associated with
foreign direct investment.
o Ex. Export Development Canada
Host Country
➢ Offer incentives to foreign firms, such as tax breaks and subsidies.
o to attract more FDI.