6-1

Lecture Focus

 Identify the economic rationale that

underlies Foreign Direct Investment
 Appreciate the role of FDI in the
world economy
 Understand the theories behind
different types of FDI
 Focus on the managerial implications
of the theories
 6-2

What is Global- FDI?

 Direct investment in foreign-based
production and/or marketing activities with
substantial managerial involvement
 Once a firm undertakes FDI, it becomes a
multinational enterprise (multinational =
more than one country)
 FDI takes two forms:
 Green-field investment: establishing a wholly
new operation in a foreign country
 Acquiring or merging with an existing firm in
the foreign country
 6-3

FDI is NOT:
 Investing in foreign financial
instruments -- this activity is known
as Portfolio Investment
 A firm that merely exports and/or
imports is not necessarily an
MNE/MNC involved in FDI
 6-4

Flow and Stock of FDI

 Flow:  Stock:
 The amount of  Total accumulated
FDI undertaken value of foreign-
over a given
owned assets at a
period of time
(usually one year)
given time
 6-5

Reasons for FDI Growth

 Faster growth than world trade and output
 FDI circumvents potential future trade
barriers
 Political and economic changes favoring FDI
are occurring in all countries
 Globalization of world markets
 FDI no longer the exclusive territory for large
MNEs -- small and midsize enterprises (SMEs)
now rule this business activity
Note: SBA definition of SME: Less than 500 employees
 6-6

Why is FDI important ?

 Companies want a presence in foreign markets
 Firms want control over growth of these
markets:
 To gain first mover advantages
 To ward off competitors
 To determine locations, advertising and other
related strategic decisions in the firm’s interest
 6-7

The Form of FDI:

Acquisitions versus Green-Fields
 The majority of  Why the preference for
investments is in the form mergers & acquisitions?
of mergers & acquisitions:  Quicker to execute
 Represents about 77% of  Foreign firms have
all flows in developed valuable strategic assets
countries  Believe they can increase
 Represent about 33% of the efficiency of the
all flows in developing acquired firm
countries
 Fewer target firms
 6-8

FDI and Risk

FDI is expensive and risky compared
to exporting or licensing because of:
 High costs of establishing
facilities
 Problems with doing business in a
different culture

Multilateral Investment Guarantee Agency, established in 1988

Part of the World Bank Group
Promotes FDI into emerging economies
Objective is to improve people's lives and reduce poverty
Offers political risk insurance (guarantees) to investors and lenders
Helps developing countries attract and retain private investment
 6-9

Jeep in China

 American Motors Corporation (AMC) established

the first auto manufacturing JV in mainland China
 Although DaimlerChrysler stopped production of
the Cherokee in the U.S.A., the “Classic” Jeep is
available to Chinese consumers as this new model
 6-10

Forms of FDI
Horizontal Direct Investment
FDI in the same industry abroad as
company operates at home.
Vertical direct investment
Backward - investments into industry that
provides inputs into a firm’s domestic
production (typically extractive industries)
Forward - investment in an industry that
utilizes the outputs from a firm’s domestic
production (typically sales and distribution)
 6-11

General Motors in the U.S.A. and India

The Chevrolet brand
Is this “Optra”
and the bow-tie logo
model a genuine
returned to India
“see the USA”, apple riding on the Isuzu
pie, motherhood, Impreza --re-
baseball, or “USA #1” christened the
Chevrolet? Chevrolet Forester
Now, GM India is
launching the
GM is using FDI to maximize Chevrolet Optra
The new car is built
returns to the company, without
regard to artificial political from the Daewoo
borders or consumer perceptions Nubira

Source: Financial Daily, The Hindu Group of Publications, 7/20/2003

http://thehindubusinessline.com/iw/stories/2003072000441300.htm
 6-12

Vertical FDI

Two forms:
 Backward: Providing inputs (for example:
raw materials, parts) for a firm’s domestic
processes
 Forward: An industry abroad sells the
outputs of the firm’s domestic processes

Raw Components Automobile Automobile Automobile

material  making  assembly  wholesale  retail (dealers)
Upstream Downstream
 6-13

Global Foreign Direct Investment

( FDI)
 Inflows to China, the largest recipient
of FDI in the developing world, climbed
by 11 per cent, to $106 billion in 2010.
 With continuously rising wages and
production costs, however, offshoring
of labour-intensive manufacturing to
the country has slowed down, and FDI
inflows continue to shift towards high-
tech industries and services.
 6-14

Global FDI
 In contrast, some ASEAN member States, such as
Indonesia and Viet Nam, have gained ground as low cost
production locations, especially for low-end manufacturing
 The decline of FDI to South Asia reflects a 31 per cent
slide in inflows to India and a sharp drop in
Pakistan ($ 1.72 billion). In India, the setback in
attracting FDI was partly due to macroeconomic
concerns.
 inflows to Bangladesh, an increasingly important low-cost
production location in South Asia, jumped by 30 per cent
to $913 million.
 6-15

FDI and Pakistan

 Year 2005-2006 Inflow of FDI $ 3.5 Billion

 Year 2006-2007 Inflow of FDI $ 5. 1 Billion
 Year 2007-2008 Inflow of FDI $ 5. 4 Billion
 Year 2008-2009 Inflow of FDI $ 3.7 Billion
 Year 2009 – 2010 Inflow of FDI $ 2.2 Billion
 Year 2010-2011 Inflow of FDI $ 1.6 Billion
 Year 2011-2012 Inflow of FDI $ 812 Mill
 Reasons for decline in inflow of FDI
 6-16

FDI and India

 6-17

FDI in India
 Inflow in year 2010-2011 $ 36 Billion
 Inflow in year 2011- 2012 $ 47 Billion